Archives: 02/2008

The Laffer Curve: Reviewing the Evidence

I’ve been pleasantly surprised by the number of views and the positive feedback for the free-market tax videos I’ve been narrating. Part I of the Laffer Curve video series already has been seen more that 14,000 times - and nearly 15,000 times if the Capital Hill Broadcast Network is added to the count.

Part II of the Laffer Curve video series is now available for your viewing pleasure. Building on the theoretical discussion in Part I, this new video reviews some of the real-world evidence on the Laffer Curve.

As always, I’m interested in feedback. And feel free to circulate any of these videos to friends and colleagues. It seems that success begets success on youtube. More people watch a video if they see other people have watched it. And since, as of this morning, the Part II video is #49 for today’s most-watched list in the News & Politics category, it’s encouraging that it is getting some attention.

Demander-in-Chief

Bill Kristol’s column in yesterday’s New York Times contained an interesting, if disconcerting, quote from Michelle Obama:

Barack Obama … is going to demand that you shed your cynicism… That you push yourselves to be better. And that you engage. Barack will never allow you to go back to your lives as usual, uninvolved, uninformed.

The President of the United States is the employee of the American people. He is not there to make demands of people. If I want to sit on my couch for the rest of my life eating Doritos and watching trashy television – unengaged, uninformed and uninvolved – that’s my prerogative.

(Hat tip: our beloved founder, Ed Crane).

Reviving Interservice Competition

I recently complained that the US defense budget fails to adhere to a strategy; that it avoids choice between means. This lack of choice is manifest in the preservation of service shares. Each military service has gotten about the same relative share of the defense budget each year under Bush, despite the war on terror. In fact, the shares have basically held since the Kennedy administration.

In recent decades, the Navy got about 26 percent of the defense budget; 31 percent including the Marines. The Air Force also got around 31 percent, and the Army 25 percent. The rest went to defense-wide programs like missile defense. Annual deviations are rarely ever above two percent. This year brings a slight uptick in the Army share; the numbers are 29 percent Navy and Marines, 28 percent Air Force, and 27 percent Army. Current budget shares deviate more from the historical norm if you include the supplemental war appropriations, which favor the ground forces. But the point of a supplemental is that it does not affect the future baseline.

In today’s Christian Science Monitor, Gordon Lubold writes that a Congressional “Roles and Missions” panel, formed under the auspices of the House Armed Services Committee, is set to release a report that questions this arrangement. That’s good news.

Congressman Jim Cooper (D-Tennessee), who chaired the panel, calls the continuity of service shares “a statistical indictment” of the Pentagon planning process. The current US national security strategy – as seen in official documents, rhetoric, and our two wars – is counter-terrorism via counter-insurgency. That is, counter-terrorism is our primary security task, and to accomplish it we aim to deny terrorists haven with wars of occupation meant to resurrect government in anarchic states like Iraq and Afghanistan. We have other objectives – contain rising powers, stem weapons proliferation, etc, but these are secondary.

This strategy favors the Army. Ground forces take center-stage in counter-insurgency and state-building, with contributing performances from aircraft and other government agencies. It follows that our defense budget would flood money into the Army and Marines and cut the Air Force and Navy’s budget to pay for it. Instead, we have given each service the same bump in funds – roughly 35% percent under Bush.

Personally, I think this strategy is foolish. I’d prefer to stay out of other people’s civil wars and hunt terrorists via intelligence agencies and police. Ideally, Congress would push a more workable and cheaper strategy. But helping align forces with the politics that theoretically govern them is still worthwhile. Insofar as we have this flawed strategy, military posture ought to reflect it.

The Monitor quotes the Chairman of the Joint Chief’s of Staff, Admiral Mike Mullen, responding to Cooper’s critique by worrying that ending fixed service shares will unleash interservice competition. I say let them fight. Everyone assumes that because jointness is helpful on the battlefield, it must be great in defense planning. But service cooperation in the Pentagon has become collusion that prevents civilian control and therefore the implementation of national policy. And competition for resources between government entities can spark smarter public policy, including military innovation, as political scientists I know argue.

During the Eisenhower administration, the Air Force, which wielded the big stick – strategic airpower – in Ike’s massive retaliation strategy, got about half the defense budget. The Army and Navy fought over the remainder. Their scramble for relevance made them advocates of alternative strategies that relied less on nuclear weapons, or at least less on nuclear weapons delivered by bombers (the Navy responded by inventing submarine launched ballistic missiles). The strategic debate gave policy-makers both well-crafted alternatives and ready bureaucratic allies for their implementation.

Were the ground forces given half of the defense budget – or if that merely seemed politically possible – the other services’ self-interest might propel them to articulate opposing strategies. Even the Army’s slight gains have recently pushed the Navy and Air Force to rearticulate their relevance. The results so far are disappointing, but more open competition could be useful. The Navy might champion an off-shore balancing strategy and attack the current small war strategy. Civilians might develop a sharper sense of their alternatives.

The beneficiaries of fixed budget shares are the military services, who get budgetary security independent of their contribution to national security. The losers are the civilians trying to run the Pentagon and taxpayers. Cooper’s report won’t change anything alone, but it may help.

Blame German Tax Law, Not Liechtenstein Privacy Law

While European politicians are ganging up in an effort to bully Liechtenstein into surrendering its fiscal sovereignty, a couple of reporters for Bloomberg point out that Germany’s tax laws are the real problem. Tax rates are too high and the tax code is senselessly complicated. As a result, almost everyone in the country seeks to evade tax:

When Andreas bought a new hard drive at a Munich computer shop the clerk offered it for 127 euros with a receipt or 80 euros without. He took the lower price. Most Germans make similar deals to avoid high taxes, the film production manager said. …Chancellor Angela Merkel has failed to fulfill a campaign promise to simplify the tax code and reduce tax avoidance. Germans evade about 30 billion euros in taxes every year, estimated Dieter Ondracek, head of the German tax collectors’ union DStG. …”Unfortunately, tax evasion has become a popular sport in Germany,” Ondracek said Feb. 19 in an interview with Bloomberg Television in Berlin. Germany last year increased its top income tax rate to 45 percent, ranking it eighth among the 27 European Union nations. Capital gains taxes of as much as 50 percent are also among the highest in Europe. …People of more modest means can find loopholes in books such as “1,000 Legal Tax Tricks” by Franz Konz, who’s helped Germans cut their tax bills for 20 years. His book, published last year by Droener/Knaur, is the bestselling tax volume on Amazon.com’s German language site. Part of the issue is that German tax laws have become increasingly complicated as politicians added more and more exemptions. Since German reunification in 1990, the number of tax advisers in the country has jumped 60 percent to 72,669, according to the latest statistics from the BStBK tax advisers’ federation. …”People feel they don’t know all the loopholes so they’re constantly uneasy about paying too much tax, which prompts them to do things that are sometimes illegal,” [Andracek] said. “A tax burden that’s generally seen as too high and wasteful government spending” contribute to discontent. Andreas agrees. “It’s not about greed, it’s about getting by,” he said. “It’s not a crime if everybody does it.”

This story deserves a personal anecdote. On my first trip to Germany, for a tax reform conference in the mid-1990s, a couple of us decided to take a 30-minute cab ride from our conference center to downtown Cologne. We hailed a cab and the first thing the driver did was ask whether we needed a receipt. Not aware of Germany’s national pastime of tax evasion, we must have looked confused, so the driver helpfully explained that we could save 30 percent if he got his fare “off the books.” What did we decide? Well, I’ll leave that to your imagination.

Saber-Rattling Academic Urges Aggression, Bullying, Sanctions, and Annexation

Writing for the Financial Times, a professor from the London School of Economics identifies a number of enemy jurisdictions that pose a grave threat to the world. Some of these jurisdictions should be subject to sanctions, he writes, but in other cases he urges much more aggressive tactics, including annexation. What makes his article so interesting is his choice of targets. He is not targeting Iran. Presumably he does not worry about nuclear weapons in the hands of Islamic fundamentalists. Nor is he targeting North Korea, a rogue state that lets its own people starve. Other despotic regimes such as Cuba, Saudi Arabia, Turkmenistan, and Venezuela also get a free pass. Instead, Professor Buiter’s Axis-of-Evil is comprised of places such as Liechtenstein, Jersey, Luxembourg, Andorra, Guernsey, Switzerland, and Monaco. These jurisdictions, because of their low tax rates and respect for human rights, attract capital from high-tax nations and therefore make it a bit more difficult for politicians in places such as France and Germany to buy votes with other people’s money. Interestingly, Buiter’s penchant for aggression varies depending on the expected level of resistance. He wants little countries such as Monaco and Liechtenstein to be forcibly annexed as part of a tax-motivated Anschluss. But he is much less bellicose in the case of Switzerland, perhaps because every able-bodied male is a member of the militia and possesses a fully-automatic machine gun. And he doesn’t even mention the United States, even though Delaware and Nevada companies are excellent tax havens for non-Americans. Perhaps it is just a matter of time before he bravely adds America to his hit list. If nothing else, his article makes for amusing reading:

The list of countries that make a living out of tax evasion and related activities (essentially the same countries that consciously created, and in some cases continue to offer, facilities, laws, regulations and institutions to facilitate money laundering) is long. The OECD lists 35 microstates with the tax haven designation, but this excludes larger countries with strong bank secrecy laws whom the shoe fits just as well (e.g. Austria, Switzerland, Luxembourg). …The vast majority of European countries - all those that lose out because of the existence of these tax havens - should unite in a determined effort to end these countries’ ability to offer safety to tax evaders by granting anonymity, confidentiality and secrecy. The exact modalities may differ from case to case. Jersey, Guernsey and the Isle of Man should simply be absorbed lock, stock and barrel into the UK, with English laws, rules and regulations applying across the board. The special status of these strange entities is not cute; it’s an enabler and facilitator of unethical and illegal behaviour. The EU should adopt a directive on bank secrecy that would end the nefarious practices of Luxembourg and Austria. Belgian dentists will just have to get used to paying taxes. Andorra, Monaco and Liechtenstein should be given the choice of ending bank secrecy or facing annexation (by France and (once it abandons its bank secrecy laws) Austria respectively). Switzerland is the big prize, as unlike the other tax havens, it is a country rather than a dwarf-state and postage-stamp curiosity, and it is outside the EU. It should be subject to sufficiently stringent economic sanctions from its neighbours (after all, it is landlocked!) to induce it to abandon the laws, rules and regulations, including its extreme version of bank secrecy, that make it the one of the countries of choice for parking illegal or extra-legal money.

Fleecing Europe’s Taxpayers

Congress certainly has its share of crooks, but Members of the European Parliament make American lawmakers look like amateurs when it comes to pilfering tax monies for private gain. The U.K.-based Sun reports on the latest scandal:

Crooked MEPs are trousering cash meant for workers’ wages, it was revealed yesterday. Some hire “ghost” staff — then claim thousands of pounds from the £100million annual allowance. Others recycle the handout by employing unqualified relatives, a bombshell report on MEPs’ expenses found. In many cases the whole £125,000 allowance is paid to just one person on the staff. One assistant received a “Christmas bonus” worth 19 times their monthly salary. Taxpayers’ money is also being diverted to party funds, with the internal probe describing the corruption as “massive and widespread”.

Brussels had wanted to cover up the abuse — but EU fraudbusters have demanded a copy of the report. Last night Lib Dem MEP Chris Davies — one of a handful of people who have seen the audit — called it “dynamite”. He said: “The allegations should lead to the imprisonment of a number of MEPs. It’s embezzlement and fraud on a massive, massive scale.”

Poland to Join Flat Tax Club?

It’s a bit too soon to crank up the unofficial theme song of the flat-tax revolution, but it appears Poland will be the next nation to hop on the flat-tax bandwagon. Because of Poland’s large population and proximity to Germany, this will create additional pressure for better tax policy in Western Europe’s welfare states.

The UK-based Guardian reports:

Poland’s centre-right government plans to introduce a low, single-rate income tax by 2011 at the latest, Prime Minister Donald Tusk said on Friday. …”On Sunday we will announce a specific timetable for launching a flat tax,” Tusk told radio RMF FM. “2010 seems to be the most likely date of introducing the flat tax, 2011 is the worst case scenario.”

Poland now has a progressive personal income tax with three rates of 19, 30 and 40 percent. A source familiar with the matter told Reuters the flat tax would likely be set at 17 percent….

Finance Minister Jacek Rostowski said on Friday that taxes had to be lowered to ensure growth stays high in central Europe’s biggest economy. Tusk led his Civic Platform to an election victory last October by attracting young, educated and urban voters on promises of lower taxes [and] less state intervention in the economy.