Tag: Competitiveness

Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

Boost Worker Pay - and Make the United States More Competitive - by Gutting the Corporate Income Tax

The business pages are reporting that Chrysler will be fully owned by Fiat after that Italian company buys up remaining shares.

I don’t know what this means about the long-term viability of Chrysler, but we can say with great confidence that the company will be better off now that the parent company is headquartered outside the United States.

This is because Chrysler presumably no longer will be obliged to pay an extra layer of tax to the IRS on any foreign-source income.

Italy, unlike the United States, has a territorial tax system. This means companies are taxed only on income earned in Italy but there’s no effort to impose tax on income earned - and already subject to tax - in other nations.

Under America’s worldwide tax regime, by contrast, U.S.-domiciled companies must pay all applicable foreign taxes when earning money outside the United States - and then also put that income on their tax returns to the IRS!

And since the United States imposes the highest corporate income tax in the developed world and also ranks a dismal 94 out of 100 on a broader measure of corporate tax competitiveness, this obviously is not good for jobs and growth.

No wonder many American companies are re-domiciling in other countries!

Maybe the time has come to scrap the entire corporate income tax. That’s certainly a logical policy to follow based on a new study entitled, “Simulating the Elimination of the U.S. Corporate Income Tax.”

Written by Hans Fehr, Sabine Jokisch, Ashwin Kambhampati, Laurence J. Kotlikoff, the paper looks at whether it makes sense to have a burdensome tax that doesn’t even generate much revenue.

The U.S. Corporate Income Tax…produces remarkably little revenue - only 1.8 percent of GDP in 2013, but entails major compliance and collection costs. The IRS regulations detailing corporate tax provisions are tome length and occupy small armies of accountants and lawyers. …many economists…have suggested that the tax may actually fall on workers, not capitalists.

Wise Words on Fiscal Sovereignty and Corporate Taxation (sort of) from Bill Clinton

I’ve always had a soft spot in my heart for Bill Clinton. In part, that’s because economic freedom increased and the burden of government spending was reduced during his time in office.

Partisans can argue whether Clinton actually deserves the credit for these good results, but I’m just happy we got better policy. Heck, Clinton was a lot more akin to Reagan that Obama, as this Michael Ramirez cartoon suggests.

Moreover, Clinton also has been the source of some very good political humor, some of which you can enjoy here, here, here, here, and here.

Most recently, he even made some constructive comments about corporate taxation and fiscal sovereignty.

Here are the relevant excerpts from a report in the Irish Examiner.

It is up to the US government to reform the country’s corporate tax system because the international trend is moving to the Irish model of low corporate rate with the burden on consumption taxes, said the former US president Bill Clinton. Moreover, …he said. “Ireland has the right to set whatever taxes you want.” …The international average is now 23% but the US tax rate has not changed. “…We need to reform our corporate tax rate, not to the same level as Ireland but it needs to come down.”

Kudos to Clinton for saying America’s corporate tax rate “needs to come down,” though you could say that’s the understatement of the year. The United States has the highest corporate tax rate among the 30-plus nations in the industrialized world. And we rank even worse—94th out of 100 countries according to a couple of German economists—when you look at details of how corporate income is calculated.

A Rare Sign of Fiscal Sanity in France

We have an amazing man-bites-dog story today.

Let’s begin with some background information. A member of the European Commission recently warned that:

“Tax increases imposed by the Socialist-led government in France have reached a “fatal level”…[and] that a series of tax hikes since the Socialists took power 14 months ago – including €33bn in new taxes this year – threatens to “destroy growth and handicap the creation of jobs”.

Given the pervasive statism of the European Commission, that was a remarkable admission.

But the Commissioner who issued that warning, Olli Rehn, is Finnish, so French politicians presumably don’t listen to his advice any more than they listen to the thoughtful, well-meaning, and generous suggestions I make.

Indeed, based on the actions of the current President and the former President, we can say with great confidence that French politicians compete over who can pursue the most misguided policies.

But maybe, just maybe, there are some people inside France who realize the house of cards is in danger of collapse.

Here are some excerpts from a story I never thought I would read. At least one senior official in France has woken up to the dangers of ever-rising taxes and an always-growing burden of government spending.

France’s state auditor urged the government Tuesday to redouble efforts to limit spending rather than increases taxes… The head of the state auditor, Didier Migaud, said the interruption in deficit reduction stemmed primarily from lower-than-expected tax revenue, due to the weak economy. Yet, he said “the spiraling welfare debt was particularly abnormal and particularly dangerous.” During his first year in power, President François Hollande relied on large tax increases to plug holes in public finances, including social programs such as pensions, unemployment benefits and health care. But economic stagnation in 2012, coupled with a mild recession at the start of 2013, has waylaid the plan, while both companies and households are crying foul over what some have called “a tax overdose.” Mr. Migaud added his voice, saying: “The strategy of fixing the system by collecting new revenue is reaching its limits.”

Before any further analysis, I have to make one correction to the story. Hollande’s plan was not “waylaid” by a recession. Instead, his policies doubtlessly helped cause a recession. You don’t impose huge tax hikes on productive behavior without some sort of negative impact on economic performance.

So the “holes in public finances” are at least partially a result of the Laffer Curve. As I’ve repeatedly warned, higher tax rates rarely - if ever - collect as much money as politicians expect.

Returning to the specific case of France, the fiscal variable that should set off the most alarm bells is that the burden of government spending has soared to 57 percent of GDP. And based on projections from the BIS, OECD, and IMF, that number is going to get even worse in the future.

This is the data that presumably has convinced Monsieur Migaud that France is approaching the point of no return on taxes and spending.

Interestingly, the French people may be ahead of their politicians. Polling data from 2010 and 2013 show that ordinary people very much understand the need to limit the size and scope of government.

Heck, a majority of French people have said they would be interested in escaping to the United States if they had the opportunity. And successful people already have been leaving the country because of punitive tax rates.

But I’m not sure I believe the aforementioned polls. If the French people genuinely have sound views, why do they keep electing bad politicians? Of course, the same thing could be said about the United States, so perhaps I shouldn’t throw stones in my glass house.

P.S. My favorite example of government running amok in France is the law threatening three years in jail if you say your husband is a fat slob or if you accuse your wife of being a nag.

P.P.S. The most vile French official may be the current Prime Minister, who actually had the gall to complain that some of his intended victims weren’t quietly entering the slaughterhouse.

P.P.P.S. Just in case you think I’m exaggerating about France being a fiscal hellhole, more than 8,000 households last year were subjected to a tax burden of more than 100 percent . Obama must be very envious.

Turning New York City into Detroit?

I recently speculated whether Detroit’s fiscal problems should be a warning sign for the crowd in Washington.

The answer, of course, is yes, though it’s not a perfect analogy. The federal government is in deep trouble because of unsustainable entitlement programs while Detroit got in trouble because of a combination of too much compensation for bureaucrats and too many taxpayers escaping the city.

A better analogy might be to compare Detroit to other local governments. Some large cities in California already have declared bankruptcy, for instance, and you can find the same pattern of overcompensated bureaucrats and escaping taxpayers.

And the same thing may happen to New York City if the next mayor is successful in pushing for more class-warfare tax policy. Here are some excerpts from an excellent New York Post column by Nicole Gelinas:

Mayoral candidate Bill de Blasio…thinks New York can hike taxes on the rich and not suffer… De Blasio’s scheme is this: Hike income taxes by 13.8 percent on New Yorkers making above half a million dollars annually….After five years, de Blasio would let this tax surcharge lapse, and — he says — find another way to pay.

But there’s a big problem with de Blasio’s plan. Rich people are not fatted calves meekly awaiting slaughter.

In 2009, the top 1 percent of taxpayers (the 34,598 households making above $493,439 annually) paid 43.2 percent of city income taxes (they made 33.9 percent of income), according to the city’s Independent Budget Office. Each of these families paid an average $75,477. No, most people won’t up and leave (though if 20 percent did, they’d leave New York with less money than before the tax hike). But they can rearrange their incomes. Unlike most of us, folks making, say, $10 million have considerable control over how and when they get paid. That’s because much of their money comes from cashing out a partnership, or selling stock or a house or a painting. To avoid a tax hike, it’s easy enough for them to pay themselves earlier by selling their stuff earlier — before the tax hike. The city made $800 million in extra taxes last year because rich people sold their stuff before President Obama increased investment taxes in December. Or, people can pay themselves later — after the five years’ worth of higher taxes are up.

Gelinas makes some very important points. She warns that the city would have less money if just 20 percent of rich people escaped. She doesn’t think that will happen, but she does explain that rich people can stay but take some simple steps to reduce their taxable income.

More Compelling Evidence that America’s Corporate Tax System Is Pointlessly Destructive

It’s probably not an exaggeration to say that the United States has the world’s worst corporate tax system.

We definitely have the highest corporate tax rate in the developed world, and we may have the highest corporate tax rate in the entire world depending on how one chooses to classify the tax regime in an obscure oil Sheikdom.

But America’s bad policy goes far beyond the rate structure. We also have a very punitive policy of “worldwide taxation” that forces American firms to pay an extra layer of tax when competing for market share in other nations.

And then we have rampant double taxation of both dividends and capital gains, which discourages business investment.

No wonder a couple of German economists ranked America 94 out of 100 nations when measuring the overall treatment of business income.

So if you’re an American company, how do you deal with all this bad policy?

Well, one solution is to engage in a lot of clever tax planning to minimize your taxable income. Although that’s probably not a successful long-term strategy because the Obama Administration is supporting a plan by European politicians to create further disadvantages for American-based companies.

More Americans Going Galt

President Obama promised he would unite the world…and he’s right.

Representatives from all parts of the globe have bitterly complained about an awful piece of legislation, called the Foreign Account Tax Compliance Act (FATCA), that was enacted back in 2010.

Michael Ramirez/Investor's Business Daily(Michael Ramirez/Investors Business Daily)

They despise this unjust law because it extends the power of the IRS into the domestic affairs of other nations. That’s an understandable source of conflict, which should be easy to understand. Wouldn’t all of us get upset, after all, if the French government or Russian government wanted to impose their laws on things that take place within our borders?

But it’s not just foreign governments that are irked. The law is so bad that it is causing a big uptick in the number of Americans who are giving up their citizenship.

Here are some details from a Bloomberg report.

Americans renouncing U.S. citizenship surged sixfold in the second quarter from a year earlier… Expatriates giving up their nationality at U.S. embassies climbed to 1,131 in the three months through June from 189 in the year-earlier period, according to Federal Register figures published today. That brought the first-half total to 1,810 compared with 235 for the whole of 2008. The U.S., the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside.

I’m glad that the article mentions that American law is so out of whack with the rest of the world.