Tag: tax

Latvia Retains Flat Tax, Disappointing Class-Warfare Advocates

The Baltic nation of Latvia is in the middle of a serious economic downturn resulting largely from a credit bubble and excessive government spending. This created an opening for those who have long wanted to undo the nation’s flat tax and impose a discriminatory system. Indeed, the economic Luddites at the Tax Research Network were already celebrating the expected demise of the single-rate tax. Unfortunately for them (but fortunately for Latvians), the government made a stunning announcement that the flat tax will be retained according to Reuters:

Latvia’s government is to reduce old age pensions and state sector salaries but not raise taxes, it said on Thursday as it tries to win more loans and avert crisis and possible currency devaluation. The five-party coalition government agreed with social partners such as unions and employers on ways to find savings of 500 million lats ($1.01 billion) to win further loans from the International Monetary Fund and European Union, which are seen as the only way to survive a deep economic slump. “It was a difficult decision and it will not be popular but it had to be done,” Prime Minister Valdis Dombrovskis told reporters after a marathon and sometimes chaotic government session of almost 12 hours. “Our decision is sending a signal to the EU that we are serious,” he added. Against expectations, the government decided against introducing a progressive income tax for the first time to replace the current flat tax of 23 percent. The moves will include a cut in old age pensions of 10 percent, a whopping 70 percent cut in the pensions of those who still work, and a 20 percent cut in state sector salaries.

To be sure, this may not be the last word on this issue. Latvian politicians eventually may decide to undo the flat tax. Or perhaps Iceland’s new left-wing government may be the first nation to backslide to a so-called progressive tax system. Regular readers of the blog may recall that we have a theme song that we include every time there is an announcement of a new flat tax nation. In preparation for bad news, we have selected a theme song for when a nation decides to go in the wrong direction.

IRS Wants Worker Cell Phones to Be Taxable

With about 100,000 employees (more than the CIA and FBI combined), the IRS has plenty of people who daydream about new ways of taking money from taxpayers. The latest scheme to emanate from the tax bureaucracy is to classify employer-provided cell phones as a taxable fringe benefit.

To be fair, non-pecuniary forms of compensation should be treated the same as cash income, but a bit of common sense should apply. What happens with cell phone plans with unlimited minutes, meaning that a business is not paying extra for personal calls? And if the IRS does go down this path, why harrass individuals when it would be much easier to simply make a portion of cell phone costs non-deductible for companies? It almost seems as if the IRS wants to instigate a tax revolt.

The Wall Street Journal reports:

The Internal Revenue Service proposed employers assign 25% of an employee’s annual phone expenses as a taxable benefit. Under that scenario, a worker in the 28% tax bracket, whose wireless device costs the company $1,500 a year, could see $105 in additional federal income tax….

The IRS move, which is spurring efforts by the wireless industry and others to kill the idea, would mark a stricter enforcement of an existing rule that classifies employer-provided cellphones as a taxable benefit, rather than a 24-hour-a-day work tool. Under a 1989 law, workers who use company-provided mobile phones for personal calls are supposed to count the value of those calls as income and pay federal income taxes accordingly. But businesses and workers have long ignored the requirement, prompting the IRS to consider steps the agency said would make it easier for businesses and workers to comply.

…Wireless companies also argue the IRS rule is outdated. Rates have declined so dramatically in the past decade — with night and weekend calls free under many plans — that it makes little sense for the IRS to assess employee benefits by nickels and dimes. “This is a regulation from a bygone time, dating back to the infancy of the cellphone business, and it is in desperate need of updating,” said Howard Woolley, a senior vice president with Verizon Wireless, a venture of Verizon Communications Inc. and Vodafone Group PLC.

Senators Want to Delay Housing Recovery

As discussed in a recent Bloomberg piece, several U.S. senators from both parties are pushing to almost double the recently enacted $8,000 tax credit for first-time homebuyers to $15,000. The same senators are also pushing to remove the current income restrictions — $75,000 for individuals and $150,000 for couples — while also removing the first-time buyer requirement.

The intent of the increase, and the original credit, is to increase the demand for housing and to create a “bottom” to the housing market. The flaw of this approach is that it creates a false bottom, one characterized by government-inflated prices and not fundamentals. It was excessive government subsidies into housing that helped create the housing bubble, additional subsidies to re-inflate the bubble will only prolong the actual market adjustment.

If it were only a matter of prolonging the adjustment, then the huge cost of the tax credit might be easier to justify. Yet by encouraging increased housing production, the tax credit will increase supply when we already have a huge glut of housing. Despite housing starts being near 50-year lows, there is still too much construction going on. The way to spur demand in housing is the same way you spur demand in any market: you cut prices.

Removing the income limits makes clear the real intention of the tax credit, to help the wealthiest households. About three-fourths of existing families already fall under the income cap of $75,000. As we move up the income latter, home equity makes up a smaller percentage of one’s total wealth. The richest families can make do with a decline in their housing wealth and continue spending; they have other substantial sources of wealth. If we have learned anything from the housing boom and bust, it should be that continued government efforts to rearrange the housing market have been costly failures.

Cash for Clunkers Lesson: How to Use the $$ to Buy a Gas Guzzler

My son’s station car is an old Ford Explorer AWD which, despite being a V-6, was rated at about 15 mpg.  Approaching 100,000 miles, the SUV’ s resale value is very low.

The House approved a bill to give him a $3,500 voucher to buy a car that is supposed to get only 18 mpg, or $4,500 if it gets 20 mpg.  Only 18-20 mpg?  That’s not moving us much closer to President Obama’s pie-in-the-sky 35.5 mpg goalpost is it?

Consider how easy it would be to game this giveaway program by using that $4,500 voucher to buy a big SUV or V-8 muscle car.

First of  all, with Chrysler and GM dealerships folding, it should be easy to buy a mediocre Chevy Cobalt or Dodge Caliber for about $10,000 more than the voucher.

What you do next is sell that boring econobox, even if you end up with $1,000 less than you paid – that still leaves you with $3,500 of free money, courtesy of taxpayers.

As this  process unfolds, the flood of resold small cars will make it even  harder for GM, Chrysler and Ford dealers to get a decent price for small cars, because of added competition from new cars being resold as used.

That’s their problem, not yours.

So, take the $9,000 net from reselling the crummy little car plus the $4,500 from Uncle Sam.  Then use that $13,500 to make a big down payment on a used Cadillac Escalade,  Toyota Tundra pickup or Corvette.

File this under “unintended consequences” (my own file is running out of space).

School Choice, Not Stalemate

A Washington Post editorial today rightly laments the seemingly insurmountable impasse reached by D.C. Schools Chancellor Michelle Rhee and the Washington Teachers Union. Actually, scratch the WTU – I mean the American Federation of Teachers, the WTU’s parent organization, which has essentially taken over the negotiations because it thinks giving into much higher pay for somewhat less job security would be a disaster of national proportions. But the union’s stifling full court press isn’t what primarily bothers the Post. It’s that lowly John Q. Public isn’t getting even a crumb of information from the power brokers about major decisions that are all supposed benefit his kids.

But since when did the best interests of kids or the public really matter in public schooling decisions? Sure, parents and regular citizens can vote every few years, but what the heck else can they do? They can’t stop paying the taxes that fund both chancellors and teachers. They can’t form their own union and require teachers and chancellors to negotiate with them. All they can do is complain, and it’s pretty hard to hear them when you’re behind closed doors, arguing with some other guy about which one of you should be king.

And to think, someone thought it was a good idea to kill a program that actually gives parents some power…

Should You Vote on Keeping Your Local Car Dealership?

There are lots of reasons Washington should not bail out the automakers.  Whatever the justification for saving financial institutions – the “lifeblood” of the economy, etc., etc. – saving selected industrial enterprises is lemon socialism at its worst.  The idea that the federal government will be able to engineer an economic turnaround is, well, the sort of economic fantasy that unfortunately dominates Capitol Hill these days.

One obvious problem is that legislators now have a great excuse to micromanage the automakers.  And they have already started.  After all, if the taxpayers are providing subsidies, don’t they deserve to have dealerships, lots of dealerships, just down the street?  That’s what our Congresscritters seem to think.

Observes Stephen Chapman of the Chicago Tribune:

The Edsel was one of the biggest flops in the history of car making. Introduced with great fanfare by Ford in 1958, it had terrible sales and was junked after only three years. But if Congress had been running Ford, the Edsel would still be on the market.

That became clear last week, when Democrats as well as Republicans expressed horror at the notion that bankrupt companies with plummeting sales would need fewer retail sales outlets. At a Senate Commerce Committee hearing, Chairman Jay Rockefeller, D-W.Va., led the way, asserting, “I honestly don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave it to local dealers and their customers to fend for themselves.”

Supporters of free markets can be grateful to Rockefeller for showing one more reason government shouldn’t rescue unsuccessful companies. As it happens, taxpayers are less likely to get their money back if the automakers are barred from paring dealerships. Protecting those dealers merely means putting someone else at risk, and that someone has been sleeping in your bed.

The Constitution guarantees West Virginia two senators, and Rockefeller seems to think it also guarantees the state a fixed supply of car sellers. “Chrysler is eliminating 40 percent of its dealerships in my state,” he fumed, “and I have heard that GM will eliminate more than 30 percent.” This development raises the ghastly prospect that “some consumers in West Virginia will have to travel much farther distances to get their cars serviced under warranty.”

Dealers were on hand to join the chorus. “To be arbitrarily closed with no compensation is wasteful and devastating,” said Russell Whatley, owner of a Chrysler outlet in Mineral Wells, Texas.

Lemon socialism mixed with pork barrel politics!  Could it get any worse?  Don’t ask: after all, this is Washington, D.C.

Injustice of Federal Subsidies

Ohio lawmakers are hot under the collar about federal stimulus dollars possibly helping Georgia bid away one of its big employers. Here’s the Dayton Daily News:

NCR’s news release touting its decision to move jobs from Dayton to the Atlanta, Ga. suburbs includes one factoid that has Ohio lawmakers in a fury: The City of Columbus, Ga. plans to use federal stimulus dollars to buy a building and construct another to accommodate the 870 manufacturing jobs expected to come to the that Atlanta suburb. ‘The fact that economic stimulus dollars were used to move an Ohio company to Georgia at taxpayer expense is an outrage,’ said state Sen. Jon Husted.

Added U.S. Rep. Pat Tiberi, R-Columbus: “Federal stimulus money is being used to create winners and losers among workers in different states and that’s just not right; it’s dirty.”

All I can say to both parties is that’s what you get for building an imperial city on the Potomac and spending the last few decades destroying the constitutional principle of federalism. As I’ve described in this study, regional warfare over federal subsidies has escalated in recent years. It’s horribly wasteful, and it’s getting worse.