Tag: taxation

Obamacare Will Be a Budget Buster

Does anyone think that a huge new entitlement program will lead to lower budget deficits? Sounds implausible, yet proponents of government-run healthcare claim this is the case according to the official estimates from the Congressional Budget Office and Joint Committee on Taxation.

To use a technical phrase, this is hogwash. This new 6-1/2 minute video, narrated by yours truly, gives 12 reasons why Obamacare will lead to higher deficits - including real-world evidence showing how Medicare and Medicaid are much more costly than originally projected.

By the way, this video doesn’t even touch on the mandate issue, which Michael Cannon explains is not being counted in order to make the cost of government-run healthcare less shocking.

Feds Giveth Jobs & Cars, Then Taketh Away Again

The bad news this morning on the impact of both the federal stimulus and the Cash for Clunkers program should not come as a surprise to anyone who has paid attention to the history of government intervention in the economy.

New data that the jobs created by the stimulus have been overstated by thousands is compelling, but it’s really a secondary issue. The primary issue is that the government cannot “create” anything without hurting something else. To “create” jobs, the government must first extract wealth from the economy via taxation, or raise the money by issuing debt. Regardless of whether the burden is borne by present or future taxpayers, the result is the same: job creation and economic growth are inhibited.

At the same time the government is taking undeserved credit for “creating jobs,” a new analysis of the Cash for Clunkers program by Edmunds.com shows that most cars bought with taxpayer help would have been purchased anyhow. The same analysis finds the post-Clunker car sales would have been higher in the absence of the program, which proves that the program merely altered the timing of auto purchases.

Once again, the government claims to have “created” economic growth, but the reality is that Cash for Clunkers had no positive long-term effect and actually destroyed wealth in the process.

Right now businesses and entrepreneurs are hesitant to make investments or add new workers because they’re worried about what Washington’s interventions could mean for their bottom lines. The potential for higher taxes, health care mandates, and costly climate change legislation are all being cited by businesspeople as reasons why further investment or hiring is on hold. Unless this “regime uncertainty” subsides, the U.S. economy could be in for sluggish growth for a long time to come.

For more on the topic of regime uncertainty and economic growth, please see the Downsizing Government blog.

For Financial Stability, Fix the Tax Code

There seems to be near universal agreement that the excessive use of debt among both corporations, particularly banks, and households contributed to the severity of the financial crisis.  However, other than the occasional refrain that banks should hold more capital, there has been little discussion over why corporations choose to be so highly leveraged in the first place.  But then such a discussion might lead us to the all too obvious answer – the federal government, via the tax code, encourages, even heavily subsidizes corporate leverage.

Cato scholar and banking analyst Bert Ely has estimated that the subsides for debt have historically resulted in an after tax cost of debt of 3 to 5 percent, compared to an after tax cost of equity of 12 to 15 percent.  With differences of this magnitude, it should not be surprising that financial companies and corporations in general become highly leveraged.

For corporations, this massive difference in cost between debt and equity financing results primary from the ability to deduct interest expenses on debt, while punishing equity due to the double-taxation of dividends along with taxing capital gains. 

If we are going to use the tax code to subsidize debt and tax equity, we shouldn’t act surprised when firms load up on the debt and reduce their use of equity – making financial crises all too frequent and severe.

An Uneven Playing Field

Cato’s tax experts, Chris Edwards and Dan Mitchell, have written extensively on international tax competition. Their research shows that countries can help attract investment and spur economic growth by lowering their tax rates.

Could countries employ this same strategy to make their sports teams better?

Real Madrid, one of the most popular and successful soccer teams in the world, recently purchased the rights to two of the sport’s top players. They acquired Kaka, who was named the world’s best soccer player in 2007, from Italian powerhouse, AC Milan. And they lured Cristiano Ronaldo, the world’s top player in 2008, away from Manchester United, the reigning champions of the English Premier League.

There are a number of reasons why Kaka and Ronaldo are moving to Spain, but it’s pretty clear that taxes played a significant role. That’s because in 2005, Spain passed a tax break for foreign workers, including soccer players. This gives Spanish teams a huge advantage in bidding wars with teams from higher-tax countries like Italy and England. To make matters worse, England recently raised its top income tax rate.

“The new tax rate in England is going to make things much harder for English clubs,” noted Jonathan Barnett, a leading sports agent whose clients include Glen Johnson, Ashley Cole and Peter Crouch. “It will hinder the [English] Premier League and help the Spanish league because Spain has big tax discounts for footballers, so there’s an enormous advantage to go there. Someone like Ronaldo could be offered the same money at Real Madrid but be 25% better off.”

Similarly, a frustrated executive from AC Milan blames Kaka’s departure on the Italian tax system: “I repeat, this is all a matter of different types of taxation. If we were a Spanish club, we would have saved €40 million.”

Policymakers and soccer fans alike should take note.

America Alone on Punitive Corporate Taxes

In Tax Notes International today, two Ernst and Young experts describe how corporate tax reforms in Japan have made America an even bigger outlier in its punitive treatment of multinational corporations:

Japan’s recent adoption of a territorial tax system as part of a broader tax reform reduces the tax burden on the foreign-source income of Japanese multinational corporations.

Before the Japanese reform, the two largest economies had both high corporate income tax rates and worldwide tax systems. Now the United States not only has the second-highest corporate income tax rate of the OECD countries, it is also one of the few that still have a general worldwide tax system.

The Japanese corporate tax reform is part of a global trend toward reduced taxation of corporate income, which often takes the form of a significantly reduced corporate tax rate but also is reflected through reduced taxation of foreign-source income.

The details of the president’s budget proposal to reform deferral are expected in the coming weeks. As we await the specifics, it is clear that the direction of the proposal runs counter to this strong current of global corporate tax reform with lower overall corporate tax rates and reductions in domestic taxation of foreign-source income.

In simple terms, Japan’s reforms may give firms such as Toyota or Hitachi an advantage over firms such as Ford or General Electric in international markets.

Alas, U.S. policymakers don’t seem to understand that in a globalized world of free-flowing capital we need to change our uncompetitive tax policies. At Cato, we will keep trying to educate them, but it is sad that our economy loses jobs and investment because our elected leaders are such slow learners compared to leaders in Japan, Jordan, Canada, and elsewhere.

Globalization and Tax Reform

Despite the recession, globalization continues to exert pressure for beneficial tax reforms. From Tax Notes International today:

Jordanian Finance Minister Bassem al-Salem on April 20 confirmed that the government is working on draft legislation that would cut corporate tax rates drastically, reducing them in some cases by more than half.

Al-Salem said the government will seek to introduce a single 12 percent tax rate for most corporate entities, although companies in the banking, insurance, and mining sectors would pay tax at a rate of 25 percent. The current corporate tax rates range from 15 percent to 35 percent for different profit levels and also differ by business sector.

The draft legislation would also rationalize individual income tax, custom duties, and other taxes to increase efficiency, al-Salem said. Jordan has about 100 different taxes.

Al-Salem said the tax cuts are needed because many countries in the region either don’t have taxes at all or have much lower tax rates than Jordan’s, making them more attractive jurisdictions for investment.

 The full story on taxation and globalization is here.

Agony of Defeat

Oh, what a burn. My tax debate with French economist Thomas Piketty was a dead heat, 50-50, for the past four days. Then just as the contest was closing, he pulled ahead to seize victory, 51-49.

The Economist editor described the tightly fought battle:

Chris Edwards got over a strong initial disadvantage to narrow what was originally a strong lead for Mr Piketty to a dead heat, but eventually Mr Piketty has prevailed: but only just—even hours before closing, the vote was split exactly down the middle. One could not have asked for a closer contest: this has been the most closely-fought of our 21 online debates, although it began with a fairly substantial lead for the proposition.

Certainly, the debate revealed high levels of interest in taxation and relative income levels. There were more than 1,100 reader comments posted, making it the “most commented” story on the Economist site for the last 10 days or so. My thanks to all the supportive voters and commenters.

Piketty won the website voting battle, but I don’t think he’ll win the war. Global tax competition has led to large cuts in top tax rates in recent decades, and will continue to exert downward pressure for years to come. However, these are dangerous times as governments press to end financial privacy, to create international tax cartels, and to substitute competition with multinational government power in various other ways.