Topic: General

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.

Germany Lurches Left: Sacrificing German Liberty and Germany’s Future

BERLIN—Germany’s Christian Democrats and Social Democrats have formed another “Grand Coalition.”  The political center in Europe’s wealthiest and most populous state now swallows most of the ideological spectrum. However, the entire political spectrum has lurched to the left.

The Christian Democratic Union-Christian Social Union combination (sister parties which run as one) is a pale version of the Republican Party.  The CDU-CSU long ago made peace with Germany’s generous welfare state. 

Even less inclined to act is CDU Chancellor Angela Merkel. She pulled her party leftward in 2005 into a Grand Coalition with the Social Democratic Party, which went on to do essentially nothing. 

She won a second term in 2005 but did little more to liberate German life. Her latest reelection campaign was based on keeping everything the way it was.

The CDU-CSU fell only five votes short of a majority. However, the poll was a disaster for the CDU-CSU’s coalition partner, the Free Democratic Party. Created in 1948 out of the ruins of the Third Reich, the FDP emphasized civil liberties, economic freedom, and entrepreneurship. In 2009, the Free Democrats enjoyed their best showing ever, 14.6 percent, and their support made Merkel Chancellor.

However, they proved to be less adept in governing. As the September election approached, the Free Democrats lacked any noticeable achievements. 

A new political competitor, Alternative for Germany criticized the endless Euro bail-outs while backing the same market-oriented economic policies as the Free Democrats. Many FDP voters shifted allegiance.   

The FDP fell just short of the five percent threshold, receiving 4.76 percent of the vote. It went from 93 Bundstag seats to none. The Free Democrats still hold some seats in regional parliaments and the European Parliament, but have no obvious path back to national power. The AFD came in just behind the FDP, with 4.7 percent, and also won no seats. However, it is well-positioned to advance, putting the FDP’s survival at risk.

The Free Democrats’ collapse left the Bundestag with a narrow left-wing majority.  However, both the SPD and Greens pledged not to join forces with Die Linke, or Left party, since it was the successor to the Communists who once ruled East Germany. 

As I pointed out in my Forbes online column:

Although the CDU-CSU was much stronger in the Bundestag, the Social Democrats demanded specific concessions, such as a national minimum wage, which will reduce Germany’s employment advantage over its European neighbors, limitations on temporary employment, which will cut job opportunities, expanded pension benefits, which will add to the financial burden of an aging society, higher than necessary state pension contributions, which will be looted to fund political initiatives, and urban rent controls, which will discourage apartment construction and maintenance.

The Economist magazine warned of “Die Grosse Stagnation” likely to come. Europe’s largest economy faces slow labor productivity, falling investment, and minimal reforms since the start of the Euro crisis. 

It is not just the government which has moved left. During the last Grand Coalition the FDP was the largest opposition party, leaving its leader the unofficial opposition leader. In this Bundestag the largest opposition party will be Die Linke. Just behind will be the Greens, traditionally known for their environmental commitment but of late pushing leftist economic nostrums as well. 

Nor does the drift stop with the left-wing parties. The Free Democrats held a special party congress in Berlin and responded to the election debacle by making Christian Lindner of North Rhine-Westphalia the new party chairman. Lindner is seen as less committed to the party’s liberal principles.

Like Americans, the German people have worked hard to prosper despite an ever-expanding regulatory welfare state. But they will find it ever more difficult to succeed as their government moves further left.  Then they will come to miss having a voice for economic and social liberty in the Bundestag. 

“Power 5” Power Play: Just Higher Ed Being What It Is

Though the NCAA still runs ads suggesting that college sports is all about students who happen to be athletes, big-time college football and basketball programs have basically given up the pretense of being about anything other than big bucks and big wins. See, for instance, the latest power play by the “BCS” football conferences.

That’s fine – better they be open about what drives them. Unfortunately, as I write in this SeeThruEdu post, the rest of higher ed is similarly self-interested. Problem is, it won’t admit it, and uses the notion that it’s all about the “common good” to get taxpayer money, often without producing any real benefit for the people paying the bills. 

North Korea’s Kim Dynasty Consumes Its Own: No Love in this Family

North Korea’s “Dear Leader” Kim Jong-il has been dead not quite two years, but his son, Kim Jong-un, appears to have taken control.  And in a much bloodier fashion than predicted, with the execution of his uncle and one-time mentor Jang Song-taek.  However, no one knows whether the regime is stabilizing or destabilizing.

The ascension of Kim fils never seemed certain.  Not yet 30 when his father passed, Kim had had little time to secure the levers of power.  Moreover, Pyongyang is a political snake-pit. 

Over the last two years hundreds of officials, many in the military, have been removed from office.  Until Jang the most dramatic defenestration was of army chief of staff Ri Yong-ho.  His departure in July 2012, alleged for reasons of health, was dramatic and sudden. 

Of greater concern to the West was North Korean policy.  The country had established a reputation for brinkmanship and confrontation.  The new government reinforced this approach. 

For instance, rhetorical attacks on and threats against South Korea and the U.S. rose to unprecedented heights.  The Democratic People’s Republic of Korea recently detained an 84-year-old American Korean War veteran and tourist for six weeks on bizarre charges.

Equally important, there is no evidence of reform, either economic or political.  Observed Bruce Klingner of the Heritage Foundation:  Kim Jong-un “has increased public executions, expanded the gulags for political prisoners, and increased government punishment for anyone caught with information from the outside world.” 

Now comes Jang’s ouster.  There is no reason for the West to mourn his passing.  But previously family members only disappeared. 

Jang’s execution could demonstrate that Kim Jong-un is solidifying his rule.  Removing another minder appointed by his father would seem to leave Kim more securely in charge.  Moreover, a willingness to execute likely deters anyone but the most determined or desperate from challenging the leadership. 

Nevertheless, the DPRK could be heading for further instability.  The episode is unprecedented, which suggests that something is amiss in paradise.  Jang could have been the casualty of a messy power struggle likely to grow worse.  If he can be taken down, no one is safe.  Fear may widen leadership divisions, spur internal resistance, and draw in the military. 

As I point out in my latest article in National Interest online:

Political uncertainty in Pyongyang almost certainly will reduce the already minimal likelihood of domestic reform and foreign engagement.  If Kim truly has consolidated power, he might feel freer to act.  However, even then orchestrating a wider purge would absorb time and effort.  And if he fears continuing opposition to his reign he probably will put off any potentially controversial policies, especially if they conflict with the interests of the military, which still potentially wields ultimate power.

Further, Jang was associated with economic reform and China relations.  After his death Jang was criticized for his economic activities.  It is hard to imagine economic reform speeding up in a government sundered by a power struggle in which a top economic official was just executed.

The greatest danger is that Kim Jong-un’s apparent ruthlessness may be less constrained internationally than that of his father and grandfather.  If the younger Kim is taking on full dictatorial power, he might misperceive domestic authority as translating into international strength.  Or if his authority is under challenge at home, he might be tempted to provoke a foreign crisis. 

The DPRK long has been the land of no good options, the geopolitical problem with no good answers.  Even if Jang’s execution changes nothing, it reminds us that North Korea remains a threatening yet mysterious presence in Northeast Asia.  And the ongoing leadership transition—whether solidified or unsettled—isn’t likely to bring peace or stability to the region.

WSJ: Dems Nuked Filibuster to Defeat Halbig v. Sebelius

Wall Street Journal editorial surmises that Senate Democrats eliminated the filibuster for non-Supreme Court judicial appointments so they could pack the U.S. Court of Appeals for the D.C. Circuit with judges that would block an important ObamaCare case called Halbig v. Sebelius:

Democrats surprised Republicans in November with how quickly they dismantled the filibuster, and we are beginning to see why. Another major challenge to ObamaCare is being heard by a D.C. Circuit district judge, this time concerning whether subsidies can be delivered by the federal exchanges. Then there’s the new IRS proposed rule curtailing the political speech of 501(c)(4) groups. This rule will also probably make its way to the D.C. Circuit, and blocking GOP-leaning groups from politicking is part of the Democratic strategy for holding the Senate in 2014.

Democrats figure they have a better chance to win if they have more nominees on the appeals court—either in a three-judge panel or en banc. The plaintiffs could appeal to the Supreme Court if they lose, but you never know if the Justices will take a case.

Case Western Reserve University law professor Jonathan H. Adler and I laid the groundwork for Halbig and three other cases challenging President Obama’s attempt to tax Americans without congressional authorization in this law-journal article.

Ryan-Murray Budget Deal Replaces Real Spending Restraint of Sequester with Budget Gimmicks and Back-Door Tax Hikes

How disappointing, but how predictable.

Politicians approved legislation in 2011 that was supposed to impose a modest bit of spending restraint over the next 10 years.

It wasn’t much. The enforcement mechanism, known as sequestration, merely was supposed to guarantee that spending climbed by $2.3 trillion rather than $2.4 trillion over the 10-year period.

But something is better than nothing, and the sequester that took place this year was a bitter defeat for President Obama and other advocates of bigger government.

Progress on the Laffer Curve*

The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.

Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).

But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.

That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.

And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.

UK Laffer CurveI don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.

 

The Wall Street Journal opines that this is a very worthwhile development.

Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.

By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.

I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.