Topic: Tax and Budget Policy

Corporate Taxes: Low Rates, High Revenues in Canada

By
Chris Edwards

Canada’s federal government introduced a budget yesterday that includes new estimates of corporate tax revenues. I’ve discussed how Canada has cut its statutory corporate tax rate to a fraction of the U.S. rate, yet Canada raises more revenue. The new budget shows that the Canadian federal 15 percent tax raised 1.9 percent of GDP in revenue in 2012, while the U.S. federal tax at 35 percent raised just 1.6 percent, per CBO.

U.S. revenues are below normal levels right now, so let’s look further out at the steady-state projections for the two countries. Canada’s budget projection to 2018 shows that corporate tax revenues under the 15 percent rate are expected to stabilize at 1.9 percent of GDP. U.S. projections by the CBO show that corporate tax revenues will rise to 2.6 percent and then fall back to 2.0 percent in the longer-term. So the Canadian corporate tax will raise 95 percent as much as the U.S. tax even though the Canadian rate is just 43 percent of the American rate. The upshot is that worries about proposed U.S. corporate tax cuts reducing revenues are misplaced. If the U.S. federal government chopped its 35 percent rate, the tax base would expand automatically over time and the government would probably lose little if any revenue.

The following charts compare U.S. and Canadian rates and revenues:

Topics: 
International Economics and Development, Tax and Budget Policy

If the Canadians Can Handle Free Trade in Hockey Equipment…

By
Simon Lester

…then can’t everyone else adopt a little free trade of their own? This is from the NY Times:

Take a walk down an aisle at Pro Hockey Life, an emporium of the Canadian national sport here on the capital’s southern fringe, and a customer comes away with a decidedly non-Canadian feel. Almost every pad, mask, stick and skate is made elsewhere — mostly in Asia, often by foreign-owned manufacturers. Just about the only thing Canadian about buying hockey equipment in Canada has for years been the tariff on imported goods. Now, even that quirk of Canadian hockey history is going away. On Thursday, the finance minister, Jim Flaherty, announced that the Conservative government would end import tariffs on all sports equipment, except bicycles, on April 1. The tariffs were as high as 18 percent.
It may be just a small step (glide?), but it’s good news for free trade nonetheless. So what prompted the change?
The government’s decision to eliminate tariffs that were protecting a largely nonexistent industry seems to have more to do with online shopping and the rise of the Canadian dollar to parity with its American counterpart. For example, many of the skates at Pro Hockey Life priced from $500 to $700, a surprisingly large category, are available from American online retailers at prices that are at least $100 lower because of low tariffs in the United States.
I was a big fan of online shopping anyway. If it can help get rid of tariffs, even better!

Topics: 
International Economics and Development, Tax and Budget Policy, Trade and Immigration

The Laffer Curve Bites Ireland in the Butt

By
Daniel J. Mitchell

Cigarette butt, to be specific.

All over the world, governments impose draconian taxes on tobacco, and then they are surprised when projected revenues don’t materialize. We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and Michigan.

Even the Government Accountability Office has found big Laffer Curve effects from tobacco taxation.

And now we’re seeing the same result in Ireland.

Here are some details from an Irish newspaper.

[N]ew Department of Finance figures showing that tobacco excise tax receipts are falling dramatically short of targets, even though taxes have increased and the number of people smoking has remained constant… [T]he latest upsurge in [cigarette] smuggling … is costing the state hundreds of millions in lost revenue. Criminal gangs are openly selling smuggled cigarettes on the streets of central Dublin and other cities, door to door and at fairs and markets. Counterfeit cigarettes can be brought to the Irish market at a cost of just 20 cents a pack and sold on the black market at €4.50. The average selling price of legitimate cigarettes is €9.20 a pack. …Ireland has the most expensive cigarettes in the European Union, meaning that smugglers can make big profits by offering them at cheaper prices.

I had to laugh at the part of the article that says, “receipts are falling dramatically short of targets, even though taxes have increased.”

Read the rest of this post »

Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

Force-Feeding Fiscal Federalism

By
Tad DeHaven

State and local politicians love federal money. Every federal dollar that a state or local politician can spend is a dollar that he or she doesn’t have to ask his or her voters to come up with through taxes or fees.

One problem is that citizens might (erroneously) view local spending that is subsidized by the federal government as being a “free lunch.” Citizens are numbed to the real cost of government and the incentive for them to keep tabs on how state and local officials spend money is weakened.

According to an article in Politico, federal sequestration cuts to state and local subsidies could mean that local taxpayers will be asked by local officials to cover the difference: 

To keep their budgets in order, local officials across the country — many of whom don’t have the luxury of running deficits — say a dysfunctional Congress is forcing them to resort to the type of tax increases that Republicans, in particular, so fiercely oppose. 

…

Some of the hard-hit jurisdictions are obvious. Residents in Fairfax County, Va., which is home to defense contractors and thousands of federal employees, are being warned that property taxes could rise by an average of $262 later this year because of fallout from the sequester.

Heaven forbid that defense contractors and federal employees – already beneficiaries of captive federal taxpayers – might have to bear a greater responsibility for the local government services that they “benefit” from. Perhaps a potential tax increase will cause Fairfax County residents to take a closer look at how local officials have been spending money and decide that additional money isn’t needed. (And perhaps the defense contractors and federal employees in particular will have a better understanding of why some of us don’t want to pay additional federal taxes to help maintain current levels of federal spending.)

Sequestration might not be the ideal way to cut federal spending, but if it results in people appreciating that federal spending isn’t a free lunch, good.

See this Cato essay for more on fiscal federalism.

Topics: 
Tax and Budget Policy

The Ryan Budget: Is Returning to Clinton-Era Levels of Fiscal Restraint Really Asking too Much?

By
Daniel J. Mitchell

It can be very frustrating to work at the Cato Institute and fight for small government.

Consider what’s happened the past couple of days.

Congressman Paul Ryan introduces a budget and I dig through the numbers with a sense of disappointment because government spending will grow by an average of 3.4 percent annually, much faster than needed to keep pace with inflation.

But I don’t even want government to grow as fast as inflation. I want to reduce the size and scope of the federal government.

I want to shut down useless and counterproductive parts of Leviathan, including the Department of Housing and Urban Development, the Department of Education, the Department of Energy, the Department of Transportation, the Department of Agriculture, etc, etc…

I want to restore limited and constitutional government, which we had for much of our nation’s history, with the burden of federal spending consuming only about 3 percent of economic output.

So I look at the Ryan budget in the same way I look at sequestration – as a very modest step to curtail the growth of government. Sort of a rear-guard action to stem the bleeding and stabilize the patient.

But, to be colloquial, it sure ain’t libertarian Nirvana (though, to be fair, the reforms to Medicare and Medicaid are admirable and stem in part from the work of Cato’s healthcare experts).

But my frustration doesn’t exist merely because the Ryan budget is just a small step.

I also have to deal with the surreal experience of reading critics who assert that the Ryan budget is a cut-to-the-bone, harsh, draconian, dog-eat-dog, laissez-faire fiscal roadmap.

If only!

To get an idea of why this rhetoric is so over-the-top hysterical, here’s a chart showing how fast government spending is supposed to grow under the Ryan budget, compared to how fast it grew during the Clinton years and how fast it has been growing during the Bush-Obama years.

Ryan Clinton vs Bush Obama

I vaguely remember taking the SAT test in high school and dealing with questions entitled, “One of these things is not like the others.”

Well, I would have received a perfect score if asked to identify the outlier on this chart.

Bush and Obama have been irresponsible big spenders, while Clinton was comparatively frugal.

And all Paul Ryan is proposing is that we emulate the policy of the Clinton years.

Now ask yourself whether the economy was more robust during the Clinton years or the Bush-Obama years and think about what that implies for what we should do today about the federal budget.

At the very least, we should be copying what those “radical” Canadians and other have done, which is to impose some genuine restraint of government spending.

The Swiss debt brake, which is really a spending cap, might be a good place to start.

Topics: 
General, Government and Politics, Tax and Budget Policy

Why I’m Not a Conservative

By
Tad DeHaven

The Washington Post notes the following quote from Rep. Paul Ryan in his CPAC speech: 

“We don’t see the debt as an excuse to cut with abandon, to shirk our obligations,” Ryan said. “We see it as an opportunity to reform government, to make it cleaner and more effective. That’s what conservatives stand for.” 

That’s interesting because more effective (or efficient) government is also what liberals stand for. 

As I wrote upon the release of Ryan’s latest budget proposal, more efficient government isn’t the same as limited government. I appreciate the argument being made by some limited-government advocates that Ryan’s budget is a “step in the right direction” because it would slow the growth in federal spending versus the Congressional Budget Office’s baseline. That’s a good thing—especially when compared to the bloated alternative put out by Sen. Patty Murray (D-WA). But I think that proponents of limited government should consider a “step in the right direction” to be a budget that actually attempts to extricate the federal government from involvement in every facet of our lives. In that regard, Ryan’s budget only represents a step toward a slightly cheaper big government. 

Note: Check out Veronique de Rugy’s commentary on the SKILLS Act for an example of what I’m talking about. 

Topics: 
Tax and Budget Policy

And the King of the Fiscal Squeeze Is…Bill Clinton?

By
Steve H. Hanke

When Congressman Paul Ryan takes the stage at CPAC Friday morning, he will, of course, tout his new budget as a solution to America’s spending problem. The 2014 Ryan plan does aim to balance the budget in 10 years. That said, it would leave government spending, as a percent of GDP, at a hefty 19% – as my colleague, Daniel J. Mitchell, points out in his recent blog.  

Proposals like the Ryan budget are all well and good, but they are ultimately just that – proposals. If Congressman Ryan really wants to get serious about cutting spending, he should look to the one U.S. President who has squeezed the federal budget, and squeezed hard.

So, who can Congressman Ryan look to for inspiration on how to actually cut spending? None other than President Bill Clinton.

How can this be? To even say such a thing verges on CPAC blasphemy. Well, as usual, the data don’t lie. Let’s see how Clinton stacks up against Presidents Barack Obama and George W. Bush. As the accompanying chart shows, Clinton was the king of the fiscal squeeze.

Yes, Bill Clinton cut government’s share of GDP by a whopping 3.9 percentage points over his eight years in office. But, what about President Ronald Reagan? Surely the great champion of small government took a bite out of spending during his two terms, right? Well, yes, he did. But let’s put Reagan and Clinton head to head – a little fiscal discipline show-down, if you will (see the accompanying chart).

And the winner is….Bill Clinton. While Reagan did lop off four-tenths of a percentage point of government spending, as a percent of GDP, it simply does not match up to the Clinton fiscal squeeze. When President Clinton took office in 1993, government expenditures accounted for 22.1% of GDP. At the end of his second term, President Clinton’s big squeeze left the size of government, as a percent of GDP, at 18.2%. Since 1952, no other president has even come close.

Some might argue that Clinton was the beneficiary of the so-called “peace dividend,” whereby the post-Cold-War military drawdown led to a reduction in defense expenditures. The problem with this explanation is that the majority of Clinton’s cuts came from non-defense expenditures (see the accompanying table).

Admittedly, Clinton did benefit from the peace dividend, but the defense drawdown simply doesn’t match up to the cuts in non-defense expenditures that we saw under Clinton. Of course, it should be noted that the driving force behind many of these non-defense cuts came from the other side of the aisle, under the leadership of Speaker Gingrich.

The jury is still out on whether Ryan (or Boehner) will prove to be a Gingrich – or Obama, a Clinton. But, at the end of the day, the presidential scoreboard is clear – Clinton is the king of the fiscal squeeze.

So, when Congressman Ryan rallies the troops at CPAC with a call for cutting government spending, perhaps the crowd ought to accompany a standing ovation for the Congressman with a chant of “Bring Back Bill!”

You can follow Prof. Hanke on Twitter at: @Steve_Hanke

Topics: 
Cato Publications, General, Government and Politics, Social Security, Tax and Budget Policy

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