Topic: Tax and Budget Policy

The Future of Dollarization in Ecuador

A new “monetary and finance” law that was approved by Ecuador’s National Assembly in July, is expected to be signed into law any day now. Many suspect that this marks the beginning of the end for dollarization in Ecuador, which began in January of 2000. But the underlying threat to dollarization is the incessant growth of public spending. Losing dollarization would be a sad development, considering it is what has protected Ecuadorians from one of the worst evils of populism: high inflation.

The remarkable contribution dollarization has made to the Ecuadorian economy is worth noting. A 2010 study published by Ecuador’s central bank (BCE) analyzed the first decade of the absence of independent monetary policy and found that average GDP growth increased from -6.3 percent during the 1990s to 4.4 percent during the 2000s; annual inflation decreased from a high of 90 percent in September of 2000 to single digits within a year, and has averaged 3 percent since 2004. Additionally, interest rates went down immediately, thereby reducing the cost of capital. According to the World Bank, the percentage of Ecuadorians living on less than $2 a day (PPP) decreased from 37.7 percent in 2000 to 10.6 percent in 2009.

Of course, there are many problems dollarization cannot solve and the positive outcomes above are not solely due to it. But it probably has been one of the main factors contributing to Ecuadorian growth prior to and during our current “revolutionary” government. In fact, Ecuador owes its superior economic performance today–compared the two most prominent populist nations in the region, Argentina and Venezuela–mostly to dollarization.

When a Hamburger Becomes a Doughnut and Other Lessons About Tax Inversions and Globalization

So Burger King plans to purchase Canadian doughnut icon Tim Hortons and move company headquarters north of the border, where corporate tax rates are as much as 15 percentage points lower than in the United States.  Expect politicians at both ends of Pennsylvania Avenue to accuse Burger King of treachery, while spewing campaign-season pledges to penalize these greedy, “Benedict Arnold” companies.
 
If the acquisition comes to fruition and ultimately involves a corporate “inversion,” consider it not a problem, but a symptom of a problem. The real problem is that U.S. policymakers inadequately grasp that we live in a globalized economy, where capital is mobile and products and services can be produced and delivered almost anywhere in the world, and where value is created by efficiently combining inputs and processes from multiple countries.  Globalization means that public policies are on trial and that policymakers have to get off their duffs and compete with most every other country in the world to attract investment, which flows to the jurisdictions where it is most productive and, crucially, most welcome to be put to productive use.
 
Too many policymakers still believe that since the United States is the world’s largest market, U.S.-headquartered companies are tethered to the U.S. economy and committed to investing, hiring, and producing in the United States, regardless of the quality of the business and policy environments. They fail to appreciate how quickly the demographics are changing or that a growing number of currently U.S.-based companies do not share their view. Perhaps too many are unaware of how the United States continues to slide in the various global rankings of attributes that attract business and investment. The leverage politicians have over America’s corporate wealth creators has diminished.

The Size and Scope of Fraud in Medicare

Medicare spends more than $600 billion annually, but not all of that money is spent wisely. Yesterday, I wrote about the Washington Post’s expose on motorized wheelchair fraud. Records suggest that 80 percent of motorized wheelchair claims are “improper,” amounting to billions in waste. Unfortunately for taxpayers, this is just the tip of the iceberg on Medicare fraud.

The Government Accountability Office estimated that Medicare’s “improper payments” amounted to $44 billion, or 8 percent of total expenditures, in 2012. GAO considers Medicare a “high risk” program for its “vulnerabilities to fraud, waste, abuse, and mismanagement.” GAO criticized Medicare for its inability to control the problem saying that Medicare “has yet to demonstrate sustained progress in lowering the rates [of improper payments].”

Other experts believe that GAO undercounts examples of fraud in Medicare. Malcolm Sparrow of Harvard University estimates that closer to 20 percent of claims–or $120 billion annually are improper.

Medicare’s lax oversight of its payment system perpetuates the issue. Millions of claims come in daily and are paid without review or analysis. Scammers know that Medicare payments will not be scrutinized; the chance of getting caught is quite low. Scammers simply adapt and continue finding ways to game the system.

Medicare’s Scooter Scam

Yesterday’s Washington Post has an in depth—and very depressing—piece about Medicare fraud. The piece focuses on scammers taking advantage of Medicare’s payment systems to buy unnecessary motorized wheelchairs and scooters for Medicare enrollees and stick American taxpayers with the bill.

Medicare’s payment system is designed to pay bills within 30 days of receipt; the system receives 5 million claims daily. Due to the huge volume of payments, Medicare only reviews a very small percentage, 3 percent, before the payment is made. Instead, payments are reviewed after they are processed, but even then not all are subject to oversight and review.

That system design invites fraud and scammers are able to take advantage. The Washington Post describes it as an “honor system.” The lack of upfront investigations costs taxpayers billions annually in fraud and wasteful payments.

But even worse than Medicare’s lax oversight is that officials knew about the fraud regarding wheelchairs and still didn’t act. According to the Washington Post,

Now, the golden age of the wheelchair scam is probably over.

But, while it lasted, the scam illuminated a critical failure point in the federal bureaucracy: Medicare’s weak defenses against fraud. The government knew how the wheelchair scheme worked in 1998. But it wasn’t until 15 years later that officials finally did enough to significantly curb the practice.

This problem was widespread. Medicare has spent $8.2 billion on power wheelchairs since 1999 for an ever-increasing proportion of enrollees. Records suggest “that at least 80 percent of claims were ‘improper.’”

Before the fraud had taken off, the chairs were rare:  One study estimated that in 1994, only 1 in 9,000 beneficiaries got a new wheelchair.

By 2000, it was 1 in 479.

By 2001, it was 1 in 362.

By 2002, it was 1 in 242.

In 2012 up to 219,000 Medicare recipients received motorized wheelchairs, 1 in 235 patients, worse than in 2002. In 2013 only 124,000 individuals, 1 in 400 patients, received power wheelchairs from Medicare.

Medicare is slowly getting the issue under control; it is just 15 years too late.

New Market Tax Credits Fail to Deliver

Created in 2000 as part of the Community Renewal Tax Relief Act, the federal New Markets Tax Credit (NMTC) program provides tax credits to “spur new or increased investments into operating businesses and real estate projects in low-income areas.” Two new reports, one from the Government Accountability Office (GAO) and the second from Senator Tom Coburn’s office, question the effectiveness of NMTC in accomplishing that goal.

The program provides tax credits to investors in low-income neighborhood development projects equaling 39 percent of the investment value over seven years. For example, a $1 million investment provides a $390,000 tax credit to the investor—a healthy sum. Congress has provided $40 billion in tax credits since 2003 with banks and other financial institutions receiving “nearly 40 percent of all NMTC[s]” since 2007.

But the program’s structure is flawed. According to GAO, the Treasury Department—which oversees the program—does not have adequate oversight of the program. For instance, the Treasury is unable to determine if a project has failed even after receiving seven years of tax credits. Treasury’s reporting on numerous aspects of the program is incomplete and missing.

Like many federal programs originally premised on helping low-income areas, the NMTC program now spreads the subsidies widely. In fact, the program’s structure results in “virtually all of the country’s census tracts” being eligible for the program according to the Congressional Research Service.  

NMTC projects are heavily subsidized. They frequently receive additional government funding from other programs. Sixty-six percent of projects from 2010 to 2012 received funding from other federal, state, or local sources, with 33 percent receiving additional federal funds. This program is one of 23 community development tax programs and 80 discretionary economic development programs.

Projects often receive NMTCs, historic tax credits, and benefits from tax-exempt bond issuances, which adds up to heavy subsidization. For instance, a streetcar project in St. Louis received $15 million from NMTC allocations, $25 million from a federal Urban Circulator grant, a Surface Transportation Program grant, and a grant from the Congestion Mitigation & Air Quality Improvement Program. “The trolley’s total cost of $43 million is almost completely paid for through federal funding,” according to Coburn’s office.

Bigger Bounties for Tax Tipsters

I’ve got a guest post up at Reason on how bounty-seeking informants are bypassing the Internal Revenue Service tipster-reward program in favor of selected state False Claims Acts, such as New York’s, which enable richer recoveries for disloyal employees and others who charge defendants with underpaying taxes. Excerpt:

Will the spread of a culture of informants sow distrust and disloyalty in the workplace, while encouraging dissident executives and their lawyers to shake settlements out of risk- and publicity-averse targets by seizing on doubtful, gray-area legal theories? That’s part of the game too. Lately hedge funds and litigation finance firms have moved in to bankroll the filing of likely “whistleblower” cases. …

…by getting pro-plaintiff laws through the legislature in just a few states — New York liberalized its law four years ago — advocates can set the stage for a nationwide informant push.

In Illinois, a single Chicago lawyer was reported in 2012 to have used that state’s whistleblower law to file at least 238 lawsuits against retailers, pocketing millions in settlements, over alleged failure to charge sales tax on shipping-and-handling.

Whole thing here.

 

 

Corporate Inversions, Tax Rates, and Tax Revenues

News outlets are running stories about the rise in corporate tax inversions. Inversions are financial reorganizations that place U.S. firms under foreign parent corporations. They are one of the many ways that companies are responding to America’s uniquely high corporate tax rate.

Liberal policymakers and pundits are outraged by inversions because they fear that the government will be starved of revenues. Treasury Secretary Jacob Lew has demanded new rules to stop inversions because “allowing these transactions to continue, we run the risk of eroding our corporate tax base and undoing the progress we have made to reduce our budget deficits.”

However, it is our high 40 percent tax rate that is eroding our corporate tax base. If we chopped the rate substantially, tax avoidance would fall and U.S. investment would rise. Over time, more income would be reported to the government, with the result that the government would probably not lose any money, and it could even gain some. Governments, businesses, and workers would all win from a corporate tax rate cut.