Topic: Tax and Budget Policy

Obama and the Cost of War

Thursday in West Virginia, Barack Obama gave a speech laying out the economic costs of the Iraq War, which he estimated as up to $3 trillion (Linda Bilmes and Joseph Stiglitz’s estimate) and $10 billion a month. He listed the many things that money could have bought. Robert Menendez made similar points in the Democrats’ weekly radio address.

Americans disagree on whether to stay in Iraq and the best use of the money we’d save by leaving, but everyone should acknowledge that this is the way to argue about the war. The questions that consume the media, whether the surge worked, whether we’re making progress, and so on, are important, but they alone cannot determine whether we ought to continue the occupation. That depends primarily on cost-benefit analysis, however uncertain. (Moral questions matter too but are not meaningful when divorced from consideration of costs and benefits.)

Since the cost of staying is enormous, the backers of continuing American participation in the war should enumerate the benefits that justify it (along with the deaths and the shifting of our constitutional design towards unbalanced executive power). War boosters seem to understand the terrible burden of their position, as evidenced by their tendency toward wild, worst-case accounts of the consequences of American departure. In my view, the war wouldn’t be worth continuing even if the surge were working, which it isn’t.

But since we’re talking opportunity costs, what about the rest of the national security budget – you know, the other 80 percent of American security spending, now approaching three quarters of a trillion dollars, which is mostly spent to defend us against a couple weak conventional enemies? Like most other Democrats, Obama not only avoids complaining about regular defense spending, but backs the ongoing plan to expand the ground forces, which will add $15-20 billion in annual defense costs in the name of better executing future occupations like Iraq. I understand the political calculus here, but let’s not give the guy too many medals for political courage.

Democrats like Obama and Menendez also argue that Iraq is a reason that we are shortchanging state-building efforts in Afghanistan. This talking point illustrates the trouble with conventional foreign policy thinking on the so-called left. By saying that Afghanistan needs the medicine Iraq is getting, Democratic foreign policy leaders are rushing to repeat a mistake they rightly condemn. As Harvey Sapolsky, Chris Preble and I have argued, this thinking shows that the hubris that brought us into Iraq is essentially intact.

Defending American interests in Afghanistan requires nothing more than the absence of haven for international terrorists and an example made of those who offer it. The latter is a lesson well taught. Should it fail, a small ground force can target terrorist camps and supporters via raids and air strikes guided by intelligence, even if Taliban militias gain power in some regions. Those missions never required that Afghanistan become a modern nation, democratic, or even stable.

Instead of this realistic approach, the next President will probably expand a second no-end-in-sight war, one meant to assert the control of a statelet in Kabul over an unruly territory offering little historic basis for the word “nation.” Afghanistan is full of arms and grievances. It lacks the basics of statehood: a road network, a national energy grid, widespread patriotism, and tax collection. The notion that a 30 or 50 percent increase of Western forces and investment can transform Afghanistan into a peaceful, centralized state shows idealism of stunning tenacity. Obama talks more sensibility about these matters than John McCain, but he should apply some cost-benefit analysis to that spending too.

USA Today Story on Corporate Tax Blames the Victim

Compared to other nations, the United States has a medium-sized tax burden. Most of Europe has harsher taxes, but there are plenty of place in the world that have lower tax burdens. But there is one area where America is behind almost every other nation, and that is the taxation of corporate income. The combined federal/state corporate rate is nearly 40 percent, exceeded by only Japan. Not only does the U.S. have a high tax rate, but the IRS taxes the “worldwide” income of companies, which means that it is especially hard for American companies to compete in foreign markets - particularly since almost every other nation relies on the common-sense approach of territorial taxation, which means they do not tax the “foreign-source” income earned by their companies. The only silver lining to this dark cloud is that American companies have some ability to postpone when they pay the additional layer of tax on their foreign-source income. In the minds of greedy politicians (and sloppy reporters), however, this “deferral” of a discriminatory tax is a loophole. Here’s what USA Today reported:

Democratic presidential contenders Hillary Rodham Clinton and Barack Obama have cast it as an outrage that should be a key target for the next president: a tax break they say encourages employers to ship American jobs abroad. The charge could be dismissed as typical campaign-trail exaggeration during a Democratic primary season marked by populism, except for one thing. Many analysts say it’s true. “The U.S. tax system does provide an incentive to locate production offshore,” says Martin Sullivan, a contributing editor to Tax Notes, a non-profit publication that tracks tax issues. At issue is the U.S. tax code’s treatment of profits earned by foreign subsidiaries of American corporations. Profits earned in the United States are subject to the 35% corporate tax. But multinational corporations can defer paying U.S. taxes on their overseas profits until they return them to the USA — transfers that often don’t happen for years. …”If you had two companies in Pittsburgh that both were going to expand capacity and create 100 jobs, our tax code puts the company who chooses to put the plant in Pittsburgh at a competitive disadvantage over the company that chooses to move to a tax haven,” says former White House economist Gene Sperling, a Clinton adviser.

But Senators Clinton and Obama, not to mention Martin Sullivan and Gene Sperling, have things backwards. It is America’s high tax rate that creates an incentive for jobs to be overseas. Deferral simply means that American companies are only somewhat disadvantaged in their efforts to earn market share in other nations. The USA Today story does acknowledge that America has a high corporate tax rate, but the reporter is surprised that this high rate means low revenue, even though it is actually a sign of “Laffer Curve” responses to punitive taxation:

The U.S. has one of the highest corporate tax rates in the world, and its corporate tax code has a well-earned reputation for complexity. But despite the high rate, the U.S. takes in less annual revenue from corporate taxes, measured as a percentage of economic output, than almost all other major economies.

The current system is bad for America, but critics have the wrong solution. Instead of making the U.S. tax code even more punitive by ending deferral, America needs a big reduction in the corproate tax rate. So long as America’s rate is far higher than other nations, companies will have an incentive to create jobs abroad. Ending deferral would not alter that incentive. All that would happen is that foreign companies would be creating a larger share of those jobs. The story does quote a couple of economists who have starkly different estimates of employment implications, but both agree the current system causes job losses:

Kimberly Clausing, a professor of economics at Reed College in Portland, Ore., says the corporate tax code may account for up to 3 million jobs being abroad. Gary Hufbauer, an economist who has written a book on international taxation, puts the number at just 200,000. …The Bush administration warned last year that U.S. corporate giants are at a competitive disadvantage in world markets because foreign rivals pay lower taxes in their home countries.

The article also notes that U.S. companies that create jobs abroad also create jobs in America. In other words, successful, growing firms tend to expand in all markets. A lower corprorate tax rates, needless to say, is one of the keys to a pro-growth environment for American companies. Ireland is a good example of a nation that reaps large benefits from a low corporate tax:

Matthew Slaughter, a Dartmouth College economics professor who worked in the Bush administration, says that historically, multinationals that have added jobs at their foreign affiliates also have expanded hiring in the USA. As U.S.-owned foreign units prosper, their corporate parents must add accountants, marketing specialists and other managers at their U.S. headquarters. In 2004, Slaughter released a study, based on employment data for the decade ending in 2001, which concluded that U.S. multinationals created two jobs in the USA for every job they added abroad. That comforting conclusion broke down in more recent years. From 1991 through 2005, multinationals created almost as many jobs abroad (3.6 million) as they added at home (3.8 million). …Evidence of legal tax-shifting can be seen in government statistics. In 2005, U.S. multinationals’ units in Ireland, which levies a corporate tax of just 12.5%, reported profits that were twice as large as the profits of all U.S. affiliates in Germany, France and Italy combined.

Who’s Coddling These “Greedy Bastards”?

A letter to the editor of the Las Vegas Review-Journal just came to my attention.  It reads:

In his Sunday commentary, “On the road to health care hell,” Steven Miller quoted Michael F. Cannon of the Cato Institute, hardly a person who could be trusted to give an even evaluation of government spending on health care, considering that the Cato Institute wants to limit government.

It is wonderful of Mr. Miller and Mr. Cannon to place all responsibility for Southern Nevada’s public health crisis on the government and none on the greedy bastards who violated their oath to do no harm, and to line their pockets with as much wealth as they could squeeze out of the public. Those who treated Mr. Duke Breuer and sent him home with an IV needle in his arm all had licenses from the state of Nevada, so I guess that Mr. Miller and Mr. Cannon would, by their twisted logic, place the blame solely on the state of Nevada.

However, I hold the state of Nevada responsible for not providing the level of regulation that is currently required, and in view of the level of greed that these doctors have shown, it is high time to level the playing field. We should strip them of every nickel that they have.

Wallace Eastman

LAS VEGAS

Whuh? There’s a public health crisis in Southern Nevada? I’m an apologist for greedy bastards? They sent some guy home with the needle still in his arm?? Yikes!

I went back and read the original Las Vegas Review-Journal op-ed by Steven Miller, vice president for policy at the Nevada Policy Research Institute. Actually, Miller provides a more responsible critique of the U.S. health care sector than most free-market advocates. For example, Miller takes seriously the alarming number of medical errors that Eastman decries. 

Eastman may be surprised by how much he and Miller have in common. Nevada’s physician-licensure laws obviously are not doing enough to protect patients from low-quality care. While Eastman argues that more stringent regulation would fix things, I suspect Miller would argue that licensing simply does not work that way; that physicians inevitably come to control the licensure process and manipulate it to protect themselves from competition, including competition from delivery systems that would reduce medical errors.

My guess is that Eastman and Miller agree that there are greedy bastards out there trying to squeeze as much wealth as they can out of the public, but that Miller would argue it’s the very regulations Eastman supports that’s letting the greedy bastards get away with it.

(As for my trustworthiness: Sure, I want to limit government. When I claim government is ineffective, readers should bear in mind my viewpoint. That’s fair, and doesn’t worry me.)

Switzerland Re-Affirms Bank Secrecy

Tax-loving politicians in Europe and tax-harmonizing bureaucrats at the European Commission in Brussels and the Organization for Economic Cooperation and Development in Paris are not smiling today. They have already received bad news from Austria and Luxembourg, and now Switzerland has announced that it has no intention of weakening its human rights laws regarding privacy simply because money is escaping high-tax nations. Here’s the report:

The Swiss finance minister has warned that anyone challenging the Swiss banking secrecy laws will break their teeth on them. Hans Rudolf Merz used an emergency debate in Switzerland’s Parliament on Wednesday to defend the country’s competitive position as a business location….

Merz claimed that Switzerland’s competitive position as an international business base of choice was at risk and called it vital that the position was not only held but if possible improved…. “The sovereignty of each state, however, — in particular with reference to its tax legislation — has to be respected,” Merz said. He mounted a strong defence of Switzerland’s right to provide a well-regulated financial system with “an internationally competitive tax burden….”

Merz added that Switzerland’s political and economic stability, modern financial infrastructure and highly qualified workforce also contributed to its attractiveness, but that the banking secrecy was not just crucial to the country’s international financial position but central to the country’s value system.

Fixing the Revenue-Estimating Process on Capitol Hill

The (hopefully) much anticipated final installment in the video series on the Laffer Curve has been released. This new video discusses the revenue-estimating process, and it builds upon the discussion of theory in Part I and evidence in Part II.

You will notice that the video clearly concludes that “dynamic scoring” is preferable to “static scoring,” but it also explains that there are significant challenges in properly estimating revenue feedback when tax rates are changed. That is why a key point is the need for transparency. If the Joint Committee on Taxation no longer operated in secrecy, it would be possible for experts to engage in a productive debate on how to best measure the revenue effects of various tax policies.

Please feel free to contact me if you have any questions or feedback. I also will be narrating the Center for Freedom and Prosperity’s next two videos, which will discuss the global flat tax revolution and the flat tax v. national sales tax debate. Stay tuned.

Striking Mortal Blow Against European Anti-Tax Competition Scheme, Luxembourg Rejects Calls to Eliminate Financial Privacy

Europe’s high-tax nations have launched another attack against low-tax jurisdictions. Using the recent German-Liechtenstein imbroglio as an excuse, they are arguing that all so-called tax havens should emasculate privacy laws so that tax collectors from countries such as France and Germany can track - and tax - flight capital. Politicians from uncompetitive welfare states are still bitter that a previous “savings tax directive” resulted in a watered-down scheme that failed to deliver big piles of additional tax revenue. But all their chest-beating may prove equally futile in 2008. Austria already has signalled that it has no interest in weakening its human-rights protections, and now Luxembourg has firmly stated that it rejects any proposals that would weaken its bank secrecy laws. This is a fatal blow since, as the UK-based Guardian explains, an expanded savings tax directive would require support from all 27 EU nations:

Luxembourg will not dilute its bank secrecy rules and is against hasty changes to European Union law that taxes foreign savings, the Grand Duchy’s Treasury Minister Luc Frieden said. …The 2005 rules only tax cash deposits while trusts, stocks and bonds are outside their scope, but Luxembourg won’t be rushed. “I’m amazed that some people want to change this directive even before having had any evaluation about how the current system works,” Frieden told the Reuters Funds Summit. The current directive took years to agree as unanimity among all the bloc’s members is needed in tax matters. …”I think we should not change things again that work well,” Frieden said. The Grand Duchy’s Central Bank Governor, Yves Mersch, said the privacy laws were widely supported in Luxembourg and the EU should focus instead on tackling cross-border abuses. …”Bank secrecy is for me part of our social consensus because confidentiality in a small country is extremely important for the maintenance of democratic rule. …”The Luxembourg government sees no need and will not come up with new proposals in this context and will not change the bank confidentiality rules as they have proven to be in the interest of a good working system in Europe,” Frieden. …Frieden was critical of how the Alpine state [Liechtenstein] has been treated. “I expect all countries to be treated with respect, independent of their size. I feel that is the case with Luxembourg and would like it to be the case vis-a-vis other countries even if they are smaller than Luxembourg,” he said.

Large Health Savings Accounts, Unveiled

This week, the journal Forum for Health Economics & Policy publishes a paper of mine on “large” health savings accounts, a novel proposal to reduce government control over the U.S. health care sector. 

Government exempts employer-sponsored insurance (ESI) from income and payroll taxes, which seems like a tax cut.  But it operates more like a tax increase because it strips workers of control over their earnings.  Oh, and it drives up health insurance premiums too.

Large HSAs would replace the tax exclusion for ESI with an exclusion for money contributed to a Large HSA, which the worker would own.  The same tax exclusion would be available to all workers, regardless of where or whether they purchase health insurance.

Altering the tax exclusion that way would force employers to shift the money they now use to purchase health benefits – on average almost $4,000 for individuals and $9,000 for families – into workers’ cash wages.  Individuals could then contribute, say, up to $8,000 annually to a Large HSA.  Families could contribute up to $16,000. 

Workers could use those funds to purchase medical care and health insurance, from any source, tax-free.  For example, they could hand the money right back to their employer and stay on the company plan.  Anything the worker doesn’t spend grows tax-free.

Large HSAs have a number of advantages over other tax-based health care reform proposals, including Sen. John McCain’s proposal to provide tax credits for health insurance.  Large HSAs would eliminate the tax code’s influence over consumers’ health care decisions to a greater extent, and with fewer economic and political downsides, than Sen. McCain’s tax-credit. 

One downside of McCain’s tax credit proposal, as well as other reform proposals, is that they discriminate against the uninsurable.  A tax break for health insurance is only valuable if you can obtain health insurance.  Tying a tax break to insurance automatically excludes a lot of very sick people.  In contrast, Large HSAs offer the same tax break to the uninsurable, who arguably need it most.

To read more about Large HSAs, click here (free download).