Topic: Tax and Budget Policy

More Thoughts on Trade Enforcement

In addition to the sock safeguard action against Honduras, the U.S. government recently requested arbitration over alleged violations by Canada of the 2006 Softwood Lumber Agreement.  (We’ve written about this long-running dispute here, here, and elsewhere). Under the SLA, Canada is required to restrict the volume of its exports or impose an export tax (or some combination of the two) when the prevailing monthly price falls below U.S. $355 per million board feet.

The deal, which the Canadians signed with guns to their heads, was agreed during a period of a robust housing market and relatively high lumber prices.  With the decline of the U.S. housing market, lumber prices have gone south, and the stipulation that Canada intervene in the lumber market has kicked in.

Enforcement in this case, then, means that the housing market slump will endure longer than it has to.  Builders will be less capable of offsetting rising mortgage rates with lower priced homes, as the cost of their most important input remains artificially high.

Even the cost of nails should be expected to rise and for the same reason –  enforcement.  On Tuesday, the U.S. International Trade Commission determined preliminarily that imports of certain steel nails from China and the United Arab Emirates (co-winners of the 2006 Congressional Pinata of the Year Award) are being sold at less than fair value in the United States and causing material injury to domestic producers.   Additional duties are likely to be formalized by the end of the year. 

Thus, the administration’s indulgence of Congress’s demands for more trade enforcement will have the noble effect of making life more difficult, in particular, for Americans at the lower end of the income spectrum, who will need to devote more of their limited resources to housing and socks.  More often than not, trade enforcement is just another term for regressive taxation.

Denmark’s Meager Tax-Cut Package

The good news is that Danish politicians have announced that taxes will be reduced. This is welcome news in a nation with the world’s highest income tax rate. Indeed, the tax burden is so onerous that even the OECD suggested it might not be a good idea to subject 40 percent of workers to marginal tax rates of more than 70 percent. Unfortunately, the tax cuts that have been proposed are akin to putting a band-aid on a compound fracture. Instead of reducing the top tax rate, the government merely intends to adjust the income level where the top bracket takes effect. While this surely is better than nothing, the government also is raising taxes on energy and increasing an already bloated welfare system. Tax-news.com reports on Denmark’s less-than-exciting reforms:

The Danish government has announced its intention to cut taxes by DKK10 billion (EUR1.34 billion) per year in 2008 and 2009 in a bid to stimulate the labour market, and improve incentives to work. Under the proposed reforms, announced by the government on Tuesday, the income ceiling for the middle and top income tax brackets will be raised to DKK353,000 per year from DKK304,100, and to DKK381,300 per year from DKK365,000, respectively. …In the same announcement, the Danish government also promised that a broad economic plan for the next eight years would not raise any taxes between now and 2015. The economic package also promises DKK50 billion in extra spending to improve Denmark’s welfare system between 2009 and 2018. …To help offset the tax cuts, the government also announced that green taxes on energy consumption would increase from 2008 to match inflation. This would increase taxes on heating, water and electricity.

Czech Republic Joins the Flat Tax Club

Following up on Marian’s earlier post, it’s time to cue up the unofficial theme song of the flat tax revolution and review one of the first English-language news reports about the Czech Republic becoming the 20th jurisdiction to adopt a low-rate flat tax. The Prague Daily Monitor reports that the vote in the Chamber of Deputies clears the only real obstacle to a low-rate tax system:

The cabinet’s package of public-finance reforms passed the final vote in the Chamber of Deputies yesterday thanks to two unaffiliated opposition MPs who voted with the governing coalition. Starting next year, the legislation will gradually reduce corporate and personal-income taxes, cut social spending and introduce cash fees for health care. It still requires Senate approval and President Václav Klaus’s signature, but no resistance is expected from either. …

The reform package will gradually lower the corporate tax rate from today’s 24 percent to 21 percent next year, 20 percent in 2009 and 19 percent in 2010. The existing progressive taxation of personal income at 12 to 32 percent will be replaced by a flat tax of 15 percent in 2008 and 12.5% in 2009. The personal income tax will be calculated from super-gross income, including social and health insurance contributions paid by the employee and the employer. This means effective taxation will be 23.1 percent of gross income in 2008 and 19.4 percent in 2009.

The Czechs Adopt a Flat Tax

The lower house of the Czech parliament passed legislation earlier today implementing a 15 percent flat tax on personal income. The new tax system will take effect on January 1, 2008, and the rate is then scheduled to drop to 12.5 percent in 2009. The legislation also reduces the corporate tax rate from 24 percent today to 19 percent by 2010.

The reform, which was narrowly passed by 101 members of the 200-member parliament, now goes to the upper house, where the government has a massive majority and no obstacles are expected. Once the reform clears that hurdle, it will then be signed into law by the Czech President Vaclav Klaus, who is a free-market economist. That act would make the Czech Republic the 20th country to adopt a flat tax. (The Bulgarian government has agreed to introduce a flat tax by January 2008, but the measure has not yet passed through the Bulgarian parliament.)

The opposition socialists have stated that they will repeal the law if or when they return to power and may even raise constitutional objections to it. For now it seems, however, that the legislation will come into force.

The Czech flat tax is a big step in the right direction, and another sign that tax competition is having a positive effect. But the legislation is not perfect. One of the salient features of a pure flat tax is the elimination of tax exemptions, deductions and loopholes. The Czech legislation is less ambitious and many of the bad features of the current system will remain in force. Also, the 15 percent tax rate will be levied on gross income, including payroll taxes. This means the tax rate is not directly comparable to nations that impose the flat tax only on net income, such as Slovakia.

Get Rid of the National Weather Service

Because of technological advances, there is very little reason for taxpayers to shell out nearly $1 billion annually to finance a national weather service. As John Lott explains at Foxnews.com, private forecasters exist and (gee, what a surprise) they do a better job than government bureaucrats:

Despite dire predictions from the National Hurricane Center, no hurricanes hit the U.S. last year. …private weather forecasting companies predicted the threat to New Orleans well before the National Weather Service. In fact, AccuWeather issued a forecast that the hurricane would hit New Orleans 12 hours earlier than the government service. …It is not just for hurricanes that private forecasting comes out on top. A new study by Forecast Watch, a company that keeps track of past forecasts, found that from Oct. 1, 2006, through June 30, 2007, the government’s National Weather Service did very poorly in predicting the probability of rain or snow. Comparing the National Weather Service to The Weather Channel, CustomWeather, and DTN Meteorlogix, Forecast Watch found that the government’s next-day forecast had a 21 percent greater error rate between predicted probability of precipitation and the rate that precipitation actually occurred. In looking at predicting snow fall from December 2006 through February 2007, the National Weather Service’s average error was 24 percent greater. “All private forecasting companies did much better than the National Weather Service,” the report concludes.

Tax Code Industrial Policy

Millionaire football fans are among the beneficiaries of supposed emergency hurricane tax relief according to an AP report. The only positive aspect of this story is that the special tax breaks deprive politicians of extra money to waste (though they will continue to borrow and waste, so don’t get too excited). Actually, this corrupt form of tax-code industrial policy also has another positive attribute – it is an excellent example of why the internal revenue code should be junked and replaced with a simple and fair flat tax:

…federal tax breaks designed to spur rebuilding are flowing hundreds of miles inland to investors who are buying up luxury condos near the University of Alabama’s football stadium. About 10 condominium projects are going up in and around Tuscaloosa, and builders are asking up to $1 million for units with granite countertops, king-size bathtubs and ‘Bama decor, including crimson couches and Bear Bryant wall art. …And they intend to take full advantage of the generous tax benefits available to investors under the Gulf Opportunity Zone Act of 2005, or GO Zone, according to Associated Press interviews with buyers and real estate officials. …The GO Zone was drawn to include the Tuscaloosa area even though it is about 200 miles from the coast and got only heavy rain and scattered wind damage from Katrina. …The GO Zone investor tax breaks are credited with contributing to the condo boom in Tuscaloosa.

British Tories Bungle Tax Cut Message

The Conservatives in the United Kingdom have been lost in the wilderness ever since the Thatcher years, and recent efforts to recapture the tax issue illustrate the Party’s incompetence. As reported by the BBC, a working group has proposed some decent tax reforms, including an attack on Britain’s death tax. The head of the group even made a pro-growth argument for the reform, but the Party’s Shadow Chancellor then confuses the message by stating that any tax cuts must be financed by tax increases (the Tories, like American Republicans, are unwilling to control the size of government):

A Conservative government should abolish inheritance tax because it penalises too many middle-income families, a policy group recommends. …Led by former Cabinet minister John Redwood, the Competitive Challenge working group says the government has introduced many “stealth taxes” since Labour came to power 10 years ago. …Mr Redwood told BBC Radio 4’s Today programme his proposals would not require cuts in public services because they would help the economy grow. …”Any reductions in specific taxes will have to be balanced by tax increases elsewhere, most notably green taxes,” [Shadow Chancellor George Osborne] added.

The Labour Party instantly seized on the mistake. As noted in the Guardian, the Tories are now being criticized for supporting “crippling” tax hikes:

A bitter war of words has broken out over Tory proposals for £21 billion in targeted tax cuts. Labour warned that the plans, put forward by former Cabinet minister John Redwood, would require “crippling” increases in fuel duty and other charges for homeowners, businesses, holidaymakers and motorists.