Topic: Tax and Budget Policy

World Socialists Whine about Flat Tax Revolution

I almost feel sorry for hard-core leftists. First, they had to endure the agony of watching the Berlin Wall crumble and the Soviet Union break apart. As depressing as that must have been, they now must be horrified that former communist nations are leading the shift to pro-market flat tax systems. But their angst is my joy. I was greatly amused to read this account from the World Socialist Web Site:

The government of Albania has agreed on a standard tax rate (flat tax) of 10 percent aimed at outdoing its East European rivals and attracting international investors. The government in Tirana is determined to transform the impoverished Balkan state into a haven for multinational companies and western speculators. From the start of next year, corporate taxes will be reduced from 20 to just 10 percent. The basic rate of income tax, which amounted to 5 percent for average incomes and a maximum of 25 percent for top earners, had already been changed to a uniform rate of 10 percent for all incomes on August 1. … Measures aimed at massive tax relief for business and the rich are not specific to Albania. It is the result of a vicious competition between states in both the East and West of Europe aimed at creating the best possible conditions for foreign speculators and the wealthy. In the so-called “first round” in the 1990s, the Baltic states began to drastically lower company and income taxes, introducing tax rates of between 25 and 29 percent. These states—with the exception of some “Special Economic Zones”—suffered a loss of interest from foreign enterprises concerned that tax rates were still too high. The “second round” of cuts was initiated by Russia in 2001. Serbia followed in 2003 with the introduction of a flat tax of 14 percent. In 2005 Ukraine, Slovakia, Georgia, and Romania followed suit. The “new round” has now begun with tax reductions in the Czech Republic and Albania. Plans for further radical tax reductions are currently in discussion in Bulgaria, Croatia, and other states.

America’s “Public Squalor” Versus Europe’s “Social Justice”

A British member of the European Parliament urges approval of the new European Union constitution (now being called a reform treaty in an effort to preclude a referendum), arguing in the Guardian that it will promote European-style solidarity rather than the American-style squalor. Yet according to both the IMF and the World Bank, per capita GDP is $8,500 higher in the United States (nearly $13,000 higher according to the CIA and $9,800 higher according to the OECD) than it is in the United Kingdom. As for the less fortunate, a left-wing think tank published a report last year showing that poor people in America have more income than poor people in the U.K. (see Figure 8D). The international data suggests that the European social model does a good job preserving the self-interest of the political class and a crummy job helping people improve their lives:

The reform treaty will explicitly commit European governments to defend and strengthen the European social model. It will enshrine the values of social justice, full employment and solidarity in the EU’s “mission statement” and commit the EU to “a social market economy, aiming at full employment and social progress”. Similarly, the treaty emphasizes that the EU must work to “combat social exclusion and discrimination”, and will be legally required to promote social justice, gender equality and solidarity between generations. It is values such as these that clearly differentiate the EU from the American model of capitalism that allows private wealth and public squalor. …The overwhelming majority of our socialist colleagues across Europe support the reform treaty, despite some reservations, precisely because it will enshrine the European social model.

Hmm… You Should Have Someone Look at That

Americans usually criticize socialized health care systems for forcing patients to wait for care, so it’s a curious thing to find American patients waiting. It happens. I’ve weighed in on Americans waiting for care, as have Tyler Cowen, Matthew Yglesias, Ezra Klein, and others.

Today’s New York Times now informs us:

Patients seeking an appointment with a dermatologist to ask about a potentially cancerous mole have to wait substantially longer than those seeking Botox for wrinkles, says a study published online today by The Journal of the American Academy of Dermatology.

Researchers reported that dermatologists in 12 cities offered a typical wait of eight days for a cosmetic patient wanting Botox to smooth wrinkles, compared to a typical wait of 26 days for a patient requesting evaluation of a changing mole, a possible indicator of skin cancer.

The article also provides this interesting contrast:

Dr. Michael J. Franzblau, a dermatologist in San Francisco, said doctors typically charged $400 to $600 for a Botox antiwrinkle treatment, for which patients pay upfront because insurance does not cover it.

Meanwhile, doctors have to wait for health insurance to reimburse them for mole examinations, for which they receive an average of $50 to $75, Dr. Franzblau said.

This article reminds me of a 2005 study that called ambulatory clinics to see who is most likely to get an appointment for follow-up care after an ER visit. The study found, roughly:

  1. “Four hundred six (47.2%) of 860 total callers and 277 (64.4%) of 430 privately insured callers were offered appointments within a week.”
  2. People with private insurance and those who offer to pay cash up-front were more likely to get an appointment than Medicaid patients, who in turn were more likely to get an appointment than patients who offered to pay $20 up front and pay the balance later.
  3. Nevertheless, one-third of those with private insurance – and even those who offered to pay cash up-front – still couldn’t get an appointment.

When I discussed that study with my colleage Peter Van Doren, he described it (with precision) as “an out-of-equilibrium situation not resolved by the price mechanism.” With regard to Medicaid, it’s easy to see what’s interfering with the price mechanism: Medicaid prices are set by state governments, and so they don’t change to eliminate shortages (i.e., waits) the way market prices might. The same is largely true of private coverage: those prices are set by insurers, who mostly just track the prices that the federal government sets through the Medicare program [$].

But then why would there still be shortages for patients who come with cash in hand? The price mechanism seems to be working for cash-paying Botox patients, but not for cash-paying ambulatory clinic patients. One possibility is that there might be spillover effects that affect cash-payers in markets dominated by third-party payment and rigid prices. But then wouldn’t we see cash-only ambulatory clinics emerge to capture those customers? If not, that suggested supply constraints to Peter and me.

Tax Havens and Prosperity

The Central Intelligence Agency ranks 229 nations and territories based on per capita gross domestic product and a quick look at the list shows that tax havens dominate the top of the rankings. A majority of the top 20 jurisdictions are tax havens, based on the definition put forth in 2000 by the statists at the Organization for Economic Cooperation and Development. Luxembourg, Bermuda, and Jersey (the one in the Channel Islands) top the list, while places like the Cayman Islands, Andorra, Hong Kong, and Switzerland also rank among the world’s richest jurisdictions. In an ideal world, other nations would emulate the so-called tax havens. Instead, high-tax nations persecute these jurisdictions as part of an effort to create an OPEC for politicians.

SCHIP’s Bad Bargain

According to a cost estimate released by the Congressional Budget Office last Friday, the Senate-passed legislation expanding the State Children’s Health Insurance Program would enroll an additional 6.1 million children in SCHIP and Medicaid. However, 2.1 million would lose their private health insurance. So while the legislation would provide government-run health care to 6.1 million children, it would reduce the number of uninsured children by only 4 million.

That’s government efficiency for you: extending health insurance to two children for the price of three!

I’ll be discussing SCHIP at a Capitol Hill Briefing with Patrick Fleenor of the Tax Foundation on September 13 (register now) and in an upcoming Cato Briefing Paper to be released the same day.

U.S. Manufacturing Sector Needs No Protection from Congress

Protectionist measures currently being considered on Capitol Hill would damage America’s manufacturing base and fail to take into account that the nation’s manufacturing sector is in fact booming. In “Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade,” Cato scholar Daniel J. Ikenson argues, “Justification for [protectionist] bills is predicated on the belief that manufacturing is in decline and that the failure of U.S. trade policy to address unfair competition is to blame. But those premises are wrong. The totality of evidence points to a robust manufacturing sector that has thrived on account of greater international trade.”

Unfair Criticism of the Fair Tax

Regular readers know that I think the flat tax is the more astute tax reform option, but I admire the Fair Tax because it has the same pro-growth features as a flat tax (low tax rate, no double-taxation of saving and investment, no special loopholes, etc). As such, I feel compelled to offer a partial defense against Bruce Bartlett’s anti-Fair Tax column in the Wall Street Journal. Bruce notes some of the political obstacles to a national sales tax, and I largely agree with those observations, but Bruce also says that Fair Tax advocates are wrong to advertise the “tax-inclusive” rate. It is true that ordinary Americans think of “tax-exclusive” rates when looking at state sales taxes, but the Fair Tax people are seeking to compare their proposal to the current income tax, which is calculated on a “tax-inclusive” basis. So while it’s true that sales tax advocates should not let people assume that the Fair Tax is calculated the same way as a state sales tax, this does not mean the “tax-inclusive” rate is not an appropriate measure when looking to overhaul the tax code. Bruce also cites the revenue estimates of the Joint Committee on Taxation as if they were carved on stone tablets, but the JCT has a long track record of inaccurate predictions because of their assumption that tax policy has no affect on economic growth. Using the JCT as an authority is akin to letting the other side serve as both player and umpire:

In reality, the FairTax rate is not 23%. Messrs. Linder and Chambliss get this figure by calculating the tax as if it were already incorporated into the price of goods and services. (This is known as the tax-inclusive rate.) Calculating it the conventional way that every other sales tax is calculated, with the tax on top of the price, yields a rate of 30%. (This is called the tax-exclusive rate.) The distinction is confusing, but think of it this way. If a product costs $1 at retail, the FairTax adds 30%, for a total of $1.30. Since the 30-cent tax is 23% of $1.30, FairTax supporters say the rate is 23% rather than 30%. …professional revenue estimators have always concluded that a national retail sales tax would have to be much, much higher than 23%. A 2000 estimate by Congress’s Joint Committee on Taxation found the tax-inclusive rate would have to be 36% and the tax-exclusive rate would be 57%. In 2005, the U.S. Treasury Department calculated that a tax-exclusive rate of 34% would be needed just to replace the income tax, leaving the payroll tax in place. But if evasion were high then the rate might have to rise to 49%. If the FairTax were only able to cover the limited sales tax base of a typical state, then a rate of 64% would be required (89% with high evasion).