Topic: Tax and Budget Policy

Three Cheers for Whoopi

It’s no fun when the IRS take a big bite out of your paycheck. But it’s even worse when the taxman makes you pay additional layers of tax on the same income. And the ultimate outrage is when the government imposes another layer of tax just because you die. Plenty of economists have complained that the death tax is a punitive form of double taxation that penalizes capital formation, but Whoopi Goldberg probably did more to advance the cause of death tax repeal when she pointed out the moral injustice of the current system during a recent episode of ABC’s The View.

Senate Farm Bill By the End of the Week?

The Senate re-commenced debating the farm bill on Friday, after Democrats and Republicans struck an agreement over the amendments process (see my earlier blog entry here). Senate leaders are hoping that they can get a bill passed by the holiday recess, and on to conference early in the new year.

Although President Bush has threatened to veto the bill that emerged from the Senate Agriculture Committee (the bill being debated now), as well as the House Farm Bill passed in July, powerful members of Congress don’t seem too rattled. According to a recent article, Colin Peterson (chair of the House Agriculture Committee) is fairly confident that he and President Bush can get together, just the two of them nice and cozy, and come to an agreement. The money quote:

…if we can get all of these other people out of this thing and just sit down and say, ‘Look, for the betterment of the country, hopefully we can work this out.’ That’s my plan.

By “all these other people”, Mr Peterson presumably means you and I, and anyone else who is unhappy with the current state of agriculture policy in America. So sit tight, everybody, and wait for the check (currently $288 billion worth).

Thomas Sorensen Avoids High Taxes

The International Herald Tribune does a great job describing tax competition in action in the European labor market.

Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent.

Denmark has fairly pro-market economic policies, ranking 15 in Economic Freedom of the World, and is enjoying solid economic growth. However, “success has given rise to an anxious search for talent among Danish companies, and focused attention on émigrés like Sorensen…The problem, employers and economists believe, has a lot to do with the 63 percent marginal tax rate paid by top earners in Denmark - a level that hits anyone making more than 360,000 Danish kroner, or about $70,000.”

The high taxes are driving out young and skilled Danes, many to London.

Danish taxes also contrast sharply with those in nearby London, often jokingly referred to among Danes as a Danish town, because so many of them live there. Lower taxes on high earners have been a centerpiece of the policy mix that has fed the rise of London as a global financial center since the 1980s.

Second Video Experiment

Many of you were kind enough to comment on the first video I narrated, which discussed the importance of a more competitive corporate tax system. Because of popular demand (perhaps a slight exaggeration), a second video has been released. This one discusses the vital role of tax competition as a constraint on government. Based in part on your suggestions, this new video was filmed in a real studio with professional equipment. And I even put on a coat and tie since a few people thought the casual look detracted from the message in the corporate tax video.

The message, of course, is what really matters in these videos. Regular readers of Cato-at-liberty surely have noticed that Chris Edwards and I regularly comment on the dramatic tax policy changes that are taking place all over the world. We would like to claim that this is because politicians are reading our papers, but a bigger factor is tax competition. Simply stated, because of globalization, it is much easier for the geese that lay golden eggs to fly across the border. This means governments are being forced to lower tax rates and reform tax systems.

This video, as well as a book that Chris and I are writing, explains this liberalizing process. But it’s not all good news; both the video and our future book warn that statist politicians want to curtail tax competition.

I would be very interested in receive feedback on this new video. Is the message compelling? Are footage and graphics being used effectively? Any thoughts or suggestions would be welcome.

We’re from the Government, and We’re Here to Help You Buy a House

There has been some good analysis of this week’s much-hyped agreement between the U.S. Treasury Department – which facilitated the meeting, we are told, but didn’t use any form of coercion – and mortgage lenders to bail out assist homeowners in danger of being slammed with a much higher monthly payment on their subprime mortgage come January. But there are some elements of the deal that haven’t been greeted with much skepticism – or, indeed, haven’t been reported much at all.

For starters, Treasury secretary Henry Paulson insists the agreement won’t cost taxpayers money. What he really should have said is that it won’t cost federal taxpayers money. But it might cost state taxpayers money. The White House will push Congress to let state governments issue tax-free bonds to fund programs that help homeowners refinance their mortgage. Those bonds have to be paid off by taxpayers some day. I usually like federalism, but this is not the sort I’ve grown to love.

Another part of the deal is to allow the Federal Housing Administration to expand its programs and help refinance 200,000 mortgages. As Paulson reminded reporters, the administration is asking Congress to increase the ceiling on the amount of FHA loans and lower the down-payment requirements to below the current rate of 3% of the home price. And here I was thinking big loans that were handed out with little or no money down were part of what got us into this problem in the first place. Silly me.

Nor is it really clear that the administration’s approach here won’t actually cost federal taxpayers money, either. The proposal allows the FHA to charge loan insurance premiums based on risk, like private lenders do. Currently, all FHA mortgage holders – at a high-risk of default or not – are charged the same amount.  You realize this is a much-needed change when you discover that currently the FHA is running deficit of $143 million because so many of its loans have gone bad and the premiums it collects from all loans isn’t enough to cover the losses. But, as Bloomberg News reports, the post-refinancing default rate of the subprime loans that the White House now wants the FHA to play with could be between 40 to 60 percent.  Taxpayers might get stuck paying for these loans after all.

The implicit theme of these proposals is that Uncle Sam might just be better at this mortgage business thing than the private sector. I guess it might be tiresome to insert a joke here about the U.S. Postal Service, eh?

More Cheerful Evidence of Tax Competition

Gordon Brown’s greed for more tax revenue is probably going to backfire. Britain’s “non-doms” bring considerable prosperity to London, but the Financial Times reports that there already is evidence that they are moving to Switzerland - and taking the UK’s hedge-fund industry with them - because of the Labour government’s compulsive desire for bigger government:

Scores of London-based hedge fund managers are moving part of their operations to Switzerland in readiness for a proposed UK tax crackdown on non-domiciled residents, according to Kinetic Partners, an investment management consultancy. London has become a popular base for the industry, with the city’s 950 or so hedge fund firms managing about 80 per cent of European hedge fund assets. But according to David Butler, founding member of Kinetic, at least 40 per cent of the founders of the consultancy’s 300-plus hedge fund clients are non-domiciles and they are reportedly getting increasingly jittery about the likelihood of a harsher tax regime. … From next April, non-doms who have lived in the UK for more than seven years will face a £30,000 a year levy if they choose to keep their offshore income and gains out of the tax net. However, a greater threat to the hedge fund industry comes from proposals to crack down on offshore trusts that also allow non-doms to escape tax on their investments. “Remove this [exemption] and the general view that is starting to prevail is that £30,000 is the thin end of the wedge,” said Mr Butler. … “There will come a time when people are using the UK just for their finance and back office operations. The key value operations will move offshore.”

This is why tax competition is so important. Politicians (at least some of them) are learning that the geese with the golden eggs can fly across the border. This means that there is growing pressure to lower tax rates and reduce the tax bias against saving and investment. So long as international bureaucracies such as the OECD and European Commission do not succeed in their efforts to cripple tax competition, more and more governments will implement better tax policy. Not because they want to, but because a competitive global economy is forcing them to do the right thing.

More Tax Harmonization in Europe

In an unfortunate development, Luxembourg has finally surrendered to demands from other European governments and agreed that online retailers in the tiny duchy should be deputy tax collectors for other European nations. This means that shoppers in countries with high value-added taxes no longer will be able to buy goods and services and benefit from Luxembourg’s 15 percent VAT. This episode is illustrative of the anti-tax competition mentality in Europe, but America faces the same danger. Politicians from high-tax states want to impose a similar scheme (see here and here) in the United States. The International Herald Tribune has the sad details:

Plans to apply sales tax in the country in which services are consumed, rather than the location of the company that sells them, are the latest assault on Luxembourg’s ability to act as a tax haven. …With its low rates of sales tax, or value added tax, Luxembourg has attracted many of the biggest names in online sales, including companies like, Skype and PayPal. Luxembourg levies VAT at 15 percent, the minimum allowed under EU rules. But most EU countries have a higher rate, making the small but prosperous duchy an attractive location for companies offering electronic services. …Until Tuesday, Luxembourg had blocked proposals to levy sales tax at the place of consumption, saying the change would cost it €220 million, or $324 million, a year, equivalent to 1 percent of its economic activity. Taxation matters require unanimous agreement within the EU, but a country like Luxembourg - which has a population of only 429,000 - finds it difficult to withstand pressure from other countries if it isolated. …The deal was welcomed by larger countries, which stand to increase their revenue.