Topic: Tax and Budget Policy

The New Deal Was a Success — at Creating Dependency

Drawing from Amity Shlaes’ excellent new book The Forgotten Man, George Will notes that FDR’s policies were an economic failure but a political success.

It is particularly galling that Roosevelt’s statist policies were so harmful (as Chris Edwards has succinctly explained), yet he is portrayed as the man who saved the nation from unbridled capitalism:

Franklin Roosevelt’s success was in altering the practice of American politics. This transformation was actually assisted by the misguided policies — including government-created uncertainties that paralyzed investors — that prolonged the Depression. This seemed to validate the notion that the crisis was permanent, so government must be forever hyperactive.

…Roosevelt, however, made interest-group politics systematic and routine. New Deal policies were calculated to create many constituencies — labor, retirees, farmers, union members — to be dependent on government.

…Roosevelt implemented the theory that (in [Shlaes’] words) “spending promoted growth, if government was big enough to spend enough.” In only 12 months, just one Roosevelt improvisation, the National Recovery Administration, “generated more paper than the entire legislative output of the federal government since 1789.” Before Roosevelt, the federal government was unimpressive relative to the private sector. Under Calvin Coolidge, the last pre-Depression president, its revenue averaged 4 percent of gross domestic product, compared with 18.6 percent today. …In 1936, for the first time in peacetime history, federal spending exceeded that of the states and localities combined.

…[A]s Roosevelt demonstrated and Shlaes reminds us, compassion, understood as making the “insecure” securely dependent, also makes the state flourish.

The Germans Attack Tax Competition…Again

Germany’s finance minister Peer Steinbrueck wants to curtail tax competition by prohibiting countries from having corporate tax rates of less than 30 percent. Since German politicians have been whining about competition from low-tax nations in Eastern Europe for quite some time, this is hardly news.

But this new round of sour grapes is particularly amusing because Herr Steinbrueck is trying to close the barn door when the horses are galloping in the fields. The average corporate tax rate in the European Union already has fallen to about 24 percent and more corporate tax cuts are about to take effect — including a tax rate reduction in Germany.

Bloomberg reports:

The European Union needs a “level playing field” in areas including tax competition…if there is to be greater integration among member states, German Finance Minister Peer Steinbrueck said. A “race to the bottom” regarding…taxes, social and environmental standards risks discrediting the idea of a more united Europe among the continent’s citizens, Steinbrueck said in a speech prepared for delivery today in Frankfurt an der Oder, on the eastern German border with Poland.

…The average corporate tax rate in Europe shouldn’t fall below the threshold of just under 30 percent, which will go into effect in Germany next year, Steinbrueck said. Eastern European governments…can’t finance the infrastructure demanded by their citizens if taxes are lowered too much, he said.

Another Flat Tax Nation?

Moldova, a former Soviet Republic, is a poor and backwards nation with too much government. Seeking a brighter future, a part of Moldova has declared independence and is calling itself Pridnestrovie. Though this new country has not yet been recognized by the world, Pridnestrovie has wisely decided to implement free market reforms — including a flat tax that has been reduced from 15 percent to 10 percent according to a story from last year in the Tiraspol Times:

Parliament in Pridnestrovskaia Moldavskaia Respublica approved new lower tax rates for the emerging but unrecognized country. Previously, the nation taxed incomes for physical persons at 15%, but starting next month the rate will be just 10% flat.

…Since its declaration of independence on 2 September 1990, Pridnestrovie has gradually transformed itself from a post-Soviet system to a free, Western-style market based economy. In the process, it has found that a flat tax provides the best incentives for citizens and investors alike.

Hoover Institution political scientist Alvin Rabushka points to a number of different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia, Pridnestrovie and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine.

Not surprisingly, the flat tax is having a positive impact. The Tiraspol Times now reports that tax revenues have more than tripled and lawmakers understand that lower tax rates can lead to more revenue — just as the Laffer Curve illustrates:

Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie, says the parliamentary press service. …Tax revenues went from 63.4 million dollars in 2001 to a whopping 221.6 million dollars in 2006, the last full year for which the numbers are available.

…Key to the reform package were measures which makes filing simpler, as well as a comprehensive program of tax relief. Five taxes which existed before 2001 have now been abolished and instead replaced with a single, simple tax.

…With both personal and corporate tax rates well below those of Ireland, the growth in Pridnestrovie’s tax income is even more impressive. As taxes have been simplified and rates have been lowered, revenues have gone up three and a half times.

Addendum: The good news about Pridnestrovie may not be so good after all. My Cato colleague Justin Logan rained on my flat tax parade by telling me that Pridnestrovie, AKA Tansnistria (I guess even the name of the place is in dispute), is not exactly the Hong Kong of Eastern Europe. The breakaway province has a very poor reputation for corruption. It also is not exactly a role model of democracy, since the boss of the country recently won 103 percent of the vote in one region (eat your heart out, Castro). Alas.

Why People Hate the IRS

My wife and I received a notice from the IRS yesterday regarding our 2006 income tax return. At first glance, I thought it said we underpaid by $107, which would be no big deal and I’d go ahead and pay.

Then I looked closer at the calculations the notice showed:

Total Tax On Return: $xx,242.00

Total Payments and Credits: $xx,241.63

Underpaid Tax: $0.37

Penalty: $106.65

Interest: $0.01

Total Amount You Owe: $107.03

You’ve got to be kidding–we underpaid our taxes by 37 cents and the IRS is dinging us with a $107 penalty?!

Page 22 of the 1040 instruction book clearly says that rounding to the nearest whole dollar is OK.  I think this needs more investigation. 

If You Build It, They Still Won’t Come

A report commissioned by the Maryland Stadium Authority and the Montgomery County Department of Economic Development tells the planners what they want to hear: that a new sports and entertainment arena in Montgomery County, Maryland, could generate revenue for the county and would give residents a place to hold events without having to leave the county. Based on the Washington Post story, it’s not clear just how strong the report’s argument is: by definition, building a new arena would provide a venue for events, so that’s not much of a claim; and the news story does not tell us if the revenue generated would make it economically viable.

But maybe the report did claim economic viability. Most studies commissioned by planners do. But independent studies never do. This short review of the academic literature finds that “not only are there theoretical reasons to believe that economic impact studies of large sporting events may overstate the true impact of the event, but in practice the ex ante estimates of economic benefits far exceed the ex post observed economic development of host communities following mega-events or stadium construction.”

Last year the Wall Street Journal reported

But while arenas with big-time tenants may bolster a city’s self-image and quality of life, evidence shows they have a minimal economic upside. Most operate at a loss.

In “The Economics of Sports Facilities and Their Communities,” published in 2000 in the Journal of Economic Perspectives, authors Andrew Zimbalist of Smith College and John Siegfried of Vanderbilt University argue that “independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development.”

The authors cite several studies, including one by sports economist Robert Baade that found “no significant difference in personal income growth from 1958 to 1987 between 36 metropolitan areas that hosted a team in one of the four premier professional sports leagues and 12 otherwise comparable areas that did not.” The authors’ conclusion: Arenas put a drag on the local economy by hurting spending on other activities in the city and boosting municipal costs such as security.

“It doesn’t make sense to build an arena for economic reasons, even if you have a team,” Mr. Zimbalist says.

Several Cato studies have reviewed the literature on stadiums and arenas, as noted here.

Tax and Regulatory Competition Make the Caymans an Ideal Home for Hedge Funds

The New York Times has a detailed story showing how good tax policy and a sensible approach to regulation have made the Cayman Islands the world’s premier domicile for hedge funds. The irritates politicians in Washington and other national capitals, but the article correctly notes that Cayman funds and American investors and managers are obeying all U.S. laws. This leaves two options for politicians. They can engage in fiscal protectionism and try to criminalize free trade in financial services, or they can improve the tax and regulatory environment in America. Sadly, it does not take a political expert to know which route is more likely:

…lucrative tax breaks and fabled financial secrecy have made this British territory a magnet for hedge fund managers. “All of the offshore jurisdictions are competing against each other to provide the most hospitable regulatory landscape, and the Caymans are really coming on strong,” Mr. Grayson says. …In as little as two weeks, and for about $35,000 in fees, hedge funds can set up shop in the Caymans — just a fraction of the time and up to one-tenth the price of incorporating a fund in drearier climes like Delaware. While speed and bargain prices are big attractions, the real draw, say analysts and Congressional investigators, are perfectly legal Caymans-based corporations and partnerships that allow major investors to avoid taxes of up to 35 percent that the Internal Revenue Service levies on unearned business income. Cayman tax laws also help American fund managers legally defer domestic taxes on their personal profits by channeling them offshore through their funds. …it is the corporate home for what the Cayman Islands Monetary Authority estimates to be three out of every four of the world’s hedge funds — more than anywhere else — thanks to its friendly tax and regulatory regimes, as well as an army of foreign bankers, tax lawyers, accountants and fund administrators who make it all work. …foreign individual investors and tax-exempt American investors — like pension plans, hospitals and university endowments — are allowed to put their money into another section of the fund that is registered offshore, in the Caymans. The American institutions have that option because, while they are tax-exempt under American tax law, a United States tax on unearned business income would apply if they invested in a domestic fund. …Some 8,500 investment funds are registered in the Cayman Islands, according to the agency — a near-tripling since 2001.

New Attack Planned Against Low-Tax Jurisdictions

The UK-based Observer reports that Norway’s socialist government is leading a new campaign against low-tax jurisdiction.

The premises are absurd, including the assumption that developing nations will prosper if they get more tax revenue. Moreover, the entire scheme is based on some very dubious “facts,” none of which are substantiated. Most importantly, the article fails to note the many benefits of tax competition, including better tax policy and the protection of human rights:

Plans have been drawn up for an international taskforce to crack down on tax haven abuses orchestrated in large part by bankers, accountants and lawyers in London. As authoritative evidence suggests that $1 trillion of illicit funds flow to secretive havens managed by financiers based in London, New York and Dubai, the Norwegian government is forming a global coalition to ‘facilitate the recovery of assets illicitly stacked away in tax havens’. Several countries are set to join, but Britain, recently classed as an offshore financial centre by the International Monetary Fund, is not among them.

…The imminent formation of an international tax haven taskforce comes as the World Bank, headed by Robert Zoellick, is coming under pressure to establish its first forensic study into the illicit cash flowing out of developing nations. …Exactly 10 times the $100bn spent on aid and debt write-offs by rich countries is siphoned out of developing countries, with corporations responsible for 60 per cent of that figure through a web of trusts, nominee accounts and the flagrant mispricing of goods to escape tax.

…Cracking down on tax havens and the evasion of taxes by some of the world’s biggest companies is seen as the ‘missing link’ in the poverty alleviation agenda. Investigators and lawyers at a conference on the Movement of Illicit Funds in Washington last Thursday confirmed it was corporations and not corrupt politicians in the developing world that accounted for most tax evasion.