Topic: Tax and Budget Policy

Trim the Fat — with a Nano-Knife

John Boehner, the leader of House Republicans, responds to a Washington Post editorial challenging him to identify what he would cut out of the budget to avoid “an irresponsible tax increase” to offset a reduction in the Alternative Minimum Tax. Seeking to restore the GOP’s fiscally conservative image, publicly challenged to offer a plan, employing all the resources of the House Republican Caucus, these are the budget cuts that Minority Leader Boehner came up with:

* $3.2 billion to revive outdated programs, such as one funding exchanges “with historic whaling and trading partners.”

* $1 million for the Clinton School of Public Service in Arkansas.

* $300,000 for an “Exploratorium” in San Francisco.

* $100,000 for an educational program conducted aboard a catamaran in California’s Monterey Bay.

So out of the $2.9 trillion federal budget, the leader of the House Republicans manages to come up with one $3.2 billion appropriation and three tiny earmarks that appear to be personal projects of Hillary Rodham Clinton and Nancy Pelosi.

Boehner is right when he goes on to say, “Moreover, the editorial missed the point. Congress doesn’t have a revenue problem. Revenue is at an all-time high after the 2001 and 2003 tax cuts, which have triggered economic growth that is ‘paying for’ an AMT patch many times over.” But he then notes, “Rather, Congress has a spending problem.”

Indeed. The Republican Congress of which Boehner has been a leader has increased spending by a trillion dollars in six years. And out of that massive gush of taxpayer dollars, Boehner can find only $3.2 billion in unnecessary spending. Which is perhaps why polls now show that voters trust Democrats more than Republicans on the issue of cutting government spending.

Defending Ron Paul’s Tax Plan

The Washington Post takes a swipe at Ron Paul, deriding his plan to abolish the income tax because revenues would fall to 1995 levels (rather than 2000 levels, as Dr. Paul mistakenly claimed in a recent Jay Leno appearance):

Expounding on his proposal for abolishing the income tax, Paul claims this would still leave the U.S. Treasury with roughly the revenues it had in 2000, in the final year of the Clinton administration. A post on the Paul campaign website explains that individual income taxes account for “approximately one third of federal revenue.” Unfortunately for the tax slashers, the one-time Libertarian candidate for president is wrong on both counts. According to the Congressional Budget Office, individual income taxes represent between 45 and 49 percent of federal tax revenues, depending on the year. For financial year 2007, total receipts from individual income tax were in the region of $1.1 trillion dollars. If you eliminated all that revenue, the federal budget would shrink to the size it was around 1995.

The Post’s criticism is akin to condemning a book because the typesetting was not centered on a few pages. The real issue is whether America would be a stronger and more prosperous nation if government was reduced to the levels envisioned by the Founding Fathers. America climbed from agricultural poverty to middle-class prosperity before the income tax was adopted, and federal government spending (with the exception of times of war) was a small percentage of GDP. The Post also fixates on whether the Paul campaign has identified $1.1 trillion of savings to match the forgone revenue from eliminating the income tax.

In attempt to figure out where the $1.1 trillion in annual savings is going to come from in a Paul administration, I talked yesterday afternoon to the candidate’s policy director, Joseph Becker. He pointed out that Paul has promised to bring troops home from Iraq and Afghanistan, eliminate foreign aid, eliminate agriculture subsidies, and get rid of the U.S. Education Department. A President Paul would, however, still have a military sufficient to defend the homeland.

Based on Paul’s rhetoric and record, this presumably is not a problem. The candidate almost certainly would favor the elimination (or transfer to the states) of the Departments of Agriculture, Energy, Education, Housing and Urban Development, Transportation, Labor, Commerce, and Health and Human Services. (What a joyous sentence to type!) Indeed, because he also would gradually turn entitlement programs into systems based on personal accounts (and shift welfare components back to the state and local levels), the long-term savings would significantly exceed the amount of money collected by the personal income tax. Ron Paul may not be a realistic candidate in today’s America, but that is an unfortunate reflection on voters (and the forces that have shaped voter attitudes), not the candidate’s platform.

Citing Impact of Tax Competition, Former IMF Chief Economist (Reluctantly?) Endorses Flat Tax

Noting that over-taxation will cause the geese that lay golden eggs to fly away, the International Monetary Fund’s former top economist says that a flat tax may be the only sensible approach. This, of course, is precisely why groups like the Cato Institute and the Center for Freedom and Prosperity are fighting to protect tax competition. Resource mobility is the enemy of greedy politiicans. Unfortunately, those politicians are not giving up without a fight. They are working through international bureaucracies such as the OECD to get the ability to track - and tax - flight capital. American lawmakers should resist this effort, both because the US is the world’s largest tax haven for foreign capital and because it is the right thing to do:

Many super-earners are also super-creative and bring enormous value. Places like the United Kingdom actively court wealthy foreign nationals through extraordinary preferential treatment of their investment income. The ultra-rich are an ultra-mobile group, too. If you are earning $540,000 an hour, it does not take too long to save up to buy an apartment, even in London. Anyway, there are limits to how much tax pressure the political system can apply to the ultra-rich. …Rather than punitively taxing wealth, globalization strengthens the case for shifting to a flat tax on income (or better yet consumption) with a moderately high exemption. Aside from the usual efficiency arguments, it is just going to become increasingly difficult and costly to maintain complex and idiosyncratic national tax arrangements.

Flat Tax Generating Big Results in Georgia

Alvin Rabushka has some remarkable data on the positive impact of tax reform in the former Soviet Republic of Georgia. The economy has been roaring since the enactment of a 12 percent flat tax, with growth of 10 percent per year. And in news that should make the IMF happy, there’s been a big Laffer-Curve effect, with revenues rising dramatically as a share of GDP (though this should be a reason to cut rates even further):

Effective January 1, 2005, Georgia (the country, not the U.S. State) adopted a flat tax of 12%, replacing its previous four-bracket system. The flat tax was augmented with a 20% tax on corporate profits, 20% on social insurance (reduced from 33%), and 18% (reduced from 20%) on VAT. The new, simpler system has had a dramatic effect on economic growth, averaging 10% a year for the past three years, and taxpayer compliance. Tax revenue increased from 14.5% of GDP in 2003 to 22% in 2006, and should reach 24% in 2007. Between 2003 and 2007, the reforms reduced the number of taxes from 22 to 7.

Media Bias around the Nation

Here’s the Salem, Oregon, Statesman-Journal’s lead on an election story today:

Oregon’s working poor will have to wait a while longer to get health-care coverage for their children.

Voters easily defeated Measure 50, a plan to raise tobacco taxes to provide universal health care for children after a record-shattering negative ad campaign financed by cigarette companies.

Gee, ya think this journalist supports the tax?

You have to read down to paragraph 11 to find out that it was a massive 85-cent-per-pack increase.

And you’d have to switch to the Oregonian to find a comment from an anti-tax organizer:

Opponents downplayed the amount of money they spent to defeat the measure, saying voters didn’t like sticking a tax in the constitution and weren’t convinced bureaucrats needed the money.

“The primary reason is there’s not an appetite out there for more taxes,” said Russ Walker, Oregon director of the anti-tax group FreedomWorks.

Update on Gisele and the Dollar

Maybe Gisele Bundchen is not bearish on the dollar after all. CNBC is pouring cold water on reports suggesting that the Brazilian supermodel prefers euros:

Anne Nelson, Bundchen’s manager … tells us reports that Gisele wants to be paid in euros are “false.” Nelson’s take: “Some idiot in Brazil reported something just to make news.” Nelson points out that Gisele lives in New York City, and thus needs U.S. dollars for her big-city lifestyle. Of course, anyone who disagrees with Warren Buffett’s investment wisdom does so at their own risk. But we have to think Gisele gets enough U.S. dollars that she can absorb any potential weakness against the Euro.

But this is not just a story about the strength of the dollar. The CNBC story notes that she lives in New York City, which raises the issue of whether she is a resident of the US for tax purposes. This would be a major mistake since America probably has the world’s worst tax system for people with global income. Being a selfless person concerned about the plight of the over-taxed entrepreneur, I want Gisele to know that I am willing to counsel her on how best to protect her earnings from rapacious government, even if it requires many hours and late-night meetings.

Gisele, feel free to contact me at my dmitchell [at] cato.org (Cato email address). I’m here for you in your time of need.

Excellent Story Shows Benefits of Tax Havens

Reporting from London, The Business notes that so-called tax havens are among the world’s richest jurisdictions. But rather than emulating success, high-tax nations attack these free-market outposts — with the Paris-based Organization for Economic Cooperation and Development leading the charge:

Of the 20 wealthiest nations, 13 of them are low-tax territories. …In the past few years, politicians from the developed world have led a determined assault on tax havens. …The Paris-based Organisation for Economic Co-operation and Development has led a series of attacks on the world’s tax havens, accusing them of complicity in money laundering and of lacking transparency. At one point the French government advocated an international boycott of tax havens, arguing that EU banks should refuse to deal with them. …Even the Vatican has joined the campaign. Pope Benedict XVI was reported last month to be working on a doctrinal pronouncement that will condemn tax evasion as “socially unjust”, while the planned encyclical — the most authoritative statement a pope can issue — will denounce the use of tax havens and offshore bank accounts by wealthy individuals, on the grounds that they reduce the tax revenues raised for the benefit of society as a whole (although curiously the Vatican hasn’t reacted so well to proposals by the Italian government to curb the Catholic church’s own tax break). But instead of attacking tax havens, other countries should be trying to learn from them. The way they lead the global wealth rankings is testament to the power of lower taxes to raise overall living standards. 

The story explains that the demagoguery against low-tax jurisdictions — particularly regarding charges of money laundering — is false (something that is confirmed by both international bureaucracies and U.S. government sources):

[T]hough money laundering through the Cayman Islands may be a staple of popular fiction, there isn’t much evidence for it in the real world. Most criminals launder the proceeds of the crimes domestically, since they are well aware that moving their money across borders only increases the chances of detection. Terrorists use traditional networks of money changers — not banks in Jersey.

The article closes with an excellent summary of the key issues. Tax competition constrains politicians and it encourages policies that make ordinary people richer, and tax havens play a key role in this process:

Low-tax territories provide an alternative to the high-tax world. They impose some discipline on governments elsewhere, restricting the amount they can raise in taxes by providing an escape route. But more importantly, they demonstrate the ability of lower taxes to consistently raise living standards, even in the most unpromising locations. Maybe it is time to stop hammering the tax havens — and start trying to learn from them instead.