Topic: Tax and Budget Policy

Hong Kong’s Flat Tax May Drop to 15 Percent

Thanks in part to tax competition from Singapore, Hong Kong is on the verge of reducing the flat tax rate on both corporate and labor income to 15 percent. The Wall Street Journal notes  ($) - or at least hopes - that this might open some eyes in the US and UK:

Chief Executive Donald Tsang delivers the first policy speech of his new term on Wednesday and it promises to make instructive reading for lawmakers elsewhere in the world who want to make their economies competitive. Mr. Tsang’s move was mooted earlier this year, when he promised to cut taxes on both salaries and corporate profits to 15% during his next term. The salaries tax currently stands at 16% and the profits tax at 17.5%. On Friday, the South China Morning Post reported he’ll start the ball rolling this week, sooner in his term rather than later. Singapore, Hong Kong’s big competitor in the region, has been steadily cutting corporate taxes over the past few years. Its rate now stands at 18%. …In the race to attract new business, New York and London are competing against a territory that thinks a 17.5% corporate tax is too high.

Romney’s Tax Plan

There are at least three approaches to tax policy a candidate may take in an election campaign:

  1. Use the tax code to offer limited giveaways that do nothing to improve the economy, but offers small benefits to the maximum number of voters. This is the Obama approach.
  2. Pursue major tax reforms combined with downsizing the government. This is the Ron Paul approach. Paul notes on his campaign website: “True tax reform is as simple as cutting or eliminating taxes” and “the real enemy of tax reform is the spending culture in Washington … we will never have tax reform in this country until Congress changes its spending habits.”
  3. Call for tax cuts that will spur economic growth and benefit all taxpayers. This is the Mitt Romney approach, as we will discuss here.

The Romney campaign released a “blueprint” on tax policy yesterday. The blueprint is just seven short bullet points, but they are all excellent points. Here they are in brief with my comments.

  1. Make the Bush tax cuts permanent. Great. Extending the income tax rate cuts and the dividend and capital gains tax cuts is important. But I’d swap the Bush child tax credits for further supply-side tax cuts.
  2. Make additional cuts to individual income tax rates. Great. That would improve economic efficiency and growth. I’d take this further and collapse the current rates into a flat rate or a two-rate structure
  3. Enact a zero tax rate on interest, dividends, and capital gains for those in the middle class. That’s a move in the right direction, but better to eliminate double-taxation on all savings. 
  4. Eliminate the estate tax. A no-brainer. The current estate tax damages growth, probably doesn’t raise any money, and enriches tax lawyers.
  5. Cut the corporate tax rate. Another no-brainer. The average corporate income tax rate in Europe is 24 percent. The average federal plus state rate here is 40 percent.
  6. Oppose Social Security tax increases. Romney’s right: tax increases won’t solve the problems with Social Security, as explained here.
  7. Make individual medical expenses deductible. A move in the right direction to equalize the tax treatment of individual and business health expenses.

All in all, candidate Romney has outlined a very pro-growth tax agenda. His plan contains numerous supply-side provisions that would increase economic efficiency and raise incomes. Kudos for proposing reforms that would benefit all Americans and resisting the impulse to craft useless tax giveaways, which is the approach of candidiate Obama.

Now if we could combine the Romney supply-side approach with the Paul downsizing approach, we would really be getting somewhere.

Norway’s Banana-Republic Shipping Industry Expropriation

The Wall Street Journal correctly castigates Norway’s socialist government for applying a huge retroactive tax hike on the shipping industry. The only silver lining to this dark cloud is that some shipper will “re-flag” its vessels in jurisdictions where politicians don’t expropriate past earnings:

It’s almost unheard of, though, for a rich, enlightened nation like Norway to deliberately undermine one of its most important industries. That’s exactly what’s expected to happen tomorrow, when Norway’s left-leaning government presents its budget to parliament. Included will be a proposal to retroactively tax shipping companies to the tune of nearly €3 billion, a move that could threaten the status of Scandinavia’s maritime superpower.

Over the past seven years, as the regime took effect, maritime employment in Norway has climbed almost 20% to about 100,000 and the number of ships on order by Norwegian fleets has risen more than threefold — keeping pace with rapid international shipping growth since the turn of the century. That boom has attracted the attention of Norway’s finance minister, Kristin Halvorsen, a member of the country’s Socialist-Left Party. Under her budget plan, all profits reinvested by the industry since 1996 would be subject to a retroactive tax.

Many ship owners are considering reflagging their vessels in nearby countries, such as the U.K. and Denmark. Moving could mitigate their future liabilities, but that will be little consolation to firms that remained in Norway over the past decade and invested in their fleets, only to be betrayed by politicians.

High-Flying Bureaucrats Rip Off Taxpayers

The New York Times reports that the Government Accountability Office found pervasive abuse of premium travel by bureaucrats. Fraud was especially rampant at the Department of Agriculture, which is doubly outrageous since the Department shouldn’t even exist:

Federal employees are routinely abusing rules on business-class travel, taking trips that cost taxpayers an estimated extra $146 million annually, Congressional investigators have found. …An Agriculture Department official, for example, spent $62,000 on 10 business-class flights to Europe to attend trade negotiations. The coach fare would have been less than $9,000. …a business-class ticket costs on average five times that of a coach ticket. The investigators found very few first-class flights, which have even stricter rules. But the study found that 65 percent of the overall premium flights, $146 million worth, broke the rules or were not appropriately authorized. …The foreign affairs agency in the State Department had one of the highest shares of questionable premium-class travel, the investigators said. Cases highlighted included a family of eight that flew business class to Eastern Europe from Washington at a cost of $46,000, as part of permanent change of assignment, a trip that auditors said should have cost $12,000. The Agriculture Department at times sent large employee groups by business class, including eight officials who went to a trade conference in Geneva on flights that cost $50,000.

Clinton’s $5,000 Baby Giveaway

In a speech last week, Senator Hillary Clinton proposed giving $5,000 (of your money) to every baby born in America in the form of a government-controlled savings account. In a speech last year, Clinton proposed a $500 baby savings account, so the cost is rising as we get closer to the election.

Clinton’s comments had roots in ideas proposed by both conservative and liberal think tanks and politicians. That’s not surprising, because both liberals and conservatives inside the beltway specialize in top-down government planning schemes. The liberal New America Foundation has a plan for a $6,000 baby giveaway. Conservative plans are discussed here.

Here are seven problems I see with baby giveaway plans:

1) Cost. Clinton’s plan would cost about $20 billion annually, but would be higher if added private savings were matched by further government subsidies. The money would come from higher taxes, causing damage to the private economy on the order of $2 for every $1 extracted (as Martin Feldstein estimated).   

2) Lobbying for Expansion. Suppose Clinton’s plan passed and would begin January 1, 2010. Do you think that parents of kids born in 2009 or 2008 would be happy that their neighbors were getting $5,000 giveaways and they weren’t? I don’t think so. I think lobby groups would quickly get Congress to expand the benefits to tens of millions of existing kids.

3) Cookie Jar Problem. Clinton suggested that when kids turned 18, they could use the money for college, buying a home, starting a business, or saving for retirement. But don’t you think that a $5,000 per-child cookie jar would be tempting for families to raid early? Interest groups would help them by lobbying to expand the accounts to cover: baby formula expenses, kids’ health costs, children’s clothes, kid’s school and tutoring costs, family emergencies, and so on. 

4)  Bureaucracy. All these exceptions would require hundreds of pages of regulations and a huge bureaucracy to administer. And we would also need a huge enforcement bureaucracy because with the government handing out $5,000 to anyone who mailed in a birth certificate, the temptation for fraud would be large.

5) Not savings. Giving people $5,000 is not savings. Savings involves individuals sacrificing current consumption for greater future security and income. There is no sacrifice here except by the taxpayers who have their own income and savings swiped by the government in higher taxes. 

6) Increased Consumption. Proponents of these savings plans claim that giving people money in freebie savings accounts will encourage them to save more on their own. Maybe. But the opposite would also occur. Parents would increase their own consumption rather than saving for their kids’ college costs because they would be counting on the government account. And kids reaching 18 would increase their own consumption because the government has their home downpayment covered. Savings is about frugality, but these accounts would encourage the opposite.

7) Generational Issues. The current Social Security and Medicare systems create a huge and involuntary transfer from young people to old people. Senator Clinton does not favor cutting these programs, while her new baby proposal would create a new program to take from older people (who are paying taxes) to give to young people. Clinton thus favors different programs that work exactly against each other.

Rather than having multiple government transfer programs working at cross-purposes, politicians might try simply cutting benefits and scaling down the fiscal war of all against all.

To boost savings, we should eliminate current government tax hurdles through universal, all-purpose, tax-free savings accounts

While money to fund baby accounts doesn’t grow on trees, crackpot schemes do in the fertile ground of federal election campaigns.

The Antitrust Religion

Many successful American businesses have been accused of anti-competitive practices. In The Antitrust Religion, a new book published by the Cato Institute, attorney and author Edwin S. Rockefeller argues that much of the conventional wisdom about antitrust is wrong. Drawing on 50 years of experience with U.S. antitrust laws, Rockefeller sheds light on why lawmakers, bureaucrats, academics, and journalists use arbitrary and irrational laws and enforcement mechanisms to punish capitalists rather than promote competition.

Rockefeller also participated in a Cato daily podcast about the book.

Maryland and Michigan Committing Economic Suicide

The title is a bit of an exaggeration, but states that raise income tax rates are engaging in extremely foolish behavior because entrepreneurs, investors, and business owners will shift to states with lower tax rates. The Wall Street Journal opines against these self-destructive policies, noting that Maryland’s tax-increase orgy will finance new spending and penalize small business:

Governor Martin O’Malley has been undertaking something close to a tax-increase-a-day tour. In Ellicott City he proposed raising the sales tax to a rate of 6% from a nickel. The next day in suburban Baltimore he unveiled his plan to raise the top income tax rate to 6.5% from 4.75%. Last Wednesday in Landover he called for a doubling of the cigarette tax to $2 a pack. He has also endorsed a one percentage point hike in the state corporate income tax to 8%, new commercial real estate taxes, and a 12 cent hike in the gasoline tax to 35.5 cents a gallon. …

In all, Mr. O’Malley hopes to wrench $2 billion a year from Maryland workers – in the name of filling a $1.5 billion gap in the state’s $30 billion budget. The extra $500 million will finance new spending. … Mr. O’Malley’s income tax plan is consistent with the Democratic Party’s nationwide revival of its New Deal theme of the tax code as a tool for income redistribution. While nations over the globe move to flatter, simpler, pro-growth tax systems, the Governor is selling his proposal as a pain-free whack at the rich. Trouble is, there aren’t enough truly rich to finance his spending goals, so his real target is the not-so-upper middle class. His two new tax brackets of 6% and 6.5% will kick in at incomes of $200,000 and $500,000, respectively, for couples. …

The Governor also fails to mention that about two-thirds of the people he wants to hammer are small business owners – the major employers in the state. He might acquaint himself with a new study by Barry Poulson of the University of Colorado which finds that states with either no income tax, or low flat-rate structures, have significantly higher income growth rates than states with steeply progressive tax rates. … The losers will be Maryland citizens, unless they move to another state, which we’d guess some of them will.

The WSJ also explains that Michigan’s tax increase is going to undermine a state that already suffers from a weak economy and a punitive tax regime:

At about 2 a.m. Monday, a handful of Republicans in the Legislature broke days of gridlock and handed Democratic Governor Jennifer Granholm the $1.48 billion tax increase she has been demanding. The state’s personal income tax will rise to 4.35% from 3.9%, and the rest of the revenue grab will come from a new 6% sales tax on business services. Already 14th in tax burden among the 50 states, according to the Tax Foundation, Michigan is now headed up in the rankings. Congratulations. …

By the way, last year Michigan introduced a new 4.95% business income tax, which will be applied on top of the sales tax. Last year, amid the national expansion, Michigan was the only state outside the Gulf Coast to lose jobs and see a decline in economic output. Comerica Bank recently moved its headquarters to Texas, in part because of Michigan’s hostile business climate. Michigan’s 7.4% jobless rate is the highest of all states and far above the 4.6% national rate. …

In the past 25 years, the only period when Michigan’s growth has exceeded that of the national economy was in the mid-1990s after then-Governor John Engler’s tax cutting and welfare reform. For a time, Michigan became the unlikely national leader in job creation. Now the total tax burden is returning to where it was before the Engler years. Michigan last went on a taxing binge in 1983, and voters were outraged enough to mount a successful recall campaign against two state Senate ringleaders. This time, two of three Michigan voters have told pollsters they want budget cuts, not new taxes. It may be that the only way to get jobs back into Michigan is to make sure the taxing politicians in Lansing lose theirs.

The only good news from Maryland and Michigan is that these states will serve as laboratories for economic failure. In upcoming years, public policy experts will compare their economic performance to the results in states – like Rhode Island and New Mexico – that have lowered tax rates. Needless to say, it is easy to predict that the states lowering tax rates will prosper relative to the states that are increasing the burden of government.