Topic: Tax and Budget Policy

Insurer Plans to Escape Germany’s High Taxes

Tax-news.com reports on the likely shift to Ireland of a major German insurance company, Hannover Re. This is part of a trend as companies of all types are moving out of high-tax nations, with Ireland and Bermuda being major beneficiaries. (Interestingly, the article notes that the U.S. states of Vermont and South Carolina are havens for captive insurance companies.)

Hannover Re, one of the world’s largest reinsurance companies, is considering switching its operations to Ireland or another low tax jurisdiction, the company’s chief executive told a conference recently. According to Bermuda’s Royal Gazette, Wilhelm Zeller, CEO of Hannover Re, told a press conference at the annual reinsurance gathering, Le Rendez-Vous in Monte Carlo, that the $5.5 billion firm is considering moving from its present base in Germany…. “For us, the ideal location, from a fiscal point of view, would be Ireland,” Zeller stated, although he added that setting up headquarters in Dublin could be costly.

While Ireland’s low 12.5% corporate tax and location within the European Union is a big draw for reinsurance and other companies, Bermuda’s 0% rate of tax has lured many insurance companies to incorporate in the jurisdiction from high-tax countries like the UK. Last year, Lloyds of London underwriting firms Hiscox and Omega set up companies in Bermuda, citing the UK’s 30% income tax and its burdensome regulation. They were swiftly followed in January 2007 by another Lloyds firm, Hardy Underwriting plc.

…The 82 new Bermuda incorporations for 2006 compare very favourably with figures recorded by other jurisdictions such as Vermont, which had 37, South Carolina with 29, and the Cayman Islands with 50.

Norwegian Government Attempts Shakedown as Price of Lower Tax on Shipping

In an excellent example of the benefits of tax competition, Bloomberg reports that Norway’s left-leaning government intends to eliminate the corporate tax on shipping because of pressure from Bermuda, Liberia, and other open-shipping registries. But there is a dark lining to this silver cloud. The politicians want to extort $3.5 billion of alleged back taxes as part of the deal. Needless to say, Norway’s shippers are understandably suspicious about any deal that requires higher payments today in exchange for promises of less tax in the future:

The government said after the market closed on Sept. 7 it would seek 20 billion kroner ($3.5 billion) of payments in exchange for scrapping corporate tax on shipping companies. Shippers have been allowed to defer tax since 1996 provided they don’t use the money for dividends. … “The government is reneging on its previous agreement,” said Rikard Vabo, an analyst at Fearnley Fonds in Oslo who has a “sell” recommendation on BW Gas. “We will probably see shippers move abroad. It will also affect related companies, such as suppliers.” … The government wants to abolish corporate tax on shippers because lower rates outside Norway have encouraged companies to register new vessels in countries such as Liberia and Bermuda. … The Oslo-based Norwegian Shipowners’ Association will “consider everything” to reverse the tax ruling, spokeswoman Marit Ytreeide said by phone today.

Tax Competition Pushing Taiwan to Cut Corporate Tax Burden

The global shift to lower tax rates is continuing, with Taiwan’s government announcing its intent to reduce the corporate rate to at least 16.5 percent. Tax-news.com reports:

A senior finance ministry official has indicated that the Taiwanese government is keen to cut the country’s rate of corporate tax to attract more investment… Chang Sheng-ford announced on Wednesday that the 25% corporate tax rate could be cut to 16.5% or lower, but revealed that this would not happen until the Statute for Upgrading Industries has expired in 2009. …A cut in corporate tax to 16.5% would put Taiwan on a par with Hong Kong, perhaps the most successful economy in the region.

Surprise! Subsidized Projects Not Viable

Sometimes I complain that the media give us a distorted picture of the world by reporting bad news and ignoring the sea of good news, like the drop in heart disease deaths that I celebrated here. I understand why bad news is news and good news isn’t, but I do worry that we get a misleading picture of the world.

But then other times, perhaps contradictorily, I open the newspaper and see a story that seems so obvious that I almost wonder why it’s reported. Like this one in the Washington Post today:

Several projects subsidized by Maryland’s economic development agency are in financial trouble, legislative auditors reported yesterday, citing, in particular, a resort in Western Maryland and a golf course in Calvert County.

Rocky Gap Lodge & Golf Resort, the state-subsidized retreat built for $45 million a decade ago to revive an economically depressed area, has operated in the red for years and is $27 million in debt, the auditors said.

Chesapeake Hills, a golf course that the Maryland Economic Development Corp. took over from Calvert County five years ago, is running a $1.3 million deficit and cannot pay its operating costs without help from the county, the auditors said.

Whattaya know? Projects that weren’t financially viable without a subsidy from the taxpayers turn out to be … not financially viable, even with the subsidy. If there just wasn’t much market demand for a resort in an economically depressed area or a golf course in Calvert County, then it’s no surprise that the projects can’t even make their operating expenses. And of course, projects that are owned, managed, or subsidized by government tend not to be run as efficiently as projects in which individuals and businesses are risking their own money.

We’ve seen a bigger example of this recently in the subprime mortgage market, of course. People who borrowed money they really couldn’t afford discover that they can’t pay it back. That’s why it’s probably best to let the market work in deciding which mortgages, business start-ups, and other projects are financially sound.

The Republicans’ Post-Election Personal Pork Party

At The Hill, I have an article about a little-known dip into the pork barrel: big bonuses for congressional staff if there’s money left over at the end of the year, especially if the money will fall into the hands of the other party at the end of the year.

How can there be money left over when the government is running multi-hundred-billion dollar deficits? Well, you might ask. But each department has its own appropriation, and those accounts often have “money left in the budget” as the end of the year approaches, necessitating the famous end-of-the-year spending spree.

In the congressional case, I found examples like this on committee staff budgets:

The House Energy and Commerce Committee showed similar patterns. In 2005, when the Republican leadership was spending its “own money” on year-end bonuses, several staffers received less than 10 percent of their annual salaries, while a few lucky staffers received extra payments of as much as 17 percent.

But when GOP Energy and Commerce bosses faced losing their chairmanship after the 2006 election, they decided to leave no dollar behind for the Democrats. Lucky staffers then got windfalls of 31 percent on a $35,000 salary, 30 percent on a $50,000 salary, 18 percent on a $100,000 salary, and so on. At least 15 committee staffers got bonuses of between $11,000 and $17,600.

And I concluded, cheekily:

Members of Congress are free to pay their staffers whatever they choose, up to an annual ceiling, so there’s nothing illegal about year-end bonuses, even year-end, post-election, before-the-other-party-gets-in bonuses.

But this pattern illustrates a big difference between the private and public sectors. In the private sector, if your customers become dissatisfied with your product, you tend to make less money. In the public sector, you get a couple of months to double-dip before you lose control of the money. For participating in a Congress that voters booted out of office, these bonuses are a handsome parting gift.

A big tip of the hat to Cato interns Schuyler Daum and Jonathan Slemrod for poring over payroll records, and to LegiStorm for making such information about Congress public and accessible.

The Reagan Revolution Sweeps the World

Steve Moore’s Wall Street Journal column celebrates the global shift to lower tax rates and free markets. To be sure, most foreign politicians are adopting pro-growth policies because of tax competition, not because they share Ronald Reagan’s vision. But the end result is a much stronger global economy:

…the Reagan economic philosophy of lower taxes, less regulation and free trade has never been more in vogue abroad – so much so that it has become the global economic operating system. …nations of old-Europe seem to be in a sprint to see which country can get their tax rates lowest quickest. Nicholas Vardy, the editor of “The Global Guru” economic newsletter calls the phenomenon “Europe’s Reagan Revolution.” …Austria cut its corporate tax rate to keep pace with its neighbor, Slovakia which recently adopted an 19% flat tax. Singapore is cutting taxes to compete with its 16% flat-tax rival Hong Kong. Northern Ireland wants to cut its tax rates so that it can compete with the economic gazelle of Europe, the Republic of Ireland. In 1988 Ireland was a high-unemployment stagnant economy with a 48% corporate tax rate, today that rate is 12.5% and the rest of the world is now desperate to match its economic results. Meanwhile German Finance Minister Peer Steinbrueck sold the latest tax cuts as “an investment in Germany as a business location.” …it is a testament to the Reagan economic revolution launched in 1981 that, a quarter century later, global tax rates are 25 percentage points lower on average today than in the 1970s. And those figures don’t even include this latest round of chopping under Reaganomics 2.0. The enactment of supply-side policies is helping ignite one of the strongest and longest world-wide economic expansions in history.

The Republicans’ Magic Budget Machine

In an article on the 2007 Virginia legislative elections, the Washington Post reports:

GOP candidates will also make the argument that if the party retains control, it would mean lower taxes, controls on development and more education spending.

Lower taxes AND more spending on good stuff – it’s hard to beat that combination. And it’s worked so well at the federal level. But it may be harder to deliver in a state that’s required to balance its budget.