Topic: Tax and Budget Policy

Parliament of Whores, Indeed

Those hoping for reform of the outdated and economically damaging farm bill have cause for disappointment today, after the House defeated, by a margin of three votes to one, an amendment that represented some hope for change. (The roll call can be viewed here). That amendment, whilst by no means close to sufficient reform, included important changes to income eligibility requirements and payment limits for subsidies, and would have closed a loophole allowing producers to manipulate the marketing loan program.

Unscathed passage of the House Agriculture Committee’s bill (see my colleague Dan Griswold’s brief criticism of the House bill here) looked in doubt just a few days ago, but House majority leaders managed to sway Rep. Jim McGovern (D., MA), originally in the reform camp, to vote for the farm bill by promising about $840 million to his pet cause, overseas food aid. The Congressional Black Caucus agreed to support the farm bill after a promise to spend $1.1 million on settling racial discrimination claims from the 1990s.

As if the House proposal for the “new” farm bill wasn’t insult enough for the taxpayer and consumer, the proposal for funding some of the largesse is beyond the pale. The $4 billion increase in food stamps and nutrition programs, which could presumably be paid for by cutting the subsidies to farmers of chosen crops, will instead be financed by taxing “inshoring” companies — U.S.-based subsidiaries of foreign companies who employ American workers.

For a Congress supposedly concerned that international trade is threatening American jobs, taxing employment of American workers seems perverse — not to mention violative of tax treaties. Business groups and Treasury Secretary Henry Paulson have expressed their deep dissatisfaction with the tax increase. Some Republicans, including the ranking member on the House Agriculture Committee Robert Goodlatte (Va.), have indicated they would vote against the farm bill (up for a final vote today) because of the tax increase. I’ll believe that when I see it.

On a more positive note, the proposed tax increase has led the administration to issue a veto threat, albeit of the less-than-clear “his senior advisers will recommend that the president veto this bill” variety.

Trillion Dollar Man

The recent budget update from the Bush administration shows that federal spending will be $2.918 trillion in fiscal 2008. That means that spending increases under Bush will break the $1 trillion mark when the new fiscal year begins in October. Spending was $1.863 trillion when he came to office in fiscal 2001.

Bush’s last budget year will be fiscal 2009, at which time he is projecting to spend $3.016 trillion. Thus in eight short years, with relatively low inflation, this president and spendthrift congresses will have blasted through both the $2 trillion spending mark and the the $3 trillion mark.

More Evidence for a Corporate Rate Cut

Glenn Hubbard, the former chairman of the Council of Economic Advisers, comments in a Wall Street Journal column ($) that the corporate income tax hurts workers. He cites recent research showing that a lower corporate tax rate would have a substantial Laffer Curve effect.

As explained in a recent Tax & Budget Bulletin, the rest of the world is moving toward lower tax rates. The longer U.S. policy makers wait to implement similar reforms, the larger the losses for American workers:

[T]he tax may be borne not entirely (or even principally) by owners of capital, but by workers. Globalization plays a role. In an open economy, with mobile capital, a source-based tax like the corporate tax will lead to a capital outflow, reducing investment and productivity and wages.

…In other research assuming that the world-wide capital stock is fixed, William Randolph of the Congressional Budget Office finds that labor bears about 70% of the corporate tax. …A recent paper by Kevin Hassett and Aparna Mathur of the American Enterprise Institute analyzes data across countries and over time, concluding that for countries that are part of the Organization for Economic Cooperation and Development (OECD), a 1% increase in corporate tax rates results in a 0.8% decrease in manufacturing wage rates.  …A recent survey and study by KPMG shows, for example, that competition for investment continues to drive down tax rates around the globe, with further cuts in the pipeline from China, Germany, Singapore and Britain, among others. The desire for these cuts comes in part from the significant responsiveness both of real investment and taxable income to corporate tax rates. …Recent research by Michael Devereux of the University of Warwick suggests, though, that the revenue-maximizing corporate tax rate in OECD countries is likely less than 30%. That is, higher corporate investment (and subsequent corporate profits and corporate tax revenue) and shifts in taxable income by multinational firms will substantially reduce the revenue “cost” of a corporate rate cut from the present 35% to, say, 30%.

Cutting the corporate tax rate would be positive for investment, productivity and economic growth. It would also reduce a tax burden now borne in large part (or even entirely) by labor, bolstering wages. And business responses to the tax cut will offset much of the “static” revenue cost.

Urgency on Corporate Tax Reform

The U.S. Treasury held a conference today regarding the growing uncompetitiveness of the U.S. corporate tax system.

Scholars and heads of large corporations have been pointing out the serious problems with the corporate tax for more than 15 years. There is now a growing consensus that the complex and high-rate corporate tax needs to be overhauled.

Here are some of the themes discussed today:

  • Europe is on a corporate tax-cutting binge. Today, the U.S. federal plus average state corporate tax rate stands at 40 percent, which is much higher than the average rate of 24 percent in the European Union. It appears that foreign rates will keep on falling for some time, putting an ever greater squeeze on U.S. competitiveness.
  • Intel Corporation stressed that tax costs are an important consideration when they locate new semiconductor plants. Over a 10-year time frame, Intel figures that it costs $1 billion more to build and run a plant in the United States over competing countries such as Ireland and Malaysia. About 70 percent of the U.S. cost disadvantage stems from taxes.
  • General Electric noted that taxes are not the key issue in determining where it builds new plants. Instead, in GE’s case, tax rules on foreign income determine whether, say, a U.S. or German company ends up owning a new facility in other countries such as Brazil. From a tax perspective, the United States is a bad place to locate the headquarters of a multinational corporation. Most economists believe that damages the U.S. economy.
  • There is a trend toward “territorial” corporate tax systems, with about two-thirds of countries having such systems today. A U.S.-style “worldwide” system is less and less popular because it puts home-country corporations at a disadvantage in global markets.
  • Several speakers stressed that a greater share of corporate value is in the form of intangible property such as patents. Intangible property is more mobile than tangible property, and thus easier to relocate to low-tax jurisdictions.
  • Peter Merrill of PricewaterhouseCoopers noted that because of higher capital mobility, a greater share of the U.S. corporate tax burden is falling on U.S. workers. Kevin Hassett of the American Enterprise Institute has shown statistically that higher corporate tax rates mean lower worker wages.
  • Supply-side economists have long pushed for tax breaks on new capital investments. But there was widespread agreement at the Treasury roundtable that getting the corporate tax rate down is more important than incentives such as investment tax credits. A lower corporate rate reduces all the distortions in the corporate tax code and directly responds to the challenges of growing global capital mobility.

The only red herring I noticed was a repeated suggestion that we should “broaden the base” of the corporate tax to pay for a corporate rate cut. But there is very little broadening that we could do that wouldn’t be economically damaging. There are not a great number of obvious loopholes in the corporate income tax. (There is lots of tax avoidance, but that is a different issue.) The Treasury listed some targeted loopholes in a recent report, but I bet most people at the conference today would object to repealing most of those, such as “deferral of income from controlled foreign corporations.”  

Anyway, kudos to Treasury Secretary Henry Paulson for the important conference and beginning some momentum for corporate tax reform. 

See here for more background on international tax competition and corporate tax reform.

Illegal Manicure in the ‘Live Free or Die’ State

In response to to my post about a (possibly) illegal hairdresser in Massachusetts, Michael Hampton of Homeland Stupidity forwards a link to a priceless local New Hampshire news report. (It’s two years old, but it’s new to me and to this blog.)

Free State Project member Mike Fisher performed an illegal manicure right in front of the “Live Free or Die” state’s Board of Barbering, Cosmetology and Esthetics. (Motto: Yew Best Drop That Thar Em’ry Board, Son.)

When the police asked Fisher if he had a license to perform that thar manicure, Fisher said no. When the police issued him a summons and asked that he stop performing that thar manicure, Fisher refused. So the cops slapped handcuffs on this dangerous outlaw and put him in a squad car. Fisher reportedly received a 30-day suspended sentence, with a vow from the judge that if Fisher receives so much as a traffic ticket, it’s off to the pokey he goes.

I wonder what the Granite State wasn’t doing with the time and resources used to arrest and prosecute Fisher.

$1.4 Trillion and Counting

Last October we estimated that unfunded costs for state and local government health care plans were about $1.4 trillion nationwide. That is the amount that taxpayers will be hit unless governments cut excessive benefits for teachers, firemen, and other workers.

Some new estimates have been released since our report, and it appears that we were conservative.

  • Credit Suisse has put nationwide unfunded costs at $1.5 trillion.
  • We estimated New Jersey at $20 billion, but the NYT reports today that unfunded costs for the state are now estimated to be $58 billion.
  • San Francisco has reported a $4.9 billion cost, Los Angeles County $16 billion, and the LA School District $10 billion
  • In December, Pennsylvania reported a $34 billion cost, which is one of the highest figures we’ve seen for the states.

MediKid

That was the name I gave the State Children’s Health Insurance Program (SCHIP), before it even had a name, 10 years ago this month.

It appeared in a paper I wrote for Citizens for a Sound Economy Foundation titled “MediKid: Whose Idea Was This, Anyway?” At the time, I foolishly hoped the paper would head off this Orrin Hatch/Ted Kennedy love-fest. CSEF issued the paper just as the House and Senate were about to go to conference on different versions of the program.

Ten years later, MediKid is about to expire. As Congress and the president are trying to figure out just how much more to spend on this ill-advised program, I thought it would be fun to share a few gems from my 1997 paper:

Congress is about to cast one of its most damaging votes ever against children’s health. Taking a page from the Clinton administration’s playbook, Congress will soon vote to expand government-run health care for children and continue the slow march toward imposing government-run health care on everyone. Instead of wasting over $8 billion on “MediKid” proposals, Congress should help parents protect their children’s health by providing additional tax relief to families…

Congress has debated the issue of uninsured children under the premise that 10 million American children are unable to obtain health coverage — a premise that is utterly false. In fact, fewer than two million children in the U.S. are chronically uninsured.

Acting on this false premise, Congress has designed new government programs to give health coverage to low-income children. Over five years, these programs will waste more than $8 billion duplicating services already provided by the private sector. Worse, MediKid will actually harm children’s health by making parents less able to meet their children’s basic health needs.

In 1993, the Clinton administration’s Health Care Interdepartmental Working Group conceived of a strategy to nationalize health insurance by providing government coverage to children first and later phasing in the adult population. Ironically, a Republican Congress’ MediKid proposals are now implementing that strategy.

About the number of uninsured children:

This poor understanding of the dynamics of the health coverage market has led to inane solutions. The Senate MediKid proposal targets children too affluent to be eligible for Medicaid yet below 200 percent of the poverty level. The [Census Bureau’s Survey of Income and Program Participation] reveals there are only 1.4 million chronically uninsured children in this income category. Nevertheless, the Senate designed a program to cover 2.8 million such children.

About the slow march toward government-run health care:

Congress’ MediKid proposals are a step toward nationalized health coverage. In 1993, the White House Health Care Interdepartmental Working Group devised a number of strategies for nationalizing health insurance. What the task force called “Option 3: Kids First Coverage” was a plan to move children out of the private health insurance market into government-run coverage as “a precursor to the new system” of national health insurance. The task force wrote:

This proposal is designed in two parts which will be implemented simultaneously: 1) The quick coverage of children — “Kids First”; and 2) the development of structures for transitioning to the new system and the phasing in of certain population groups.

Does anyone actually doubt that that’s the whole point?