Topic: Tax and Budget Policy

Will the IRS Drive More Business Offshore?

In a baffling move, the Internal Revenue Service is poised to unilaterally change the rules for “captive” insurance companies, a policy that will drive business out of the
United States.

It is unclear whether the tax agency actually has the regulatory authority to make this change, and the IRS in the past has tried to use regulations to overturn existing law, so anything is possible. In any event, a report from the Cayman Islands shows that low-tax jurisdictions are looking forward to taking advantage of the IRS’s initiative:

A recent Internal Revenue Service proposal to remove tax deductions for certain U.S. captives may drive more companies to go offshore, with Cayman and Bermuda the prime beneficiaries of the change. If approved, this proposal would eliminate the ability of U.S. captives to claim tax deductions for money set aside in reserves to pay for future claims and losses. Instead, these deductions would only be allowed at the time the actual claims are paid out, potentially leading to millions of dollars in taxes being collected up front.

…Vermont has been the only real onshore competitor for Bermuda and Cayman as large numbers of U.S. companies have turned to captives, transforming this once exotic product into a mainstream choice on the global market place.  …To date, Bermuda leads the captive market with about 870 companies, followed by Cayman (756) and Vermont (562).

Hillary Claus

Hillary Clinton’s Christmas-weekend TV ad shows her sitting at her famous couch wrapping presents. They’ve all got tags — reading “Alternative Energy,” “Middle Class Tax Breaks,” “Universal Health Care,” and “Universal Pre-K.” (Also “Bring Troops Home,” but she’s already made clear that that box is empty.) I’d embed the video here, but you’d think it was a Club for Growth parody, so instead I’ll link directly to her campaign website.

Hillary actually sees herself as Santa Claus, handing out presents to the voters. Except, as my colleague Justin Logan notes, instead of putting together the toys at the North Pole with her elves, she’ll just take our toys, wrap them up, and then give them back to us after taking her cut and then pretend that it’s a great act of beneficence.

I complained once about teenagers interviewed by Parade magazine who “seemed to regard the new president as a combination of Superman, Santa Claus, and Mother Teresa.” But they were teenagers, not 60-year-old presidential candidates. Only one of the teens interviewed had an adult understanding of where government benefits come from. “I worked every day last summer,” he told Parade, “repairing and setting up cattle fences, from 8 a.m. to 5 p.m. in very hot weather. I got a good tan, but other than that it wasn’t worth it — just to have the government take a third of my money and have it go to someone I don’t even know who didn’t earn it in the first place. Do something about taxes.” He’s old enough to vote now. If only he were old enough to run for president.

Korean Tax-Cutter Wins

The corporate tax-cutting revolution may take another step forward with the election of Lee Myung-bak to the South Korean presidency.

Lee has promised to cut the country’s federal corporate tax rate from 25 to 20 percent.

Lee seems to have a very pro-market perspective on fiscal economics: “The ratio of taxation against national income was 17.9 percent under former President Kim Young-sam’s administration, but it increased to 20 percent under the incumbent administration, which almost stops the economy from growing.”

America’s tax ratio is closing in on 19 percent of GDP and our federal corporate tax rate at 35 percent will be 75 percent higher than Korea’s.

The Man with the Plan

The Russian government’s monthly propaganda insert in the Washington Post includes this headline today:

The Man with the Plan/President Putin Has Got the Nation’s Future Mapped Out

It reminded me of an article I wrote a few years ago with the same title, “The Man with the Plan.” (In Liberty, July 1996, or you can read it in my forthcoming book The Politics of Freedom.) I was writing about Clinton adviser Ira Magaziner, whose various planning schemes, while scary, are certainly not as bad as the ones that have been tried in Russia over the past century. Though this idea, expressed by presidential candidate Bill Clinton on the campaign trail in 1992, might come close:

We ought to begin by doing something simple. We ought to say right now, we ought to have a national inventory of the capacity of … every manufacturing plant in the United States: every airplane plant, every small business subcontractor, everybody working in defense.

We ought to know what the inventory is, what the skills of the work force are and match it against the kind of things we have to produce in the next twenty years and then we have to decide how to get from there to there. From what we have to what we need to do.

Five-year plans not having planned out so well, Clinton and Magaziner decided the problem was their short-term focus. Whether Bill or Hillary, Putin or Magaziner, when I hear the phrase “the man (or woman) with the plan,” I think of Adam Smith:

The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

A Moment of Idiocy, of Real Idiocy

The above title is the correct assessment of the new energy bill that President Bush just signed into law less than 24 hrs after the House approved it by a 314–100 margin. House Speaker Nancy Pelosi, speaking just prior to yesterday’s vote, gave the politicians’ assessment: “You are present at a moment of change, of real change.”

Of course, it’s not that much of a change for politicians to substitute their collective judgment for the private decisions of consumers who have strong incentives (stronger than politicians!) to make the most efficient choices. Still, the new energy bill — assuming Congress sticks to it — will make some changes:

  • The incandescent light will be phased out of existence beginning in 2012.
  • Average fuel economy for new vehicles will move from the current 25.0 MPG to 35.0 by 2020 — a standard that only the Toyota Prius and Honda Civic hybrids currently meet.
  • New government mandates and subsidies will push the domestic ethanol industry to some 36 billion gallons in sales by 2020. (This will actually lessen fuel efficiency because ethanol gets considerably worse mileage than gasoline.)
  • The move to more biofuels will continue to increase food prices as farmland is reallocated to the production of energy stocks.

All this leads to one question: Why are these mandates necessary? If the changes are as sensible as Congress and the White House claim, consumers would make them privately. Indeed, the data indicate that consumer preference for fuel-efficient cars is stronger than what the economics would justify.

So then, what is this energy bill really all about?

ADDENDUM:  Beth Douglas Kelly, a mechanical engineer who specializes in energy R&D, emailed me about a bit of sloppiness in my parenthetical that ethanol gets worse gas mileage than gasoline. My statement is correct but, she points out, it’s not that important — it simply means that a certain volume of gasoline gets you farther than the same volume of ethanol. That fact bypasses the important questions of gasoline’s and ethanol’s costs (understood in a broad sense).

Here are the important comparisons:

  • What is the cost per mile for gasoline vs. ethanol? (Currently, gasoline still beats ethanol when you take into account the loss of gas mileage.)
  • What are the environmental externalities of gasoline and ethanol? (Here, ethanol seems to be better but there’s still some argument.)
  • What are the other externalities of gasoline use vs. ethanol use?
  • Will consumers ever be made to bear (and thus judge between) those costs, or will politicians continue to hide them?

Unfunded State Health Costs: Still $1.4 Trillion

The New York Times and Washington Post report today on a new study by the Pew Center on the States regarding unfunded state and local pension and health costs for retirees.

Let’s just look at the health costs. Pew finds that state governments have promised their workers $370 billion of retiree health care that they have not put money aside for. Unless those benefits are cut, that figure represents the looming hit on future taxpayers.

But Pew only looks at state governments, which employ 4.3 million people, according to Census data. Local governments employ 11.8 million people. If the local health care problem is as big as the state problem, the total state/local unfunded amount would be $1.4 trillion.

Interestingly, that is precisely the figure that Jagadeesh Gokhale and I came up with when we looked at this problem last year. We estimated that state and local governments have racked up about $1.4 trillion in unfunded retiree health costs.

Our study and the Pew study highlight two fundamental problems. First, governments have been irresponsible in making huge promises to workers regarding future benefits, but then not funding them as private benefit plans would.

Second, “public sector employees are far more likely to receive retirement benefits [than private sector employees] and the gulf between private and public sectors continues to grow,” according to Pew. For example, 82 percent of government workers receive retiree health benefits, compared to just 33 percent of private sector workers.

The solution is to cut back sharply on the gold-plated benefits received by government workers, while privatizing as many state and local activities as possible.

Prior posts: here, here, and here.

Universal Coverage Is the Health of the State

California’s health care sector is as bloated and inefficient as the rest of the country’s, meaning that it already bleeds the taxpayers dry.  But that’s just not good enough for Gov. Arnold Schwarzenegger (R). 

He and Assembly Speaker Fabian Nuñez (D) have cobbled – and the state Assembly has approved – a package of health care reforms that would further kneecap the taxpayers, march them down to Death Valley, and bury them up to their necks to be eaten alive by special-interest fire ants.  But perhaps I understate.

Unless the Senate or the voters stop the plan, it will carve up taxpayers by regulating health insurance to protect favored insurers from competition; regulating employee benefits to protect favored employers from competition; imposing enormous taxes on young and healthy Californians; creating taxes and subsidies that seem deliberately designed to keep low-income Californians poor; imposing on all Californians the sort of punitive mandates that never have achieved universal coverage and never will; and fraudulently foisting part of the cost onto taxpayers in other states.  And all in the face of a $14 billion deficit.

Just goes to show what Republicans and Democrats can do when they work together toward a common disaster like universal coverage.