Topic: Tax and Budget Policy

Is England Becoming a Nation of Big-Government Snitches?

According to Tax-news.com, about 200,000 Brits have tattled on their neighbors to the tax authority. It is unclear whether this has generated more revenue for the
UK’s bloated public sector, but the more interesting aspect of this story is that the snitches do not get any reward. At least Russians who ratted out family members to the KGB might get a pair of jeans from the West. And Cubans who turn in their colleagues might get their meat ration upped to twice monthly:

Almost 200,000 Britons have shopped their friends, family and colleagues to the tax man in the year since HM Revenue and Customs set up a confidential hotline for taxpayers to inform on those they suspect of dodging their taxes. … However, it is difficult to gauge the effectiveness of the HMRC initiative, as the Treasury reportedly refused to divulge to the Times how many successful prosecutions had resulted from such informants, nor how much extra tax had been brought in. …informants in the UK receive no monetary rewards for shopping tax evaders. …HMRC has said that it needs additional powers and deterrents to extract money from non-payers, in order to reduce the cost and effort of pursuing around 200,000 people through the court system every year.

Anti-Money Laundering Laws Impose Heavy Costs, yet Do Not Hinder Crime and Terrorism

The Associated Press reports that financial institutions in North America are paying 71 percent more over the past three years to comply with government anti-money laundering rules and regulations. Even supporters of the current approach admit that the costs are enormous, totaling about $7 billion yearly (and that estimate is three years old). This steep burden might be worthwhile if it led to a reduction in crime and/or terrorism, but as I have explained elsewhere, there is scant evidence that anti-money laundering laws reduce underlying criminal/terrorist behavior. Indeed, because law enforcement resources are being used to spy on everybody rather than targeted at those who want to harm the country, it is possible that the misallocation of resources required by anti-money laundering policy actually makes America less safe:

Complying with anti-money laundering laws has been much more expensive than banks anticipated, and some still aren’t meeting all requirements, a new survey says. …Among the six regions surveyed, North American banks saw the highest percentage cost increase, with costs rising 71 percent over the last three years. …Many governments require that banks take steps to prevent money laundering. Money laundering involves making certain financial transactions to hide the source, nature or destination of illegal funds. The United States has the Bank Secrecy Act, which was passed in 1970 and amended by the USA Patriot Act of Oct. 26, 2001. It has since been used increasingly to stop the flow of financing to terrorist organizations.

How Schooling Affects Culture

Cato’s Brink Lindsey has a good essay in today’s WSJ on how cultural differences between communities (from child-rearing to views and expectations on education) widen America’s socioeconomic gap. The one point where I diverge from Brink is that I am far more sanguine about the feasibility of reducing the cultural gaps that exacerbate the socioeconomic gap. The key is to understand that our educational institutions actually shape our culture.

Our monopoly school system has gradually marginalized parents, removing from them any significant responsibility for deciding where, what, how, when, and by whom their children are taught. This usurpation of traditional parental responsibilities has not only facilitated but fomented an unprecedented level of disengagement from their children’s education. Responsibilities breed responsibility. Powerlessness breeds apathy and disengagement.

When parents are actively involved in choosing their children’s schools, and when they have some measure of financial responsibility for their children’s education, they take a more active role, they are more satisfied with their children’s education, and their children’s achievement and attainment goes up. The most dramatic findings come from the areas most in need of improvement: our inner cities. University of Chicago economist Derek Neal has shown that urban black students attending Catholic schools are far more likely to graduate from high-school, be accepted to college, and graduate from college than similar students who attend government schools. That and other relevant research is digested and linked to here.

Replacing our dependency-producing school monopoly with a free education market that requires all parents to choose their children’s schools, and requires all parents to contribute something to the cost of their own children’s education (in kind rather than cash, where necessary), would not simply minimize the damage done by America’s culture gap. It would significantly shrink that gap, because it would compel parents to once again take a more active role in their children’s education. “Free” monopoly schooling isn’t merely inefficient, it is socially destructive.

Gordon Brown’s Finance Minister Defends UK’s Status as Tax-Haven

The United Kingdom has extremely favorable rules for “non-domiciled” residents, a policy that enables highly productive people to live in London while avoiding most taxes on capital income and foreign-source income. The left in Europe hates this policy, especially since entrepreneurs and investors are escaping high-tax nations to live in London, but the new Chancellor of the Exchequer seems content to leave well enough alone. The Observer reports:

London, the great global financial centre, has another claim to fame: it has become the fastest growing destination for international tax avoiders. The world’s super-rich and an elite cadre of financiers working in the Square Mile are increasingly using non-domicile tax status to sidestep paying tax on their fortunes. …Those benefiting from non-dom status have rocketed over the last five years. The Treasury…confirmed that 112,000 individuals indicated non-dom status in their self-assessment returns in the tax year to April 2005. This is a 74 per cent increase over 2002’s figures. …Unlike UK citizens, non-doms escape tax on income from property or capital gains. It is not only the international jet set who claim non-dom status; it is also available to some of the most powerful figures in the City. …Non-domicile status is self-assessed. Forms are easy to download from the web and there are just 19 questions. One tax expert says it is easy to convince the Revenue that a claimant is based overseas, whether it is through a relative or a series of overseas investments. In addition, the Revenue makes very few checks on status. Many senior City figures qualify for non-dom tax exemptions, including Dominic Murphy, the UK boss of private equity giant KKR. And it is widely thought that the Chancellor’s City adviser Sir Ronald Cohen and a large collection of Labour Party donors do too.  …Earlier this week, new Chancellor Alistair Darling made it clear that nothing must harm the international pre-eminence of the City and he warned against ‘knee jerk’ reactions to calls to amend the regulation.

The New Deal Was a Success — at Creating Dependency

Drawing from Amity Shlaes’ excellent new book The Forgotten Man, George Will notes that FDR’s policies were an economic failure but a political success.

It is particularly galling that Roosevelt’s statist policies were so harmful (as Chris Edwards has succinctly explained), yet he is portrayed as the man who saved the nation from unbridled capitalism:

Franklin Roosevelt’s success was in altering the practice of American politics. This transformation was actually assisted by the misguided policies — including government-created uncertainties that paralyzed investors — that prolonged the Depression. This seemed to validate the notion that the crisis was permanent, so government must be forever hyperactive.

…Roosevelt, however, made interest-group politics systematic and routine. New Deal policies were calculated to create many constituencies — labor, retirees, farmers, union members — to be dependent on government.

…Roosevelt implemented the theory that (in [Shlaes’] words) “spending promoted growth, if government was big enough to spend enough.” In only 12 months, just one Roosevelt improvisation, the National Recovery Administration, “generated more paper than the entire legislative output of the federal government since 1789.” Before Roosevelt, the federal government was unimpressive relative to the private sector. Under Calvin Coolidge, the last pre-Depression president, its revenue averaged 4 percent of gross domestic product, compared with 18.6 percent today. …In 1936, for the first time in peacetime history, federal spending exceeded that of the states and localities combined.

…[A]s Roosevelt demonstrated and Shlaes reminds us, compassion, understood as making the “insecure” securely dependent, also makes the state flourish.

The Germans Attack Tax Competition…Again

Germany’s finance minister Peer Steinbrueck wants to curtail tax competition by prohibiting countries from having corporate tax rates of less than 30 percent. Since German politicians have been whining about competition from low-tax nations in Eastern Europe for quite some time, this is hardly news.

But this new round of sour grapes is particularly amusing because Herr Steinbrueck is trying to close the barn door when the horses are galloping in the fields. The average corporate tax rate in the European Union already has fallen to about 24 percent and more corporate tax cuts are about to take effect — including a tax rate reduction in Germany.

Bloomberg reports:

The European Union needs a “level playing field” in areas including tax competition…if there is to be greater integration among member states, German Finance Minister Peer Steinbrueck said. A “race to the bottom” regarding…taxes, social and environmental standards risks discrediting the idea of a more united Europe among the continent’s citizens, Steinbrueck said in a speech prepared for delivery today in Frankfurt an der Oder, on the eastern German border with Poland.

…The average corporate tax rate in Europe shouldn’t fall below the threshold of just under 30 percent, which will go into effect in Germany next year, Steinbrueck said. Eastern European governments…can’t finance the infrastructure demanded by their citizens if taxes are lowered too much, he said.

Another Flat Tax Nation?

Moldova, a former Soviet Republic, is a poor and backwards nation with too much government. Seeking a brighter future, a part of Moldova has declared independence and is calling itself Pridnestrovie. Though this new country has not yet been recognized by the world, Pridnestrovie has wisely decided to implement free market reforms — including a flat tax that has been reduced from 15 percent to 10 percent according to a story from last year in the Tiraspol Times:

Parliament in Pridnestrovskaia Moldavskaia Respublica approved new lower tax rates for the emerging but unrecognized country. Previously, the nation taxed incomes for physical persons at 15%, but starting next month the rate will be just 10% flat.

…Since its declaration of independence on 2 September 1990, Pridnestrovie has gradually transformed itself from a post-Soviet system to a free, Western-style market based economy. In the process, it has found that a flat tax provides the best incentives for citizens and investors alike.

Hoover Institution political scientist Alvin Rabushka points to a number of different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia, Pridnestrovie and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine.

Not surprisingly, the flat tax is having a positive impact. The Tiraspol Times now reports that tax revenues have more than tripled and lawmakers understand that lower tax rates can lead to more revenue — just as the Laffer Curve illustrates:

Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie, says the parliamentary press service. …Tax revenues went from 63.4 million dollars in 2001 to a whopping 221.6 million dollars in 2006, the last full year for which the numbers are available.

…Key to the reform package were measures which makes filing simpler, as well as a comprehensive program of tax relief. Five taxes which existed before 2001 have now been abolished and instead replaced with a single, simple tax.

…With both personal and corporate tax rates well below those of Ireland, the growth in Pridnestrovie’s tax income is even more impressive. As taxes have been simplified and rates have been lowered, revenues have gone up three and a half times.

Addendum: The good news about Pridnestrovie may not be so good after all. My Cato colleague Justin Logan rained on my flat tax parade by telling me that Pridnestrovie, AKA Tansnistria (I guess even the name of the place is in dispute), is not exactly the Hong Kong of Eastern Europe. The breakaway province has a very poor reputation for corruption. It also is not exactly a role model of democracy, since the boss of the country recently won 103 percent of the vote in one region (eat your heart out, Castro). Alas.