Topic: Tax and Budget Policy

Tony Blair’s Wise Warning against ‘Isolationism and Protectionism’

In an essay published this week by the Economist magazine, outgoing British Prime Minister Tony Blair shared “What I’ve Learned” during his decade in office. I’ll leave it to others to dissect what he said about the transatlantic alliance, the Iraq War and the National Health Service, but his words of wisdom on the importance of an open global economy are worth quoting.

Declaring that “‘Open v closed’ is as important today in politics as ‘left v right,’” Blair wrote:

Nations do best when they are prepared to be open to the world. This means open in their economies, eschewing protectionism, welcoming foreign investment, running flexible labour markets. It means also open to the benefit of controlled immigration. For all nations this is a hugely contentious area of policy. But I have no doubt London is stronger and more successful through the encouragement of targeted migration.

Isolationism and protectionism now cut across left and right boundaries. They are easy tunes to play but pointless in anything other than the very short-term.

I wish more members of the U.S. Congress would learn the same lessons.

What a County Government Does When It Has Too Much Money

The Fairfax County Taxpayers Alliance, here in the Washington suburbs, complains that property taxes have soared over the past seven years. The typical Fairfax homeowner is paying $4830 a year in property taxes. The FCTA points out that “if during the past seven years the Supervisors had held real estate tax increases to the rate of inflation, which averaged three percent per year, the typical homeowner would be paying $3,079.” Home values have been rising fast in the Washington area (at least until the past year), so taxes have also increased sharply.

Taxpayers urge the supervisors to cut taxes. The supervisors–in Fairfax County and everywhere else–respond, “Would you have us close fire stations or fire teachers or throw widows out in the snow?” Somehow they never discuss, as another item in the FCTA newsletter does, the fact that salaries and benefits have increased far more than population growth or any other measure over the past seven years. Just hold county employees’ salary increases to the rate of inflation, and you could save the taxpayers a lot of money.

Or maybe, just maybe, Fairfax County’s $3.3 billion annual budget contains some low-priority items, like this one that was the subject of a charming article in the Washington Post:

This group of 12 kids, ages 6 to 10, are in the otherwise empty cafeteria of Anthony T. Lane Elementary School in Alexandria for the last of their eight Saturday morning classes on manners, offered through the Fairfax County Park Authority.

European Treasury Chiefs Try to Discourage French Tax Cuts

Nicolas Sarkozy, the new President of France, has been flirting with tax cuts. Some of his ideas, such as lowering the corporate rate and reducing death taxes and/or wealth taxes, would be very beneficial for the French economy. Others, such as special tax breaks for overtime work, are gimmicky. But in all cases, as the EU Observer reports, European Finance Ministers are pouring cold water on the notion of less money for government. Cynics suspect that the Finance Ministers do not like tax competition and that they use any excuse to discourage tax cuts in other nations. But even if their concerns –that deficit reduction is the most important goal of fiscal policy – are genuine, it is ironic that they are rather vocal when discouraging tax cuts and remarkably silent when it is time to comment about proposed increases in the burden of government spending. This is hardly a European phenomenon. Many American politicians cry crocodile tears about deficits when tax policy is being debated, but routinely vote for bigger government:

EU finance ministers meeting in Luxembourg on Tuesday (5 June) urged France to stick to its EU deficit reduction targets amid concerns about the implications of president Nicolas Sarkozy’s tax-cutting plans. … Mr Juncker’s warning is in response to plans announced by Mr Sarkozy last month to give the country a “fiscal shock” by undertaking a series of tax-cutting measures likely to cost up to €20 billion. The proposed measures include almost entirely scrapping inheritance tax and cutting tax on overtime.

The Mouse that Roared

Luxembourg is a tiny nation with less than 500,000 residents, but its tax-haven policies have made it one of the world’s wealthiest countries. Other European states resent Luxembourg’s success, not surprisingly, because their own citizens often prefer to work, save, shop, and invest where taxes are lower. But rather than lower their own taxes to be more competitive, they try to bully Luxembourg into changing its laws. The latest skirmish deals with whether Luxembourg companies should be forced to act as deputy tax collectors for foreign governments when they make online sales to residents of other EU nations. The International Herald Tribune reports that tiny Luxembourg is resisting the 26 other EU nations and defending its fiscal sovereignty:

Luxembourg, which has become a center for e-commerce in Europe because of its low sales tax, held off an assault on that lucrative business Tuesday by the rest of the European Union. At a meeting of EU finance ministers in the small but prosperous duchy, Luxembourg refused to agree to a lifting of the tax advantages that have prompted iTunes, Skype, eBay and other big Internet companies to set up shop there. That effectively blocked the package, because adoption of tax measures requires unanimous agreement by all 27 EU members. Telecommunications companies, satellite broadcasters and other companies providing online services apply a value added, or sales, tax based on where the company is established, not where the customer is. That makes Luxembourg, where VAT on Internet-related sales is 15 percent, an attractive place to operate. … EU ministers had hoped for a deal that would force companies to charge sales tax on services delivered online at the rate set in the country where they are bought. Such a move could prove a boon to tax collectors in countries like Germany and France. … This is not the first time that the Grand Duchy has been at the center of controversy over tax rates. For years French and German savers have invested their cash in Luxembourg and avoided tax on interest income.

Gordon Brown’s Dismal Fiscal Legacy

What developed nation has taken the biggest steps in the wrong direction since the turn of the century? The answer is not France, Germany, or Sweden. The United Kingdom has that dubious honor. Government spending has jumped from less than 38 percent of GDP in 2000 to more than 45 percent of economic output today. That is the largest increase among OECD nations, and the United Kingdom now has a bigger burden of government than Germany. Higher taxes are an obvious consequence, and Tax-news.com reports on the grim developments:

The average Briton is effectively paying ten pence more on the pound in income tax as a result of Gordon Brown’s ten years in charge of the nation’s purse strings, according to a new report. The study by business advisers Grant Thornton attributes about 70% of this increase in the tax burden to so-called ‘fiscal drag’, also known as ‘bracket creep’ whereby the government fails to adjust marginal income tax brackets in line with wage inflation, meaning more taxpayers have been dragged into the higher income tax bands during Brown’s tenure at the Treasury. This effect also applies in other areas of taxation, such as inheritance tax, where house prices have rocketed during the last ten years, but the threshold at which IHT becomes payable has, comparatively, barely moved. The government’s own figures show that 3.5 million taxpayers now pay tax at the higher rate of 40% - a 58% rise since the Labour government came to power in 1997. …And despite Brown’s decision to decrease the rates of corporate and personal income tax by 2% in his last budget before succeeding Tony Blair as Prime Minister, tax advisers say that lost revenue will be clawed back and more through less-publicised tax changes elsewhere. Francesca Lagerberg, head of Grant Thornton’s national tax office, noted: “Despite headline announcements in this year’s Budget of dropping the basic rate of income tax, aligning national insurance contributions and reducing mainstream corporation tax, the reality is that other increases will lead to a maintenance of the status quo.” “Aligning national insurance to a higher tax threshold will in total eat away most, if not all of the savings generated from cutting the basic rate of income tax by 2 pence to 20 pence from April 2008,” she added.

Albanian Government Approves 10 Percent Flat Tax

According to a regional news report, another nation has joined the flat tax club, meaning that as of July 1 there will be 18 countries with income tax systems that treat taxpayers equally. With a low rate of 10 percent, Albania will have – at least temporarily – the world’s lowest flat tax rate. The corporate rate also will drop to 10 percent, and other tax rates have also been reduced:

In a move aimed at creating a friendlier investment climate and making the economy more competitive, the Albanian government approved a fiscal package last week that includes implementing a 10% flat tax – the lowest level in Southeast Europe. Corporate taxes will also be slashed to 10%. …Advocates of the move say it will bring many benefits. In addition to attracting Foreign Direct Investment, they say, it will encourage the legalisation of the shadow economy and simplify tax collection. Economic activity increases, and so does honest reporting of income, while tax evasion drops. …The government hopes to implement the legislation by July 1st, with the exception of the corporate tax reduction, which will be implemented January 1st, 2008. The Democratic Party-led government has already instituted various tax reductions during the past two years. The most important of these was the reduction of social security contributions from businesses, from 29% to 20%, and a lowering of taxes on small businesses.

The Myth of the Rational Voter

Cato adjunct scholar Bryan Caplan has a fantastic new book out from Princeton University Press called The Myth of the Rational Voter: Why Democracies Choose Bad Policies. In it he argues that misguided policies can’t just be blamed on special interests and the “concentrated benefits/dispersed costs” dynamics explored by public choice economics. According to Caplan, voter irrationality – systematic erroneous biases in public opinion – is a major culprit as well.

Which is to say, Caplan confirms the wisdom of H. L. Mencken’s observation: “Democracy is the theory that the people know what they want and deserve to get it good and hard.”

In my opinion, Caplan’s book makes a major contribution to our understanding of the sausage grinder of democratic policymaking. So buy it and read it!

But if you’re short on time, here are some shortcuts for getting up to speed on what Caplan has to say. First, Cato released last week a new Policy Analysis that is an excerpt from the book. In particular, I’d heartily recommend this paper to all those who fancy themselves members of the “reality-based community” yet blithely cling to social-scientific illiteracy when it comes to basic principles of economics. The “assault on reason,” it turns out, is a pincer movement involving both sides of the political spectrum.

Also, you might want to check out this “diavlog” between Caplan and Cato policy analyst Will Wilkinson on bloggingheads.tv.

Ahead of the curve as always, Cato Unbound devoted its November issue last year to an in-depth discussion of Caplan’s thesis.

And just to whet your appetite, take a look at this profile of Caplan from the New York Times magazine.