Topic: Tax and Budget Policy

Hong Kong’s Flat Tax Rate Dropping to 15 Percent

Unlike American politicians, Hong Kong lawmakers understand that lower tax rates are a key to staying ahead in a competitive global economy. The Chinese Territory’s chief executive has just announced that the flat tax will drop by one percentage point, from 16 percent to 15 percent. As BBC news reports, the corporate rate also will drop, with further reductions likely:

Hong Kong has said it will cut taxes, in a move to promote further growth and lure foreign investment. Leader Donald Tsang said taxes would be cut by 1 percentage point, to 16.5% for firms and 15% for individuals, in the first policy speech of his new term. …In announcing the tax cuts, Mr Tsang said: “We will consider further profits tax relief if our economy remains robust and our public finances stay sound.”

Absence of Income Tax is Key to State Competitiveness

The Tax Foundation has released its annual State Business Tax Climate Index and there are two things that jump off the page. First, the top five states (and seven of the top 10) have no state income tax. The flip side is that the worst-performing states all have income taxes, generally with steeply “progressive” rates. Rhode Island is in last place, though it will be interesting to see whether a quasi-flat tax adopted this year will improve the state’s future rankings. Tax-news.com reports:

The Tax Foundation’s 2008 State Business Tax Climate Index has found that Wyoming has the most business friendly tax regime in the United States, while the business powerhouses of California and New York continue to fare particularly badly in terms of state tax competitiveness. …According to the index, the top ten states with the best business tax climate in 2008 are: Wyoming, South Dakota, Nevada, Alaska, Florida, Montana, New Hampshire, Texas, Delaware and Oregon. Propping up the table was Rhode Island in 50th place. California, New York and New Jersey occupy 47th, 48th and 49th place on the index respectively. The remaining states in the bottom ten include (descending): Maine, Minnesota, Nebraska, Vermont, Iowa and Ohio. “There’s no question that states are competing with one another for companies, jobs, and people,” announced study co-author Curtis Dubay. “Taxes matter to businesses, and the states with better business tax climates will reap the rewards.”

Real Tax Reform

A group of House Republicans has introduced a plan that could eventually break the logjam on moving tax reform legislation through Congress.

House members Paul Ryan, Jeb Hensarling, and John Campbell proposed a “Simplified Tax” system as an alternative to the current complex and inefficient individual income tax.

The Simplified Tax has two rates, 10 and 25 percent, a huge standard deduction of $25,000 for married filers (half that for singles), and a $3,500 personal exemption. It would eliminate all other deductions and credits that litter the current tax code. The dividend and capital gains tax rates would be made permanent at the current 15 percent.

I have proposed a similar two-rate tax plan. Remember also that the bipartisan Tax Reform Act of 1986 created a two-rate income tax structure of 15 and 28 percent. 

The GOP proposal is part of a broader package called the Taxpayer Choice Act, which includes elimination of the alternative minimum tax (AMT). While the Democrats and the Bush White House want to replace a $1 trillion of future AMT tax increases with other revenues, the House GOP plan would simply repeal the AMT. That makes sense because federal revenues have surged in recent years above historical levels. The White House should embrace the new plan as way out of their misguided AMT strategy.

Indeed, the White House could play a constructive role by bringing their corporate tax reform ideas to the table. The House plan does not include corporate tax reforms, but they should be added to the mix. In particular, the Simplified Tax could be paired with a 15 percent corporate tax rate (down from the current 35 percent), which would match the current 15 percent rate on dividends. That would make the combined corporate plus individual rate on dividends similar to the top rate on wage and interest income, and reduce the tax code bias against corporate equity.

The result of these reforms would be a much more efficient tax code that treated different households and different types of income more equally. The lower rates on individuals and corporations would sharply cut tax avoidance and evasion, which has been a concern on Capitol Hill this year.  Investment would pour into the United States, raising wages for every American worker.

As a way to grease the legislative wheels, the GOP tax plan would offer individuals the choice of staying with the old tax system or jumping to the new one. No taxpayer would be a loser under this plan. The only losers would be the army of tax accountants and lawyers needed to keep the current system running.

Senator Clinton’s “Savings” Plan

Presidential candidate Hillary Clinton has proposed new 401(k)-style savings accounts. But the proposal is not really a savings program, it is a new entitlement program. Savings is about people being frugal today in order to improve their prosperity tomorrow. Real savings helps families and benefits the broader economy. But Senator Clinton’s plan would impose $20 billion per year of damage on families paying the cost, while distorting the economy with higher taxes.

The plan would take money from people who earned it, and simply give it to other people to spend on retirement, buying a house, paying for college, and other items. Those eligible could receive $1,000 a year, but at the expense of others who would bear the burden. I see no justice in that, nor any economic benefit.

I’ve got a better idea: Let’s allow Americans to keep their own money, downsize the giveaway factory in Washington, and reduce government hurdles to individual savings.

Senator Clinton should consider supporting expanded and simplified Individual Retirement Accounts. These accounts would not rob Peter to pay Paul, while boosting real savings and spurring growth to the benefit of all families.

The Future of the GOP?

Tuesday night’s CNBC/MSNBC Republican candidate debate showed those of us who still value limited government the extent of the GOP rebuilding process to date — a preview of what Republicans would stand for in a post-Bush world.

The top-tier candidates avoided the crass populism some of the second-tier candidates favor and defended free trade instead. It also seems that the candidates have at least learned something from the electoral trouncing last year since each of them ran screaming from the wreckage that is the GOP spending record of the past six years.

Yet each candidate seemed unwilling or unable to enunciate a coherent view of what the role of government should be in a free society. The support for free trade was saddled with an incongruous quest for an unachievable and nebulous “energy independence.” The promises to “control” health care costs were mostly uninfluenced by the notion that it was government meddling that caused the problems in the first place. Even a tepid endorsement of a private-account solution to the impending bankruptcy of Medicare and Social Security was nowhere to be heard.

Some limited-government conservatives might have been slightly reassured by the look of the GOP future on Tuesday, but I’m sure many were left wanting, too.

[A version of this post originally appeared in a National Review Online symposium today.]

Tim Carney on SCHIP’s Bootleggers

Amid the debate over the State Children’s Health Insurance Program, author and Washington Examiner columnist Tim Carney asks the question, “Does SCHIP insure kids or subsidize savvy HMOs?”:

[W]hile Democrats are dragging children to the White House for photo ops, as if the children are the primary constituency of this bill, federal lobbying records tell a different tale.

Lobbying records from the first half of 2007 show that the health care industry spent more than $227 million lobbying Washington. Congressional Quarterly Healthbeat News reported last month: “What’s behind health care lobbyists’ spending frenzy? Most signs point to … SCHIP.”

Sure enough, the biggest lobbyists in the industry all support the Democratic bill. America’s Health Insurance Plans (AHIP), the trade association for HMOs, supports the bill, as do its biggest members, such as Blue Cross Blue Shield.

The Pharmaceutical Research and Manufacturing Association (PhRMA), one of Washington’s most powerful lobbyists, is also behind the bill. So is the American Medical Association.

Because the details of any substantial bill or regulation will be complex, the mainstream media will always portray the debate as a battle between the interested parties. In this case, the official storyline is that it’s poor children against a president overly concerned about the boogie man “government-run health care.”

But poor children don’t have clout on Capitol Hill. They’re not the reason this bill got 68 votes in the Senate and 265 votes in the House.

It’s got to be nice [for] the Democrats now. You get to do a favor for the HMOs, and everyone’s convinced it’s “for the children.”

I include the nation’s governors – who are always in favor of more federal money – in the bootleggers category.

Kudos to Tim Carney for reporting what less-rigorous reporters will not. (Why, oh, why can’t we have a better press corps?)

Taxes, Trade and the “Level Playing Field”

Almost every nation has a value-added tax (VAT), which is a type of national sales tax that is imposed at each stage of the production process. Indeed, the United States is the only developed nation without a VAT. But this is a good thing. It is no coincidence that the burden of government in America is smaller than it is in almost every other industrialized country. Simply stated, VATs are “money machines” for big government.

Not surprisingly, this is why many politicians in Washington would love a VAT. But what is surprising is that some otherwise sensible people are sympathetic to a VAT because they think it will help exports. They point out, quite correctly, that the World Trade Organization allows governments to provide rebates for value-added taxes on exports (a practice known as border adjustability). But they are wrong when they argue that this boosts exports and creates a trade advantage.

Regarding the first point, it is downright silly to argue that imposing a VAT - and then creating an export exemption - will boost exports. At the risk of stating the obvious, the export exemption cancels the tax, so the price of American products sold outside US borders would not change.

It is also misguided to claim that a border-adjustable VAT gives other nations some sort of trade advantage. Under current law, all goods sold in America, whether made in America or made in Europe, are sold without a VAT. Likewise, all goods sold in Europe, whether made in America or made in Europe, are sold with a VAT. How much more level can the playing field get? This is not just a debate for navel-gazing academics and lint-covered policy wonks. As reported by the Wall Street Journal, some Republican presidential candidates (or at least their advisers) are focused on “border adjustability.”

Mr. Thompson’s aides outline a change to the tax code that would move away from taxing income or profits and shift toward a system that would reduce taxes on exports when they cross the border and impose them on imports when they enter the country. Under international rules, the European value-added tax, a kind of sales tax, is waived for exports, but those rules block the U.S. from reducing corporate-profit taxes for exporters. “The best thing to do would be to have the [World Trade Organization] change its rules to level the playing field, and that should be the first step. If that fails then we should play by the same game that everyone else plays,” said Lawrence Lindsey, Mr. Thompson’s economic adviser and former director of the National Economic Council for President Bush.

The key question, of course, is whether focusing on the unimportant issue of border adjustability leads to good policy or bad policy. Senator Thompson has made some positive noises about a wholesale replacement of our current anti-growth tax system with a consumption-base tax system like a flat tax or national sales tax. That would be great news, and it would be great news even if border adjustability led the candidate to choose a sales tax over the flat tax. What matters is not border adjustability, but that we would be getting rid of the many warts in the current tax system. But if a myopic fixation on border adjustability led a candidate to propose a VAT or other form of national sales tax without fully (and permanently) eliminating the income tax, then politicians would have an additional source of money to waste and America would be at grave risk of becoming an uncompetitive, European-style welfare state.