Topic: Tax and Budget Policy

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.

Tax Shares for Rich and Poor

The Tax Foundation provides a nice summary of the latest Internal Revenue Service income tax data here.

Pundits are always interested in tax data for particular income groups. For example, they want to know whether Bush has favored the highest-income 1% of taxpayers.

A good way to find out is to look at average tax rates over time. By “average tax rates” I mean total federal income taxes divided by adjusted gross income. The following figure shows average tax rates for six income groups in 1990, 2000, and 2005. 

The income groups refer to percentiles of tax filers ranked from those with the highest AGI to those with the lowest AGI. The figure shows the highest-income groups on the left and the lowest-income groups on the right.

1990 was before the Clinton tax increases of 1993. 2000 was after the modest tax cuts of 1997, but before the Bush tax cuts of 2001. 2005 was with the Bush tax cuts in place. 

Observations

Tax rates on those with high incomes are far greater than for other Americans. Folks at the top pay about 25% of their income in federal income taxes, which compares to less than 5% for half of the population at the bottom end.

For the top two groups, the tax rate in 2005 was about the same as 1990. Essentially, the Bush tax cuts just reversed out the Clinton tax increases on these folks.

The Bush tax cuts substantially reduced tax rates for people in every income group. Indeed, those at the bottom had the largest relative reductions in their tax rates.

This is a little wonky, but let’s compare average tax rates in 2000 to 2005. For the top group, the rate fell from 27.45% to 23.13%, a reduction of 16%.

Now consider the middle-income “top 26-50%” group, for example. Their tax rate fell from 9.28% to 6.93%, a reduction of 25%.  

Those at the bottom have paid little, and now they pay even less, due to legislation under both Clinton and Bush. Indeed, these data do not include the tens of billions of dollars sent to lower-income families as a result of the earned income tax credit, and thus it overstates taxes paid by the bottom group.

I’m for lower taxes for everyone, but I wish people would look at the actual data first before carping about the rich supposedly being specially favored by recent tax cuts.

Edwards’ Budget Law

More evidence that when the government says a project will cost $1, taxpayers will end up paying $2 or more.

The Washington Post notes that Congress is considering further funding of a Navy ship program: ”The congressional action followed months of delays as costs ballooned. The cost for the initial two ships was estimated at about $220 million each but now appear to cost up to double that.”

More on cost overruns here and here.

Hong Kong’s Flat Tax May Drop to 15 Percent

Thanks in part to tax competition from Singapore, Hong Kong is on the verge of reducing the flat tax rate on both corporate and labor income to 15 percent. The Wall Street Journal notes  ($) - or at least hopes - that this might open some eyes in the US and UK:

Chief Executive Donald Tsang delivers the first policy speech of his new term on Wednesday and it promises to make instructive reading for lawmakers elsewhere in the world who want to make their economies competitive. Mr. Tsang’s move was mooted earlier this year, when he promised to cut taxes on both salaries and corporate profits to 15% during his next term. The salaries tax currently stands at 16% and the profits tax at 17.5%. On Friday, the South China Morning Post reported he’ll start the ball rolling this week, sooner in his term rather than later. Singapore, Hong Kong’s big competitor in the region, has been steadily cutting corporate taxes over the past few years. Its rate now stands at 18%. …In the race to attract new business, New York and London are competing against a territory that thinks a 17.5% corporate tax is too high.

Romney’s Tax Plan

There are at least three approaches to tax policy a candidate may take in an election campaign:

  1. Use the tax code to offer limited giveaways that do nothing to improve the economy, but offers small benefits to the maximum number of voters. This is the Obama approach.
  2. Pursue major tax reforms combined with downsizing the government. This is the Ron Paul approach. Paul notes on his campaign website: “True tax reform is as simple as cutting or eliminating taxes” and “the real enemy of tax reform is the spending culture in Washington … we will never have tax reform in this country until Congress changes its spending habits.”
  3. Call for tax cuts that will spur economic growth and benefit all taxpayers. This is the Mitt Romney approach, as we will discuss here.

The Romney campaign released a “blueprint” on tax policy yesterday. The blueprint is just seven short bullet points, but they are all excellent points. Here they are in brief with my comments.

  1. Make the Bush tax cuts permanent. Great. Extending the income tax rate cuts and the dividend and capital gains tax cuts is important. But I’d swap the Bush child tax credits for further supply-side tax cuts.
  2. Make additional cuts to individual income tax rates. Great. That would improve economic efficiency and growth. I’d take this further and collapse the current rates into a flat rate or a two-rate structure
  3. Enact a zero tax rate on interest, dividends, and capital gains for those in the middle class. That’s a move in the right direction, but better to eliminate double-taxation on all savings. 
  4. Eliminate the estate tax. A no-brainer. The current estate tax damages growth, probably doesn’t raise any money, and enriches tax lawyers.
  5. Cut the corporate tax rate. Another no-brainer. The average corporate income tax rate in Europe is 24 percent. The average federal plus state rate here is 40 percent.
  6. Oppose Social Security tax increases. Romney’s right: tax increases won’t solve the problems with Social Security, as explained here.
  7. Make individual medical expenses deductible. A move in the right direction to equalize the tax treatment of individual and business health expenses.

All in all, candidate Romney has outlined a very pro-growth tax agenda. His plan contains numerous supply-side provisions that would increase economic efficiency and raise incomes. Kudos for proposing reforms that would benefit all Americans and resisting the impulse to craft useless tax giveaways, which is the approach of candidiate Obama.

Now if we could combine the Romney supply-side approach with the Paul downsizing approach, we would really be getting somewhere.

Norway’s Banana-Republic Shipping Industry Expropriation

The Wall Street Journal correctly castigates Norway’s socialist government for applying a huge retroactive tax hike on the shipping industry. The only silver lining to this dark cloud is that some shipper will “re-flag” its vessels in jurisdictions where politicians don’t expropriate past earnings:

It’s almost unheard of, though, for a rich, enlightened nation like Norway to deliberately undermine one of its most important industries. That’s exactly what’s expected to happen tomorrow, when Norway’s left-leaning government presents its budget to parliament. Included will be a proposal to retroactively tax shipping companies to the tune of nearly €3 billion, a move that could threaten the status of Scandinavia’s maritime superpower.

Over the past seven years, as the regime took effect, maritime employment in Norway has climbed almost 20% to about 100,000 and the number of ships on order by Norwegian fleets has risen more than threefold — keeping pace with rapid international shipping growth since the turn of the century. That boom has attracted the attention of Norway’s finance minister, Kristin Halvorsen, a member of the country’s Socialist-Left Party. Under her budget plan, all profits reinvested by the industry since 1996 would be subject to a retroactive tax.

Many ship owners are considering reflagging their vessels in nearby countries, such as the U.K. and Denmark. Moving could mitigate their future liabilities, but that will be little consolation to firms that remained in Norway over the past decade and invested in their fleets, only to be betrayed by politicians.