Topic: Tax and Budget Policy

Abracadabra! County Pulls a Subsidy Out of a Hat

Jacob Grier, the blogger-barista-magician with a highly coveted Vanderbilt degree, has been writing about Montgomery County’s plans to evict Barry’s Magic Shop from the site in Wheaton, Md., where it has survived for 31 years. As he wrote last June:

The real story is that simply because a few county planners have decided that the land could be better used to attract developers than as a magic store, the man who owns the building has had his property forcibly taken from him and a small business that has thrived for decades is being evicted years before its lease is up.

The county used eminent domain to take the building in order to build a walkway as part of a grand plan for Wheaton. The plan has been in the works for years, and there are no immediate plans for actually building the walkway, but the building has been seized.

But today there’s good news! For Barry’s and its customers, anyway, if not for Maryland taxpayers and property owners. In addition to spending over $2 million to take the building and build the walkway, taxpayers – in the person of Montgomery County Executive Isiah Leggett – are also going to spend $260,000 to relocate the magic shop.

So first the county spends taxpayers’ money to seize private property in the name of its own vision of what that corner of Wheaton should look like. Then it spends more taxpayers’ money to subsidize a small business.

Here’s an idea: Why not let the market decide where businesses locate, without subsidizing the businesses and without seizing their property? As Jacob says,

This is a story that should make people angry. Angry that George Chaconas had his land taken from him. Angry that Barry Taylor and Suzie Kang are being evicted years before their lease is up. Angry that this is all being done with taxpayers’ money to subsidize the developers who will eventually move into the area, just because some guy named Joseph Davis thinks that’s the way things ought to be.

Montgomery County, Maryland: Where everything goes according to plan. Or else.

A Good Tax Increase?

Fannie Mae and Freddie Mac are quasi-private mortgage companies that receive huge implicit subsidies from taxpayers. So it is difficult to know how to react to a deal between the Bush Administration and Congressman Barney Frank (D-MA) that would skim some money from Fannie and Freddie and use the money for so-called affordable housing. The bill would curtail the ability of Fannie and Freddie to use their subsidized status to expand into new markets, which is good. The bill also would make Fannie and Freddie shareholders unhappy, which is good (or at least amusing) since they have been implicitly profiting from government rather than market forces. But the deal also means more money for politicians to redistribute, which is akin to giving an alcholic keys to a liquor store. The Wall Street Journal reviews the good and bad of the deal:

[Rep Frank’s] bill would tax Fannie and Freddie to the tune of 1.2 basis points of their total book of business – or just over 1/100th of 1% of all the mortgages Fannie and Freddie have bought and packaged to sell to investors. That’s more than $500 million a year, with potential to grow. The Bush Administration has insisted that the fund be disbursed based on non-political criteria, but, c’mon, this is Washington. While the first year’s payout is supposed to go for housing on the Gulf Coast, a honey pot this sweet will soon be passed out based on the interests of the most powerful Members. The larger political danger is that such a fund gives Congress an even greater stake in seeing Fan and Fred grow. The fund amounts to an annual dividend payout to Congress. The Fannie Tax would thus make it even less likely that these “government-sponsored enterprises” (GSEs) will ever be weaned off their implicit taxpayer subsidy and act like normal private companies. Congress could also look at this earmarked tax precedent and try to apply it elsewhere – say, on the profits of energy companies for a “global warming fund.” …the current meltdown in the subprime and Alt-A mortgage markets has led to calls – by the same people now dunning Fan and Fred – for all kinds of new lending oversight, rules and restrictions. Mr. Frank’s latest brainstorm is to stick investors in mortgage-backed securities with the losses when subprime borrowers default. It’s hard to imagine a measure better designed to cut off credit to those Mr. Frank claims to want to help. If investors don’t have legal certainty about the debt they are buying, they won’t lend the money.

England Contemplating Territorial Tax Regime

The core principles of good tax policy are low tax rates, taxing income only one time (no more double-taxation of saving and investment), no special loopholes (which also means simplicity), and territoriality (only tax income inside national borders). The Anglo-Saxon world is often guilty of violating the last principle, generally imposing worldwide taxation. Fortunately, tax competition is eroding the ability of nations to impose bad tax policy. The United States, for instance, approved the Homeland Investment Act a couple of years ago, which temporarily allowed companies to repatriate foreign-source income at a much lower rate of tax. The United Kingdom is now considering a a much better solution – a permanent change that would move much closer to a territorial tax regime. As is so often the case, tax competition is the impetus for the reform. British policy makers are afraid that companies are moving abroad to escape the anti-competitive burden of having foreign-source income subject to tax by both the nation where it was earned (which is appropriate) and the British Exchequer. Tax-news.com reports on this potentially important development:

The United Kingdom government is reportedly working on proposals that would allow British-based multinationals to repatriate billions of pounds in profits earned overseas free of tax. According to a report by the Financial Times, the Treasury is preparing to launch a consultation document this Spring which will discuss a number of options, including an European-style “participation exemption” for foreign dividends, as well as a different approach to the anti-avoidance rules that impose tax on profits generated in low-tax jurisdictions. The move by the British government is being viewed as part of its effort to improve the corporate tax regime, after several warnings from business groups that recent additions to UK tax legislation are making the country increasingly uncompetitive compared with its economic rivals. Seemingly heeding these calls, Chancellor of the Exchequer Gordon Brown announced in his budget statement last month a 2% cut in corporate tax to 28%, bringing the UK below the OECD corporate tax average. …it is anticipated that the change would be welcomed by companies, as they would no longer have to apply complex tax strategies to minimise taxes on repatriated profits.

European Bureaucrats Want Massive Expansion of Savings Tax Cartel

Appeasement generally is not a good strategy since it encourages an aggressor to make additional demands. This certainly is the case in Brussels. The European Commission is gearing up for a campaign to expand the size and scope of the so-called savings tax directive. This cartel seeks to prop up bad tax policy by making it easier for high tax nations to double-tax income that is saved and invested. The bureaucrats in Brussels are upset that the current version of the directive, which was implemented in 2005, is riddled with loopholes, enabling most taxpayers to protect their assets from an additional layer of tax. So now they want to expand the directive, both in terms of the types of savings and investment that would be subject to double-taxation and the number of countries asked to be in the cartel. Hong Kong and Singapore already have told the Europeans that they have no desire to sabotage their economic interests by helping Europe’s welfare states track - and tax - flight capital. This resistance is good news, but the bureaucrats learned from the first round of this battle that it is possible to badger low-tax jurisdictions into making foolish decisions. The Financial Times reports on the European Commission’s radical agenda:

has launched a drive to close the gaping loopholes in a two-year-old European savings law… early evidence is that the directive is failing to bite. Switzerland, the world’s biggest offshore financial centre, only raised €100m in the first six months of the law’s operation. Meanwhile Mr Kovacs is worried that some savers have moved to Hong Kong and Singapore – not covered by the directive – and he is trying to arrange reciprocal deals with them. …Whether he can persuade EU member states and third countries to give their unanimous agreement is questionable: diplomats say big offshore financial centres like Switzerland, Luxembourg and Austria only agreed to the directive precisely because it contained so many loopholes. …A Commission working document…proposes…extending the directive’s reach to include companies and trusts. It also floats the idea of blocking the deliberate routing of interest payments through branches of banks located in jurisdictions not covered by the directive, whose reach also includes several Caribbean islands, the Channel Islands and the Isle of Man. The working paper suggests that the tougher definition of “beneficial ownership” used for anti-money laundering obligations should be adopted for the savings directive. This would bring discretionary trusts and companies into its scope. It suggests imposing a new obligation on EU banks to report – or withhold – interest payments made through non-EU branches. …It suggests reconsidering whether interest-generating securities “wrapped” within life insurance, pension or annuity contracts should be exempt from the directive.

Will Growing Government Turn America into a European Welfare State?

If left on auto-pilot, government spending is going to consume larger and larger shares of America’s economic output. But many people already know about this entitlement-driven crisis. What is less well known is that the tax burden is scheduled to rise significantly as well. In part, this is because the Bush tax cuts are scheduled to disappear at the end of 2010 and the AMT is projected to trap more taxpayers. But the biggest factor is that economic growth leads to “real bracket creep,” meaning more people will face higher tax rates because of rising income levels. Kevin Hassett of the American Enterprise Institute warns that America is at risk of becoming like France if steps are not taken to reduce the tax burden and dramatically curtail the growth of spending:

The U.S. has consistently outgrown its European allies for many years. There is little dispute among economists that the U.S.’s big advantage is its relatively small government. Federal government outlays take up about 20 percent of U.S. gross domestic product; in France, it’s almost 55 percent. …The latest budgetary maneuverings in the U.S. have virtually guaranteed that a good bit of that advantage will disappear, at least if Democrats remain in power. The current laws, as written, have put the U.S. on the road to France. The primary culprit is our programs for retirees. According to the latest long-run outlook of the Congressional Budget Office, government spending may take up fully 50 percent of GDP by 2050. Yet revenue will increase tremendously over the same time period. Revenue relative to GDP, currently a smidgen more than 18 percent, will climb to 23.7 percent by 2050 and extrapolate out to a whopping 27.5 percent by 2075. A spending binge is coming, and a good chunk of the revenue needed to pay for it is coming as well. The bad news for fans of small government is this: Even if spending were reined in enough to keep it equal to revenue, the size of the government will increase by about 50 percent in the coming decades.

Is Benign Neglect the Best Immigration Policy?

Writing in the Wall Street Journal, a professor from the University of California, San Diego, argues that an expanded guest worker program might be less desirable than the status quo. Given the likelihood that politicians and bureaucrats will sabotage even a good idea with needless regulation and red tape, this is a compelling argument:

…from a purely economic perspective, illegal immigration is arguably preferable to legal immigration. …the illegal route is for the moment vastly more efficient than the cumbersome legal system. Illegal immigration responds to economic signals in ways that legal immigration does not. Illegal migrants tend to arrive in larger numbers when the U.S. economy is booming and move to regions where job growth is strong. Legal immigration, in contrast, is subject to bureaucratic delays, which tend to disassociate legal inflows from U.S. labor-market conditions. The lengthy visa application process requires employers to plan their hiring far in advance. Once here, guest workers cannot easily move between jobs, limiting their benefit to the U.S. economy.

French Presidential Candidate Calls for 25 Percent Corporate Tax Rate

It is always easy to make fun of the French for their hopeless infatuation with redistribution, intervention, and other statist policies. So it is rather embarrassing that France (33 percent) currently has a significantly lower corporate tax rate than the United States (about 40 percent, if state taxes are included). Imagine, then, how humiliating it will be if Nicolas Sarkozy wins the French presidency and follows through on his proposal to lower France’s corporate rate to 25 percent. To be sure, the impetus for a lower corporate rate is tax competition rather than a new-found appreciation for market forces. And even Sarkozy’s call for a lower corporate tax rate does not mean he has embraced the foreign concept of “laissez-faire.” As Tax-news.com reports, companies would have to jump through numerous hoops to benefit from the lower tax rate:

In an interview with French business daily La Tribune, Xavier Bertrand, a spokesman for the centre-right presidential candidate, said that Sarkozy wants to lower the rate of France’s corporate tax to 25%, bringing the tax down to about the average rate in the European Union. However, unlike France’s European partners, Sarkozy is keen to link a cut in corporate tax to a series of governance criteria, and companies would have to demonstrate that their employment, wage and investment strategies were “synchronised”. …Sarkozy fears that with key European competitors having recently announced corporate tax cuts, including Germany, Spain and the UK, France risks becoming increasingly unattractive as a place to do business and cannot afford to do nothing. Under plans agreed by Germany’s coalition government, the effective corporate tax burden there will fall to below 30% from almost 40% in January 2008, while the UK’s Chancellor of the Exchequer Gordon Brown announced a 2% cut in corporate tax in his recent budget speech. The old EU15 also continue to face growing tax competition from the new EU entrants in Central and Eastern Europe, such as the Czech Republic, where the government has announced proposals for a 15% flat tax on personal income and a 5% cut in corporate tax to 19%.