Topic: Tax and Budget Policy

Vermont Is a Tax Haven

The Providence Journal reports that Vermont is one of the world’s leading tax havens for “captive” insurance companies. This is both amusing, because it is contrary to Vermont’s image as a refuge for 1960s dropouts, and illuminating, since it shows that the pressure to attract jobs and capital causes even left-leaning politicians to adopt market-oriented policy:

In a development somewhat counter to its apple-cheeked image, Vermont has become a leading tax haven for U.S. companies. As described in a recent New York Times report, the state markets itself alongside Bermuda and the Cayman Islands as the answer to certain types of tax headaches. …Vermont law has permitted the creation of insurance captives for more than 20 years. But it only began aggressively marketing them about a decade ago, presenting captives as a sound alternative to the insurance business that thrives outside U.S. borders. Today, more than 560 American companies have set up camp in Vermont, which also hosts an annual captive-insurance industry conference.

Budget Bravado

In a letter to lawmakers, the president’s budget director, Rob Portman, …accused Democrats of doing little to rein in “the unsustainable growth in entitlement spending” on Social Security, Medicaid and Medicare [reports the Washington Post].

Well, they did almost all oppose the trillion-dollar expansion of Medicare in 2003 that then-Rep. Portman voted for and that President Bush bludgeoned reluctant Republicans into supporting.

Medicare Pays $869 for an Air Mattress. (Yawn.)

The Justice Department’s Medicare Fraud Strike Force (cue theme music) has announced the arrest of 38 people who allegedly defrauded Medicare by charging outrageous amounts for items that were never delivered … like an $869 air mattress … and … I’m sorry, I nodded off. 

This is nothing new.  In Medicare Meets Mephistopheles, David Hyman quotes former Medicare administrator Bruce Vladeck:

“There are plenty of $400 toilet seats in the Medicare program…”

Nor is the amount of money involved impressive.  In all, these people allegedly defrauded Medicare for $142 million, or 0.038 percent of annual Medicare outlays.  HHS Secretary Michael Leavitt estimates that further anti-fraud efforts could save as much as $2.5 billion, or 0.67 percent of Medicare outlays … I’m sorry, I nodded off again.  Here’s some more from David Hyman:

In fact, no one knows how common fraud and abuse are, but 72 percent of the American public believes that Medicare would have no financial problems if fraud and abuse were eliminated. This perception is utterly uninformed by any connection with reality…

Fraud is bad, mmm-kay?  But while Medicare’s anti-fraud laws occasionally nab some real bad guys, according to Hyman they probably inflict as much damage as they prevent:

The vast sums of money spent by Medicare create the demand for [anti-fraud] laws to restrain the avarice of providers. Provider avarice triggers a search for ways around those laws, which, in turn, results in the broadening of those laws. As the laws are broadened, they discourage organizational innovation and market entry and catch more innocent providers. This, in turn, triggers a backlash against the law and widespread violation thereof. Plus, lawyers get rich off each step.

We’re barking up the wrong tree, here.  If you’re looking for real and substantial fraud in Medicare, look no further than the politicians who have promised Medicare benefits well in excess of the program’s ability to pay, or who pooh-pooh the program’s future funding shortfalls.  Again, Medicare Meets Mephistopheles:

The legal system imposes harsh penalties on pyramid scheme organizers, because defrauding hundreds or thousands of people is much worse than defrauding a handful of people. Indeed, if anyone other than the United States government were running the Medicare program, those responsible would already be serving long prison terms for fraud.

Now that’s an anti-fraud operation to get excited about.

More Evidence that 2003 Tax-Rate Reductions Boosted Growth

Some politicians want higher tax rates because they resent success and think it is okay to base public policy on emotions like hate and envy, but most pro-tax lawmakers presumably are interested solely in getting more money to spend. These “practical” lawmakers may want to consider becoming supply-side tax cutters. After all, the Treasury has received a gusher of additional tax revenue since the 2003 reductions in capital gains tax rates, dividend tax rates, and personal income tax rates. The real lesson, of course, is that pro-growth tax policy leads to faster growth – and faster growth translates into more taxpayers and more taxable income. As the Wall Street Journal opines, the key question is whether politicians can control the impulse to over-spend:

Americans are sending more money than ever to Washington; revenues for the first seven months of fiscal 2007 are up 11.3%, or $153 billion. This Beltway bonanza has helped to slash the projected federal budget deficit by more than half from the same point last year. Across the past three Aprils, federal red ink has sunk by nearly $300 billion. The deficit this year could tumble to $150 billion, or an economically trivial 1% of GDP. This revenue boom certainly casts doubt on the political wails about tax loopholes for the rich. So far this year, the taxes paid on so-called nonwithheld income, which are dollars that don’t come from normal wages and salaries, have climbed by nearly 30%. This is income largely derived from capital gains, dividends and other investment sources – i.e., the tax rates that President Bush cut in 2003. Individual income taxes are also up by 17.5% – a handsome fiscal dividend from rising wages and low unemployment. In other good news, the pace of federal spending, which was pedal-to-the-metal in Mr. Bush’s first term, has finally decelerated. So far this year federal outlays have climbed by 3%, and, save for Medicare and Medicaid, federal expenditures are nearly flat from 2006.

Don’t Expect Much from Sarkozy

A Financial Times column neatly summarizes the economic views of Nicolas Sarkozy. His opposition to “fiscal dumping” really means that he opposes tax competition and wants to insulate the French welfare state from global competition:

He wants the EU to move in a French direction, offering citizens “protection” from the outside world. …During the campaign, he called on the EU to protect its citizens from unfair competition from abroad, particularly
Asia, and from fiscal, social and environmental “dumping” from poorer EU members in eastern Europe. That approach is at odds with the “open
Europe” model being promoted by most northern, central and eastern European countries.

The Global Flat Tax Revolution Continues

A column in Canada’s Globe and Mail reviews the successful shift to flat tax systems and appropriately notes that tax competition is a key reason for the adoption of better tax policy:

In one of its first acts last year as an independent country, Macedonia (population: two million) legislated radical tax reforms. On Jan. 1, 2007, the country introduced a flat-rate tax of 12 per cent on both personal and corporate income, matching the rate introduced two years ago by Georgia (population: 5.6 million). On Jan. 1, 2008, Macedonia will cut its rate to 10 per cent - and achieve one of the lowest tax rates in the world. Macedonia’s tax revenues will almost certainly rise. The country’s new, young (age: 36 years) free-market Prime Minister, Nikola Gruevski, cites the phenomenon of voluntary compliance that accompanies flat-tax regimes. “This reform will decrease tax evasion,” he says, “and encourage people to meet their obligations to the state.” As Russia (population: 144 million) vividly demonstrated when it adopted a flat tax (replacing a 40-per-cent rate on personal income with a 13-per-cent rate) in 2000, low rates are persuasive tax collectors. Russia’s revenues rose 25 per cent in the first year, 25 per cent in the second year, 15 per cent in the third year. People who violently resist getting scalped will submit voluntarily for a trim. …Around the world, tax rate competition is getting keener. Countries that resist flat-tax reform are nevertheless lowering rates. Poland (population: 37.5 million) has moved three-quarters of the way to a flat tax - with a single rate of 19 per cent for all corporate income, capital gains, dividends and self-employed individuals. Spain (population: 40 million) has introduced a flat rate of 18 per cent for all income derived from savings. Effective this year, Iceland (population: 300,000) taxes all personal income at a flat rate of 32 per cent - which appears high because it includes municipal as well as national taxes. It now taxes capital gains, dividends, interest income and rental income at a flat rate of 10 per cent.

Time for Taxpayers to Sing the Blues

Blue corn isn’t subsidized like white and yellow corn, and that’s just not right. Or so say the blue corn growers. Cindy Skrzycki’s “Regulators” column in the Washington Post today is the sort of thing that ought to make you a libertarian. So many lawyers writing so many regulations, with clauses and sub-clauses. And it’s all nonsense.

So here’s the problem:

Under the regulatory system that determines which crops qualify for inclusion in Department of Agriculture support programs, blue corn is an orphan. According to the department rulebook, it isn’t even considered corn because it’s not yellow or white, the only versions of the food that are eligible for federal agricultural loans and crop payments.

This means that farmers who grow blue corn, which is made into the blue-corn tortilla chips that many of us love to dip into a nice salsa, aren’t growing “real” corn, so they don’t qualify for loan or other support programs, according to the government. 

Now you might think this is no big deal since blue corn sells for about twice what white and yellow corn do. But the growers feel hurt and victimized and, you know, invisibilized. They want to be an official government-recognized crop. And, you know, get the loans and subsidies. Like popcorn got in 2003.

But fear not. Rep. Dennis Cardoza (D-Calif.), chairman of the House subcommittee on horticulture and organic agriculture (seriously), is listening. He’s promised the blue-corn growers that he’ll try to address their needs in the current farm bill.

And then taxpayers can subsidize premium organic blue corn, lest this great nation ever run out of blue-corn tortilla chips in a national emergency.