Topic: Tax and Budget Policy

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.

England Becoming a Top-Flight Tax Haven

The UK-based Guardian reports that the number of “non-doms” has nearly doubled in three years. The phrase refers primarily to foreigners who move to the UK and are allowed to dodge any taxes on the income they earn in other jurisdictions. This policy is strongly opposed by leftists in the Labour Party, though Tony Blair obviously has chosen to leave it intact. And if the Guardian can be believed, Gordon Brown may decide to leave well enough alone when he moves into 10 Downing Street:

The number of people claiming non-domicile tax status has nearly doubled in three years, fuelling fears that Britain is becoming the world’s first onshore tax haven. …The tax break…is now increasingly used by City tycoons and overseas billionaires who are flocking to London to take advantage of a loophole that allows them to keep their vast fortunes intact. …Labour MP Stephen Pound has called on Sir Ronald Cohen, Gordon Brown’s closest ally in the City, to come clean over whether he benefits from non-domiciled tax status. Cohen, a substantial Labour donor who founded Apax Partners, Britain’s most successful private equity firm, exerts strong influence over the Chancellor. He has repeatedly refused to disclose his tax status.

The Latest from the Children’s Defense Fund

Or maybe a small child, judging by CDF’s fairly shameless pro-SCHIP campaign.

Turns out there is a solid case to be made that expanding SCHIP and Medicaid would leave us with more dead kids.  Of course, the ideological left won’t engage that debate. 

They’d rather just accuse their opponents of killing kittens.

Politicians May Slow Growth - and Help America’s Competitors - with Big Tax Hike on Capital Markets

The Wall Street Journal appropriately savages a putative Senate proposal to dramatically increase the tax on private equity firms. Senators Baucus and Grassley apparently think it is wrong that fund managers get a slice of the capital gains pie if investments rise in value, and they want to tax those gains as if they were income instead of increases in net worth. In a well-designed system that eliminates double taxation of saving and investment, the capital gains tax rate would be zero, so this proposal clearly would be a big step in the wrong direction. But politicians specialize in bad policy. First, they drove a substantial share of IPO business to Hong Kong and London with Sarbanes-Oxley. Now they want to drive private equity firms out of America as well:

This week Senators Max Baucus and Charles Grassley, the chairman and ranking minority member of the Finance Committee, will hold “informal meetings” to ponder a 133% tax hike on private equity firms. There’s no good rationale for this beyond the fact that Congress wants money and private equity funds have lots of it. Private equity firms will raise and deploy a record one-half trillion dollars of investment capital this year – funds that provide start-up and expansion-phase money for firms large and small. …Senator Grassley says he suspects “subterfuge” that allows fund managers to underpay their taxes. The managing partners of equity funds generally receive compensation in two ways. They charge the fund investors a 1% or 2% management fee for finding high-return business opportunities and for orchestrating the portfolio. Those fees are taxed at the personal income tax up to 35%. But fund managers also typically lay claim to a 20% slice of the fund’s future profits. That return is called “carried interest” and is taxed at the long-term capital gain rate of 15%. Congress is considering reclassifying that income as labor compensation and taxing it at the 35% income tax rate. … Far from being a clever tax dodge, carried interest plays a central role in the performance of private equity funds: It establishes an incentive structure which aligns the financial interests of the managers and investors. …The biggest losers from a private equity tax hike may be pension funds, which have become large investors in these funds; their high performance has made millions of Americans wealthier in their retirement.