Topic: Tax and Budget Policy

Gordon Brown’s Dismal Fiscal Legacy

What developed nation has taken the biggest steps in the wrong direction since the turn of the century? The answer is not France, Germany, or Sweden. The United Kingdom has that dubious honor. Government spending has jumped from less than 38 percent of GDP in 2000 to more than 45 percent of economic output today. That is the largest increase among OECD nations, and the United Kingdom now has a bigger burden of government than Germany. Higher taxes are an obvious consequence, and Tax-news.com reports on the grim developments:

The average Briton is effectively paying ten pence more on the pound in income tax as a result of Gordon Brown’s ten years in charge of the nation’s purse strings, according to a new report. The study by business advisers Grant Thornton attributes about 70% of this increase in the tax burden to so-called ‘fiscal drag’, also known as ‘bracket creep’ whereby the government fails to adjust marginal income tax brackets in line with wage inflation, meaning more taxpayers have been dragged into the higher income tax bands during Brown’s tenure at the Treasury. This effect also applies in other areas of taxation, such as inheritance tax, where house prices have rocketed during the last ten years, but the threshold at which IHT becomes payable has, comparatively, barely moved. The government’s own figures show that 3.5 million taxpayers now pay tax at the higher rate of 40% - a 58% rise since the Labour government came to power in 1997. …And despite Brown’s decision to decrease the rates of corporate and personal income tax by 2% in his last budget before succeeding Tony Blair as Prime Minister, tax advisers say that lost revenue will be clawed back and more through less-publicised tax changes elsewhere. Francesca Lagerberg, head of Grant Thornton’s national tax office, noted: “Despite headline announcements in this year’s Budget of dropping the basic rate of income tax, aligning national insurance contributions and reducing mainstream corporation tax, the reality is that other increases will lead to a maintenance of the status quo.” “Aligning national insurance to a higher tax threshold will in total eat away most, if not all of the savings generated from cutting the basic rate of income tax by 2 pence to 20 pence from April 2008,” she added.

Albanian Government Approves 10 Percent Flat Tax

According to a regional news report, another nation has joined the flat tax club, meaning that as of July 1 there will be 18 countries with income tax systems that treat taxpayers equally. With a low rate of 10 percent, Albania will have – at least temporarily – the world’s lowest flat tax rate. The corporate rate also will drop to 10 percent, and other tax rates have also been reduced:

In a move aimed at creating a friendlier investment climate and making the economy more competitive, the Albanian government approved a fiscal package last week that includes implementing a 10% flat tax – the lowest level in Southeast Europe. Corporate taxes will also be slashed to 10%. …Advocates of the move say it will bring many benefits. In addition to attracting Foreign Direct Investment, they say, it will encourage the legalisation of the shadow economy and simplify tax collection. Economic activity increases, and so does honest reporting of income, while tax evasion drops. …The government hopes to implement the legislation by July 1st, with the exception of the corporate tax reduction, which will be implemented January 1st, 2008. The Democratic Party-led government has already instituted various tax reductions during the past two years. The most important of these was the reduction of social security contributions from businesses, from 29% to 20%, and a lowering of taxes on small businesses.

The Myth of the Rational Voter

Cato adjunct scholar Bryan Caplan has a fantastic new book out from Princeton University Press called The Myth of the Rational Voter: Why Democracies Choose Bad Policies. In it he argues that misguided policies can’t just be blamed on special interests and the “concentrated benefits/dispersed costs” dynamics explored by public choice economics. According to Caplan, voter irrationality – systematic erroneous biases in public opinion – is a major culprit as well.

Which is to say, Caplan confirms the wisdom of H. L. Mencken’s observation: “Democracy is the theory that the people know what they want and deserve to get it good and hard.”

In my opinion, Caplan’s book makes a major contribution to our understanding of the sausage grinder of democratic policymaking. So buy it and read it!

But if you’re short on time, here are some shortcuts for getting up to speed on what Caplan has to say. First, Cato released last week a new Policy Analysis that is an excerpt from the book. In particular, I’d heartily recommend this paper to all those who fancy themselves members of the “reality-based community” yet blithely cling to social-scientific illiteracy when it comes to basic principles of economics. The “assault on reason,” it turns out, is a pincer movement involving both sides of the political spectrum.

Also, you might want to check out this “diavlog” between Caplan and Cato policy analyst Will Wilkinson on bloggingheads.tv.

Ahead of the curve as always, Cato Unbound devoted its November issue last year to an in-depth discussion of Caplan’s thesis.

And just to whet your appetite, take a look at this profile of Caplan from the New York Times magazine.

American Politicians Lagging in Global Race to Squander Tax Dollars

While U.S. lawmakers do their best to waste money, Europeans politicians inevitably seem to have more expertise when it comes to squandering other people’s money. A good example comes from Finland, where the city of Tampere is using European Union funds (it is easier to finance absurd ideas when other people are paying the bills) so that clowns can entertain city bureaucrats. Indeed, the title of the story on the English-language Finnish website is “Clowns enlisted to raise spirits of Tampere municipal workers.” Sure, American politicians have concocted some crazy ideas, such as building an indoor rainforest in Iowa, but even that bit of pork cannot beat the absurdity of paying clowns to boost the morale of bureaucrats:

The idea for the city clowns came from comedian Mona Ratalahti, occupational well-being trainer Riita Harilo, and its godmother was Kirsi Koski, head of the Mayor’s office. Koski has worked as the city’s head of personnel for three years. ”I have thought about what would be the core of well-being. Yes, it is laughter”, Koski says. “It is all right to laugh at craziness - at what is not said out loud in business discussions.” Ratalahti feels that a clown nose “changes us and the viewer in such a way that forces people to look at things differently”. …Tampere’s city clowns are the 41st idea that the “Creative Tampere” programme has decided to support. The programme has a budget of EUR 12 million to back corporate ideas worthy of development. The EUR 25,000 earmarked for the clowns makes it possible for four artists, who have mostly worked alone, can concentrate on joint projects.

The Show was a Hoax, but the Organ Shortage Is Real!

It is disappointing that it takes the sensationalism of a hoax reality show to focus attention on a very real tragedy.

On Friday June 1st, as part of the Dutch “Big Donor Show,” it was revealed that the woman willing to donate a kidney to one of three lucky contestants in need of an organ was an actress. The whole show was a publicity stunt to motivate the Dutch government to reform its organ donation laws which currently only allow organ donation between family and friends.

In the U.S. organ donation is not just limited to family and friends, but the National Organ Transplant Act of 1984 forbids anyone from receiving “valuable consideration” for a human organ. This provision is interpreted as prohibiting the donor from receiving any compensation beyond the good feeling of having done an altruistic deed. Medical expenses directly related to the transplant and recovery are usually paid by the transplant unit or the recipient’s insurance, but any payment of expenses beyond these initial transplant related costs are legally questionable. Both state and federal lawmakers have introduced legislation to allow organ donors to recover other more distantly related costs such as lost wages, travel expenses and future medical expenses potentially related to the donation.

Given the very real tragedy of an average of seven people dying daily in the U.S. while waiting for an organ that never comes, why not allow “valuable consideration” in order to save lives? Maybe a reality show competition isn’t the most tasteful way to proceed, but giving someone life-long medical coverage, life-insurance, or whatever other arrangement competent adults are willing to make, seems a logical way to proceed.

The common argument that receiving “valuable consideration” for human organs must be prohibited because it offends human dignity is paternalism at its worst. Only the donors themselves are in a position to judge what is or is not an affront to their dignity. It is hard to imagine how saving a life, whether someone is compensated for doing so or not, could ever be an affront to human dignity.

Sigrid Fry-Revere interview on Fox News before show was revealed as a hoax:
http://www.cato.org/realaudio/fry-revere-on-fox-news-05-31-07.html

CBS News report that “Big Donor Show” was a hoax:
http://www.cbsnews.com/stories/2007/06/01/health/printable2876573.shtml

Tax Competition Creating Pressure for Lower Corporate Rate in Canada

Neil Reynolds continues his good work by explaining how tax competition is leading to better policy and that Canada better jump on the tax-cutting bandwagon:

As tax reform sweeps the world, Canada stands resolutely on guard for high rates. …the two essential principles of good government remain unchanged: (1) If you want more of something, subsidize it; (2) if you want less of something, tax it. …Britain’s Margaret Thatcher, a conservative, was the first leader in Europe to cut corporate rates. In the 1980s, she reduced them from 52 per cent to 35 per cent. This was the catalyst. As KPMG observed last year in a global review of corporate taxes, once Britain acted, “other [European] countries seemed compelled to do the same.” …In 1987, Denmark went from 50 per cent to 30 per cent. In 1991, Sweden went from 60 per cent to 28 per cent. In 1992, Norway went from 51 per cent to 28 per cent. In 1993, Finland went from 43 per cent to 25 per cent. Germany and France, bastion countries of Europe, fiercely resisted, trying to turn tax competition into a criminal conspiracy. Yet, in 2000, Social Democrat chancellor Gerhard Schroeder cut Germany’s corporate federal rate from 40 per cent to 25 per cent. (Combined with local and regional corporate taxes, the country’s rate remained one of the highest in the world at 40 per cent.) Now, finally, Germany has capitulated, surrendering unconditionally, cutting its combined rate from 40 per cent to 30 per cent. …France, in turn, will cut its corporate rate, now 33 per cent, by “a minimum of five percentage points” - assuming French President Nicolas Sarkozy, a conservative, keeps this promise. Spain’s socialist Prime Minister, Jose Luis Rodriguez Zapatero, has announced that he will cut rates by as much as France. In the past 14 years (1992-2006), KPMG calculated that the average corporate tax rate in the world has fallen by almost one-third - from 38 per cent to 27 per cent. The economic evidence, the company said, indicates that the countries that adopted lower rates had tended to “do better” than the countries that had not.

Swiss Court Rules Against Obwalden Tax Regime

The Canton of Obwalder created a stir by voting for a tax system that rewards more productive residents with a lower income tax rate. The Swiss Federal Court has ruled against this regime, though the nation’s Finance Ministry quickly noted that the decision does not undermine Switzerland’s support for federalism and tax competition. Swissinfo.org reports:

Canton Obwalden’s degressive tax system, aimed at attracting wealthy residents, has been ruled unconstitutional by the Swiss Federal Court. The country’s highest court said on Friday that degressive income taxes ran counter to constitutional measures designed to ensure taxation according to economic performance. …Obwalden had adopted a degressive income tax system which meant that the richer you are, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent. It was introduced in 2006 following a cantonal vote as a way of boosting the fortunes of Obwalden, one of the poorest cantons located in Switzerland’s mountainous centre. …Friday’s court ruling comes in response to a case brought by Communist parliamentarian Josef Zisyadis – who moved to Obwalden to oppose the tax charges… The Finance Ministry said that the court’s decision would neither change the system of tax competition between the cantons nor encourage tax harmonisation. It emphasised that federalism and tax competition were essential parts of Swiss identity that also made the country more attractive for foreign companies.