Topic: Tax and Budget Policy

Canadian Columnist Urges Radical Corporate Tax Rate Reduction

Highlighting a recent OECD report that admitted the benefits of tax competition and lower tax rates, a Canadian columnist warns that Canada’s high corporate tax rate is making the nation less competitive. All of the arguments apply even more forcefully to the United States, where the corporate tax rate is about six percentage points higher:

…capital and skilled labour are highly mobile these days. Countries compete aggressively for both with lower and lower tax rates. …The OECD says this competition for lower corporate and personal tax rates will continue. “Globalization favours greater tax competition,” the OECD report says. “It encourages the pursuit of efficiency gains in tax systems - by shifting tax burdens away from capital and labour and toward property and consumption.” …In a single decade, competition has reduced corporate tax rates around the world, the OECD report notes, “in some countries by a considerable amount.” In 1996, the highest corporate tax rate in the world was 60 per cent; in 2006, the highest rate is 40 per cent. …What will the highest rate be a decade hence? Twenty per cent? Ten per cent? Zero per cent? …Whatever the number, it will be much less than 28 per cent and it will necessarily determine Canada’s rate - unless we are not interested in attracting investment capital and highly skilled workers from abroad (or keeping our own from going abroad). Mr. Flaherty’s commitment to lower our corporate rate to 30 per cent over the next five years means his success will in fact ensure failure. You can’t pass the puck to the spot where the receiver now is - he won’t still be waiting there.  Mr. Flaherty needs to pass ahead to the receiver’s future position, which requires a corporate rate of less than 20 per cent by 2011. This ought to be easy. No country has yet hurt itself by reducing tax rates, corporate or personal. …the OECD report tracks the steep decline in corporate rates in one, the subsequent compelling rise in tax revenue in the other. In one decade, the world effectively cut its corporate tax rate in half - and doubled the revenue it gets from it. This is the Laffer Curve, vindicated again. The Laffer Curve expresses a simple, incontrovertible proposition: that decreases in tax rates can increase tax revenue.

We’ll Have Fun, Fun, Fun till the Taxman Takes the Good Times Away

Rising property taxes may tear down a beach amusement park that has lasted 117 years at Ocean City, Md., where thousands of Washington and Baltimore families escape the summer heat. The Washington Post reports:

For 117 summers, generations of children have frolicked through Trimper’s Rides on this beach resort town’s signature boardwalk. But this Memorial Day weekend might begin the last summer they circle the antique wooden carousel, fling around the Tilt-a-Whirl and loop through the Tidal Wave roller coaster.

The Trimpers say they are considering closing the amusement park and arcade this year.

Trimper's Rides, an Ocean City mainstay since 1890, is owned by 14 family members, some of whom are seeking help from the state to keep the park open.  Linda Davidson – The Washington Post

As Ocean City has exploded into a megaresort, property taxes have soared for Trimper’s, which operates on the last chunk of undeveloped land on the town’s three-mile boardwalk. In the past three years, family members said, their assessed property value has tripled, from $21 million to $65 million.

You couldn’t blame the Trimper family if they decided to cash in on the value of their land. But it would be a shame if the family wanted to continue operating the oldest continuously owned amusement park in the United States, and rising property taxes forced them to sell. After all, their income isn’t going up nearly as much as the assessed value of the land. So an owner being taxed on the theoretical value of land that he isn’t planning to sell is then forced by the burden of taxation to sell his land after all.

The power to tax is the power to destroy charming old amusement parks.

We might note that the same phenomenon can destroy environmental amenities. A landowner who prefers to leave his land undeveloped even as development happens around or near him can find the assessed value of his land rising, and thus faces a higher tax burden, and thus feels compelled to sell the land to a developer. I have nothing against development if it’s a market phenomenon, but I don’t like the idea of conservation-minded landowners being forced by the property tax into making a decision they wouldn’t otherwise choose.

Of course, one might object that the Trimpers and the conservation-minded landowners have just as much obligation to pay for the state of Maryland’s budget as any other landowner. And you can hardly expect a big modern state like Maryland to subsist on the taxes it can assess on a three-block area valued at $21 million. So that’s part of the problem–governments today do so much that they can’t be supported with modest levels of taxation.

And then–to bring it full circle–the very people who demand bountiful government services that require burdensome taxes then bemoan the loss of cultural and environmental amenities; so they propose that government subsidize amusement parks, or buy up land and keep it undeveloped, or forbid development in designated areas. Thus requiring more government spending, more taxes, more forced sales, and the cycle continues.

So kids, when you see Trimper’s being demolished to build some more oceanfront hotels and condominiums, remember that big government did it.

A Poison Pill for China?

Last week top Chinese and American economic officials met in Washington for the second “Strategic Economic Dialogue.” While trade and exchange rates grabbed all the headlines, one less publicized subject was advice from the American side on how the Chinese can promote consumption in their domestic economy.

More consumption would presumably mean the Chinese would buy more American products and send less of their excess savings to the United States, leading eventually to a smaller Chinese trade surplus with the United States and the world.

How did U.S. government officials propose to promote more consumption in China? The Chinese were advised by their American friends to “create a social safety net for its population, similar to the Social Security and Medicare programs in the United States, so Chinese residents do not need to continue to save as much as 50 percent of their income for their retirement and future medical needs,” according to one trade newsletter.

Whoa. Would China’s economic managers really want to saddle its population with the same unsustainable government promises that characterize our two biggest entitlement programs? As my Cato colleagues have long noted, and as USA Today reported on its front page this week, the unfunded liabilities wracked up by those two programs has now reached more than $45 trillion (yes, that’s trillion).

I suppose saddling the Chinese economy with a huge, unfunded government obligation would be one way to “level the playing field.”

Canadian Tax Exiles

Thanks to high tax rates, two successful Canadian artists have escaped to Switzerland. Both Shania Twain and Luc Plamondon have decided that the Canadian residence is not worth the price if government seizes too much of their income. One politician calls tax migration a form of “economic treason,” but the real problem is greedy politicians who think that successful people should be milk cows for wasteful government. The Montreal Gazette reports:

He’s one of Quebec’s highest-profile tax avoiders - moving to Ireland, and then to Switzerland to avoid paying Canadian and Quebec income taxes. For the last few weeks, successful songwriter Luc Plamondon is also the owner of an Order of Canada pin, presented to those who, through their achievements, set an example for other Canadians. Ironically, the presentation of Plamondon’s Order of Canada pin by Governor-General Michaelle Jean in a private ceremony last month comes as the Conservative government is moving to crack down on tax avoidance by Canadian companies. …some MPs, such as Liberal finance critic John McCallum, say they see nothing wrong with electing a residence outside Canada to avoid Canadian taxes, others, like New Democrat MP Pat Martin, strongly condemn the practice. “I call it economic treason to be a tax fugitive,” said Martin, suggesting that Plamondon return his Order of Canada pin. …In 1999, three years before he was named to the Order of Canada, Plamondon moved to Ireland, saying he was doing it to avoid high federal and provincial taxes in Canada and to take advantage of its special tax breaks for artists. “There is an enormous number of writers and musicians from around the world who have moved to Ireland because of the tax savings,” Plamondon said when he sold his Montreal home. …Among the other residents of the Montreux area is Canadian singer Shania Twain, also an Order of Canada recipient. …David Perry, senior research associate with the Canadian Tax Foundation, said countries like Canada, which has higher tax rates than some other countries, risk having some of their most successful citizens elect to live outside the country of their birth. “Any country that has had a very high level of taxation on the rich … soon finds itself exporting that type of talent.” A minority of wealthy Canadians elect to reside outside the country to escape its taxes, and the practice is less common than it once was, he said. However, it nevertheless increases the frustration for other Canadians left to bear the tax burden, he said.

Tony Soprano Earmarks

A commentary from Jeff Birnbaum of the Washington Post aired on American Public Media’s Marketplace yesterday.  The topic was the evolving alternative to earmarks, what Birnbaum calls “phonemarks.” 

Here’s the basic idea (from the transcript available at the Marketplace website):

Eager to avoid the bad publicity of legislative earmarking, lawmakers are secretly calling or writing bureaucrats and demanding that they fund their pet projects by fiat. These projects-via-telephone, or “phonemarks,” are the hottest new gimmick on the Washington scene.

Executive branch officials can dole out millions of dollars with impunity. And they avoid the scrutiny of the public, since they are done quietly and without any disclosure.

Earmarks actually have to be written down in a public law. Phonemarks, on the other hand, are accomplished through bureaucratic sleight-of-hand and nobody but the lawmaker and the bureaucrat need to know for sure.

My preferred descriptor is “Tony Soprano earmarks.”  As I wrote in a January 22 column for Business Week:

Even if transparency leads to fewer earmarks, there are no promises these projects won’t reappear in other ways and other places. The congressional budget process is nothing if not a game of reinvention. You could call spending items Happy Funtime Projects instead and sock them away in another part of the budget, but they will remain the coin of the realm on K Street.

Of course, Congress could simply give a bucket of money to an agency with no strings attached. But then a member of the Appropriations Committee would write a letter to the department head suggesting something like: “Gee, wouldn’t it be nice if Project X got some of this pot of money?”

Can you really blame a government department head who reads a letter like that—from a member of Congress who controls his budget and oversees his agency—and obliges? It would strike anyone in that position as similar to Tony Soprano saying to the corner grocery store owner: “Nice little place you got here. Damn shame if anything were to happen to it.”

Now for a secret.  The big problem in Washington isn’t earmarks.  They’re just a symptom of the real problem: policymakers who believe the federal government should be all things to all people.  Pork projects – disclosed or not – are inevitable in such an environment no matter what you call ‘em.      

Tax Competition Catches the Attention of the International Herald Tribune

An article in the IHT reports on the rush to cut corporate tax rates in Europe. The story appropriately credits tax competition, though the story is incomplete in that it should mention the reductions in death taxes, wealth taxes, capital taxes, as well as the flat tax revolution in Eastern and Central Europe:

A tax-cut war is spreading across Europe as leaders of the Continent’s biggest economies give up criticizing smaller neighbors for cutting business-tax rates and decide to join them instead. … It comes after Ireland and new European Union members from Eastern Europe succeeded in attracting investment, and irking their larger rivals, with tax rates of less than 20 percent, among the world’s lowest. … The EU’s average corporate tax rate at the end of 2006 was a record low of 26 percent, and more cuts are in the works this year. … The rush to lower business taxes is a turnaround for the biggest European countries, whose governments once complained that their neighbors were engaging in “tax dumping” and threatened to cut aid to them. Just three years ago, Sarkozy, then the French finance minister, sought EU support to implement a minimum corporate tax rate throughout the bloc. Feeding the complaints were business-tax reductions by Poland, Slovakia and Hungary before their EU entry in 2004. Poland cut its levy to 19 percent from 27 percent. Slovakia adopted a flat-tax rate of 19 percent, down from 25 percent, and Hungary went to 16 percent from 18 percent. The lower rates helped lure operations from companies in higher-tax countries. PSA Peugeot Citroën, an automaker based in Paris, and Siemens, an engineering company based in Munich, for example, moved some production to Slovakia. … Supporters of lower corporate taxes point to the success of Ireland, whose 12.5 percent rate, the lowest in the developed world, is down from 47 percent in 1988. That proved a magnet for such U.S.-based technology companies as Microsoft, Intel and Dell and helped Ireland’s economy grow more than three times the rate of the euro area in the past decade, while still running a budget surplus in nine of the 10 years. … a study of 86 countries last year by KPMG International … showed corporate tax cuts allowed countries to attract and retain business investment with little loss of revenue.

Corporate-Style Accounting Shows Growing Burden of Entitlements

A feature story in USA Today reveals the staggering burden of entitlement programs if future deficits are recognized today. These figures are revealing, but they can also be misleading. The key concern, for instance, should be the size of government in the future, not the share that is debt-financed. Funded liabilities and unfunded liabilities, after all, both result in the transfer of resources from the productive sector to government. Another problem with corporate accounting is that it assumes that political promises are binding. In reality, politicians can enact laws to completely eliminate unfunded liabilities (though they are more likely to pass bills to make the problem worse). Even with these caveats, however, the data is sobering since the numbers show that the U.S. is destined to become a European-style welfare state unless dramatic reforms are implemented:

The federal government recorded a $1.3 trillion loss last year — far more than the official $248 billion deficit — when corporate-style accounting standards are used, a USA TODAY analysis shows. The loss reflects a continued deterioration in the finances of Social Security and government retirement programs for civil servants and military personnel. The loss — equal to $11,434 per household — is more than Americans paid in income taxes in 2006. …Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later. The federal government does not follow the rule, so promises for Social Security and Medicare don’t show up when the government reports its financial condition. Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household. …Unfunded promises made for Medicare, Social Security and federal retirement programs account for 85% of taxpayer liabilities. State and local government retirement plans account for much of the rest. This hidden debt is the amount taxpayers would have to pay immediately to cover government’s financial obligations.