Topic: Tax and Budget Policy

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.

WAMU Wags Its Finger, Part I

I listen to National Public Radio in the morning.  The frequent left-wing bias can be grating, but that’s nothing compared to the inaccuracies and condescension of those annoying NPR membership drives.

My local NPR station is WAMU, which broadcasts from American University in Washington, DC.  WAMU is holding one of their membership drives this week. In the past, I’ve heard NPR and WAMU personalities lecture listeners that we are “free riders” unless we cut them a check.  The only problem with that argument is that WAMU receives about 7 percent of its revenue from the federal government, which means that every WAMU listener already contributes to the station – albeit involuntarily.  Calling any of WAMU’s listeners “free riders,” therefore, is the sort of inaccuracy of which a journalist should be ashamed.

This came to mind at about 8am today when I heard a WAMU reporter reprove, “It is important for you to become a participatory member.” As if I weren’t already.

I value WAMU.  It’s just so darned informative.  But I’ve decided that I’m not writing them any checks until they forswear all involuntary contributions or Congress weans them off of the same

Until then, I’ll try to blog every inaccurate or condescending ploy that I hear WAMU use to belittle my existing contributions.  I encourage my NPR-listening colleagues to do the same.  If we blog enough of them, maybe we can wrap them up and send them to WAMU as a very special contribution. 

Though I wouldn’t count on getting the tote bag.

The Flat Tax May Spread to Bulgaria

The global tax reform revolution may soon include Bulgaria. The Sofia Echo reports on the pressure - thanks to tax competition - for Bulgaria to hop on the flat tax bandwagon:

It won’t be surprising if in a couple of years Bulgaria introduces a flat 10-per cent tax on incomes, Georgi Angelov, senior economist at Open Society Institute, said, as quoted by Pari daily. Radical reforms are carried out more easily in countries with radical problems, such as those in Eastern Europe. A quarter of the countries in Europe levy a flat tax. The first to introduce a flat tax rate was Estonia – 26 per cent in 1994. The tax has been cut to 22 per cent already and the fashion has spread to neighbouring countries like Lithuania, Latvia, Russia and Ukraine. The example has been followed by Slovakia, Romania, Georgia, Serbia and Macedonia, with the Czech Republic and Albania expected to apply the lowest rate of 10 per cent from 2008. According to Angelov, one of the reasons for that is that Bulgaria has so far focused on reducing the corporate tax. Now that the tax has been cut to 10 per cent, the logical step is to reduce labour taxation by implementing a single rate. Just a few years ago, a 10 per cent tax was wishful thinking, but now it is a fact.

Property Tax Revolt: The First Time Was Only a Warning

It looks like a property tax revolt is brewing across the country, perhaps the biggest one since the era of Proposition 13, in the late 1970s. The Christian Science Monitor reports today that “legislative proposals, citizen initiatives, and lawsuits are on the agenda in at least 20 states.”

It’s no surprise why. Rising home values have meant rising assessments in many parts of the country. Rising home values are great if you’re selling; but if you’re not planning to sell your house, the increase can just mean higher taxes. And now, as Dennis Cauchon pointed out in USA Today, house prices are falling in some places but assessments haven’t yet been adjusted.

More importantly, cities and counties gleefully increased spending as the tax revenue rolled in during a decade or so of rising prices. But now that the revenue increases are slowing, local governments don’t want to cut back. Instead, they want to raise rates to keep the good times rolling—for governments if not for taxpayers.

The Wall Street Journal reports that more and more taxpayers are protesting their assessments. That’s one form of rebellion. Another is tax protests and calls for political action, and the Journal reports that those are happening, too, from Florida to Minnesota.

Back in 1978, the college newspaper cartoonist Berke Breathed (later famous for “Bloom County” and “Opus”) drew a brilliant cartoon about Proposition 13. For the benefit of our younger readers, I’ll explain: Proposition 13, which slashed property taxes in California, was spearheaded by Howard Jarvis. And it passed in June 1978, about the time the movie The Omen II came out, with its tagline “The first time was only a warning.” And Breathed was right: Prop 13 was a warning to the political class that taxpayers were fed up. After Proposition 13, the Democratic Congress cut the capital gains tax rate. Massachusetts passed Proposition 2-1/2 in 1980. More than a dozen other states put constitutional limits on taxes in the next few years. Ronald Reagan ran for president on a tax-cutting platform; he defeated incumbent Jimmy Carter, swept in a Republican Senate, and cut the top marginal income tax rate from 70 percent to 50 and then to 28 percent.

From earmarks to entitlements to local assessments, it’s time for taxpayers to give the political class another warning.

The NYT’s IRS Puff Piece

In advance of a rigged Senate Finance Committee hearing, the New York Times recently ran an article that blindly accepted the assertions of those who want more powers and money for the Internal Revenue Service.

Part of the article dealt with a report from the Government Accountability Office  that purports to show that offshore tax evasion is easy because of a three-year time limit. Yet buried later in the article is an acknowledgement that the time limit is not binding.

The real issue is that IRS agents actually are subject to poor performance reviews if it turns out that they were engaging in baseless harassment of law-abiding taxpayers. Needless to say, the reporter did not bother to interview anyone representing the interests of taxpayers:

The IRS is curtailing audits of many people who use offshore tax havens, even when agents see signs of tax evasion, because agents fear they cannot meet a three-year deadline for finishing an examination, congressional investigators have found. In a report to be released on Thursday, the GAO found that I.R.S. agents are so hobbled by “dilatory tactics” by offshore taxpayers and other problems that it takes almost two and a half years to complete a typical audit.

…The average assessment of unpaid taxes tripled to $17,500 for the limited number of audits that were allowed to run longer than three years, and it shot up to nearly $100,000 for the small number allowed to run four or five years.

…As part of its inquiry, the G.A.O. examined 12 offshore tax audits. …Audits can be pursued for more than three years, but agents have to meet tough requirements and their findings can be dismissed and the agents reprimanded if the unpaid taxes turn out to be smaller than expected.

It’s also worth noting that the story allowed a left-wing law professor to make an extremely weak claim about the amount of tax evasion taking place offshore, even though the so-called offshore sector does not show up in IRS tax-gap estimates and the Congressional Research Service has determined that similar evasion estimates are, for all intents and purposes, fabrications:

…Reuven S. Avi-Yonah, a professor of law at the University of Michigan who will testify at the Senate hearing on Thursday, estimated last year that the United States could be losing as much as $50 billion from international tax maneuvering.

No-Tax Texas Out-Competes High-Tax Arkansas

Writing in National Review, Greg Kaza discusses how Texas has been growing faster and creating more jobs than Arkansas. Much of the credit, he writes, is due to the fact that Texas has no state income tax while Arkansas penalizes workers with a  tax rate of 7 percent: 

Employment growth in Texas has been significantly higher than in Arkansas during periods of economic expansion. The population in Dallas has nearly tripled in the post-WWII period, while the population in Little Rock has barely doubled in size. Per capita personal income in Texas is 94 percent of the U.S total. In Arkansas it’s 77 percent of the nation’s total, a level that has hardly budged since the 1970s.

The list of statistical disparities is long, and there’s a good reason why: While Arkansas and Texas share a common border, each taxes income and capital in radically different ways. Arkansas has a top income-tax rate of 7 percent, the highest among the bordering states. Texas, however, does not impose an income tax. The imbalance is the same for capital gains: Arkansas taxes them. Texas does not. As a result, we can see a very basic economic principle at work: Talent and capital always will flow toward higher returns.

Bloated Salaries at the World Bank

The controversy involving Paul Wolfowitz  is seemingly devoid of any policy issues, but it has brought to light some of the exorbitant waste at the World Bank. Nearly 1,400 employees have salaries above the amount given to America’s secretary of state. But even that comparison is misleading, since World Bank bureaucrats get tax-free compensation.

The Wall Street Journal comments on the sweet deal — and virtual lifetime tenure — of the staff:

American taxpayers supply some 17% of the bank’s capital, and a new round of fund raising for the bank’s International Development Association is about to commence. If Congress is going to ante up the $7 billion or so the bank is expected to request, the least it can do is insist on more accountability….

Of its roughly 10,000 employees, no fewer than 1,396 have salaries higher than the U.S. Secretary of State; clearly “fighting poverty” does not mean taking a vow of poverty at “multilateral” institutions. At the time of Ms. Riza’s departure from the bank, she was a Grade “G” (senior professional) employee; the typical salary in that grade hovers around the $124,000 mark. For the next level, Grade “H”—the level to which Ms. Riza was due to be promoted—salaries average in the $170,000 range, with an upper band of $232,360. No fewer than 17% of bank employees are in this happy bracket.

Even sweeter, all of this is tax-free to non-Americans. U.S. employees have to pay U.S. tax but have their income taxes reimbursed by the bank. As with any public bureaucracy, these jobs are also impossible to lose for anything other than gross incompetence or venality.