Topic: Tax and Budget Policy

Paulson Commits Faux Pas, Tells Truth About Tax Gap

Democrats on Capitol Hill are upset because the Treasury Secretary told the truth about the tax gap. Testifying before the Senate Finance Committee, Henry Paulson explained that there was very little chance of substantially closing the tax gap without resorting to onerous measures that would diminish freedom and penalize millions of compliant taxpayers. Paulson’s testimony is particularly refreshing since the IRS has been using the issue to seek a bigger budget and more power. The Washington Post has the story:

Treasury Secretary Henry M. Paulson said yesterday that the Internal Revenue Service would have a tough time wringing money out of the nation’s tax cheats without imposing “draconian” new burdens on honest taxpayers. Speaking to a Senate committee led by Democrats eager to raise cash without raising tax rates, Paulson said it was “unrealistic” for them to expect to collect hundreds of billions of dollars from the federal tax gap, the difference between taxes owed and taxes paid. …Democrats bristled at Paulson’s remarks and accused the administration of failing to take seriously its duty to enforce the nation’s tax laws. Finance Committee Chairman Max Baucus (D-Mont.) demanded that Paulson return in July with a strategy for increasing the voluntary compliance rate to 90 percent by 2017 from 84 percent, a change he said would increase tax collections by $150 billion a year. …Paulson said other tax-gap ideas floating around Washington “would be unnecessarily painful, expensive and time-consuming for taxpayers.” Politicians haven’t endorsed the more extreme notions, but Paulson cited some anyway – steps such as eliminating most cash transactions or tripling the number of IRS audits. “In theory, each of these measures could bring in some additional revenue,” Paulson said. “But the cost of compliance for individuals and businesses – most of whom already pay what they owe – would far outweigh the gains.”

Bon Voyage, Politicians

Senator McCain and Speaker Pelosi have been criticized for their visits to the Middle East, but at least they can claim that their trips were relevant to issues of national importance. Most members of Congress, by contrast, create excuses for junkets to Europe and the Caribbean. Taxpayers pick up the tab for these quasi-vacations - and the price tag is staggering since politicians travel on private jets operated by the military and generally stay in plush hotels. The Examiner explains:

Congress is keeping Andrews Air Force base plenty busy this year ferrying lawmakers all over the globe at taxpayers’ expense. Rep. Bennie Thompson of Mississippi took his wife, nine Democrats and two Republicans - Reps. Dan Lungren of California and Mike Rogers of Alabama - on a whirlwind tour of the Caribbean last week. After stops in Honduras and Mexico, they stopped in the U.S. Virgin Islands, where the delegation stayed at the five-star Caneel Bay resort. In a separate trip to the Caribbean last week, Rep. Eliot Engel of New York squired his wife and four Democratic members to Grenada and Trinidad. All told, the military flew at least 13 congressional delegations to various destinations during the Easter recess – at an estimated rate of $10,000 or more per flying hour. …At the Caneel Bay resort, where room rates reach $1,100 per night, the spokeswoman said Thompson and his wife paid the “government rate.” But, according to the reservations department, Caneel Bay doesn’t “offer any government rates.” …Rep. Jim Oberstar, D-Minn., also led a trip to Belgium over the two-week Easter recess. In February, Sen. Bob Bennett, R-Utah, took a delegation there. “We’re at war with Iraq and Afghanistan, but apparently our members see Belgium as our most urgent international destination,” scoffed one Republican member of Congress.

Tax Competition Forcing Lower Corporate Rates in Europe

The news pages of the Wall Street Journal have an excellent article showing how nations in Europe are cutting corporate tax rates in an effort to compete for jobs and capital. The politicians and bureaucrats do not like this process, of course, but European Commission-led efforts to harmonize taxes fortunately have failed. In closing, the WSJ article cites a post on the Cato blog about the shame of America having a higher corporate tax rate than France:

Europe’s major economies are competing with one another to cut corporate taxes as they fight to attract and keep investment, fueling a trend that has taken Europe’s corporate-tax rates below those of other regions. Nominal tax rates on corporate income in the European Union average 26%, compared with 30% in the Asian-Pacific region and nearly 40% in the U.S. The latest moves by European governments suggest business taxes in the EU will fall further in coming years. … In recent years, many smaller European nations – including Ireland and the former Soviet-bloc nations of Eastern Europe – have slashed corporate-tax rates to as low as zero, as part of their economic-growth strategies, and have succeeded in attracting investment from multinational corporations. That success has put pressure on Europe’s larger economies to cut their taxes. Until recently, Germany condemned the low-tax competition from Poland and others as “tax dumping.” But after failing to win support within the EU, Germany has joined in: Chancellor Angela Merkel’s ruling coalition has agreed to cut the corporate-tax rate to just under 30% next year from 39%. Others in Western Europe have reacted to the tax cut in Germany, Europe’s largest economy. In March, Britain’s finance chief, Gordon Brown, announced a reduction to 28% from 30%, following complaints from British companies that Britain was losing its status as one of Europe’s low-tax countries. Nicolas Sarkozy, a leading contender to become France’s next president, wants to cut the French corporate-tax rate to less than 28% from around 34%, albeit with some vaguely defined strings attached. … Elsewhere in Europe, Spain is reducing its tax rate on corporate profits to 30% from 35% in stages. … The Cato Institute in Washington, a free-market think tank, calls it “rather embarrassing” that France has a lower corporate-tax rate than the U.S.

Estonia’s Flat Tax Leads to Economic Boom

In an article on the anti-growth American tax system, John Stossel notes that other nations have implemented simple and fair tax systems. Estonia’s low-rate flat tax has been particularly successful:

Other countries have made their citizens’ lives better by simplifying and lowering taxes. Estonians need an average 10 to 15 minutes to file their income taxes. Most do it without leaving their desk: 84 percent file online. … Unsurprisingly, Estonia is booming. The former Soviet republic used to be poor, with an average income 65 percent below its European neighbors. Today, Estonians are almost as rich as their neighbors, and their economy is growing more than 11 percent a year. Corporations like a tax system that is low and simple, too, and that leads them to do more business in flat-tax countries. American companies such as Microsoft, Colgate, 3M, Bristol-Meyers Squibb, and Johnson & Johnson opened businesses in Estonia after the flat tax was adopted. Twelve years ago, foreign investment in Estonia made up only 5 percent of GDP, but today, it’s up to 20 percent.

Preliminary HSA Limits for 2008

Former White House health policy advisor Roy Ramthun has announced what he estimates will be the limits for deductibles, out-of-pocket exposure, and health savings account (HSA) contribution limits for 2008:

 

2007 Amount

Est. 2008 Amount

Self-only coverage
Minimum deductible

$1,100

$1,100

Maximum HSA contribution

$2,850

$2,900

Out-of-pocket maximum

$5,500

$5,600

Family coverage
Minimum deductible

$2,200

$2,200

Maximum HSA contribution

$5,650

$5,800

Out-of-pocket maximum

$11,000

$11,200

Ramthun, who is the president of HSA Consulting Services, LLC, writes:

We now know all the data points to calculate the 2008 numbers for HSAs. This will give everyone offering an HSA program in 2008 much more time for planning. In past years, this information was not available until very late in the year.

Noting that the minimum deductible limits for HSA-qualified health insurance probably will not change from 2007 to 2008, Ramthun writes:

This means HSA-qualified plans will not have to make any changes to their plan designs because their current policies will meet the minimum deductibles and out-of-pocket limits for 2008.

Ramthun further notes that the limit on “catch-up” contributions by HSA holders age 55-64 in 2008 will remain $900; that amount is set by law rather than a formula, and will top out at $1,000 in 2009.

The IRS will publish the official HSA limits for 2008 by June 1.

For more on HSAs, click here.

Too Many Americans Have Their Snouts in the Federal Trough

A disturbing new reports estimates that more than one-half of Americans are somehow dependent on government for their livelihood. This is part of a troubling trend, and has worsened in recent years thanks to the profligacy of the Bush Republicans. Investor’s Business Daily certainly understands the danger of having a nation where the people riding in the wagon out-number (and maybe out-vote) the people pulling the wagon:

Gary Shilling, an economist in Springfield, N.J., figures that 52.6% of Americans, which includes dependents of direct recipients, “now receive significant income from government programs” … the data from 1950, when a mere 28.3% of Americans relied on Washington, that really shows how needy we’ve become. … if the current pace is not abated in 10 years, the percentage could exceed the 55% mark of 1980, the year Reagan was elected on a platform of scaling back the federal behemoth. By 2040, it could be 60%, Shilling reckons. This bodes ill for any prospects of cutting government back to any reasonable size and reforming our messy and intrusive tax system. … when more than half of the country has a financial interest in seeing the government grow, that’s the part of America to which they will cater. That’s certainly not healthy and it is likely unsustainable. … How long before the richest and most productive Americans decide that they will no longer prop up the poorest and least productive? With their political influence waning as that of the untaxed and low-taxed Americans and those who live off the government grows, they can either seek a tax-haven nation where government isn’t a growth industry, or they can choose to be less productive. Neither choice is good for America’s future.

Jurisdictional Competition Forcing Switzerland to Lower Tax Rates

While Switzerland generally is a low-tax country – at least by European standards – the tax rate on hedge funds if far too high and London dominates the European market. Thanks to this tax competition, Switzerland is moving to lower its tax rate, showing that even tax havens sometimes need jurisdictional rivalry to control the burden of government.

Tax-news.com reports:

The Swiss government is reportedly mulling a plan to improve the tax regime for hedge funds in a bid to lure more fund managers away from London, which currently dominates the European hedge fund industry. … One of the key proposals that has been floated includes a special 10% rate for the fund industry, amounting to an effective cut in the marginal tax rate of 35%. “The financial marketplace is of enormous importance to our country,” Merz was quoted as observing in the report. “I know that we have a disadvantage in taxes. We understand the problem, and we have to solve it.” … Switzerland had been overtaken by competitors which offered more flexible regulatory structures, lower taxes, and access to the lucrative EU market on preferential terms. However, Merz told Bloomberg that the new policy was not designed as a “frontal attack” on London’s hedge fund dominance, but was aimed at stimulating greater jurisdictional competition for fund business in Europe.