Topic: Tax and Budget Policy

Socialists in Bulgaria Pondering Flat Tax or Tax Rate Reductions

American politicians, even supposed conservatives, are timid about embracing tax reform, yet left-wing parties in Eastern Europe are slashing tax rates and adopting simple and fair flat taxes. The latest example comes from Bulgaria, where the Socialist Party is trying to decide between across-the-board tax cuts and a 10 percent flat tax:

Bulgarian socialists will discuss plans to impose a flat tax rate at the party congress that starts on Saturday, the event’s agenda shows. …The Socialists are the senior partner in the three-way ruling coalition and hold half of the 16 ministerial portfolios. The party has singled out lowering the individual tax burden as one of its main priorities and will consider two proposals to achieve that goal. The first option is to lower the tax brackets to 10%, 16% and 24%, respectively. The second is to impose the 10% flat tax for all income above a certain tax-exempt amount.

Seen and Not Seen

The Washington Post Magazine had a detailed profile of the daily activities of freshman House member Joe Courtney (D-CT).

We learn that he spends much of his time raising campaign money, even though the next election is still 17 months ago.

More interesting is how a single business in his district, Electric Boat Corp., seems to dominate his time on Capitol Hill. He meets with the company, he lobbies Democratic Party bosses on the firm’s behalf, and he makes sure to ask questions in congressional hearings related to the company.

Electric Boat makes vessels for the Pentagon and employs 6,000 in Courtney’s Connecticut district. That’s a lot of people, but there at 680,000 people in Courtney’s congressional district — what about all their interests? Does Courtney put any effort, for example, into keeping taxes low for the benefit of all the other thousands of businesses in his district?

The article reminded me of Frederic Bastiat’s “What is Seen and What Is Not Seen.” Unfortunately, most politicians focus only on the immediate, most simple, and most visible effects of government action, and don’t have the imagination or capacity for abstract thought to recognize the unseen but much larger effects of big government.

How do we fix this bias?

The United Kingdom Now Has a Bigger Government than Germany

The Financial Times reports that the German Finance Ministry has produced a study showing that the burden of government spending in Germany is on track to fall below the level in the United Kingdom. Indeed, if OECD data is reliable, the UK became a bigger welfare state this year.

This is mostly a poor reflection on British PMs Tony Blair and Gordon Brown, who have presided over an explosion in the size of the state sector. But German politicians deserve a small pat on the back for imposing at least a modest bit of discipline on the growth of government spending:

Public spending in Germany, as a percentage of total economic output, has fallen sharply in the past three years and is fast approaching British levels, according to a finance ministry study. The report, obtained by the Financial Times, shows state expenditures reached 45.6 per cent of gross domestic product last year, compared with 44.1 per cent in the UK, which is generally thought of as a low-tax, low-spending economy.

…Instead of focusing on the fiscal deficit — the difference between state expenditures and revenues — the report concentrates solely on spending. The [German] spending-to-GDP ratio fell from 47.1 to 45.6 per cent between 2004 and 2006, making Germany the fourth-smallest spender in the eurozone. The same ratio rose from 42.7 to 44.1 in the UK over the same period.

…”Good progress has been made in the recent past, mainly in cutting public sector headcounts,” said Winfried Fuest, economist at the business-funded IW economic institute. But he expressed worries about government being tempted “to spend more now that the economy is doing better”.

The Mikulski Principle

Politicians are circling around hedge funds like vultures. They want to raise taxes on hedge funds, maybe by treating their capital gains as normal income. Why? Because hedge funds are mysterious — do you know what they really do? — and they have a lot of money. Make billion-dollar profits, get headlines, attract taxers — it’s as certain as ants at a picnic.

There are whole books on the correct theory of taxation. I’ve always assumed that Democratic members of Congress operate on the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):

Let’s go and get it from those who’ve got it.

There are many theories of taxation, such as Haig-Simons, the Tiebout model, and the Ramsay Principle. But I’d bet that the Mikulski Principle explains actual taxation best.

You Mean It Could Get Worse?

The House Agriculture Committee yesterday released its preliminary discussion draft of the commodity section of the Farm Bill (the section that deals with the subsidy programs). But the changes proposed by Rep. Colin Peterson (D, Minn.), House Agriculture Committee chairman, are precisely the wrong sort of changes needed to avoid legal challenges to its farm programs and inject life into the Doha round of global trade talks.

Chairman Peterson has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices.

When farmers are paid according to the amount they produce, this encourages overproduction and depresses world market prices. That infuriates our trade partners, and we can expect more of the type of legal challenge to U.S. farm programs as the cotton case (more here) and the new case against U.S. farm subsidies brought by Canada (background here).

While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase. It makes no sense to increase the types of payments that are causing legal trouble. And if commodity prices fall from the current historic highs, then these subsidies would have a necessarily higher budgetary impact than the current setup.

My colleage Dan Griswold and I have proposed bribing farmers to let us scrap the whole thing altogether.

Maine House Approves Flat Tax — Over GOP Objections

Maine has one of the country’s highest income tax rates, which stifles growth and undermines competitiveness. But this may soon be a relic of the past, as the state House has approved a flat tax. The supposed revenue loss from lower income tax collections will be offset by broadening the base of the sales tax, which currently applies to only a narrow range of products.

Interestingly, Republicans in the statehouse are opposing the proposal, though it is not clear whether they are being partisans and reflexively opposing a Democratic plan or whether there are some genuinely objectionable features of what otherwise seems to be a pro-growth reform. This story in the (Brunswick, ME) Times Record, for instance, does not reveal whether the tax plan is designed to raise more money for government:

The House voted largely along party lines Wednesday to support a tax restructuring plan that expands the sales tax base to lower the income tax rate — a plan Republicans warned would cause a revolt back home when people realize how it affects their day-to-day purchases.

…[I]t gives tax relief to Mainers of all income-levels and stabilizes the tax system that currently relies on sales in just 24 categories. That limited base makes sales tax revenue very volatile and leaves the state short on cash when the economy slows. On the other hand, the state has the seventh highest income tax rate in the country and that discourages businesses from moving here and retirees from making the state their full-time home. The plan would rebalance that system. “This plan will provide a tremendous economic boost to the state of Maine,” [state Rep. John] Piotti said. “It will be a huge stimulus for people in state who want to expand and for people out of state looking to do business….”

The proposal would raise more than $230 million in sales-related revenue by expanding the 5 percent sales tax base to a long list of currently exempt services; raising the meals and lodging tax from 7 to 8 percent; increasing the real estate transfer tax on a sliding scale based on the property’s selling price; and doubling the excise tax on beer and wine. That money, in turn, would be used to lower the state’s graduated income tax to a flat tax of 6 percent.