Topic: Tax and Budget Policy

Irish Business Leader Explains Why Optional Tax Base Harmonization Leads to Mandatory Tax Rate Harmonization

Big businesses have rarely been principled defenders of individual liberty. A good example is the fight over a harmonized corporate tax base in Europe. Some multinational companies like this approach because it means one tax return instead of 27 tax returns. But this short-sighted approach overlooks the inevitable misuse of power by politicians who will want to manipulate the system for their own benefit. An Irish business leader explains in the Financial Times:

Businesses should wake up to the fact that, if work to harmonise European Union tax systems succeeds, they will face huge uncertainty regarding their tax liabilities, pay higher tax bills and face a more rigid corporate tax regime. Lázsló Kovács, the tax commissioner, is firmly set on introducing a legislative proposal by the end of 2008 to harmonise the corporate tax base across the Union. …Separate accounting for cross-border transactions within a group would be eliminated, and group profit would be shared by means of a set formula between member states and taxed at the rate applicable in each state. …To date, business has expressed surprisingly little scepticism about this untested assertion. Such a sanguine attitude is misplaced.

 …companies doing business in Europe would pay higher tax bills. …CCCTB would drive some investment to more flexible and competitive tax jurisdictions outside the EU. Business lobbies have only backed the scheme if CCCTB is optional for companies. But, for how long could it remain optional? If simplicity and a reduction in administration costs are part of the raison d’être , then running an additional system side by side with national tax regimes makes no sense. The Commission said in 2006 that: “CCCTB should initially [my italics] be proposed as optional for companies”, and on May 2 it said: “CCCTB should be optional … where these [existing rules] are maintained alongside the CCCTB by member states.” …Despite assurances that it does not intend to extend this work to cover the tax rate, the Commission has a long history of pushing for harmonised tax rates – and a common tax base is a prerequisite of tax rate harmonisation. When the Commission embarked on this initiative, France and Germany made no secret that their end-game was tax rate harmonisation.

Uncle Sam: Electrician

My new Cato policy analysis goes into great detail about how the federal government uses your tax money to subsidize businesses.  In fiscal 2006, the “corporate welfare state” cost $92 billion, all of which funded programs that provide unique benefits to particular companies or industries.

One of these programs is the Rural Utilities Service (RUS).  A relic of the New Deal, the goal of the program was to electrify the countryside.  Now that reading by candlelight in the boonies is a thing of the long forgotten past, the RUS has morphed into a fountain of cash for rural electricity co-ops. 

As a story on the front page of this morning’s Washington Post highlights, it’s always easier to create a program than to kill it:

The key to the longevity of the Agriculture Department’s programs for rural utilities has been the [electricity co-ops’] powerful political voice. More than 30,000 members gave an average of $41 last year to the co-op association for political contributions. Given their geographic scope, the co-ops can mobilize letter-writing campaigns across a vast number of states and congressional districts.

To learn more about the corporate welfare budget generally, tune in to my live interview on Bloomberg Radio’s “On the Economy” today at 6:30 pm Eastern.  A podcast about the corporate welfare state will be featured on the Cato website on Tuesday.   

John Edwards Wants America to be More Like Slow-Growth Europe

Presidential candidate John Edwards deserves some praise for honesty. He has openly admitted that he wants more taxes and more spending. His chief rivals, as noted by the Associated Press in a story, have been less forthcoming. But honesty does not count for much if a candidate’s proposals will mean less prosperity. Edwards seems to think that European-style levels of government spending can be imposed without European-style levels of stagnation and unemployment:

Edwards is quick to acknowledge his spending on health care, energy and poverty reduction comes at a cost, with more plans to come. All told, his proposals would equal more than $1 trillion if he could get them enacted into law and operational during two White House terms. … To pay for some of his priorities, Edwards would roll back Bush’s tax cuts on Americans making more than $200,000 a year. He also said he would consider raising capital gains taxes to help fund his plans and raise or eliminate the $90,000 cap on individual earnings subject to Social Security taxes to help cover the projected shortfall in the system. … Edwards’ ideas have already opened him to accusations of being just another tax-and-spend liberal, a label put on Walter Mondale, the 1984 Democratic presidential nominee who said he would raise taxes and then lost 49 states to President Reagan. … Edwards has been the most forthcoming Democratic candidate when it comes to describing the details of how he would like to run the country. His chief rivals — Sens. Hillary Rodham Clinton and Barack Obama — have offered few hints about their policy proposals.

Vermont Is a Tax Haven

The Providence Journal reports that Vermont is one of the world’s leading tax havens for “captive” insurance companies. This is both amusing, because it is contrary to Vermont’s image as a refuge for 1960s dropouts, and illuminating, since it shows that the pressure to attract jobs and capital causes even left-leaning politicians to adopt market-oriented policy:

In a development somewhat counter to its apple-cheeked image, Vermont has become a leading tax haven for U.S. companies. As described in a recent New York Times report, the state markets itself alongside Bermuda and the Cayman Islands as the answer to certain types of tax headaches. …Vermont law has permitted the creation of insurance captives for more than 20 years. But it only began aggressively marketing them about a decade ago, presenting captives as a sound alternative to the insurance business that thrives outside U.S. borders. Today, more than 560 American companies have set up camp in Vermont, which also hosts an annual captive-insurance industry conference.

Budget Bravado

In a letter to lawmakers, the president’s budget director, Rob Portman, …accused Democrats of doing little to rein in “the unsustainable growth in entitlement spending” on Social Security, Medicaid and Medicare [reports the Washington Post].

Well, they did almost all oppose the trillion-dollar expansion of Medicare in 2003 that then-Rep. Portman voted for and that President Bush bludgeoned reluctant Republicans into supporting.

Medicare Pays $869 for an Air Mattress. (Yawn.)

The Justice Department’s Medicare Fraud Strike Force (cue theme music) has announced the arrest of 38 people who allegedly defrauded Medicare by charging outrageous amounts for items that were never delivered … like an $869 air mattress … and … I’m sorry, I nodded off. 

This is nothing new.  In Medicare Meets Mephistopheles, David Hyman quotes former Medicare administrator Bruce Vladeck:

“There are plenty of $400 toilet seats in the Medicare program…”

Nor is the amount of money involved impressive.  In all, these people allegedly defrauded Medicare for $142 million, or 0.038 percent of annual Medicare outlays.  HHS Secretary Michael Leavitt estimates that further anti-fraud efforts could save as much as $2.5 billion, or 0.67 percent of Medicare outlays … I’m sorry, I nodded off again.  Here’s some more from David Hyman:

In fact, no one knows how common fraud and abuse are, but 72 percent of the American public believes that Medicare would have no financial problems if fraud and abuse were eliminated. This perception is utterly uninformed by any connection with reality…

Fraud is bad, mmm-kay?  But while Medicare’s anti-fraud laws occasionally nab some real bad guys, according to Hyman they probably inflict as much damage as they prevent:

The vast sums of money spent by Medicare create the demand for [anti-fraud] laws to restrain the avarice of providers. Provider avarice triggers a search for ways around those laws, which, in turn, results in the broadening of those laws. As the laws are broadened, they discourage organizational innovation and market entry and catch more innocent providers. This, in turn, triggers a backlash against the law and widespread violation thereof. Plus, lawyers get rich off each step.

We’re barking up the wrong tree, here.  If you’re looking for real and substantial fraud in Medicare, look no further than the politicians who have promised Medicare benefits well in excess of the program’s ability to pay, or who pooh-pooh the program’s future funding shortfalls.  Again, Medicare Meets Mephistopheles:

The legal system imposes harsh penalties on pyramid scheme organizers, because defrauding hundreds or thousands of people is much worse than defrauding a handful of people. Indeed, if anyone other than the United States government were running the Medicare program, those responsible would already be serving long prison terms for fraud.

Now that’s an anti-fraud operation to get excited about.

More Evidence that 2003 Tax-Rate Reductions Boosted Growth

Some politicians want higher tax rates because they resent success and think it is okay to base public policy on emotions like hate and envy, but most pro-tax lawmakers presumably are interested solely in getting more money to spend. These “practical” lawmakers may want to consider becoming supply-side tax cutters. After all, the Treasury has received a gusher of additional tax revenue since the 2003 reductions in capital gains tax rates, dividend tax rates, and personal income tax rates. The real lesson, of course, is that pro-growth tax policy leads to faster growth – and faster growth translates into more taxpayers and more taxable income. As the Wall Street Journal opines, the key question is whether politicians can control the impulse to over-spend:

Americans are sending more money than ever to Washington; revenues for the first seven months of fiscal 2007 are up 11.3%, or $153 billion. This Beltway bonanza has helped to slash the projected federal budget deficit by more than half from the same point last year. Across the past three Aprils, federal red ink has sunk by nearly $300 billion. The deficit this year could tumble to $150 billion, or an economically trivial 1% of GDP. This revenue boom certainly casts doubt on the political wails about tax loopholes for the rich. So far this year, the taxes paid on so-called nonwithheld income, which are dollars that don’t come from normal wages and salaries, have climbed by nearly 30%. This is income largely derived from capital gains, dividends and other investment sources – i.e., the tax rates that President Bush cut in 2003. Individual income taxes are also up by 17.5% – a handsome fiscal dividend from rising wages and low unemployment. In other good news, the pace of federal spending, which was pedal-to-the-metal in Mr. Bush’s first term, has finally decelerated. So far this year federal outlays have climbed by 3%, and, save for Medicare and Medicaid, federal expenditures are nearly flat from 2006.