Topic: Tax and Budget Policy

If Inequality Is Okay, Let’s Redistribute Anyway

In an outstanding post, Alex Tabarrok explains how the changing economic and technological conditions that helped Harry Potter creator J.K. Rowling become a billionaire lead to inequality without apparent injustice.

Matthew Yglesias’s reply puzzled me:

Insofar as this is a large part of the inequality story, it does tend to undercut highly moralized objections to the right [to be] so darn rich. Rowling isn’t doing anything wrong to get so rich. But on the other hand, insofar as this story is right, it also seems to me that the primary pragmatic worries one might have about pro-equality measures likewise tend to melt away. If the very best in a range of fields are just bound to reap enormous windfall earnings under current technological conditions then it seems unlikely that tax measures aimed at limiting the size of those windfalls would significantly deter anyone from doing their work. One doubts Rowling set about down this path because she thought it stood any reasonable chance of making her a billionaire.

I am confused. If Alex’s account “tends to undercut” the moralized objection to wealth inequality generated by superstar effects, then it also tends to undercut a large part of the motivation for wealth-equalizing confiscation and redistribution, namely, so-called “distributive justice.” Despite his misguided insistence in referring to a sum created by millions of voluntary acts of exchange as a “windfall,” Matt has, it seems, conceded that Rowling’s riches have been justly earned–that the process by which all this money got “distributed” to her is fair. So there is no question of exploitation, injustice, cause for redress, etc. Nevertheless, Matt would like us to know that should political elites decide to confiscate a good portion of Rowling’s fortune anyway, despite the fact that she owns it justly, this policy may not actually be self-undermining in the long run. But then, what is the point of this kind of “pro-equality” redistribution once it is agreed that there was no moral objection to the prior distribution? I’m sure Matt has something in mind, and I hope he’ll share it.

In any case, regarding the “pragmatic” case for taxing superstars, in The Winner Takes-All Society, Robert Frank and Philip Cook argue that huge payouts for superstars induce inefficient overinvestment in their fields. The point of taxing superstars, on this account, is precisely to limit entry into superstar fields and to channel human capital investment that will otherwise be wasted in the largely futile attempt to become NBA players or Hollywood screen legends into more socially productive uses. Frank and Cook acknowledge that this may result in a reduced supply of excellence in certain fields, but argue that this loss is more than offset by more mundane economic gains from increased efficiency in the allocation of skills to people. Even if we don’t get the best rock stars, we’ll still have good rock stars, and we’ll have fewer people wasting productive years trying to be rock stars. And lower levels of inequality!

Now, I don’t know about Rowling’s motivations in particular, but Frank and Cook’s argument – the most sophisticated case I’m aware of for raising taxing on superstars – seems to me to undercut Matt’s general point. If Matt would like to change his argument to “Sure, by sticking it to big-money authors we might not have gotten Harry Potter, but we would have gotten offsetting returns from increased output among schoolteachers and lawyers, and a decrease in inequality,” then I’ll be happy to argue against that instead. As it stands, his current argument seems wrong both as a matter of morality and a matter of pragmatism.           

Free Market Has Lifted Millions Out of Poverty

Free market incentives are spectacularly changing lives over much of the world. In the last 25 years, hundreds of millions of people—400 million in China alone—have climbed out of the dire poverty of living on less than $1 per day. It is the largest movement out of poverty in human history. At 10 p.m. EST on Tuesday, April 24, HDNet will be premiering the documentary The Ultimate Resource, which tells the story of what can happen when ordinary people around the world are given the tools to help themselves. Cato senior fellow Johan Norberg, James Tooley, the author of several Cato policy papers, and noted scholars Muhammad Yunus and Hernando de Soto, are featured in the production.

An IMF Study Says the UK Is a Tax Haven

The International Monetary Fund has published a study that seeks to use a neutral formula for determining which jurisdictions are tax havens. The formula used is far from ideal, focusing primarily on the size of the financial services sector relative to the overall economy rather than specific policies such as privacy laws and/or information-sharing policies. But it is worth noting that the United Kingdom was placed on the list of major offshore centers. Does anybody want to guess when the Organization for Economic Cooperation and Development will put the UK on its “tax haven” blacklist? If you answered never, you get a gold star. The OECD is infamous for targeting small and relatively powerless jurisdictions, while giving a free pass to its own member nations - such as the UK, US, Netherlands, Switzerland, Luxembourg, Austria, and Belgium - that have tax haven policies (see this study from the Center for Freedom and Prosperity for more information). In any event, the IMF study is good news since it further exposes OECD hypocrisy and enables persecuted low-tax jurisdictions to more effectively resist pressure from high-tax nations. The IMF study also is good news, since it upsets leftists in the UK, as this column in the Observer illustrates:

The International Monetary Fund has effectively branded Britain a tax haven. The world’s most important financial organisation last week published a working paper seeking a definition of offshore financial centres. For the very first time it ranked Britain alongside the likes of Bermuda and the Cayman Islands - unregulated jurisdictions associated with illicit funds. …The City of London is the world’s largest tax haven… The UK has become a centre for illicit funds drained from many of the world’s poorer countries, and British offshore secrecy prevents those countries from running effective tax regimes.

IRS Chief Will Make Ideal Vampire

The American Red Cross is known for its blood drives, so there is something appropriate about the selection of an IRS Commissioner as its new chief. Mark W. Everson compiled a dismal record at the IRS, expanding the power and size of the tax agency, so he has ample experiencing extracting blood from unwilling victims. The Washington Post reports:

One day after taxpayers filed their annual returns, the American Red Cross picked the head of the Internal Revenue Service to take over the disaster-relief agency as it struggles to restore a reputation damaged by its responses to Hurricane Katrina and other recent catastrophes. The Red Cross Board of Governors voted yesterday to name IRS Commissioner Mark W. Everson, the nation’s top tax man since 2003, as the new president and chief executive of the $6 billion organization.

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.