Topic: Tax and Budget Policy

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.

Over-Taxed Canadians

Having just survived tax day, Americans may not be in the mood to feel lucky, but at least they should be thankful they do not live in Canada. According to a new report from the Fraser Institute, the average Canadian family is paying 45 percent of its income to the government. Since medieval serfs only paid a third of their income to the Lord of the Manor, Canadian taxpayers need an old-fashioned tax revolt. The National Post reports on the new study:

Taxes are eating into Canadians’ incomes more than ever, costing the average family more than food, clothing and housing combined, suggests a new survey. … The average Canadian family earned $63,001 in 2006 and paid taxes equalling $28,311, almost 45 per cent of its income, while spending 35.6 per cent of its income on food, clothing and housing. According to the institute, 45 years ago that same family earned $5,000 and paid $1,675, or 33.5 per cent of its total income, in taxes. In 1961, the average family spent 56.5 per cent of its income on the necessities of life.

Is This Libertarian Paternalism?

From the Washington Post:

Other experts are considering more creative ways to improve tax compliance. One idea is to take advantage of people’s desire to get a refund at the end of the year.

“What some people do when they are doing their taxes is they do a first draft and see how much they are getting back,” said Richard Thaler, a University of Chicago economist who studies how people think about money. “If they owe money, then they do a second draft. They keep finding deductions until the refund is positive.”

Thaler said mandatorily increasing withholding levels so more people get refunds could increase compliance because taxpayers would no longer have to go to great lengths to get a refund.

Thaler is one of the leading advocates of “libertarian paternalism,” which Will Wilkinson roundly pummeled the other day.

So is withholding more money from people’s paychecks in order to make the poor dumb sheep think they’re getting money back 16 months later an example of libertarian paternalism? No, it’s just old-fashioned sheep shearing.

Volunteer Today!

This is National Volunteer Week – which is really appropriate, since it’s also the week our federal income taxes are due, and the income tax system is based on “voluntary compliance.” No, really, it says so right on the 1040 packet and throughout the IRS website. Indeed, the friendly folks at the IRS acknowledge (.pdf) that some people get the wrong idea because the IRS itself tells taxpayers in the Form 1040 instruction book that the tax system is voluntary.” But if you take their little online test of “Your Role as a Taxpayer,” they explain to you that it is True that “IRS publications state that the tax system is voluntary,” but it is also True that “The government has the right to force me to pay my taxes and charge me penalties for not paying taxes.” Go figure.

Anyway, if you have any time or money left after paying your taxes, consider doing some volunteer work.

Europe’s Dismal Fiscal Future

Nations such as France and Germany already are over-burdened by excessive taxes and spending, but things are going to get worse. A column in the Wall Street Journal notes that the number of potential workers per retiree is going to shrink dramatically. This helps explain, of course, why so many European politicians are opposed to tax competition. Mobility of labor and capital undermines their ability to keep Ponzi schemes afloat:

A shrinking population in itself is not necessarily a problem. But the rise in the “old age dependency” most definitely is. Fewer and fewer younger workers will have to finance the retirement of more and more elderly people in need of a range of support services from pensions to health care. European Commission forecasts suggest that the number of people aged 65 and older as a percentage of the working population (aged 15-64) will more than double between now and 2050 to 53% from 25%. …A continuation of the current pay-as-you-go pension systems, where employee contributions are used to pay for the pensions of those already retired, seems unsustainable. It would require an almost superhuman willingness among the shrinking pool of workers to pay ever rising payroll taxes for the increasing ranks of the older generation. It would overstretch the solidarity between generations and would only accelerate an already observable brain drain. Many of the most talented Europeans are already looking for higher salaries and lower taxes abroad.

But Americans should not gloat. Entitlement programs are pushing the United States in the same direction.

Upside-Down Budgeting in Europe

Politicians in Washington are quite adept at wasting money and coming up with clever excuses for new programs, but they are rank amateurs compared to their counterparts across the ocean. In Europe, politicians and bureaucrats have become so adept at twisting words that the European Commission actually announced that it “protected taxpayers’ interests” by spending almost every penny it received. The EU Observer reports on this Kafka-esque abuse of language:

The European Union has become better at spending money resulting in EU capitals getting back less of their annual membership fee, the European Commission has announced. …Out of the €107.4 billion EU spending finally agreed on for 2006 only €950 million was left unused - down from €1 billion in 2005. “Improved budget management and better planning help protect taxpayers’ interests,” said EU budget commissioner Dalia Grybauskaite in a statement. …the European Union is not allowed to make any profit and any surplus is therefore channelled back to EU member states’ coffers by way of a rebate on the year’s EU fee.

Freeing the Farm

Today Cato’s Center for Trade Policy Studies released a new study, “Freeing the Farm: A Farm Bill For All Americans”, as part of our efforts to promote serious and permanent reform of farm policy in the United States. We will be holding a forum to discuss the study on April 26 (register here).

For too long, American consumers and taxpayers have been supporting farmers, many of whom run successful agribusinesses (for more information on subsidies and who receives them, see the excellent work of the Environmental Working Group here). Removing price supports, import barriers and subsidies will save taxpayers and consumers billions of dollars and will expose farmers to the 21st century economy. To the extent that reforms help to achieve a successful conclusion to the Doha round of multilateral trade negotiations, American businesses (including farmers) and consumers will gain further.

How would we propose to achieve all this, given the notorious power of the farm lobby? A one-time, limited buyout of commodity support coupled with legislative changes and contracts.

With any luck, the 2007 Farm Bill will be the last.