Topic: Tax and Budget Policy

Tax Competition Forces Lower Tax Rates in Germany

The Wall Street Journal celebrates the putative announcement of a nine percentage point reduction in Germany’s corporate tax rate. There is a dark lining to this silver cloud since there are hidden tax increases included in the proposal. The initiative also leaves in place some loopholes that could have been used to finance even lower tax rates, but it is nonetheless encouraging to see that one of Europe’s biggest cheerleaders for tax harmonization is being forced to join the tax-cutting bandwagon: 

Europe’s vibrant tax competition has finally reached Germany, which usually prefers to sit back and tut-tut while its neighbors cut taxes and grow their economies. Chancellor Angela Merkel’s cabinet today is expected to slash the top corporate tax rate to 29.8% (the average federal-municipal rate) from 38.7%. That’s still a far cry from flat-tax Slovakia’s 19% or Ireland’s 12.5%. But it would move Germany from the third-highest corporate tax rate in the OECD, after Japan and the U.S., to a more comfortable middle position. …The Finance Ministry missed the opportunity to simplify the tax system in one go. Getting rid of tax exemptions for corporations – thereby broadening the tax base – would have been a useful move. It would have had the added benefit of giving Berlin more room to cut rates beyond the planned nine percentage points. …Over the long run, the corporate tax cuts will likely increase revenues by encouraging economic activity and tax compliance.

How Dumb Do They Think We Are?

For the past six years Democrats have railed against President Bush’s gimmicky, deceptive, wildly unbalanced budgets. Now that they control Congress, they have the power to write their own budgets. And what have they come up with? As the Washington Post explains,

Senate Democrats unveiled a spending blueprint yesterday that envisions a massive expansion of the nation’s health-insurance program for children, as well as billions of additional dollars for other domestic priorities such as public education, veterans’ health care and local police. 

Despite the additional spending, Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, said the proposal would virtually erase the federal deficit within four years without raising taxes and produce a surplus of $132 billion by 2012.

It’s not true that politicians never learn anything. Conrad and his colleagues have learned a great deal from Bush and his budget spinners.

The Government Is Not the Country

The Washington Post reports,

“Three of the last five years, there’s been no budget for this country,” [Sen. Kent] Conrad said in an interview.

Actually, for the past 218 years, there’s been no budget for this country. The country is a vast, sprawling nation of 300 million people, millions of businesses, and more than 100 million households. The country is not a corporate entity, and it has no budget.

On the other hand, there is supposed to be a budget for the federal government, and Congress is indeed derelict in failing to pass one. But politicians should not forget the distinction between the country and the government.

Government Hall of Shame

The Washington Post reported the other day that there are more delays and cost overruns at the new Capitol Hill Visitor Center.

In my letter in the Post today, I suggest a display case be installed in the visitor center for the most outstanding federal cost overruns: scale models of the Big Dig, the International Space Station, the Denver airport, and much more could be included (see ships, fighters, much more).

Even better would be an independent “Government Hall of Shame” built somewhere near Capitol Hill. That way visitors to Washington could find out how the government really works after they have listened to the bedtime stories about grand federal achievements heard at the usual D.C. tourist stops.

The Hall of Shame could focus not just on outstanding cost overruns, but could also include scale models of infamous pork projects such as the Alaska Bridge to Nowhere. Another display could highlight grand-scale federal failures such as high-rise public housing and the Army Corps of Engineer’s New Orleans levees. 

Madame Tussauds has announced plans to open a D.C. museum. Perhaps they could donate wax figures of Jack Abramoff, Duke Cunningham, Dan Rostenkowski, and other scoundrels to the Hall of Shame. 

The Good News behind Today’s Trade Deficit Report

America’s broadest trade account reached another record deficit in 2006, according to a report this morning from the U.S. Commerce Department. The U.S. current account deficit reached $857 billion last year, which will predictably unleash a lot of wailing and gnashing of teeth in Washington today about the alleged failure of U.S. trade policy and the menace the deficit poses to U.S. economic growth.

The deficit doomsayers are wrong yet again. Far from being a sign of failure, today’s report contains a lot of good news if you care about the freedom of Americans to engage in international commerce. U.S. exports of goods and services last year were up by 12.7 percent from 2005, and imports grew by 10.5 percent, stoked by strong demand from American consumers and producers alike. Driving the record deficit last year were continued inflows of foreign capital, including a 67 percent jump in foreign direct investment. Growing levels of trade and foreign investment have boosted U.S. growth, job creation, and rising real wages.

As I have argued for a long time now, the trade deficit does not mean what our politicians and cable commentators keep telling us it means. For example, in a Free Trade Bulletin of mine published this week, I found no evidence that rising trade deficits are associated with slower economic growth. In fact, more robust economic growth typically translates into a rising current account deficit. 

If the expanding current account deficit is a drag on growth, somebody forgot to tell the U.S. economy.

Dice-K Takes American Job

Russell Roberts of George Mason University writes about Japan, China, and the trade deficit scare in the Wall Street Journal. Along the way he notes:

The story of the baseball off-season is the Red Sox spending $100 million to bring Daisuke Matsuzaka from Japan to the United States. Dice-K, as he’s known, is the ultimate import. He takes away a job from an American pitcher.

Russ is mocking the protectionist argument, of course. But he could have drilled in on this point more than he did. We often hear that immigrants “take American jobs.” But really, when America welcomes software engineers from India or magazine editors from England or the laborers who built my house from El Salvador, they don’t necessarily take anybody’s job. An expanding economy–expanding partly because of the immigrants–may well need more engineers, editors, or laborers than it would have needed in the absence of immigration.

But Dice-K actually is taking someone’s job. He’s going to pitch in the major leagues. There’s a fixed number of major league teams, and pretty much a fixed number of pitchers on each team. If the Red Sox hire Dice-K, they’re going to fire or not hire some other pitcher. Probably some good ol’ boy from the American South, whose next best alternative is, yes, being a greeter at Wal-mart. Maybe even one of my Kentucky relatives. Hey, maybe Pat Buchanan’s onto something here…

British Trade Association Warns against Growing Burden of Government

The Institute of Directors is urging the UK government to slow the growth of government in order to protect England from becoming an uncompetitive continental-style welfare state. The group notes that Spain successfully has reduced the burden of government by nearly 11 percentage points of GDP. A smaller burden of spending, the group explains, would facilitate much-needed tax reforms, including a lower corporate rate and the abolition of the death tax. Tax-news.com reports:

As part of its Budget submission, the Institute of Directors (IoD) has warned the UK government that economic policy now stands at a “fork in the road,” and that the level of taxation now stands at a “tipping point” as international companies begin to seek out more tax competitive jurisdictions in increasing numbers. The IoD argues that the UK government now faces a choice of continuing along its present path towards an economy that will mirror that of other EU economies with large governments, or of pursuing polices that aim to reduce the size of the state towards the levels seen in the US, Australia, Ireland and Switzerland, where public spending is between 34% and 37% of GDP. …Miles Templeman, Director General of the IoD commented: “There is nothing inevitable about a rising burden of public spending and taxation. Other countries have achieved huge reductions in the spending to GDP ratio. The UK should take Spanish lessons. Since 1993 public spending in Spain has fallen by 10.8% of GDP – from 48.6% to 37.8% of GDP in 2007. The optimal size of Government in the UK is well below its current size. …Unfortunately, the current size of the state in the UK is not globally competitive.” …The Institute also called on the government to consider its previously announced proposals to simplify the capital gains tax system and abolish inheritance tax, while calling for the proposed planning gain supplement to be abandoned.