Topic: Tax and Budget Policy

Property Tax Revolt: The First Time Was Only a Warning

It looks like a property tax revolt is brewing across the country, perhaps the biggest one since the era of Proposition 13, in the late 1970s. The Christian Science Monitor reports today that “legislative proposals, citizen initiatives, and lawsuits are on the agenda in at least 20 states.”

It’s no surprise why. Rising home values have meant rising assessments in many parts of the country. Rising home values are great if you’re selling; but if you’re not planning to sell your house, the increase can just mean higher taxes. And now, as Dennis Cauchon pointed out in USA Today, house prices are falling in some places but assessments haven’t yet been adjusted.

More importantly, cities and counties gleefully increased spending as the tax revenue rolled in during a decade or so of rising prices. But now that the revenue increases are slowing, local governments don’t want to cut back. Instead, they want to raise rates to keep the good times rolling—for governments if not for taxpayers.

The Wall Street Journal reports that more and more taxpayers are protesting their assessments. That’s one form of rebellion. Another is tax protests and calls for political action, and the Journal reports that those are happening, too, from Florida to Minnesota.

Back in 1978, the college newspaper cartoonist Berke Breathed (later famous for “Bloom County” and “Opus”) drew a brilliant cartoon about Proposition 13. For the benefit of our younger readers, I’ll explain: Proposition 13, which slashed property taxes in California, was spearheaded by Howard Jarvis. And it passed in June 1978, about the time the movie The Omen II came out, with its tagline “The first time was only a warning.” And Breathed was right: Prop 13 was a warning to the political class that taxpayers were fed up. After Proposition 13, the Democratic Congress cut the capital gains tax rate. Massachusetts passed Proposition 2-1/2 in 1980. More than a dozen other states put constitutional limits on taxes in the next few years. Ronald Reagan ran for president on a tax-cutting platform; he defeated incumbent Jimmy Carter, swept in a Republican Senate, and cut the top marginal income tax rate from 70 percent to 50 and then to 28 percent.

From earmarks to entitlements to local assessments, it’s time for taxpayers to give the political class another warning.

The NYT’s IRS Puff Piece

In advance of a rigged Senate Finance Committee hearing, the New York Times recently ran an article that blindly accepted the assertions of those who want more powers and money for the Internal Revenue Service.

Part of the article dealt with a report from the Government Accountability Office  that purports to show that offshore tax evasion is easy because of a three-year time limit. Yet buried later in the article is an acknowledgement that the time limit is not binding.

The real issue is that IRS agents actually are subject to poor performance reviews if it turns out that they were engaging in baseless harassment of law-abiding taxpayers. Needless to say, the reporter did not bother to interview anyone representing the interests of taxpayers:

The IRS is curtailing audits of many people who use offshore tax havens, even when agents see signs of tax evasion, because agents fear they cannot meet a three-year deadline for finishing an examination, congressional investigators have found. In a report to be released on Thursday, the GAO found that I.R.S. agents are so hobbled by “dilatory tactics” by offshore taxpayers and other problems that it takes almost two and a half years to complete a typical audit.

…The average assessment of unpaid taxes tripled to $17,500 for the limited number of audits that were allowed to run longer than three years, and it shot up to nearly $100,000 for the small number allowed to run four or five years.

…As part of its inquiry, the G.A.O. examined 12 offshore tax audits. …Audits can be pursued for more than three years, but agents have to meet tough requirements and their findings can be dismissed and the agents reprimanded if the unpaid taxes turn out to be smaller than expected.

It’s also worth noting that the story allowed a left-wing law professor to make an extremely weak claim about the amount of tax evasion taking place offshore, even though the so-called offshore sector does not show up in IRS tax-gap estimates and the Congressional Research Service has determined that similar evasion estimates are, for all intents and purposes, fabrications:

…Reuven S. Avi-Yonah, a professor of law at the University of Michigan who will testify at the Senate hearing on Thursday, estimated last year that the United States could be losing as much as $50 billion from international tax maneuvering.

No-Tax Texas Out-Competes High-Tax Arkansas

Writing in National Review, Greg Kaza discusses how Texas has been growing faster and creating more jobs than Arkansas. Much of the credit, he writes, is due to the fact that Texas has no state income tax while Arkansas penalizes workers with a  tax rate of 7 percent: 

Employment growth in Texas has been significantly higher than in Arkansas during periods of economic expansion. The population in Dallas has nearly tripled in the post-WWII period, while the population in Little Rock has barely doubled in size. Per capita personal income in Texas is 94 percent of the U.S total. In Arkansas it’s 77 percent of the nation’s total, a level that has hardly budged since the 1970s.

The list of statistical disparities is long, and there’s a good reason why: While Arkansas and Texas share a common border, each taxes income and capital in radically different ways. Arkansas has a top income-tax rate of 7 percent, the highest among the bordering states. Texas, however, does not impose an income tax. The imbalance is the same for capital gains: Arkansas taxes them. Texas does not. As a result, we can see a very basic economic principle at work: Talent and capital always will flow toward higher returns.

Bloated Salaries at the World Bank

The controversy involving Paul Wolfowitz  is seemingly devoid of any policy issues, but it has brought to light some of the exorbitant waste at the World Bank. Nearly 1,400 employees have salaries above the amount given to America’s secretary of state. But even that comparison is misleading, since World Bank bureaucrats get tax-free compensation.

The Wall Street Journal comments on the sweet deal — and virtual lifetime tenure — of the staff:

American taxpayers supply some 17% of the bank’s capital, and a new round of fund raising for the bank’s International Development Association is about to commence. If Congress is going to ante up the $7 billion or so the bank is expected to request, the least it can do is insist on more accountability….

Of its roughly 10,000 employees, no fewer than 1,396 have salaries higher than the U.S. Secretary of State; clearly “fighting poverty” does not mean taking a vow of poverty at “multilateral” institutions. At the time of Ms. Riza’s departure from the bank, she was a Grade “G” (senior professional) employee; the typical salary in that grade hovers around the $124,000 mark. For the next level, Grade “H”—the level to which Ms. Riza was due to be promoted—salaries average in the $170,000 range, with an upper band of $232,360. No fewer than 17% of bank employees are in this happy bracket.

Even sweeter, all of this is tax-free to non-Americans. U.S. employees have to pay U.S. tax but have their income taxes reimbursed by the bank. As with any public bureaucracy, these jobs are also impossible to lose for anything other than gross incompetence or venality.

Rare Sighting of Pro-Trade Democrats Rumored, Unconfirmed

Just when it seemed that control over the direction of U.S. trade policy was hopelessly and totally in the grips of congressional forces of darkness, there is a faint glimmer of hope that some Democrats might remember the days when they weren’t forced to consider trade a dirty word.  Given where things stand today, that’s not a trivial matter.

In a letter (sorry, subscription required–see excerpt below) dated May 2, six members of the House Ways and Means Committee (five of whom are Democrats!) urged Commerce Secretary Carlos Gutierrez to abandon (or at least work to minimize the disruption to trade caused by) his Department’s Import Monitoring Program of Textile and Apparel Products from Vietnam.  The novelty alone of a letter from Congress urging the administration to tread lightly where imports are concerned warrants this post.

As you may recall from a previous post, the Bush Administration felt it had to buy off opposition to the bill that granted Permanent Normal Trade Relations (PNTR) status to Vietnam.  Prominent holdouts demanding compensation were Sen. Elizabeth Dole (R-NC) and Sen. Lindsey Graham (R-SC), and the price, ultimately, was a commitment from the administration to monitor imports and to self-initiate antidumping cases if the situation warranted. That commitment from the administration was unprecedented, unnecessary, and disappointing.  Today it is reported to be scaring away investment in the Vietnamese industry and deterring trade between Vietnamese producers and U.S. customers. On trade policy, Democrats have earned most of their scorn by marching to the tune of labor unions, which would just as soon permanently separate U.S. customers from their foreign sources.  But Democrats also count among their constituents importers, distributors, wholesalers, retailers, producers, truckers, warehouse operators, port employees, and consumers who suffer when supply chains get tangled and severed.  The authors of the letter acknowledge:

Congressional passage of [PNTR] for Vietnam was intended to provide benefits for both United States businesses and consumers, as well as strengthen the U.S.-Vietnam relationship and provide opportunities for economic growth that would benefit the Vietnamese people.  We are deeply concerned that the disruption in trade caused by the import monitoring program is cutting away at many of the benefits of granting PNTR status to Vietnam.

Well put, indeed! Hopefully, the congressional trade leadership was copied because its recently unveiled New Trade Policy for America reflects predominantly an antitrade perspective that has been allowed to fester and metastisize within the Democratic caucus.

Will Democrats Impose French-Type Tax Rates on America?

The alternative minimum tax is a wretched system affecting a couple of million taxpayers per year, but the AMT is scheduled to expand dramatically if current law is left untouched. Democrats do not like this tax, largely since it indirectly takes away the state and local tax deduction – and thus aggravates taxpayers in high-tax, Democratic states like New York and California. The AMT should be abolished, but the question is whether the elimination of this built-in tax hike will be “paid-for” with a tax increase on other taxpayers. Steve Moore of the Wall Street Journal opines on the growing possibility that Democrats will try to increase income tax rates on the so-called rich, even if it means that tax rates in America will climb above the oppressive levels found in welfare states like France and Germany:

Democrats want to go after high-income earners, whom they call “rich.” What is surprising is how high rates must be raised to make their plan’s numbers add up. The top AMT rate would increase to 31.5% from 28%. Democratic tax experts also recommend eliminating the lower rate for capital gains and dividends for those subject to the AMT. This would raise the capital gains tax rate to about 31% from its present 15% rate. …The changes in the AMT rate, and the treatment of dividends and capital gains, still leaves Mr. Rangel at least $600 billion short of paying for the AMT fix. House Democrats have acknowledged that to close this final gap, they will have to look to personal income taxes. Rep. Richard Neal of Massachusetts, the head of the Ways and Means tax panel, says this will require raising the top tax rate of 35% by no more than three to five percentage points. Mr. Neal should check his math. Tax experts on Capitol Hill and in the Treasury Department calculate that to get $60 billion a year from the top 1% of income earners would more likely require rate hikes of 10 to 15 percentage points. This would lift the top federal marginal income tax rate as high as 50%. “I can’t think of a better way to throw the economy into recession and end the bull market expansion of recent years than to raise tax rates like this,” warns Michael Darda, chief economist for MKM Partners. It’s hard to argue with that assessment. Overnight, the U.S. would go from being a nation with one of the lowest set of income-tax rates to one of the highest in the developed world. …In countries as diverse as Ireland, China, India, Japan, Russia and Hong Kong, tax rates are flat or falling, part of a world-wide effort to reward growth and get more of it. Yet Reaganomics, alive nearly everywhere else, is dead in the halls of the United States Congress.

Two Million French Have Escaped France

Anne Applebaum’s Washington Post column discusses the upcoming French election. But most relevant for fans of tax competition, she notes that two million French have fled the high taxes and economic stagnation of their home country. Not surprisingly, a poll reveals that the overwhelming majority of French expats are happy in countries with more opportunity. Applebaum also explains that Europe’s less competitive nations have been trying to export their anti-growth policies in an effort to “make life equally difficult everywhere.”

Standing in the heart of London’s financial district, Sarkozy heaped compliments upon his country’s historic enemy. The British capital was, he said, a “town that seems more and more prosperous and dynamic every time I come here.” More important, it had become “one of the great French cities.” He understood, furthermore, that hundreds of thousands of Frenchmen had moved to Britain because “they are risk-takers, and risk is a bad word” in France. … [E]ven a Sarkozy victory in the final round of voting on Sunday won’t persuade all of the 2 million-plus French exiles to go home. Asked by a French polling company, TNS Sofres, “Are you satisfied with your life abroad?” 93 percent of French emigres surveyed recently said “yes.” … [T]here is nothing odd about the fact that the French now vote with their feet. There are better-paying jobs in London, taxes are lower in London, the economy grows faster in London: C’est la vie – and tough luck for Paris. … For the past decade, French, German and other European leaders have tried to unify European tax laws and regulations, the better to “even out the playing field” – or (depending on your point of view) to make life equally difficult everywhere.