Topic: Tax and Budget Policy

Montenegro Joins the Flat Tax Club

The International Monetary Fund published a discredited attack on the flat tax last year, which concluded that, “the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.” The IMF’s powers of prediction are perhaps even worse than its economic analysis. Since that paper was published, four new nations have a flat tax and several others are about to implement a flat tax. The latest to join the club is Montenegro. Alvin Rabushka, intellectual Godfather of the flat tax movement, explains:

In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. Effective July 1, 2007, it replaces the previous system of three rates… The new law sets the flat rate at 15% in 2007 and 2008, reduces it to 12% in 2009 and 9% in 2010. Montenegro has set the corporate profits tax rate at 9%, reduced from the previous two-rate system of 15% on taxable profit up to 100,000 and 20% on the gain exceeding 100,000. In 2010, Montenegro will have a unified flat tax of 9% on personal and corporate income. This will be one percentage point less than the 10% unified rate in Macedonia.

Rabhushka’s article also comments on the likely adoption of the flat tax in Albania and East Timor (where the IMF, not surpisingly, is advocating a higher-than-necessary tax rate):

Prime Minister Sali Berisha of Albania secured approval of the Strategic Planning Committee that he chairs for a unified 10% flat tax on personal and corporate income. The proposal has been sent to Albania’s parliament for its consideration. If enacted in a timely manner, the 10% tax on personal income would take effect on July 1, 2007. The proposed 10% flat tax on would slash Albania’s corporate 20% tax in half effective January 1, 2008. …Ramos-Horta plans to transform East Timor into a free-trade nation, with no tariffs, sales tax, or excise taxes save on dangerous substances. He proposes to set personal and corporate income tax rates at the same flat rate between 5 and 10%. His proposal is being drafted into law based on consultations with the World Bank, the United Nations Development Program, academics, and the International Monetary Fund. Although the IMF had pushed for a flat rate between 15 and 20% to prevent East Timor from becoming a tax haven.

Russian Parliament Rejects Proposal for So-Called Progressive Taxation

Russia’s flat tax has been remarkably successful. Growth is reasonably strong and tax compliance has improved. Indeed, inflation-adjusted personal income tax revenues have been growing at double-digit rates. Despite this record of success, some politicians wanted to re-impose discriminatory tax rates on more productive taxpayers. Fortunately, as Tax-news.com reports, this misguided scheme was rejected:

The Russian State Duma, the lower house of parliament, has voted to reject two amendments to the Russian tax code that would replace Russia’s flat rate of tax on personal income with a progressive system whereby those who earn more pay more tax. The amendments concerned article 224 of the tax code, which stipulates that Russian tax residents pay income tax at a rate of 13% regardless of their income, and were introduced by the nationalist Rodina party, who argue that the current tax system disproportionately hits the poorest taxpayers. One of the amendments proposed no tax on individual incomes up to 60,000 rubles per year, a 10% tax on incomes from 60,000 to 120,000 rubles, a 13% tax on incomes from 120,000 to 1.2 million rubles, a 20% tax on income from 1.2 million to 3.6 million rubles and a 30% tax on income over 3.6 million rubles. The bill was opposed by both Deputy Prime Minister Alexander Zhukov and the speaker of the State Duma, Boris Gryzlov.

Florida Enjoys No-Income Tax Status

While New Hampshire residents are famous for their aversion to the income tax, Florida taxpayers also are spared from this odious levy and state politicians wisely avoid any mention of the income tax. As the Gainesville, Florida, newspaper reports, even Democrats are reluctant to broach the subject. Not surprisingly, tax competition plays a role. The original amendment banning the income tax was motivated by a desire to attract productive people, an approach which simultaneously - and deservedly - punished high tax states:

…one potential new revenue source, common in most states, remains unthinkable and unmentionable in Florida: a personal income tax. “It’s a terrible way to tax,” said House Policy and Budget Committee Chairman Ray Sansom “We would never consider something like that. That would be the last thing. It’s sort of over our dead bodies.” Sansom, R-Destin, said House Republicans never gave income tax the slightest thought when they came up with their tax-swap proposal. …Senate Democrats also never considered an income tax when they drew up their proposal… Florida’s income tax aversion dates to 1924, when voters banned it through an amendment to the state constitution. The state remains a tax haven more than 70 years later… Politicians saw the ban as a way to attract wealthy people and encourage them to invest in Florida at a time when other states just were beginning to tax incomes.

Over-taxed

From the Agoraphilia blog, Glen Whitman ridicules those who ridicule Americans who feel over-taxed:

Sub-headline from an article about a survey on taxes: “An MSN-Zogby poll says that many Americans think they’re paying too much in taxes even though research shows the average tax burden is light compared with other developed countries.”

Interesting. I’ve also heard that for some reason, paraplegics would like to get the use of their limbs back, even though other people are totally paralyzed from the neck down. Oh, and people who have lost an eye would like to get their 3D vision back, despite the existence of blind people. What is wrong with these people?

The Nation’s Worst-Managed Transit Agency

For years, Washington, D.C. has been considered by many students of government to have the nation’s worst city government. Similarly, the Washington area transit system, Metro, is in contention as the nation’s worst-managed transit agency.

The Metro Rail system was built with federal dollars, with the understanding that local governments would pay for its operation. But no one was prepared to pay for rail reconstruction, which is needed every 30 years or so and which costs a substantial fraction of the original construction cost. Now, some of the system is approaching 30 years of age and is breaking down with increasing frequency.

But Washington’s Metro is not the nation’s worst-managed transit agency — not by a long shot. That dishonor goes to San Jose’s Santa Clara Valley Transportation Authority (VTA).

VTA persuaded local taxpayers to raise sales taxes to construct billions of dollars worth of rail transit lines. But it failed to budget enough money to operate those lines. Even as it opened new light-rail lines in the early 2000s, VTA was forced to severely cut bus and rail service on its existing lines. The result was a 34 percent decline in transit riders.

A few weeks ago, a consultant hired by VTA released an audit blaming the system’s board of directors for its failures. “The Board has approved capital projects that were political solutions to address the needs of certain local neighborhoods at the expense of regional congestion management,” states the audit. “As a result, VTA has built transportation systems that have low ridership and are also expensive to operate and maintain.”

After the audit was published, VTA’s chief financial officer resigned. Unfortunately, none of the board members followed. Instead, they hired a temporary chief financial officer for the munificent sum of $13,600 per week for 39 weeks. That’s a total of $530,400 and more than three times the weekly pay of the previous CFO.

It gets weirder: The new CFO has no history in the transit industry. Instead, he is a former mining company executive who oversaw a shell game of companies taking over other companies. “He has a lot of experience with projects and a lot of our money is tied up in projects,” says VTA’s general manager. There are so many similarities between digging gold and sapphire mines and building transit lines — like none.

One wonders what the new CFO might do. Merge VTA with Washington Metro? Bull the stock with rumors of an untapped source of transit riders? Corner the market in light rail?

Meanwhile, everyone is trying to ignore the gorilla in the corner, which is that VTA’s board wants to spend $4.7 billion to connect the San Francisco BART system to San Jose. The agency only has enough money to build to the edge of San Jose, but even if it had all the money for construction, its general manager admits “we clearly do not have the money to operate the system.” Nevertheless, the board recently voted to spend $185 million — more than half of VTA’s annual operating budget — on preliminary engineering.

Meanwhile, VTA is still short on operating funds, so it is contemplating “eliminating or consolidating” service on more than a quarter of its remaining bus lines.

Almost every Bay Area transit group opposes the BART line. But the audit (which itself cost $500,000 — I would have done it for $5,000) barely mentions the BART line, and the Silicon Valley Leadership Group (formerly the Silicon Valley Manufacturers Group) strongly supports it.

Last June, San Jose voters angrily rejected VTA’s request for a further sales tax increase to build the BART line. VTA’s board members are hoping they can convince taxpayers that they are fiscally responsible enough to deserve a tax increase anyway. But spending $530,400 for less than one year’s work by a temporary CFO hardly seems conducive to gaining the taxpayers’ trust.

Abracadabra! County Pulls a Subsidy Out of a Hat

Jacob Grier, the blogger-barista-magician with a highly coveted Vanderbilt degree, has been writing about Montgomery County’s plans to evict Barry’s Magic Shop from the site in Wheaton, Md., where it has survived for 31 years. As he wrote last June:

The real story is that simply because a few county planners have decided that the land could be better used to attract developers than as a magic store, the man who owns the building has had his property forcibly taken from him and a small business that has thrived for decades is being evicted years before its lease is up.

The county used eminent domain to take the building in order to build a walkway as part of a grand plan for Wheaton. The plan has been in the works for years, and there are no immediate plans for actually building the walkway, but the building has been seized.

But today there’s good news! For Barry’s and its customers, anyway, if not for Maryland taxpayers and property owners. In addition to spending over $2 million to take the building and build the walkway, taxpayers – in the person of Montgomery County Executive Isiah Leggett – are also going to spend $260,000 to relocate the magic shop.

So first the county spends taxpayers’ money to seize private property in the name of its own vision of what that corner of Wheaton should look like. Then it spends more taxpayers’ money to subsidize a small business.

Here’s an idea: Why not let the market decide where businesses locate, without subsidizing the businesses and without seizing their property? As Jacob says,

This is a story that should make people angry. Angry that George Chaconas had his land taken from him. Angry that Barry Taylor and Suzie Kang are being evicted years before their lease is up. Angry that this is all being done with taxpayers’ money to subsidize the developers who will eventually move into the area, just because some guy named Joseph Davis thinks that’s the way things ought to be.

Montgomery County, Maryland: Where everything goes according to plan. Or else.

A Good Tax Increase?

Fannie Mae and Freddie Mac are quasi-private mortgage companies that receive huge implicit subsidies from taxpayers. So it is difficult to know how to react to a deal between the Bush Administration and Congressman Barney Frank (D-MA) that would skim some money from Fannie and Freddie and use the money for so-called affordable housing. The bill would curtail the ability of Fannie and Freddie to use their subsidized status to expand into new markets, which is good. The bill also would make Fannie and Freddie shareholders unhappy, which is good (or at least amusing) since they have been implicitly profiting from government rather than market forces. But the deal also means more money for politicians to redistribute, which is akin to giving an alcholic keys to a liquor store. The Wall Street Journal reviews the good and bad of the deal:

[Rep Frank’s] bill would tax Fannie and Freddie to the tune of 1.2 basis points of their total book of business – or just over 1/100th of 1% of all the mortgages Fannie and Freddie have bought and packaged to sell to investors. That’s more than $500 million a year, with potential to grow. The Bush Administration has insisted that the fund be disbursed based on non-political criteria, but, c’mon, this is Washington. While the first year’s payout is supposed to go for housing on the Gulf Coast, a honey pot this sweet will soon be passed out based on the interests of the most powerful Members. The larger political danger is that such a fund gives Congress an even greater stake in seeing Fan and Fred grow. The fund amounts to an annual dividend payout to Congress. The Fannie Tax would thus make it even less likely that these “government-sponsored enterprises” (GSEs) will ever be weaned off their implicit taxpayer subsidy and act like normal private companies. Congress could also look at this earmarked tax precedent and try to apply it elsewhere – say, on the profits of energy companies for a “global warming fund.” …the current meltdown in the subprime and Alt-A mortgage markets has led to calls – by the same people now dunning Fan and Fred – for all kinds of new lending oversight, rules and restrictions. Mr. Frank’s latest brainstorm is to stick investors in mortgage-backed securities with the losses when subprime borrowers default. It’s hard to imagine a measure better designed to cut off credit to those Mr. Frank claims to want to help. If investors don’t have legal certainty about the debt they are buying, they won’t lend the money.