Topic: Tax and Budget Policy

Czech Government Officially Proposes Flat Tax

Although its prognosis is unclear because of the ruling government’s lack of a firm majority in parliament, the Czech government has unveiled its flat tax. Combined with reductions in social welfare spending, the tax reform could dramatically boost Czech competitiveness and put more pressure on Western Europe’s welfare states. Tax-news.com reports:

The Czech government has announced a raft of major tax reform plans, which include a flat tax on personal income, a significant reduction in tax on corporate income, and changes to the value-added tax regime. Under the proposals announced by Finance Minister Miroslav Kalousek, if approved Czech taxpayers will pay a 15% flat tax on their personal income, while companies will see their income tax rate drop to 19% from the current 24% by 2010. At present personal income tax rates vary according to wages, and range from 12% to 32%. The lower rate of value-added tax will increase under these reforms to 9% from 5%, but the headline rate will remain unchanged at 19%. …with the tax cuts accompanied by some major cuts in welfare spending, such as unemployment benefits and healthcare, the government is sure to encounter opposition from the left.

But We Can Trust the Government, Right?

A common criticism of Social Security choice (and defense of the Social Security status quo) is that there are dishonest actors in private markets who would put people’s private account assets at risk of (in the words of the AFL-CIO) “corruption, waste and Enron-ization.” These critics argue that society is much better off keeping Social Security in the honest, benevolent hands of Uncle Sam.

What must these critics be thinking about today’s NYT above-the-fold article on teacher pension fund shenanigans in New Jersey? The lede says it all:

In 2005, New Jersey put either $551 million, $56 million or nothing into its pension fund for teachers. All three figures appeared in various state documents — though the state now says that the actual amount was zero.

Like many state and local government pension systems, New Jersey’s is woefully underfunded compared to the benefits it will have to pay in the future. (This situation will make headlines in the coming years, as state and local governments begin to disclose their pension fund and retirement benefit system shortfalls in accordance with a recent GASB requirement.) In New Jersey’s case, the shortfall is more than has been publicly acknowledged, however: “an analysis of its records by The New York Times shows that in many cases, New Jersey has overstated even what it has claimed to be contributing, sometimes by hundreds of millions of dollars.”

Talk about the Enronization of retirement benefits…

What should be especially troubling to SS choice opponents is that New Jersey has a number of “good government” provisions on its books, including one requiring any new state spending be paid for using a specified revenue source. When the state sweetened its pension benefits a few years ago, lawmakers supposedly complied with the law. Moreover, New Jersey officials told the NYT that there is no impropriety in the pension fund’s accounting — everything (including the apparent misstatements) is on the level.

So, despite “the right” legal safeguards, despite accounting mandates, despite the existence of a special interest (aka the state’s teachers’ union) with strong incentive to make sure the teachers’ pension fund is healthy, and despite the fund’s handling by supposedly honest, benevolent government, New Jersey’s teachers’ pension fund is “in dire shape, with a serious deficit.”

Choice opponents do have a reasonable concern that bad actors in investment markets could harm private accounts. But they fail to acknowledge that bad actors (and even non-bad actors) can — and do — harm public pensions. Wouldn’t it be sensible to allow people to put their public pension nest eggs in many different private investment baskets (some of which may be susceptible to bad actors) instead of keeping those eggs all in one Social Security basket (also susceptible to bad actors)?

At the very least, wouldn’t it be sensible to give people a choice of which bad actor risk they’d rather run?

Review of Barber’s Consumed

I have a review in today’s Wall Street Journal (subscription required) of Benjamin Barber’s new book Consumed, which examines the supposed perils of material plenty. The book’s unsubtle subtitle makes it clear enough where Barber stands: How Markets Corrupt Children, Infantilize Adults, and Swallow Citizens Whole.  

Here’s a sample of my take on Barber:

[Barber] sees the explosion of consumer choices today and assumes that Americans are growing ever more materialistic: The more gadgets, gizmos and fripperies the marketplace serves up, the more deeply we fall under commerce’s evil spell. In fact, the opposite is true.

Political scientist Ronald Inglehart has exhaustively documented a world-wide shift toward “postmaterialist” values, in which, as he puts it, the “emphasis on economic achievement as the top priority is now giving way to an increasing emphasis on the quality of life.” The more stuff we have, the less interested we become in simply accumulating more and the more we seek out instead the intangible satisfactions of memorable experiences, meaningful work and self-realization.

The existence of books like Mr. Barber’s proves the point. In an amusing irony, the progress of capitalist development creates a continuing demand for fulminations against the evils of materialism. Thus do anti-market intellectuals like Benjamin Barber find their niche in the consumerist cornucopia they so revile.

For my further thoughts on the revolutionary social consequences of capitalist mass affluence, check out my forthcoming book (out next month) The Age of Abundance: How Prosperity Transformed America’s Politics and Culture.

The USTR Pulls An All-Nighter

With only minutes before a key deadline, the Bush administration formally notified Congress last night that a deal had been reached with South Korea on a free trade agreement. The Office of the United States Trade Representative’s press release (which contains not many details and plenty of the usual mercantalist, all-exports-all-the-time rhetoric) can be viewed here.

As expected, rice was not included in the agreement. Korean negotiators had been adamant that rice, an extremely sensitive (i.e., protected) sector in Korea, was not on the table for negotiation and that a deal would be impossible if the United States insisted on pushing for access to the Korean rice market. On that basis, the Americans evidently decided to drop the rice issue.

Rice was never so much a concern, though, as beef. U.S. beef has been denied access to Korea on food safety grounds since late 2003, when BSE was found in beef originating in Canada. Although the issue was not formally part of the FTA negotiations, and thus was not resolved in the agreement itself, it has the potential to scupper it if lawmakers link their approval of the deal to resolution of the beef dispute. Sen. Max Baucus (D-MT), chair of the Senate Finance Committee, has made it clear that his support for the Korean FTA depends on a full re-opening of the Korean market to U.S. beef. (The Ranking Member of that Committee, Sen. Chuck Grassley (R.-IA), was somewhat more measured in his comments).

Similarly, Sen Debbie Stabenow (D-MI) sees that reducing Korean tariffs (albeit over a long phase-out period for trucks) on U.S. autos and a “restructuring” of the Korean auto tax structure is not enough: her press release insists that she will “do everything in [her] power to defeat this agreement and ensure that any future fast-track authority includes provisions guaranteeing that American businesses and workers can get a fair deal”. Sen. Stabenow does not say what specific measures would assuage her concerns, although one suspects that she is offended at the USTR’s refusal to specify minimum guaranteed sales targets.

In short: yes, the USTR met the deadline of concluding the deal so that it can be considered under fast-track authority. But its passage is far from secured.

More broadly, though, the statements of these lawmakers, especially if it is a taste of what is to come, should worry free-traders everywhere. While bilateral and regional trade agreements are, at best, only the third most optimal way of liberalising trade, the deal between South Korea and the United States was one of the more worthwhile agreements of this administration. And if Congress is going to base support for agreements on its ability to manage trade in certain sectors, then the trade agenda is in serious trouble.

Welfare for the Wealthy (an Ongoing Series)

An earlier post noted the hot political trend of convincing the upper middle class and the wealthy that they are financially vulnerable and in need of government assistance.

From loan subsidies for McMansions to blue-blood public works, from the doling out of market power and financial support to businessmen, to the offering of government money and tax breaks to (usually well-to-do) people who consume in a government-approved manner, politicians of Red stripes and Blue are all about helping the down-and-out in the (gated) community.

Such welfare-for-the-wealthy is the subtext of Sunday’s NYT story about the Children’s Health Insurance Program. CHIP was once intended to help children in families that are low-income but that do not qualify for Medicaid; now Congress is pushing for the state-operated/federally supported program to use its money to cover families up to four times the poverty level (e.g., a family of four earning $82,600 a year) — that is, nearly all families in the second-highest income quintile, aka the upper middle class.

The NYT article includes a provocative figure about the effects of CHIP. When the program was first implemented, the percentage of families with income between the poverty level and 200% of the poverty level (i.e., the families whom the program was intended to help) with uninsured children began to decline, falling from 20% in 1998 to about 12% by 2002. However, the percentage of those lower-income families with privately insured children also began to fall over that time, from about 55% to about 45%. Since 2002, the percentage of uninsured children in that income range has roughly plateaued while the percentage of children with private insurance has continued to fall, to about 35 percent by 2006. This suggests (though, by itself, does not prove) that, by 2002, CHIP had gone about as far as it could go in reducing the percentage of uninsured children in poor families; since then, CHIP has simply displaced private insurance — a dubious policy goal.

Given that, it’s no wonder politicians want to mission-creep CHIP into wealthier income brackets. But one must wonder what the next welfare-for-the-wealthy program will be. Perhaps a chicken in every pot and a Lexus in every garage?

Irish Commissioner Fights EU Tax Harmonization

The former finance minister of Ireland, Charlie McCreevy, is now an EU commissioner. To his credit, he does not appear to have sipped the Kool-Aid in Brussels.

While most EU commissioners push for centralization and tax harmonization, McCreevy is making waves by denouncing the tax harmonization schemes of a fellow commissioner. The Sunday Business Post reports:

Ireland’s European Commissioner, Charlie McCreevy, has launched a strong attack on the European Commission’s efforts to introduce a common business tax base across Europe. McCreevy has warned of the danger of a ‘‘bully-boys’ charter’’ which would favour large states over smaller members like Ireland.

…McCreevy said the tax harmonisation issue was being ‘‘aggressively pushed forward by some in Europe’’. …Referring repeatedly to ‘‘tax harmonisation forces’’, McCreevy warned that, were they successful, it would threaten inward investment to the EU, undermine competitiveness and discriminate against smaller EU states.

Despite outright opposition from a number of member states, including Ireland, the commission has continued to lay the groundwork for the adoption of a common tax base, which is feared by many to be a prelude to the harmonisation of tax rates across Europe. Such a move would inevitably lead to considerably higher tax rates in Ireland, which has among the lowest corporate and personal tax rates in Europe. Brussels sources say there is increasing resentment about the success of Ireland’s low-tax strategy — which is seen by many as ‘‘unfair tax competition’’.

Government Should Not Interfere with Company Pricing Decisions

It is currently illegal for a company to insist that a retailer sell a product at a certain price. Politicians claim that this policy, known as resale price maintenance, results in higher prices. This surely is true, but the key question is why a firm would want to insist on higher prices, especially since the retailer reaps the benefit?

The answer, as Steve Chapman explains in his column, is that some products are more likely to do well if the retalier has an incentive to give potential consumers more time, advice, and service. But this won’t happen if consumers can benefit from this attentiveness at one store and then buy the product at another store:

For a manufacturer to make an agreement with retailers to sell only at a specified minimum price is illegal — even when it promotes competition and offers benefits to consumers. …[E]stablished federal law … treats resale price maintenance agreements as invariably malignant. …The assumption is that if you let manufacturers control retail prices, they’ll hose consumers for their own profit.

But if they wanted to hose consumers, they could just raise the wholesale price they charge to retailers. That way, they would get the full proceeds of the rip-off, instead of sharing them with stores. So it’s reasonable to assume there is some motive besides price-gouging at work.

…Why would a company making purses or televisions or running shoes want to keep prices at a certain minimum? Maybe to induce stores to offer exceptional service or technical assistance. A store can afford to do that only if it can charge a commensurate price. But a service-oriented store can’t charge a commensurate price if a consumer can come in, get lots of help and then go across the street to Discounts Galore and buy the item at 30 percent off. By setting a floor, the manufacturer can prevent “free-riding” by bargain outlets.

In our hypercompetitive retail environment, if the strategy doesn’t serve customers, manufacturers who use it won’t survive. Consumers who can’t get one brand at a discount price will defect to other brands.