Topic: Tax and Budget Policy

European Bureaucrats Want Massive Expansion of Savings Tax Cartel

Appeasement generally is not a good strategy since it encourages an aggressor to make additional demands. This certainly is the case in Brussels. The European Commission is gearing up for a campaign to expand the size and scope of the so-called savings tax directive. This cartel seeks to prop up bad tax policy by making it easier for high tax nations to double-tax income that is saved and invested. The bureaucrats in Brussels are upset that the current version of the directive, which was implemented in 2005, is riddled with loopholes, enabling most taxpayers to protect their assets from an additional layer of tax. So now they want to expand the directive, both in terms of the types of savings and investment that would be subject to double-taxation and the number of countries asked to be in the cartel. Hong Kong and Singapore already have told the Europeans that they have no desire to sabotage their economic interests by helping Europe’s welfare states track - and tax - flight capital. This resistance is good news, but the bureaucrats learned from the first round of this battle that it is possible to badger low-tax jurisdictions into making foolish decisions. The Financial Times reports on the European Commission’s radical agenda:

has launched a drive to close the gaping loopholes in a two-year-old European savings law… early evidence is that the directive is failing to bite. Switzerland, the world’s biggest offshore financial centre, only raised €100m in the first six months of the law’s operation. Meanwhile Mr Kovacs is worried that some savers have moved to Hong Kong and Singapore – not covered by the directive – and he is trying to arrange reciprocal deals with them. …Whether he can persuade EU member states and third countries to give their unanimous agreement is questionable: diplomats say big offshore financial centres like Switzerland, Luxembourg and Austria only agreed to the directive precisely because it contained so many loopholes. …A Commission working document…proposes…extending the directive’s reach to include companies and trusts. It also floats the idea of blocking the deliberate routing of interest payments through branches of banks located in jurisdictions not covered by the directive, whose reach also includes several Caribbean islands, the Channel Islands and the Isle of Man. The working paper suggests that the tougher definition of “beneficial ownership” used for anti-money laundering obligations should be adopted for the savings directive. This would bring discretionary trusts and companies into its scope. It suggests imposing a new obligation on EU banks to report – or withhold – interest payments made through non-EU branches. …It suggests reconsidering whether interest-generating securities “wrapped” within life insurance, pension or annuity contracts should be exempt from the directive.

Will Growing Government Turn America into a European Welfare State?

If left on auto-pilot, government spending is going to consume larger and larger shares of America’s economic output. But many people already know about this entitlement-driven crisis. What is less well known is that the tax burden is scheduled to rise significantly as well. In part, this is because the Bush tax cuts are scheduled to disappear at the end of 2010 and the AMT is projected to trap more taxpayers. But the biggest factor is that economic growth leads to “real bracket creep,” meaning more people will face higher tax rates because of rising income levels. Kevin Hassett of the American Enterprise Institute warns that America is at risk of becoming like France if steps are not taken to reduce the tax burden and dramatically curtail the growth of spending:

The U.S. has consistently outgrown its European allies for many years. There is little dispute among economists that the U.S.’s big advantage is its relatively small government. Federal government outlays take up about 20 percent of U.S. gross domestic product; in France, it’s almost 55 percent. …The latest budgetary maneuverings in the U.S. have virtually guaranteed that a good bit of that advantage will disappear, at least if Democrats remain in power. The current laws, as written, have put the U.S. on the road to France. The primary culprit is our programs for retirees. According to the latest long-run outlook of the Congressional Budget Office, government spending may take up fully 50 percent of GDP by 2050. Yet revenue will increase tremendously over the same time period. Revenue relative to GDP, currently a smidgen more than 18 percent, will climb to 23.7 percent by 2050 and extrapolate out to a whopping 27.5 percent by 2075. A spending binge is coming, and a good chunk of the revenue needed to pay for it is coming as well. The bad news for fans of small government is this: Even if spending were reined in enough to keep it equal to revenue, the size of the government will increase by about 50 percent in the coming decades.

Is Benign Neglect the Best Immigration Policy?

Writing in the Wall Street Journal, a professor from the University of California, San Diego, argues that an expanded guest worker program might be less desirable than the status quo. Given the likelihood that politicians and bureaucrats will sabotage even a good idea with needless regulation and red tape, this is a compelling argument:

…from a purely economic perspective, illegal immigration is arguably preferable to legal immigration. …the illegal route is for the moment vastly more efficient than the cumbersome legal system. Illegal immigration responds to economic signals in ways that legal immigration does not. Illegal migrants tend to arrive in larger numbers when the U.S. economy is booming and move to regions where job growth is strong. Legal immigration, in contrast, is subject to bureaucratic delays, which tend to disassociate legal inflows from U.S. labor-market conditions. The lengthy visa application process requires employers to plan their hiring far in advance. Once here, guest workers cannot easily move between jobs, limiting their benefit to the U.S. economy.

French Presidential Candidate Calls for 25 Percent Corporate Tax Rate

It is always easy to make fun of the French for their hopeless infatuation with redistribution, intervention, and other statist policies. So it is rather embarrassing that France (33 percent) currently has a significantly lower corporate tax rate than the United States (about 40 percent, if state taxes are included). Imagine, then, how humiliating it will be if Nicolas Sarkozy wins the French presidency and follows through on his proposal to lower France’s corporate rate to 25 percent. To be sure, the impetus for a lower corporate rate is tax competition rather than a new-found appreciation for market forces. And even Sarkozy’s call for a lower corporate tax rate does not mean he has embraced the foreign concept of “laissez-faire.” As Tax-news.com reports, companies would have to jump through numerous hoops to benefit from the lower tax rate:

In an interview with French business daily La Tribune, Xavier Bertrand, a spokesman for the centre-right presidential candidate, said that Sarkozy wants to lower the rate of France’s corporate tax to 25%, bringing the tax down to about the average rate in the European Union. However, unlike France’s European partners, Sarkozy is keen to link a cut in corporate tax to a series of governance criteria, and companies would have to demonstrate that their employment, wage and investment strategies were “synchronised”. …Sarkozy fears that with key European competitors having recently announced corporate tax cuts, including Germany, Spain and the UK, France risks becoming increasingly unattractive as a place to do business and cannot afford to do nothing. Under plans agreed by Germany’s coalition government, the effective corporate tax burden there will fall to below 30% from almost 40% in January 2008, while the UK’s Chancellor of the Exchequer Gordon Brown announced a 2% cut in corporate tax in his recent budget speech. The old EU15 also continue to face growing tax competition from the new EU entrants in Central and Eastern Europe, such as the Czech Republic, where the government has announced proposals for a 15% flat tax on personal income and a 5% cut in corporate tax to 19%.

IBD Argues Against Back-Door Capital Gains Tax Hike

With the support of some Republicans, revenue-hungry politicians are contemplating a tax hike on the “private equity” industry. These firms help ensure the efficient allocation of capital. And as Investor’s Business Daily explains, part of their reward for successful investing is a share of the capital gain. In an ideal tax system, there is no capital gains tax. Investments, after all, are made with after-tax dollars. It certainly would be a mistake, therefore, to move in the other direction by more than doubling the rate:

With the Sarbanes-Oxley regulatory regime making life miserable for many public companies, a number of troubled firms have innovatively turned to private equity to better their fortunes — or even save themselves. …So why do prominent members of both parties in Congress, and even the Bush administration’s Justice Department, seem poised to declare war on private equity? …It’s not surprising that Democrat Barney Frank, chairman of the House Financial Services Committee, plans hearings on private equity. More alarming, Charles Grassley, ranking Republican on the Senate Finance Committee, is considering joining that panel’s Democratic chairman, Max Baucus of Montana, in pounding the PE industry with a massive tax increase. Private equity firms usually take a 20% profit share, or “carry,” on their complex deals. Under current law, the carry is subject to the 15% long-term capital gains tax. Grassley wants it taxed at the 35% rate for ordinary income. The New York Times has hailed this “Grassley Tax” on jobs and capital as the first step toward a general capital gains tax hike — a surefire means of pulling the rug out from under the vibrant economy. …Congress will get just $5 billion to $7 billion in annual revenues from the Grassley Tax — hardly worth its ruinous economic costs. …Does the senior senator from Iowa, who likes to tout himself as a tax cutter, really want his epitaph to end up being: “Sen. Chuck Grassley, R-France”?

Hollywood For the Stylish

I loved this. It seems that there is a push (led by a fashion lawyer and a fashion show consultant, no less) for Washington, D.C. to get its own version of Chicago’s Magnificent Mile. According to today’s Yeas and Nays column in the Examiner (second item), a few D.C. council members are pushing to create a “Commission on Fashion Arts and Events.” It will “recognize the achievements of D.C.’s burgeoning fashion community” (really) and dedicate a section of the “city’s landscape” for fashion retail.

Bad Tax System and Predictable Bureaucratic Sloth Put Americans at Greater Risk of Adverse Consequences in Cases of Identity Theft

A story in Tax-news.com reports on sloppy security at the IRS. The Treasury Inspector General for Tax Administration found numerous instances of confidential taxpayer information being improperly safeguarded. The article highlights the risks for taxpayers, mostly because of identity theft, but the untold story is that much of the risk is a function of the current tax system. Taxpayers today are forced to divulge information about their financial assets. Why? Because the internal revenue code contains pervasive double-taxation of income that is saved and invested. So if a thief steals an IRS laptop, he may be able to determine all of a taxpayer’s assets. Under a flat tax system, by contrast, there is no double-taxation. Income is taxed only one time, when first earned, and there is no additional tax if people save and invest their after-tax income. The only personal information the IRS would need to enforce a flat tax is the size of the taxpayer’s household and the level of wage and pension income. Under a national sales tax (assuming politicians could be trusted to completely eliminate the income tax), the IRS would have no personal taxpayer information:

…a new government report…has revealed just how vulnerable taxpayer data contained on employee laptops is to theft, fraud and other criminal abuses. The report by the Treasury Inspector General for Tax Administration (TIGTA) found that hundreds of IRS laptop computers and other computer devices had been lost or stolen, employees were not properly encrypting data on the computer devices, and password controls over laptop computers were not adequate. TIGTA concluded that as a result, “it is likely that sensitive data for a significant number of taxpayers have been unnecessarily exposed to potential identity theft and/or other fraudulent schemes.” The report prompted harsh criticism from Grassley, the senior Republican on the Finance Committee, who commented that: “Thieves are very good at mining sensitive data for their own end. One stolen IRS laptop could put thousands of taxpayers in jeopardy. It’s hard to see why this is still a problem when the IRS knew about it more than three years ago.” …The TIGTA report shows that theft of IRS computer equipment potentially containing sensitive information on thousands of taxpayers is running at alarmingly high levels. Between January 2, 2003, and June 13, 2006, IRS employees reported the loss or theft of at least 490 computers. A large number of IRS laptops were stolen from employees’ vehicles and residences, but 111 incidents occurred within IRS facilities, where employees were likely not storing their laptop computers in lockable cabinets while they were away from the office. …TIGTA also evaluated the security of backup data stored at four offsite facilities and found that data was not encrypted and adequately protected at the four sites. For example, at one site, non-IRS employees had full access to the storage area and the IRS backup media. Envelopes and boxes with backup media were open and not resealed. At another site, one employee who retired in March 2006 had full access rights to the non-IRS offsite facility when TIGTA inspectors visited in July 2006.