Topic: Tax and Budget Policy

(Ways and) Means to an End

The House Ways and Means Committee released their trade policy vision on Tuesday, and it should give cause for concern to free-traders who thought a compromise could be reached between the Democratic majority and the administration on how to advance the trade agenda. There are few details on how exactly trade agreements could be made acceptable to Democrats in the immediate future, and plenty of demands that could give potential trade partners cause for alarm.

The administration must give 90 days’ advance notice to Congress when seeking its approval for trade agreements, under the terms of the trade promotion authority delegated by Congress to the President. Because that authority expires on July 1, there are only two working days left to iron out differences on completed trade agreements (those with Peru, Colombia, and Panama, and possibly the still-under-frantic-negotiation agreement with South Korea). The Democrats’ one-pager was lamentably short on details about how to make these agreements acceptable to them.

In the longer-term, if the new majority’s trade strategy is indicative of its overall approach to trade policy (and we have every reason to believe that it is) then negotiated trade liberalization looks to be over for the next two years at least. Unless, of course, the secret 15-page proposal (mentioned in this NY Times piece) presented to the administration contains more of substance, and less of the deal-breaking demands, than what was released to the public.

The details we do have from the one-pager, however, do not paint a pretty picture. The Democrats’ plan proposes new emphasis on labour and environmental standards (including some standards to which, some critics point out, the United States is not a party), non-tariff barriers, calls for immediate action (italics in original) on currency manipulation in China and Japan, and more help for workers displaced by trade. Organized labor has welcomed it, of course, although–bizarrely–so have some Republican members of the committee, including the ranking Republican, Jim McCrery (R-LA). Steven Pearlstein in an article in yesterdays Washington Post, called some of the demands “political poison pills.”

Previous Cato research on some of these topics can be viewed here, and my colleague Dan Ikenson gave an interview on BBC on Tuesday night on the Dems’ proposal: view here.

Is the Czech Republic Joining the Flat Tax Club?

Although the government lacks a majority in Parliament, the Czech Republic’s Prime Minister has announced a 15 percent flat tax. According to Tax-news.com, the proposal will be unveiled next month:

Czech Prime Minister Mirek Topolanek has reportedly stated that his government’s plan to introduce a flat income tax is a near certainty. In comments made to the daily Hospodarske Noviny newspaper, Topolanek said that at the moment, a 15% flat tax rate is “certain”. … The reform package will be published by the government in April. … Initially, the coalition had planned to introduce a flat tax at a rate of 17% to 19%. Corporate tax in the Czech Republic was reduced to 24% last year, and personal income tax rates are levied at progressive rates to a maximum of 32%.

Given the government’s precarious hold on power, it is unclear whether the proposal will be enacted. A Czech news service notes that the economic community likes the flat tax, but there is some concern that it will not get enough votes:

Analysts are cautiously optimistic that the government’s upcoming flat tax and other tax reforms, set to be announced April 3, may strengthen public finances. However, while all the analysts spoken to by CBW agree a tax reform is much needed, and that the proposals published thus far would have a positive impact on the economy, they caution that the draft legislation is still a long way from the law books and is likely to change before it gets there. … David Marek, macroeconomic analyst, with brokerage Patria Finance said that the lower corporate tax rates are the most important part of the reform because they will give the Czech Republic one of the lower corporate tax rates in Europe and encourage foreign direct investment.

But if it did get enacted, it would create additional pressure on Western Europe’s welfare states. One can only imagine that French and German politicians are praying that the flat tax is not adopted.

Europe Takes Another Step Toward Tax Harmonization

Even though several nations are opposed, the European Commission plans to harmonize the definition of taxable income for corporations. It is true that the current system is a hassle for multinational companies, requiring 27 different tax returns for firms operating in all EU nations. But there are good ways and bad ways to address this problem. Allowing firms the option of choosing the “common” tax base would ensure that the bureaucrats in Brussels had less of an incentive to use the new system as a way of extorting more money from businesses. Another option would allow firms to use their home country’s definition of taxable income – an approach that would promote rather than retard tax competiiton since governments would have an incentive to attract companies by using a pro-growth definition of taxable income. Needless to say, the European Commission is not using either of these approaches. The EU Observer reports:

The European Commission is set to press ahead with introducing a single EU company tax base by 2010 in only a limited number of member states, circumventing national veto power in the sensitive tax area. … EU member states are deeply divided over possible harmonization, with 12 capitals in favour, five to seven against and the rest remaining undecided. Britain, Ireland and the Baltic states fear that the next step for Brussels would be interference in the levels of their corporate taxes, an area where EU states compete with each other as well.

Undermining America’s Social Capital with Redistribution

A new report from the Tax Foundation analyzes the degree of redistribution imposed by government. According to the study:

America’s lowest-earning one-fifth of households received roughly $8.21 in government spending for each dollar of taxes paid in 2004. Households with middle-incomes received $1.30 per tax dollar, and America’s highest-earning households received $0.41. Government spending targeted at the lowest-earning 60 percent of U.S. households is larger than what they paid in federal, state and local taxes. In 2004, between $1.03 trillion and $1.53 trillion was redistributed downward from the two highest income quintiles to the three lowest income quintiles through government taxes and spending policy.

This huge shift of resources punishes those who produce and rewards those who do not. This hurts economic performance by distorting incentives. Investor’s Business Daily identifies another problem that may be equally troublesome. Massive amounts of redistribution create an entitlement mentality. People being to think that government owes them a living. And as an editorial from IBD notes, public opinion data are trending in the wrong direction:

…the U.S. tax code is becoming more progressive, not less. No one minds helping the truly needy. But as with welfare in the pre-1996 reform era, reliance on government can become a habit — imposing huge costs on our national economy. Worse, a ‘what’s in it for me?’ attitude seems increasingly the norm. Once a nation of stoic, self-reliant individualists, America now seems full of people who think other taxpayers owe them something. They see the ‘system’ as a giant cow to be milked — and damn the cow. This is backed up by polling data. In a 1994 Pew poll, 57% agreed with the statement ‘Government should care for those who can’t care for themselves.’ Today, it’s 69%.

Moving (Government) Forward Faster

Washington, D.C., mayor Adrian Fenty released his proposed budget last week.  Titled “Moving Forward Faster,” it’s an example of the sort of thing you’d expect from a D.C. mayor who is quite fond of the nanny state.

To avoid having to read the entire document yourself, here’s the punch-line:  Government spending – that is, expenditures financed by locally-derived revenue, not federal transfers – grows by a proposed 8.8 percent.  By way of comparison, the city’s budget under Mayor Anthony “Baseball” Williams grew by an annual average of 7.5 percent.

But the large increase can be explained by a growing DC population, right?  Nope.  The most recent Census numbers show that the city’s population fell between July 2005 and July 2006.  Even if fewer people flee to Virginia or Maryland this year – or even if more people start actually moving in the opposite direction – it’s virtually impossible that the population growth figures will spike by nine percent.  Average annual population growth since 2003, for instance, hasn’t even come close to breaching the one-percent mark.

Fenty describes his budget proposal as “fiscally conservative” in his transmittal letter to the DC Council.  Yet maybe we shouldn’t ridicule him for that.  Since he’s operating in a city where a Republican president who spends taxpayer money almost as fast as Lyndon Johnson also calls himself “fiscally conservative,” perhaps the mayor is just mimicking the local custom.