Topic: Tax and Budget Policy

Tax Havens Protect Against Greedy Government

The New York Times has a story reviewing developments in the private banking industry. The article notes a couple of important points. First, high-tax nations - and the international bureaucracies that represent those nations - resent Swtizerland for serving as a refuge:

For generations, Europe’s wealthy journeyed through mountains and valleys to quietly stash their money with Switzerland’s bankers, famed for taking their secrets to the grave. …many of the country’s detractors complain that Switzerland remains the world’s prime tax haven. The European Union and the Organization for Economic Cooperation and Development have pressured Switzerland to loosen its bank secrecy.

Second, the article notes that high-tax countries can get at least some money to return home if they remove and/or reduce the tax penalites:

Several countries, including Italy and Belgium, have lured back untaxed assets held abroad by decreeing an amnesty for tax evasion. But that is not the biggest challenge.

Third, tax competition is creating other havens for people seeking to avoid not only punitive taxes, but also other forms of oppression:

As Swiss bankers penetrate markets abroad they are facing like-minded competitors from elsewhere in the world. Dubai and Singapore have cultivated sophisticated private banking hubs, offering discreet financial services and a tax haven aimed at luring away wealthy clients. And just as the Swiss have moved overseas, foreign banks like Citibank have flocked to Switzerland. Geneva, once a sleepy lakeshore town, now has branches of 100 foreign banks.

Lastly, the article notes that Switzerland has a completely different approach from America. Unlike the US - which has a so-called Bank Secrecy Act that strips away financial privacy, Swtizerland still respects the fundamental right to privacy. Citizens are treated like adults - a relationship that is facilitated by a better tax regime:

Unlike regulations in the United States, Swiss law forbids bankers from divulging information about clients or their assets, under threat of penalty. Tax evasion is not considered a crime.

In Praise of Administrative Costs

Advocates of socialized medicine, such as Physicians for a National Health Program, love to argue that America’s health care sector is less efficient than socialized systems because private insurers appear to have higher administrative costs. In yesterday’s New York Times, Tyler Cowen reveals the flaw in that logic:

The monitoring, marketing and overhead costs of private insurance are what allow more expensive medical treatments through the door. It is precisely because competing insurance companies spend money evaluating the appropriateness of claims that they are willing to pay for so many heart bypasses, extra tests, private hospital rooms and CT scans.

If European health care systems appear to have lower administrative costs, it is because, rather than scrutinizing claims, they limit the overall amount they will spend on medical services. Of course, that just means they shift costs to patients who either must pay for medical services themselves, or deal with the costs of waiting.

If the U.S. Medicare program appears to have lower administrative costs, it is because, rather than scrutinizing claims, Medicare just shovels money out the door. That merely shifts those costs onto taxpayers by driving up Medicare spending and taxes. 

In Medicare Meets Mephistopheles, Cato adjunct David Hyman delights in the irony that medicine-socializers praise one of Medicare’s greatest failings (inadequate oversight of claims payment) as if it were a virtue.

The Real College Sports Madness

Tonight the mighty Hoyas of Georgetown University will square-off against the Vanderbilt Commodores in a Sweet 16 hoops tilt.

In light of Georgetown’s dominance this season (28-6 overall, winners of 17 of their last 18, champions of the Big East Conference, and easy victors over the Commodores back in November), it’s probably a bit cruel to make Vandy face the Hoyas again. At least in the big picture, though, this is a fair match-up: both teams are from relatively small, private schools with pretty high academic standards, and both rely on voluntary fan and booster support to compete.

Unfortunately, a bit of breaking college basketball news on ESPN.com yesterday demonstrates that the latter is not always the case. The story was about Steve Alford leaving his head coaching job at the University of Iowa to take the reins at the University of New Mexico, a move many college hoops fans consider a bit of a step down. Iowa, after all, plays in the powerful Big Ten Conference, while New Mexico toils in the lesser Mountain West. So what was Alford’s inducement to trade corn for sand?

One possibility is that Alford was on his way out of Iowa anyway. He had only three NCAA Tournament appearances in eight seasons there, and not every Iowa fan exactly loved him. But, important as this might have been in Alford’s decision, it wasn’t what ESPN said ultimately attracted him to Albuquerque (it also wasn’t the city’s famed petroglyphs):

Sources said Alford was thrilled with the commitment from recently hired New Mexico athletic director Paul Krebs and impressed by the university’s decision to upgrade the famed Pit, which, according to Krebs, will receive $12 million from state government for renovation. There also is hope that the figure could rise to $20 million. [Italics added]

Now, as a matter of principle, I’m against forcing taxpayers to fund entertainment venues, arenas, or any of the other “bread and circuses” projects on which politicians love to lavish public dollars. But what really makes me angry about public schools like UNM building new basketball arenas with taxpayer funds is the unfair advantage it gives those schools over little private schools like Georgetown and Vanderbilt, who need people to give them money voluntarily. Facilities have been an especially big problem at GU, where the on-campus gym seats at-most 2,500 people, forcing the team to play almost all of its home games at the downtown Verizon Center and lose lots of revenue in rent.

Of course, UNM is not the only public university where the sports teams benefit from forced taxpayer largesse. Last May, for instance, the State of Minnesota decided to pay $10.25 million per-year for 25 years to help finance a new U of M football stadium. Similarly, the University of Pittsburgh’s Petersen Events Center, where the school’s basketball teams play, was financed with $10 million from the couple after whom it was named and $53 million from state taxpayers who, as always, have remained nameless. 

Now, colleges and universities in general — both public and private — benefit from all kinds of tax breaks, pork projects, and government subsidies, so don’t feel too sorry for Georgetown and Vanderbilt. When it comes to big-time sports, though, recognize what private schools are up against, and perhaps root for them a little harder. And, come to think of it, maybe do feel sorry for Vanderbilt. Georgetown is going to crush them tonight.

(In the interest of full disclosure, Neal McCluskey in a Georgetown graduate and a huge Hoya fan.)

Bob Herbert, What Are You Talking About?

Give New York Times columnist Bob Herbert credit — not many writers can pack three ridiculous claims into a single lede. Somehow he manages to do so in his latest column, which begins:

One of the weirder things at work these days is the fact that we’re making it more difficult for American youngsters to afford college at a time when a college education is a virtual prerequisite for establishing and maintaining a middle-class standard of living.

Did you catch all three? They are:

  1. “American youngsters” are finding “it more difficult “to afford college.”
  2. “[W]e’re” the ones who are “making it more difficult for American youngsters to afford college.”
  3. “[A] college degree is a virtual prerequisite for establishing and maintaining a middle-class standard of living.”

Let’s tackle these in order: 

If American youngsters are finding it more difficult to go to college, that’s not showing up in college enrollment data. The enrollment rate of recent high school graduates for 2004, the most recent year for which data are available, was the second-highest in history at 66.7 percent. The years 2000, 2002 and 2003 are also among the seven highest in history, with enrollments of 63.3, 65.2 and 63.9 percent, respectively. And, looking forward, projected enrollment numbers out to the 2015–2016 school year suggest enrollment rates will continue to rise.

What of Herbert’s claim that “we’re” the ones who are making it more difficult for youngsters to go to college? If by this he means that American taxpayers aren’t doing enough to help college students pay their tuition bills then, again, the data aren’t on his side. Funding for federal Pell grants has increased 80 percent in real terms between 1994 and 2006, while the money available through federally subsidized student loans (Perkins Loans, Direct Student Loans, and Family Education Loans) has increased 87 percent in real terms over that time. Data from the 2003–2004 school year (the most recent data available) show that more than half of undergraduates that year received grant money (in the average amount of $4,000) while 35.1 percent of undergraduates received subsidized loans (in the average amount of $5,800).

What of Herbert’s claim that a college degree is a “virtual prerequisite” for a middle-class standard of living? To be sure, higher education translates into increased earnings over a person’s lifetime. However, people who lack a college degree are not doomed to a life of lower-class living. Earnings data for 2004 show that a high school diploma and some work experience can add up to a middle-class lifestyle. The mean earnings per person in 2004 were $37,897; the mean earnings for a person with only a high school diploma who was between 35 and 44 years of age were $32,060. If that person had some college education but no degree, mean earnings were $38,076.

Herbert’s column goes on to lament the debt burden incurred by recent college graduates, including grad- and professional school graduates. Remarkably, he gives no thought to the value of the degrees that were purchased with that debt. Fortunately, more-thoughtful people have done present-value calculations on various college degrees (see, e.g., these calculations by Arizona State’s Carey School of Business, or these by Don Burleson of Burleson Consulting, or these by MSN Money’s Liz Pulliam Weston). The general consensus is that a bachelor’s degree, after subtracting tuition and other college costs as well as lost earnings from the years spent in school, has a present value of about a quarter-million dollars. Advanced degrees provide mixed returns (my MA in philosophy is of great personal value, but it doesn’t deliver much bling in the marketplace), but degrees in law and medicine deliver a present-value payback of upwards of $1 million dollars or more. And the still-ridiculously-cheap associates degree is the best deal in higher education, delivering well over $100,000 in present value for a mere few thousand dollars in cost.

Now, ask yourself: Would you be willing to spend $5,000 in exchange for something worth $100,000? Or $50,000 in exchange for $300,000? Or $100,000 in exchange for $1 million? Apparently, Herbert wouldn’t — unless taxpayers subsidize him (more) to do so.

Herbert’s column strikes me as yet another example of the all-too-common “progressive” lament that not enough money is being redistributed to the upper middle class. He would tax people (including many with no college degrees) to help out the soon-to-be-well-off.

Curiously, Herbert’s column says absolutely nothing about the one obvious issue in higher education financing: Why has a four-year college education gotten so expensive? My Cato colleague Neal McCluskey has discussed that, and you can read some of his thoughts here.

Corporate Tax Rate Dropping to 28 Percent in England

Bowing to the pressure of tax competition, Gordon Brown announced that the corporate tax rate will be reduced by two percentage points. This is a very small cut, and it will be at least partially offset by other tax hikes (especially on manufacturers), so the United Kingdom is not exactly poised to become the next Estonia, Ireland, or Slovakia. Nonetheless, it is always amusing to see politicians who want higher tax rates being compelled to lower tax rates instead. Tax-news.com reports:

Chancellor of the Exchequer Gordon Brown surprised many yesterday by announcing a 2% reduction in the rate of corporation tax and a 2% cut in the basic rate of income tax, representing the first major cut in these taxes in many years. Brown has been on the receiving end of growing criticism of his handling of the public finances and his propensity to add complexity to an already unwieldy tax system, but many of the more cynical observers believe that the Chancellor’s generosity has more to do with securing his place as the next Prime Minster than it does with giving the UK’s tax competitiveness a much-needed fillip. Taking centre-stage in what is likely to be Brown’s last budget speech was the announcement that corporation tax would be cut by 2% to 28%. According to the Chancellor, this would bring the UK’s corporate tax rate below both the OECD and EU15 average. However, tax experts observe that while the Chancellor has given with one hand, he will claw back much of this lost revenue with the other through changes in capital allowances. …Paul Davies, UK Head of Tax at Ernst & Young noted that while the Chancellor appears to have finally woken up to the pleas of the business community for a tax cut, the overall result of the budget is a “mixed bag of changes that may affect different taxpayers in different ways.” “The cut in the main rate of Corporation Tax is welcome, showing that the UK is once again on a competitive path. This will reassure those companies thinking of moving offshore. However, the gain from the rate reduction will be more than clawed back by the change in plant and machinery capital allowances. As a result it is clear that the main beneficiaries of the rate cut will be in the service sector rather than the manufacturing sector,” he stated.

Regulatory Excess in the States

George Will’s Townhall.com column describes some of the more inane efforts to impose cartels at the state level:

In New Mexico, anyone can work as an interior designer. But it is a crime, punishable by a fine of up to $1,000 and up to a year in prison, to list yourself on the Internet or in the Yellow Pages as, or to otherwise call yourself, an “interior designer” without being certified as such. Those who favor this censoring of truthful commercial speech are a private group that controls, using an exam administered by a private national organization, access to that title. This is done in the name of “professionalization,” but it really amounts to cartelization. Persons in the business limit access by others – competitors – to full participation in the business. …in Las Vegas, where almost nothing is illegal, it is illegal – unless you are licensed, or employed by someone licensed – to move, in the role of an interior designer, any piece of furniture, such as an armoire, more than 69 inches tall. A Nevada bureaucrat says that “placement of furniture” is an aspect of “space planning” and therefore is regulated – restricted to a “registered interior designer.” Placing furniture without a license? Heaven forfend.

Will notes - quite accurately - that businesses are in favor of regulation when it means they can raise prices on consumers and/or disadvantage competitors. This is why there is a big difference between being pro-market and pro-business:

It is not true that businesses, as a matter of principle, want to fend off government regulation. Businesses have a metabolic urge to make money, which is as it should be. But when a compliant government gives them the opportunity to use government regulations to enhance their moneymaking, businesses’ metabolic urge will overpower any principles about the virtues of free (from government intervention) enterprise.

Sawing Through the Limb You’re Standing On

I was just asked by a business reporter about the state of economics education in the United States, and thought I’d share my response:

There are no national or international benchmarks for student achievement in economics, so it’s hard to precisely gauge Americans’ grasp of the subject. The available evidence is not comforting, however. An academic survey study conducted in 1990 compared how much Americans and Russians understood about the way markets work. It found no significant difference. Americans understood free markets no better than a nation of people with virtually no personal experience of them. That’s sobering. And since the heaviest academic emphasis of the last fifteen years has been on elementary mathematics and reading, there is little reason to believe that we have improved our grasp of economics in the interim.

This should come as no surprise, for a couple of reasons. First, and most obviously, the academic performance of U.S. twelfth graders is at or near the bottom in mathematics and science according to the Third International Mathematics and Science Study, when compared to the performance of students in other industrialized nations. We’re doing poorly in other subjects, why should economics be any different?

Second, it would be institutionally suicidal for a monopoly school system to do a good job of teaching market economics. The very fact that we continue to have a monopoly school system is retroactive proof that market economics has not been well taught. Monopolies, after all, tend to be frowned on by the economically savvy.

Note that this observation does not assume that government school officials are deliberately neglecting instruction in market economics. It simply posits that if they had been doing a good job of it, the system would already have been supplanted by one organized along free market lines.