Topic: Tax and Budget Policy

Russia Examining Corporate Tax Rate Reduction

Lower tax rates are not a solution to all Russia’s problems, but tax policy is moving in the right direction. Tax-news.com reports that the government wants to reduce the corporate tax rate to 20 percent. Even more impressive, policy makers seemingly understand that lower corporate tax rates will have a larger supply-side effect than a reduction in the value-added tax, demonstrating a better grasp of economics than nine-tenths of the US Congress. The story also notes that Russia has taken other positive steps, though it does not mention the 13 percent flat tax implemented in 2001: 

Russia may cut its corporate profit tax rate to 20% from 24% as part of a three-year tax policy plan, Deputy Finance Minister Sergei Shatalov stated last week. The government had previously been considering a further reduction in value added tax, currently 18%, to as low as 13%, but Shatalov said that a cut in corporate profit tax would be more likely to stimulate economic growth and boost levels of investment. …Putin has stated many times that while the government remains committed both to simplifying tax legislation and reducing the tax burden, tax reform must be balanced against needs of business, which requires certainty in the tax code. Since 2002, the Putin administration has reduced or abolished a number of taxes, including turnover tax, payroll taxes, sales tax, and value added tax. According to Putin, in 2005 Russia’s tax burden eased to 27.4% of GDP, from 28.7% in 2004.

Cost Overruns, Again

The Washington Post reported yesterday that the cost of new combat ships from Lockheed Martin and General Dynamics will likely be at least $350 million each, instead of the originally budgeted $220 million.

That 59 percent cost increase is routine for big federal procurements. The table below summarizes official government estimates of costs for various defense, energy, and transportation projects.

No doubt, what goes on with these projects is a “nudge nudge, wink wink” between federal officials and major contractors. The game involves key players on both sides low-balling initial costs in order to get project approval, and then having an informal agreement to let costs float up over time.

In this case, one cause of the combat ship cost increase, noted the Post, was that ”the Navy said its original cost estimate did not factor in some management costs.” How convenient!

A Sampling of Federal Cost Overruns
(Defense items in constant dollars; other figures in current dollars)
Project Estimated Cost and Date of Estimate
Original Latest or Actual
Transportation    
Boston “Big Dig” $2.6b (1985) $14.6b (2005)
Virginia Springfield interchange $241m (1994) $676m (2003)
Kennedy Center parking lot $28m (1998) $88m (2003)
Air traffic control modernization $8.9b (1998-2004) $14.6b (2005)
Denver International Airport $1.7b (1989) $4.8b (1995)
Seattle light rail system $1.7b (1996) $2.6b (2000)
     
Energy  
Yucca mountain radioactive waste $6.3b (1992) $8.4b (2001)
Hanford nuclear fuels site $715m (1995) $1.6b (2001)
Idaho Falls nuclear fuels site $124m (1998) $273m (2001)
National ignition laser facility $2.1b (1995) $3.3b (2001)
Weldon Springs remedial action $358m (1989) $905m (2001)
     
Defense (per unit in 2003 dollars)  
Global Hawk surveillance plane $86m (2001) $123m (2004)
F/A-22 Raptor fighter $117m (1992) $254m (2002)
V-22 Osprey aircraft $36m (1987) $93m (2001)
RAH-66 Comanche helicopter $33m (2000) $53m (2002)
CH-47F cargo helicopter $9m (1998) $18m (2002)
SBIRS satellite system $825m (1998) $1.6b (2002)
Patriot advanced missile $5m (1995) $10m (2002)
EX-171 guided munition $45,000 (1997) $150,000 (2002)
     
Other  
Capitol Hill visitor center $374m (2002) $559m (2004)
Kennedy Center opera house $18.3m (1995) $22.2m (2003)
Kennedy Center concert hall $15.1m (1995) $21.3m (1997)
Washington D.C. baseball stadium $435m (2004) $611m (2007)
International space station $17b (1995) $30b (2002)
FBI Trilogy computer system $477m (2000) $600m (2004)
Pentagon secret spy satellite $5b (n/a) $9.5b (2004)
Pentagon laser anti-missile system $1b (1996) $2b (2004)
Sources: Compilation by Chris Edwards based on GAO reports and Washington Post stories. Figures in $millions (m) or $billions (b).

Even Private Schools Sometimes Teach Awful Lessons

The anti-capitalist mentality of government schools is disturbing, but the virus of envy and resentment sometimes infects private schools. A TCSdaily.com column discusses a private school in Seattle that is using Legos to indoctrinate children in favor of collectivism:

Some Seattle school children are being told to be skeptical of private property rights. This lesson is being taught by banning Legos. A ban was initiated at the Hilltop Children’s Center in Seattle. According to an article in the winter 2006-07 issue of “Rethinking Schools” magazine, the teachers at the private school wanted their students to learn that private property ownership is evil.

…[T]hey first explored with the children the issue of ownership. Not all of the students shared the teachers’ anathema to private property ownership. “If I buy it, I own it,” one child is quoted saying. The teachers then explored with the students concepts of fairness, equity, power, and other issues over a period of several months. At the end of that time, Legos returned to the classroom after the children agreed to several guiding principles framed by the teachers, including that “All structures are public structures” and “All structures will be standard sizes.”

Pork and Principle

The Hill reports that Blue Dog Democrats are very concerned about the proper balance of powers between the president and Congress. But for a big hike in farm subsidies, they’ll forget about that little constitutional matter. 

House Democratic leaders will add nearly $4 billion for farmers to a bill funding military operations in Iraq and Afghanistan to attract conservative Democrats concerned that the measure would wrongly constrict President Bush’s power as commander in chief.

The Democrats hope that moderate Republicans are just as malleable:

Democrats may also add money for children’s health insurance in the hope of winning the votes of Republicans such as Illinois Reps. Mark Kirk (R) and Judy Biggert (R), whose home state faces a $240 million deficit in its State Children’s Health Insurance Program (SCHIP).

To be fair, there’s no proof in the story that Kirk and Biggert are considering such a deal, but Republican leaders are reported to fear it.

In the civics books, they tell us that members of Congress deliberate about war, separation of powers, balanced budgets, and so on, and then make collective decisions. If you read a newspaper, though, you soon learn about logrolling and other budget games. Still, it’s one thing to trade your vote for farm pork for the other guy’s vote for urban pork; the taxpayers lose twice, but at least it’s only money. Trading your vote on a matter of life and death, which is also a fundamental constitutional issue, for a few billion in home-state pork seems entirely unbecoming to a member of the legislature of the world’s most successful republic.

Wealth, Income, and the Folly of Redistribution

A column by Peter Cuthbertson at TCS Daily comments on research showing that most wealthy people have very frugal habits. Indeed, their frugality is a big reason why they are wealthy:

Dr. Stanley revealed that the typical millionaire spent less than $400 on their most expensive suit, and only about 1% spent more than $2,800. Only one in ten millionaires had ever spent more than $300 on a pair of shoes. Most millionaires pay a few hundred dollars or less for their watch, and $30,000 or less for their main motor vehicle. They have been married to the same person most of their adult lives. …This is no coincidence. It is not that most millionaires are in the habit of being frugal despite their wealth: it is that they are so wealthy because they are in the habit of living so frugally. The plentiful residual income goes into savings and investments that are left to grow for decades. It is not inheritance that explains American millionaires: most inherited nothing and fewer than one fifth inherited even 10% of their wealth.

The column also notes that there is a big difference between income and wealth, and explains how class-warfare policies are poorly designed:

This surprising picture of America’s wealthy presents class warriors with two problems. First, un-American as it might be to scapegoat and overtax the rich when they are perceived as Porsche-driving and Rolex-wearing, one can nonetheless imagine the envy that might inspire. But what is the future of class hatred in an America where, in fact, Porsche drivers and Rolex wearers have little net wealth, and the real rich are those who eat at the same restaurants and drive the same cars as most people, even when they can afford not to? …Second, devising economic policies that would target the wealthy would be still more difficult. Higher income taxes might reduce income inequality, but it would be a sideshow to the reality that inequalities of wealth are a result of some living below their means, not unequal incomes.

Unfortunately, the American left is unlikely to promote the behaviors that would lead to greater prosperity among those with lower incomes:

If liberals are determined to reduce economic inequality, they would have to take lessons from Dr. Stanley and encourage generally a culture of delayed gratification and a certain amount of self-denial – a self-reliant America of stockholders and coupon-clippers who marry and stay married. This is the profile of America’s wealthy, and a serious effort to reduce inequality would mean getting more Americans to adopt this lifestyle.

India Reveals Its Preference

My favorite concept in economics (it should tell you something about my dorkiness that I even have a favorite economics concept) is the theory of revealed preference. Basically, this theory (one of Samuelson’s) says that if you want to know the preferences of a rational economic actor, you just need to observe their behavior. It is basically the economists’ way of saying (and showing, using the ubiquitous diagrams) that actions speak louder than words.

India has treated us to a beautiful display of the theory by announcing yesterday that it will unilaterally reduce its tariffs on some goods and reduce its maximum tariff on non-agricultural goods to 10 percent (from a previous cap of 12.5 percent) in an effort to control inflation (more here).

This is the same India that is one of the main hold-outs in the Doha Round of multilateral trade talks. The same India that, in the poisoned atmosphere of the failed talks in Cancun, formed the G-20 in an attempt to assert developing countries “rights,” and to generally disrupt talks. Particularly in the agriculture negotiations, India has been frustratingly adamant that developed countries do more to open markets than developing countries and has been a strong proponent of mechanisms by which developing countries can shield a certain (20 percent, insists India) share of their “sensitive” agricultural products from tariff reductions.

Why, one is then tempted to ask, are India’s trade negotiators still clinging to the same tired mercantilist position in the Doha round, while the treasury goes ahead with (albeit limited) trade liberalization? Bureaucratic inconsistency, perhaps. Or maybe India enjoys, in the theater of the WTO, stickin’ it to the man. It’s a pity that the man they’re stickin’ it to is the man on the Indian street.

China and France May Copy America’s Punitive Tax Penalty on Non-Resident Citizens

America is the world’s only developed nation to impose tax on its citizens that live and work abroad – even though they already are subject to taxation by the foreign country where they reside. As the Wall Street Journal notes, China has decided to adopt this foolish policy:

The U.S. is the only developed nation to tax its citizens abroad. Now China has picked up on Mr. Grassley’s grand idea. From March 31, all mainland citizens working abroad will be taxed on their world-wide income. That might give some comfort to U.S. protectionists worried about China’s labor competitiveness, even though mainland employees aren’t so far a huge force abroad. But as America is now discovering, punitive taxation is an export that comes with a high price.

Not surprisingly, French socialists are intrigued by this self-destructive form of double-taxation. A column in The American comments on Segolene Royal’s interest in extending bad French tax laws to those who have escaped to friendlier jurisdictions:

…a report recently prepared for Royal’s camp floated a creative proposal—a “citizen contribution” (read: tax) for all French citizens residing abroad. The “contribution” would be designed to collect revenues from all French people residing abroad, irrespective of their reasons for leaving France: businessmen, families, retired workers, successful artists, etc. would all be affected. Former finance Minister Dominique Strauss-Kahn laid out the rationale: “It is no longer acceptable that French citizens be able to escape taxes by installing themselves outside of France. We propose to define a citizen contribution that will be paid in accordance with contributive capacities by each Frenchman residing abroad who does not pay taxes in France.” … If she implements her Socialist rhetoric, like Mitterrand in the early 1980s, financial forces beyond her control will quickly force her to change. For France’s sake, it is a situation she would do well to avoid.