Topic: Tax and Budget Policy

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.

Sweden Repeals Wealth Tax

Globalization has been an ally of taxpayers. Because it is increasingly easy for jobs and capital to cross borders, politicians are being forced to eliminate or reduce taxes that penalize productive behavior.

The latest example comes from Sweden, which is now eliminating its tax on wealth:

Maybe the next Bjorn Borg won’t feel compelled to move to Monaco now that Sweden plans to scrap a decades-old “wealth” tax that imposes levies on assets — not just on income. …The move, expected to be approved by parliament later this year, underscores the country’s efforts to keep successful Swedes and their capital at home by changing its fabled but costly welfare state.

“It’s not sustainable to keep taxes that radically diverge from other countries,” Finance Minister Anders Borg, who is not related to the tennis great, told The Associated Press on Thursday. “Not if you want the money to stay in the country.”

Sweden is not alone. The article notes that other nations have been forced to eliminate this punitive levy on capital:

Several European countries have dropped taxes on wealth in the last decade, including Denmark, the Netherlands and Finland.

Switzerland and Monaco seem to be the favored destinations of Sweden’s tax exiles. At least the new government recognizes the damage caused by punitive tax rates. The wealth tax is being abolished in an effort to lure talented entrepreneur and capital back to Sweden:

[T]he wealthiest Swedes have fled the country, including IKEA founder Ingvar Kamprad, No. 4 on Forbes magazine’s list of the world’s richest people. He lives in Switzerland. Five-time Wimbledon winner Bjorn Borg moved to tax-haven Monaco in the late 1970s. The principality is also home to many Swedish sports stars such as Alpine skier Anja Paerson, high-jumper Kajsa Bergqvist and triple jumper Christian Olsson.

The government says more than 500 billion kronor, the equivalent of almost C$83 billion of Swedish capital, is outside of the country’s borders. “This is money that, if it was brought home, could be invested to create jobs and welfare in Sweden,” the country’s coalition leaders said in a joint statement this week.

Stefan Persson, the main owner of fashion retailer H&M, threatened to leave the country in the 1990s because of the wealth tax. The Social Democratic government at the time changed the law, giving him an exemption.

…Borg, the finance minister…added it was necessary for Sweden to remain competitive in an increasingly globalized economy. “It’s a step on the way back toward making Sweden an entrepreneurial society,” he said.

Is Giuliani a Supply-Sider?

Writing in the Wall Street Journal, Steve Forbes endorses Rudy Giuliani and makes a reasonably compelling argument that he believes in smaller government:

Rudy Giuliani…cut taxes and the size of government…. Mr. Giuliani delivered, overcoming the initial resistance of the overwhelmingly Democratic City Council. He ultimately prevailed 23 times, including cuts in sales, personal income, commercial rent and hotel occupancy taxes.

…Mr. Giuliani always made fiscal discipline a priority: instructing city commissioners to cut agency budgets even when the deficits had turned to surpluses. Mr. Giuliani set out to cut the size of city government, insisting that New York should live within its means. New Yorkers saw their quality of life improve with more effective delivery of services while the bureaucratic ranks were being thinned by nearly 20,000 — a near 20% decrease in city headcount, excluding police officers and teachers.

But there are reasons to question Giuliani’s pedigree. In a post on the New York Sun’s political blog, Ryan Sager quotes Giuliani trashing the flat tax:

“It [the flat tax] would really be a disaster and it’s totally inconsistent with the movement of the Republican Congress toward giving more responsibility to state and local government,” Mr. Giuliani said on CNN’s “Capital Gang,” on March 9, 1996.

To be sure, even good policymakers sometimes say silly things because of competing political interests. Nonetheless, it is difficult to reconcile Giuliani’s recent supply-side rhetoric with his harsh 1996 statement. If he had merely expressed concern, that would be understandable, but claiming that a flat tax would be a “disaster” suggests a genuine hostility to the flagship policy goal of supply-side economics.

Pure Protectionism

Several years ago, I appeared on the radio show of the late and much-missed David Brudnoy to discuss deregulation of taxicabs. I advocated a free market and an end to licensing and medallions. We got a call from a spokesman for the taxicab industry, who was outraged. Public safety! he exclaimed. “Without licensing, you could have some crazy person driving a cab and have an accident and you could have a mudda an’ a dotta killed! Do you want to be responsible for that?!”

I remembered that call when I saw the letter in the Washington Post from Michael C. Alin, executive director of the American Society of Interior Designers. Responding to George Will’s column on the absurdity of licensing for interior decorators, Alin writes:

In one of the worst hotel fires in U.S. history, 85 lives were lost and more than 700 people were injured at the MGM Grand Hotel and Casino in Las Vegas in November 1980, partly because some of the materials in the interior finish and furnishing fueled a rapid spreading of the fire. If furniture is placed in such a manner that it impedes egress during an emergency, people will die. Should a nonqualified, non-educated person select the materials for the interior of a hospital, school or high-rise building? 

Will had blithely and insensitively mocked the idea of criminal penalties for impersonating an interior designer:

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, that is 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.

I hope that Will is suitably chastened now that he understands the real risks of letting just anyone pick out wallpaper and position furniture.

(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.