Topic: Tax and Budget Policy

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.

Resistance Grows to State Tax Cartel

Idaho’s legislature has rejected the so-called streamlined sales tax proposal (or streamlined sales and use tax agreement). As reported by Euro2day.gr, lawmakers correctly viewed the scheme as an attack on sovereignty and a means of insulating governments from competitive pressure:

Anti-tax hawks in the state House have put a halt to Idaho’s plan to join a nationwide push aimed at eventually forcing Internet and catalog companies to collect sales taxes when they sell to out-of-state customers. Wednesday’s vote was 37-to-32 against the plan, with foes arguing it was unconstitutional and would lead to tax increases on Internet businesses that sell elsewhere. …So far, 18 states, including Wyoming, have signed agreements to simplify their tax systems in this push. Idaho won’t be the next one, after conservatives including Rep. Lenore Barrett, R-Challis, likened the Streamlined Sales Tax Project to “crawling into bed with other states.” “It’s a backdoor tax-increase waiting to happen,” Barrett said during House debate. “It would allow member states to collude and destroy tax competition.”

A similar battle is taking place in Hawaii, and Grover Norquist of Americans for Tax Reform has an article asking legislators in that state to resist this proposed cartel that will hurt consumers and enrich politicians:

The real motivation of SSUTA is to target businesses that are not physically located in the state and to export a state’s tax burden. SSUTA is a back-door tax increase. The implications of SSUTA go beyond the direct tax increase in coming years. Like any cartel, SSUTA would allow states to collude to destroy tax competition.  The incentive to keep tax rates moderate or foster competitiveness would be gone, and the pressures to raise taxes would lose their counter-balance.

Hubris Today

USA Today writes in an editorial:

That’s one reason the proposed XM-Sirius combination, announced this week, may be the rare merger that is good for consumers.

The rare merger that’s good for consumers? That’s rich coming from the flagship newspaper of Gannett, the rapacious media conglomerate that has swallowed up the major independent papers in Iowa, Mississippi, Kentucky, Tennessee, Arizona, Vermont, and other states.

Now, to be sure, USA Today did endorse the radio merger. And I don’t question the right of newspaper owners to sell their papers to Gannett. But USA Today ought to acknowledge that its parent company has been built on mergers (or takeovers) that in the eyes of critics reduced competition.

The rare merger that’s good for consumers? Mergers often benefit consumers; they can generate efficiencies and reduce costs. And the market is the best test [.pdf] of which mergers work and which don’t.

Giuliani

A new poll shows that Rudy Giuliani has pulled into the frontrunner position for the Republican nomination for President. Thus, it is worth looking at his fiscal performance as New York City Mayor (1994 through 2001).

A good source of data are the Comprehensive Annual Financial Reports issued by the city’s comptroller. See the CAFR for fiscal 2002, which contains 10 years of historical data.

Total NYC general fund expenditures.

1994: $31.3 billion

2001: $40.2 billion

representing a 3.6 percent average growth rate.

NYC Outstanding General Obligation Bonds.

1994: $22.9 billion

2001: $26.8 billion

representing a 2.3 percent average growth rate.

The data suggest that Giuliani exerted reasonable fiscal control, particularly in comparison to prior NYC mayors, or President Bush. For example, NYC debt more than doubled in the five years prior to Giuliani entering office. But more analysis needs to be done.  

Articles in the Financial Times and the Economist Defend Tax Competition

The Economist has an entire section on the “offshore” world in the latest issue. Among the key findings are that so-called offshore financial centers promote growth and discourage wasteful government:

…the most vexing problem that highly mobile financial flows pose for governments is that when they cross borders they may take tax revenues with them. …As companies become ever more multinational, they find it easier to shift their activities and profits across borders and into OFCs. …Financial liberalisation—the elimination of capital controls and the like—has made all of this easier. So has the internet, which allows money to be shifted around the world quickly, cheaply and anonymously. …tax, regulatory and other competition is healthy because it keeps bigger countries’ governments from getting bloated. Others argue that OFCs may be an inevitable concomitant of globalisation. “Even if today’s OFCs were somehow stamped out, something like them would pop up to take their place,” says Mihir Desai of Harvard Business School. Some academics have found signs that OFCs have unplanned positive effects, spurring growth and competitiveness in nearby onshore economies. …International organisations have launched various initiatives to try to get OFCs to tighten supervision, co-operate more with foreign governments to catch tax cheats and, at least in Europe, eliminate “harmful” tax practices. OFCs think such initiatives are designed to force them out of business. The countries that set these standards “are an oligopoly trying to keep out smaller competitors. They are both players and referees in the game. How can they be objective?”, asks Richard Hay, a lawyer in Britain who represents OFCs. …the broader concern over OFCs is overblown. Well-run jurisdictions of all sorts, whether nominally on- or offshore, are good for the global financial system.

A column in the Financial Times takes an even stronger position. It notes that tax competition encourages more responsible behavior by lawmakers. It also explains that low taxes are not akin to subsidies, and points out that anti-tax-competition advocates will not be satisfied until all pro-growth tax policies are exterminated:

The European Commission seems to recognise no limits in its drive to impose tax harmonisation across Europe. Having issued a sanction against Luxembourg last July for its preferential tax regime on holding companies, Brussels is now trying to put pressure on a country outside the European Union by targeting Swiss cantons’ tax breaks and low business tax rates. Such a move, if it succeeds, will hurt not only the Swiss but all taxpayers in Europe. Tax competition gives you - the entrepreneur or citizen - the opportunity to escape fiscal pressure from your own government by moving to jurisdictions with more favourable tax regimes. It gives strong incentives for all governments to lower taxes, allowing taxpayers to keep more of their money and making markets less distorted. Such tax competition has existed for some time in Europe and is being intensified by globalisation. Luxembourg and Switzerland, for example, can be considered in a sense to be tax havens at Europe’s heart, benefiting not just European but world taxpayers. Those benefits are being undermined by Brussels’ campaign to condemn places with favourable tax regimes. …The Commission has a strange concept of free trade. It is easy to grasp how public subsidies to business - which involve confiscating resources from some parties and giving them to others - should be regarded as “state aid”. But how can the fact that certain taxes are not levied be placed on the same footing? …This harmonisation logic will inevitably lead EU bureaucrats to attack other regimes that benefit taxpayers, be they in the EU or outside. In Ireland, for example, the corporate tax rate is lower than in Swiss cantons and in Estonia undistributed corporate profits are simply not taxed. When can we expect pressure on Ireland to raise its rates or on Estonia to repeal a system that has contributed to its economic dynamism?