Topic: Tax and Budget Policy

Putin’s New Deal

According to David Ignatius of the Washington Post,

To explain the Putin phenomenon, the Kremlin’s chief ideologue, Vladislav Surkov, recently compared him to Franklin Delano Roosevelt, another president who brought his country back from economic disaster and restored its pride. Like FDR, Putin is using “presidential power to the maximum degree for the sake of overcoming the crisis,” Surkov said.

Inasmuch as FDR’s economic policies were a failure until after World War II, let’s hope that Putin and Surkov aren’t planning to emulate him too closely.

U.S. to Comply with WTO Ruling on Zeroing

I have been warning on this blog that U.S. failure to comply with the latest WTO ruling against the antidumping calculation technique known as zeroing could open a Pandora’s box that could undermine and eventually destroy the rules-based trading system.  Well, in the words of the old Gilda Radner character from SNL, Emily Litella, “Nevermind!”

The U.S. mission in Geneva announced yesterday that, despite its view that the Appellate Body’s decision was intrusive and wrongheaded, the United States intends to comply.  That is very good news, for at least two reasons. 

First, zeroing severely and unjustly inflates antidumping duty assessments and collections, creating bigger trade barriers.  Depriving the Commerce Department of that methodological trick will undoubtedly lead to lower dumping margins overall.

Second, it is important that the United States show some respect for the outcomes of dispute settlement.  Berating and disregarding those outcomes only serves to erode support for the system.  And if the United States expects to get some mileage as a complainant out of its likely string of cases before the WTO (a subsidy case against China was filed two weeks ago, and the Democratic congress is at least rhetorically fixated on enforcement, enforcement, enforcement), it should show some deference to the rules.

Compliance with the zeroing ruling will likely take at least one year (and probably more), so it’s not entirely out of the question that sentiments could change in Congress or the administration before then. 

On the broader question of whether the WTO dispute settlement system is fair, please check out the online debate between Robert Lighthizer and myself, hosted by the Council on Foreign Relations.

European Union Wants One-Size-Fits-All Regulation

European bureaucracies such as the Organization for Economic Cooperation and Development and the European Commission are infamous for their anti-tax competition campaigns, but the zeal to harmonize is not limited to fiscal policy. The European Commission has set an explicit goal of exporting EU regulation to the rest of the world. If successful, this would be an unfortunate development. Competition among regulatory regimes helps control excessive government. But if an international bureaucracy succeeds in becoming a global “standard setter,” then politicians will exploit that monopoly position to impose more onerous regulatory burdens. That certainly will be the case if the bureaucrats in Brussels succeed in this latest push for regulatory harmonization. As the Financial Times indirectly notes, the Euro-crats are not very sympathetic to markets:

Brussels wants the rest of the world to adopt the European Union’s regulations, the European Commission will say this week. A Commission policy paper that examines the future of the Union’s single market says European single market rules have inspired global standard-setting in areas such as product safety, the environment, securities and corporate governance. …The paper calls on the EU to encourage other jurisdictions to follow suit – for example by “promoting European standards internationally through international organisation and bilateral agreements”. …The EU’s drive to establish itself as the pacesetter for worldwide business regulation could well lead the bloc into conflict with the US and other trading partners. US officials have often voiced concern about the Union’s growing clout as a global standard-setter, and the two sides have clashed over issues such as rules for the chemicals industry and the EU’s stance on genetically modified foods. …The two sides have very different regulatory philosophies, with the EU placing a heavy emphasis on consumer protection and environmental legislation while the US tends to promote a more market-based approach. Some critics of the European approach argue that the Union’s stance on issues such as GM foods may also reflect a desire to protect the region’s commercial interests.

More Fallout from Switzerland’s Tax Fight with Brussels

This site has closely followed the European Commission’s attempt to undermine Swiss tax sovereignty - an effort that has implications for the US since high-tax nations like France and Germany could use the same argument (that low taxes somehow are contrary to free trade) against America at the WTO if the anti-Swiss campaign proves successful. Fortunately, that is not likely to happen. The European Commission ultimately has only one weapon, which is the ability to impose protectionist sanctions against Swiss goods and services. But as Euractiv.com notes, there are EU member states that support tax competition and presumably would not approve an effort to punish Switzerland for the supposed sin of good tax law:

The Commission, on 13 February, accused Switzerland of offering unfair company-tax advantages that it says amounts to illegal state aid, in order to lure multinationals away from the EU. …Member states are likely to give strong backing to the Commission, as frustration has grown with the increasing number of multinationals, including General Motors, Kraft Foods and Procter & Gamble, deserting their EU headquarters to set up in Switzerland. Tax competition is also a problem within the EU, with countries like Ireland and Luxembourg luring companies away from high-tax France and Germany thanks to their low business tax rates. But, a Commission move to harmonise tax systems across the EU is being fiercely resisted by low-tax member states.

Needless to say, the Swiss-EC fight has nothing to do with trade and everything to do with tax competition. Politicians from high-tax nations despise fiscal rivalry since it forces them to lower tax rates (or at least not to raise rates even further) in an effort to prevent the loss of jobs and capital. Switzerland is a beneficiary of this liberalizing process, both because its overall tax burden is low compared to the rest of Europe, but also because the nation has a genuine federal system, meaning that regional (cantonal) and local governments must compete to offer the most attractive fiscal policies. A recent paper published by the Center for Freedom and Prosperity explains the role of intra-national tax competition, and a report from Euro2day.gr shows that Swiss leaders understand the valuable role of their federal structure:

Zug has been particularly exposed. “We don’t understand why the Commission has made these accusations now,” says Peter Hegglin, the cantonal finance minister. …Like most Swiss, Mr Hegglin emphasises the role of tax competition as a cornerstone of Switzerland’s extreme form of devolution, where individual cantons and communities set their own levies, and as an instrument to ensure lean, efficient government. “Tax competition is something that is so deeply ingrained in Switzerland internally that the government has little leeway to negotiate anything,” says Walter Kielholz, chairman of Credit Suisse. …Zug is now the hub for companies from global commodities traders, such as Glencore, to the regional headquarters of leading pharmaceuticals groups. Nord Stream, the Russian dominated consortium planning a new gas pipeline under the Baltic, is the latest of many arrivals. Zug’s appeal lies in its proximity to Zurich, its lawyers, accountants and consultants – and its modest taxes. All companies must pay Switzerland’s nationwide 8.5 per cent federal profits tax. Some others also face cantonal and municipal levies, taking the total to 16-16.5 per cent.

Last but not least, a letter-to-the-editor of the Financial Times mockingly asks whether the bureaucrats in Brussels will extend their complaint about Switzerland’s tax laws to other policies:

The Swiss know many more ways of unfair competition to lure successful businesses to settle there. Take my own typical recent travel experience: Queueing for check-in and security control at Kastrup airport, Copenhagen: 2hr 15min. Queueing at Birmingham international airport: 1hr 45min. I always avoid using Heathrow and BA because it is even worse. No queueing at Geneva airport, check-in and security control completed in less than 20 minutes. …In the UK or Sweden the whole rail system breaks down if 5cm of snow falls. The Swiss trains run 90 per cent on time, even if it is snowing! Another example of unfair efficiency. The political system with its direct democracy is less corrupt in Switzerland than in the UK, Germany and Sweden. Is this not an outrageous example of unfair competition? Because of low taxes the Swiss public services must be well organised and more efficient than in Scandinavia and the UK. The efficiency of public services together with reasonable taxes is Switzerland’s most important advantage.

Senators Introduce Bill Attacking Low-Tax Jurisdictions

Politicians from France and Germany are infamous for whining about “unfair” competition from low-tax jurisdictions. It is embarrassing to note that there are politicians in the United States with the same sore-loser attitude. With Senator Levin of Michigan as the ringleader, three senators have introduced an anti-tax haven bill that would impose onerous new burdens on taxpayers while dramatically increasing the power of the Internal Revenue Service. The sponsors make a number of completely inaccurate assertions, including a claim that so-called tax havens account for $100 billion of lost tax revenue. Even a cursory review of IRS data, however, show that the vast majority of the “tax gap” is from small business taxpayers. But Levin’s attitude apparently is that facts should not get in the way of good press release. The legislation has numerous other problems, most notably the fact that is almost certainly would put the US in violation of World Trade Organization obligations and that it would make foreign-managed hedge funds more competitive by imposing onerous regulatory burdens on US funds (much as Sarbanes-Oxley helped Hong Kong and London become much more attractive places for venture capital business such as IPOs). The Washington Post reports on the bill’s introduction: 

Three senators proposed legislation that would target what they say is $100 billion a year in tax revenue lost each year because of overseas tax havens, in part by forcing hedge funds to track their foreign investors. The measure would impose tougher requirements on U.S. taxpayers using offshore secrecy jurisdictions, give the U.S. Treasury the authority to take action against foreign jurisdictions that impede tax enforcement, stiffen penalties against abusers and close offshore trust loopholes, according to a summary of the bill released by Michigan Democrat Carl M. Levin. …”We cannot tolerate tax cheats offloading their unpaid taxes onto the backs of honest taxpayers,” Levin said in a joint statement with co-sponsors Norm Coleman (R-Minn.) and Barack Obama (D-Ill.). “Offshore tax havens have declared economic war on honest taxpayers by helping tax cheats hide income and assets that should be taxed in the same way as other Americans.” The Treasury Department and top lawmakers in both houses of Congress have made a priority this year reducing the so-called tax gap, the difference between what individuals and companies owe and what they pay. The IRS said a study of 2001 tax returns shows the tax gap is about $345 billion a year, only $55 billion of which is recovered.

Washington’s Dishonest Budget Math

During fiscal debates in DC, politicians, the press, and interest groups all complain about supposed budget cuts. Yet every year, the budget gets bigger and more expensive. This seeming contradiction is due to the fact that Washington uses a strange form of math called “current services” budgeting. Under this system, a “cut” occurs anytime a budget doesn’t increase as fast as previously projected. This means that programs sometimes grow at more than twice the rate of inflation, but advocates of more spending get to complain that they are being subjected to “cruel” and “savage” reductions. While everyone inside the beltway understands how this game is played, ordinary Americans are completely deceived. They think that spending cuts are actually cuts - i.e., spending will be lower next year than it is this year. Defenders of the current system argue that “current services” budget is justified because it enables policy makers to know how much spending is “requried” because of inflation, demographic change, and previously-legislated program expansions. There is nothing wrong with having that information, of course, but that doesn’t justify dishonest presentation of budget numbers. If a politician or interest group wants to argue that a program should get a six percent increase because of various factors, that is a legitimate debate. But when a politician says that a program is getting a two percent cut because spending is climbing by four percent instead of six percent, that is deceptive. An article in the American Enterprise Institute’s magazine explores Washington’s dishonest budget math:
President Bush is not “cutting” Medicare spending—all the media hype notwithstanding… the President has not been suddenly seized by fiscal conservatism fever and did not, in fact, propose any spending cuts. Under the President’s proposal, federal spending on Medicare and Medicaid is set to increase by $84 billion from 2006 to 2008. That spending increase is certainly not a cut—even when including inflation, it represents a generous increase in entitlement spending. Newsweek confused cutting the rate of spending growth with cutting spending itself. The President’s proposals reveal an interesting picture: instead of growing at a 6.5% rate, the President would have Medicare grow at a 5.6% rate. Medicaid was set to grow at 7.3%; the President has proposed a 7.1% rate of growth. …It’s useful to place this spending restraint in perspective: entitlements face a looming $43 trillion shortage over the next 60 years, and unless entitlement spending is curbed, those programs are headed straight for bankruptcy. What’s fascinating is that if the President’s modest Medicare plans were realized, $8 trillion dollars would already be shaved off of Medicare’s future liability. It’s a hopeful reminder that moderate fiscal restraint can, over time, accomplish a great deal of good.

Some Good News on the Budget

Thanks in large part to the heroic efforts of Senators Jim DeMint and Tom Coburn, the corrupting culture of budget earmarks has hit a big bump in the road. Even more important, government spending is no longer climbing quite as fast. To be sure, it is hardly a victory to hold the growth of annual appropriations to the rate of inflation. After all, many of the programs being appropriated should be completely abolished. Moreover, annual appropriations does not include entitlement programs, many of which are growing at twice the rate of inflation. But in a town enriches itself by transferring income and wealth from the productive to the special interests, even a slowdown in the rate of spending growth is welcome news. The Wall Street Journal explains:

On Thursday, White House budget director Rob Portman issued little-noticed guidance to all federal departments and agencies that no Congressional requests for spending should be accommodated unless they are “specifically identified in statutory text” – which is to say, the law. This may sound like it ought to be regular practice, but it’s a revolution in the Beltway. That’s because, in order to dodge the legislative earmark limits that Mr. Byrd has been bragging about, Members have been speed-dialing executive branch officials and asking them to fund their specific earmark requests out of agency budgets even though they were purged from the larger budget bill. This Congressional lobbying can be hard for the average federal bureaucrat to refuse, since he doesn’t want to offend those on Capitol Hill who control his budget. …this means the Fiscal 2007 federal budget could have the fewest number of these pork-barrel projects in many a year. By the way, thanks to efforts late last year by GOP Senators Jim DeMint of South Carolina and Tom Coburn of Oklahoma to block a last-minute bipartisan spending splurge, the 2007 budget holds overall federal appropriated spending to the rate of inflation; recent years have often seen three times that.