Topic: Tax and Budget Policy

Proposed Hedge Fund Regulations Would Limit Options for All but the Rich

The nanny-state mentality of the Bush Administration and its appointees shows no sign of abating. The latest farce comes from the Securities and Exchange Commission, which want to prohibit all but the very wealthy from taking advantage of successful hedge fund investing. Richard Rahn comments in the Washington Times:

Financial regulation is most often justified by arguing it is needed to protect all participants from those who would engage in fraud or theft, and to protect unsophisticated investors from losing money in investments they do not understand. The U.S. Securities and Exchange Commission (SEC) has just proposed that the amount of liquid net worth an individual must have before investing in hedge funds and other so-called risky investments be raised to as much as $2.5 million. People meeting a net liquid worth requirement are considered “accredited investors.” …Even though most people would agree it is important to try to protect “widows and orphans” from unscrupulous and/or incompetent financial promoters, there is a fine line between protecting those who need protection and denying freedom to those who don’t. Does it make sense to prohibit a person who has recently obtained a graduate degree in finance from a leading business school from buying and selling hedge funds, because he or she has not yet accumulated some arbitrary amount of wealth – while legally allowing any adult man or woman to take all of his or her wealth and go to Las Vegas and blow it at the gambling tables?

America’s High Corporate Tax Rate Hurts Competitiveness

As other developed nations race to cut corporate tax rates in order to attract jobs and investment, politicians in the United States are sitting on their hands. Kevin Hasset of the American Enterprise Institute explains how this hurts America:

Imagine you are the CEO of a major U.S. manu­facturing company. You are looking to locate a new domestic plant. All other factors being equal, would you locate the plant in the state with the highest taxes? Now, make that question international. Would you locate a plant in a country with high taxes or low? The obvious answer points to a growing eco­nomic problem for the United States. Among the 30 wealthy countries that make up the Organization for Economic Cooperation and Development (OECD), the U.S. ranks sec­ond, just below Japan, for the highest combined tax rate (federal and state) on corpo­rate profits. Our position in the world hierarchy is rela­tively new. In 1994, the U.S. ranked 18th. But since then, other nations have been cutting rates—from an average of 37 percent to 28 percent—while the U.S., at 39 percent, has main­tained its high level. …most foreign multinationals are head­quartered in countries that charge taxes only on domestic operations. If a French firm locates a plant in Ireland, then all of the profits of the Irish plant are taxable in Ireland, but are free from French tax­ation. So French firms have an enormous incentive to locate in the country with the lowest taxes they can find. That rules out the United States. …the latest literature suggests that relative tax rates are a big, big deal. Indeed, the dramatic flow of international capital to the lowest tax environment is one of the strongest and most reliable findings in the history of economic science. If a country lowers its rate below its rivals, as Ireland, now with a 12.5 percent rate, began doing more than a decade ago, then multinationals flood that nation with capital. It’s very much in the data. …The status quo—one of the most unfriendly tax policies toward business on earth—is unacceptable to anyone who cares about the future of American industry. No one should be surprised if our best firms continue to flee overseas and if foreign-based firms prefer locating their plants outside America.

The School Choice Revolution Continues

The teacher unions are not having a very good year. Utah is on the verge of a sweeping school choice plan, and South Carolina may be next.

The Wall Street Journal explains:

South Carolina could be next. Legislation is now being drafted to allow nearly 200,000 poor students to opt out of failing public schools by giving them up to $4,500 a year to spend on private school tuition. Middle class parents would be eligible for a $1,000 tax credit.

Governor Mark Sanford, a Republican, also wants to create more choice within the public system by consolidating school districts so students who can’t afford to live in a certain zip code aren’t forced into the worst public schools — a system that now consigns thousands of African-American students to failing schools. In his State of the State Address last month, Mr. Sanford branded the current districts a “throwback to the era of segregation.” The comment drew hardly a flutter in the legislature, he told us, because “everyone knows it’s true.”

Despite a 137% increase in education spending over the past two decades and annual per pupil spending that exceeds $10,000, South Carolina schools trail the nation in performance. The state ranks 50th in SAT scores, only half of its students graduate from high school in four years and only 25% of eighth graders read at grade level. The Governor’s budget puts it this way: “The more we expose students to public education, the worse they do.”

In last year’s elections three legislators paid for their opposition to school choice with their seats. One freshman reformer is Representative Curtis Brantley, an African-American Democrat from rural Jasper County who defeated a white incumbent in a June primary. He told us he supports school choice because something must be done to shake up the status quo.

Flat Tax in Romania

Romania’s flat tax is generating results that would make French politicians delirious with joy — huge increases in tax revenue. Income tax collections jumped 44.7 percent in 2005, the year the flat tax was introduced. (Sadly, the increased revenue isn’t keeping pace with Romanian government spending; as the country works to meet the various conditions for EU membership, its budget deficit is growing, which has led to complaints from Brussels.)

Rather than learn from this “Laffer Curve” example, the high-tax nations that dominate the EU are complaining about Romania’s “harmful tax competition.” A Hungarian news service reports:

Romania increased spending on roads, railways, pensions and other areas last year, mainly in December, to bring standards closer to those in the EU, which it joined on January 1.

…The Finance Ministry said today the government boosted revenue to 31.8% of GDP last year from 30.3% the previous year, helping meet a key EU recommendation. EU Monetary Affairs Commissioner Joaquin Almunia said last year that budget revenue as a proportion of GDP was lower than in any EU nation and recommended the country increase it. Economic growth, which the government has estimated at about 8% last year from 4.1% in 2005, also stimulated revenue collection, the finance ministry said.

…Romanian government spending increased 25% last year in nominal terms and accounted for 33.5% of GDP, from 31.2% in 2005, the ministry said. Income tax collection rose 44.7% to 9.8 billion lei ($3.8 billion). Romania has said income tax revenue has consistently increased since January 1, 2005, when it introduced a flat tax of 16% on corporate and personal income, the lowest in eastern Europe. It replaced a corporate tax rate of 25% and a personal income tax rate of as high as 40%.

More Evidence of FEMA Incompetence

Failure is rewarded in Washington, and the Federal Emergency Management Agency is a prime example. Its squandering of money after last year’s hurricane season was astounding even by government standards.

If Republicans had a shred of principles, they would have used the fiasco to argue that responding to natural disasters is not a proper role of the federal government. Instead, FEMA gets a bigger budget.

The Associated Press reports on new evidence of FEMA’s reckless stewardship of taxpayer funds: 

In the neighborhood President Bush visited right after Hurricane Katrina, the U.S. government gave $84.5 million to more than 10,000 households. But Census figures show fewer than 8,000 homes existed there at the time.

…The pattern was repeated in nearly 100 neighborhoods damaged by the hurricanes. At least 162,750 homes that didn’t exist before the storms may have received a total of more than $1 billion in improper or illegal payments, the AP found. The AP analysis discovered the government made more home grants than the number of homes in one of every five neighborhoods in the wake of Katrina.

…[T]he AP’s findings are similar to those of a February report by the Government Accountability Office, which found hurricane aid was used to pay for guns, strippers and tattoos. The GAO concluded that between $600 million and $1.4 billion was improperly spent on Katrina relief alone. In one neighborhood GAO scrutinized, at least one person gave an address as a cemetery. Records show FEMA gave 27,924 assistance grants worth $293 million in that neighborhood. The AP’s analysis shows only 18,590 homes existed, meaning up to $98 million in aid could have been disbursed improperly or illegally.

Unsurprising News from the Pentagon

The Washington Post reports yesterday on cost overruns for weapons procurement. “It is not unusual for weapons programs to go 20 to 50 percent over budget, the Government Accountability Office found.”

That’s for sure. As I’ve documented, it’s not unusual for weapons to more than double in cost. I’m talking about the F/A-22 Raptor, the V-22 Osprey, the CH-47F helicopter, the Patriot missile, and on and on. See here, and see the discussion in Downsizing the Federal Government.

The same pattern occurs in federal highway projects, energy projects, and many other government endeavors.

Part of the reason this occurs is that contractors and government officials have a quiet understanding that the initial cost numbers that are used to get projects launched should be low-balled. Both sides know that later on, after projects are underway, excuses can be found to raise the price tag. “The scope of work has expanded.” “We couldn’t have foreseen those additional problems.” “The mission requirements have changed.” “There are new regulatory requirements.”

It doesn’t really matter. Once the money is flowing to certain states and jobs are at stake, no member of Congress has an incentive to be frugal with taxpayer money. 

Not Overstated

Last year, Jagadeesh Gokhale and I estimated [pdf] that state and local governments were sitting on about $1.4 trillion of promised, but unfunded, health care costs for their workers.

The Economist kindly discussed our estimate in their November 18 issue, but noted: “Even if Messrs Edwards and Gokhale have overstated the problem …”

It turns out that we hugely understated the problem for at least one state. We had New Jersey down for $20 billion, but news from that state today indicates that taxpayers may get hit with a $78 billion tab for state worker health costs unless are reforms are made (or $8,500 for every resident of the state).