Topic: Tax and Budget Policy

Singapore Cuts Corporate Tax

If the average state levy is included, the U.S. corporate tax rate is about 40 percent, which is higher than the coporate rate in every European welfare state. American companies also must endure heavy regulatory burdens — especially in the aftermath of Sarbanes-Oxley.

Politicians fret that America is losing manufacturing jobs and they complain when American companies build plants overseas. Contrast the short-sighted behavior of U.S. lawmakers with those in Singapore. As noted by tax-news.com, the government of Singapore has just announced that the corporate tax rate is being reduced to 18 percent to boost international competition. The government also is boosting the value-added tax, so Singapore is not a perfect role model, but at least lawmakers understand the negative impact of high corporate tax rates:

In his Budget Statement for the Financial Year (FY) 2007, Second Minister for Finance, Tharman Shanmugaratnam announced a two percentage point reduction in the corporate income tax rate to 18% to sharpen Singapore’s competitive edge. However, the corporate tax cut will be balanced against a number of revenue raising provisions, such as…an increase in the GST rate from 5% to 7%.

OECD Says Sweden Should Consider Abolishing the State Income Tax

In a report on the Swedish economy, the Organization for Economic Cooperation and Development revealed more of its schizophrenic nature (see this article for more information on the OECD’s Jekyll and Hyde personality). While the Paris-based bureaucracy has become infamous for its so-called harmful tax competition project that seeks to penalize jurisdictions with pro-growth tax law, the economists at the OECD often write studies and reports that reflect a solid understanding of the negative impact of government intervention. The Policy Brief on the Swedish economy is a good example. As excerpted below, it notes the problems of high tax rates and excessively generous welfare benefits. It calls for the elimination of the wealth tax and reductions in punitive marginal tax rates. It even suggests that Sweden abolish the state income tax:

…the new government has renewed the commitment for sound macroeconomic framework conditions and will stick to the target for general government net lending of 2% of GDP over the cycle which is necessary to keep public finances on a sustainable path. Underlying this target is the assumption that taxes can be sustained at current levels which could be difficult in the future, not least due to mobile tax bases and international tax competition. …the share of 20 64 year olds who depend on public income transfers has declined to 20% in 2006, but it remains well above the 15-16% of 1990-91. …Sickness absence among those employed and the number entering disability pension increased rapidly from the late 1990s. The numbers are now falling, although the stock of disability pensioners remains among the highest in the OECD. …Letting people keep a bit more of the value they create is vital to encourage both labour supply and entrepreneurship. The plans to abolish the wealth tax should therefore be endorsed, as it sets in at a rate of 1½ per cent already from wealth slightly above the average price of a metropolitan-area one-family house. Abolition of the wealth tax might lead to repatriation of capital, possibly making more investment capital available for new small firms. Marginal income taxes are also important, though, because high rates kick in already from slightly above average full-time earnings. The combination of social contributions, income and consumption taxes drives the effective marginal tax rate above 70% for over a third of the full-time employed, helping to explain why working hours for those employed are below the OECD average. …Moving up the threshold by SEK 100 000 from 105% to 135% of average full-time earnings, for example, would halve the number of persons exposed to the above-70% combined marginal tax rate, which results when the state income tax sets in on top of social contributions, municipal income tax and consumption taxes. …In fact, completely abolishing the state income tax would cost just 1½ per cent of GDP.

French “Conservative” Candidate Calls for Hedge Fund Tax

While most nations are trying to liberalize their economies, both major candidates in France are competing to promise higher taxes and more spending. Sarkozy is supposed to be the market-oriented candidate, but he has endorsed higher taxes on financial services - and is suggesting sympathy for a higher VAT, according to MSNBC:

Nicolas Sarkozy will push for a European tax on “speculative movements” by financial groups, such as hedge funds, if he wins this year’s French presidential elections. …his plan to tax financial flows is likely to dismay US and UK financial groups, as well as parts of the French business community, which largely prefers him to Ms Royal. …His comments echo the traditional Gaullist suspicion of capitalism and financial investors, for which Mr Chirac has become well known. Mr Sarkozy’s attack on speculative finance mirrors the views of some business leaders. Claude Bébéar, chairman of insurer Axa, France’s biggest institutional investor, yesterday pilloried the “dictatorship of the market” and the “short-term interests” of hedge funds. …[Sarkozy’s] record as finance minister was notably dirigiste. He intervened to save Alstom, the engineering group, from bankruptcy and brokered an all-French merger of Aventis and Sanofi to avert a takeover by Switzerland’s Novartis. …Mr Sarkozy admitted he was watching Germany’s three percentage point increase in VAT with interest.

The story also notes that Sarkozy also was an interventionist finance minister. The net result is that France almost surely will continue to stagnate, regardless of who replaces Jacques Chirac.

Deferred Gratification and Income Inequality

The Economist reports on an interesting new study showing that members of a Bolivian tribe who understood the value of deferred gratification also experienced higher income gains:

One phenomenon that is almost unique to humans is deferred gratification—in other words, patient anticipation of a reward. Dr Reyes-Garcia and her colleagues therefore guessed that as the Tsimane’ became more enmeshed in modern society, the more patient of them would do better than the less. The Tsimane’s traditional subsistence economy depends on folk knowledge and learned skills that have quick pay-offs. Formal schooling does not pay off for years, but opens the door to bigger potential incomes. To test their idea, the researchers offered all 151 adults in two Tsimane’ villages a choice between receiving a small amount of money or food immediately, getting a larger amount if they were willing to wait a week, and getting a larger amount still in exchange for several months’ wait for payment. They found that the more education a villager had, the longer he was willing to delay gratification in return for a bigger reward. Five years later, Dr Reyes-Garcia and her colleagues came back again. They re-interviewed 100 of their volunteers (the other 51 were unavailable for one reason or another) and found that those who had shown most patience in the original experiment had also seen their incomes increase more than those of their less patient counterparts. The effect was relatively small—the incomes of the patient had grown 1% a year faster than those of the impatient. Over a lifetime, though, that adds up to a significant amount of inequality. The patient, then, could take their place alongside the lucky, the smart and the violent at the top of society’s heap.

These results are similar to research in advanced societies. All other things equal, successful people tend to recognize the value of sacrificing today in order to enjoy more income/consumption/wealth in the future. But consider what this research implies for the current political debate about income inequality. Leftists are beating the drums for higher tax rates and more income redistribution, in part because they insist that rich people are either lucky or that their wealth is earned at the expense of the less fortunate (the fixed-pie fallacy). But if income differences are the result of individual choices, these arguments are less persuasive. Rather than seeking to punish success, honest leftists should focus their energies on figuring out how to create a culture of deferred gratification in poor communities.

Swiss Leaders Defend Low Taxes, Reject Complaint from Brussels

The tax bureaucrats at the European Commission apparently believe that low tax rates and territorial taxation (the common-sense principle of only taxing income earned inside national borders) are a violation of free trade rules. The Swiss, not surprisingly, have a different perspective. This European fight has long-term implications for America. If the Euro-crats succeed in characterizing good tax policy as an unfair trade subsidy, it will be only a matter of time before high-tax nations use the same theory at the World Trade Organization. Ideally, Switzerland will hold firm and this will never happen. As explained by tax-news.com, the EU has very little leverage in this battle unless they are willing to impose protectionist barriers against Switzerland, but there are a number of low-tax EU nations that presumably would side with Switzerland and block any sanctions:

Switzerland has rejected criticism from the European Commission of corporate tax rates in some cantons, saying it will not yield its sovereignty over this issue. …Finance Minister Hans-Rudolf Merz shot down the EU proposal, saying in Bern that there was nothing to negotiate. …The commission wants the Swiss to change tax rules that it claims offer unfair advantages to firms operating out of Switzerland. It said low corporate taxes offered by cantons such as Obwalden and Zug violated a 1972 trade agreement, calling it a disguised state subsidy. …Merz said he does not fear a backlash from Brussels since so far all the talk is about negotiations. He reckons that sanctions are also unlikely, as some EU member states would probably not back them. The finance minister admitted though that the European initiative was aimed at stopping firms – and their tax money – leaving the union for Switzerland’s greener pastures.

Time to Reform “Soviet” Road Pricing

A TCSdaily.com column explains why market-based pricing for road usage would be an improvement over the current system, which encourages congestion by charging the same price (zero) for trips at the peak of rush hour and in the middle of the night:

…congestion pricing is conservative economics at its best. For decades, conservatives have championed market-oriented solutions to highway problems as a means to allocate scarce resources. Congestion pricing gives consumers the opportunity to decide when it is in their economic interest to ride crowded roads, and whether the price charged for a given trip is worth their travel time savings. In the former Soviet-bloc states, the standard way to allocate scarce goods was to set the purchase price low enough for everyone to afford, but to make consumers wait in long lines to buy them. The real price depended on what value consumers placed on their time. This approach is the way we’ve always allocated access to most roadways in capitalist America - access is “free,” just like for a public park. But our real cost skyrockets when we consider the time we spend crawling along in bumper-to-bumper traffic and with no option to pay extra for a faster trip. And even without factoring in the cost of time frittered away listening to satellite radio, highways have never really been “free,” but subsidized by taxpayer dollars. Congestion pricing is not a tax increase, but a user fee, which, conservatives agree, is a better way to divide costs.

The author is right that congestion pricing is not a tax increase. But roads today currently are financed by taxes. So if congestion pricing is implemented, it should be accompanied by a tax cut of equal magnitude to prevent politicians from inadvertently having a new pile of money to waste on other government programs.