Topic: Tax and Budget Policy

European Commission Poised to Officially Attack Switzerland for the “Crime” of Low Tax Levels

In a move that is both remarkable and disturbing, the European Commission plans to file a complaint - and threaten protectionist trade barriers - because attractive Swiss tax policies are supposedly a violation of a free-trade accord. The bureaucrats in Brussels are not arguing that Switzerland is imposing barriers against EU products. Instead, the Commission actually is taking the position that low taxes are attracting businesses that might otherwise operate in high-tax nations. The implications of this radical assertion are breathtaking. It certainly is true that a nation with more laissez-faire policy will attract economic activity from neighbors with more burdensome levels of government. But if this migration of jobs and investment is a “distortion” or trade, then the only “solution” is complete and total harmonization of all taxes (and regulations, spending, etc). If the Euro-crats succeed with this argument at the European level, it will be just a matter of time before similar cases are filed at the World Trade Organization. Look at this story from the Neue Zuricher Zeitung, but insert “U.S.” for Switzerland and you may get a glimpse of the future:

The European Commission is expected next week to make an official complaint about the practice of Swiss cantonal tax authorities giving corporate tax breaks. But the reproach is considered dubious because the Commission cannot really prove there has been any infringement of free trade. Brussels and Bern have been at loggerheads for more than a year over low corporate taxes some of the cantons use to attract new companies, including firms from European Union countries. The Swiss government has made it clear in recent months that a low tax regime is not in breach of a 1972 free trade agreement. …There may be objections from some EU Commission members but a condemnation of non:EU member Switzerland is practically certain. …The draft claims that these tax practices distort trade between Switzerland and the EU, and therefore contravene the bilateral free trade agreement. …It is also claimed that there does not have to be cast:iron proof of trade distortion. According to article 23 of the free trade accord, it is enough if a privilege “threatens to distort” trade.v…the EU specifically mentions “protective measures” in the draft complaint. The indirect threat is aimed at making Switzerland negotiate over cantonal tax practices.

Pro-Business Does Not Mean Pro-Freedom or Pro-Market

Representatives of the business community frequently are the worst enemies of freedom. They often seek special subsidies and handouts, and commonly conspire with politicians to thwart competition (conveniently, they want competition among their suppliers, just not for their own products). Fortunately, most business organizations still tend to be - on balance - supporters of limited government. But as the Wall Street Journal notes, some state and local chambers of commerce have become relentless enemies of good policy: 

…many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. In Colorado, a coalition of property owners, conservative think tanks, anti-tax groups and small businesses fought against a ballot initiative in 2005 that was intended to gut the state’s Taxpayer Bill of Rights (Tabor). They lost, and as a result state spending will expand by $5 billion over the next five years, costing the average family several thousand dollars in higher taxes. It was not the teachers’ unions or class-warfare liberals who spearheaded the campaign against Tabor, however – it was the Denver Chamber of Commerce. …In Virginia, the state and local chambers, along with big-business allies, have spent more than $4 million in recent years on ballot initiatives and legislative lobbying to raise $2 billion in taxes for roads, rails, buses and schools. This year they want a billion more for transportation, despite the state’s multibillion-dollar surplus, and have even threatened to run candidates against fiscal conservatives in the legislature who take a “no new taxes” pledge. …In New Jersey – home of some of the worst schools in the nation – the state chamber took out an ad with the teachers’ unions opposing a school-voucher initiative for families in inner cities. The ad was withdrawn only after pro-school reform business members hollered in protest. Last summer taxpayers revolted when Democratic Gov. Jon Corzine called for a $1.5 billion hike in the sales tax; but “the chamber and other business groups sat on their hands in order to avoid making enemies with the legislature,” notes Frayda Levin, New Jersey director of Americans for Prosperity. In Oklahoma the state chamber filed a petition with the state Supreme Court to block eminent domain reform, and vowed to fight a taxpayer-led movement to enact a Colorado-style Tabor. Massachusetts? The state chamber and allied business groups oppose an income tax cut.

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%.