Topic: Tax and Budget Policy

Czech Tax Reform

Because of the tenuous nature of the current government, plans for a flat tax may be postponed. But as the Prague Post explains, the government’s fall-back position is big, pro-growth tax cuts and expenditure limitations — so taxpayers will win regardless of the outcome:

Prime Minister Mirek Topolánek’s Cabinet, which won a slim vote of confidence Jan. 19, was voted into office thanks to an ambitious plan centered on economic reforms. …[T]he government plans to pursue canceling taxes on dividends and capital gains, as well as inheritance and gift taxes and the property transfer tax. …The Cabinet plans to reduce the share of mandatory expenditures on the overall state budget from its current 70 percent to below 50 percent by 2010. …The Cabinet’s weak support in the Parliament also makes it unlikely that the flat tax will be put in effect anytime soon.

Gruber & Simon: Crowd-out Is Clearly Significant

Have you checked your inbox for this week’s summary of the latest working papers from the National Bureau of Economic Research? 

If not, you might have missed the latest from Jonathan Gruber and Kosali Simon about how expanding government health programs reduces private health insurance coverage. Here’s the abstract:

The continued interest in public insurance expansions as a means of covering the uninsured highlights the importance of estimates of “crowd-out,” or the extent to which such expansions reduce private insurance coverage. Ten years ago, Cutler and Gruber (1996) suggested that such crowd-out might be quite large, but much subsequent research has questioned this conclusion. We revisit this issue by using improved data and incorporating the research approaches that have led to varying estimates. We focus in particular on the public insurance expansions of the 1996–2002 period. Our results clearly show that crowd-out is significant; the central tendency in our results is a crowd-out rate of about 60%…. We also find that recent anti-crowd-out provisions in public expansions may have had the opposite effect, lowering take-up by the uninsured faster than they lower crowd-out of private insurance.

In other words, for every 10 people added to the Medicaid rolls, the number of people with private health insurance falls by six.

And just in time for the debate over SCHIP reauthorization.

Tax Competition Pushes States to Improve Tax Policy

Thanks to the mobility of labor and capital, state politicians face pressure to lower tax rates and reform tax systems. Indeed, the Wall Street Journal explains that the nine states without income taxes soon may have company, especially since it is increasingly apparent that no-tax states are growing much faster than states that have adopted the punitive levy:

In Georgia, Missouri, and South Carolina, governors and state legislatures are drafting serious proposals to repeal their income taxes to promote economic development. St. Louis, one of America’s most distressed cities, may overturn its wage/income tax as a way to spur urban revival. And in Michigan, the legislature is in the last stages of phasing out its hated business income tax — the most onerous in the land.

“States are now in a ferocious competition to attract jobs and businesses,” says economist Arthur Laffer, who is advising several governors and legislators on the issue, “and one of the best ways to win this race is to abolish the state income tax.”

…The idea of financing state services without an income tax is hardly radical. Nine states today — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — manage well without one. With a few exceptions, the non-income tax states are America’s most prosperous. Meanwhile, the high income tax states, which tend to be congregated in the Northeast, keep surrendering jobs, people, and voters to the South and West.

State lawmakers also seem to have learned from two of the most recent states to adopt an income tax: New Jersey and Connecticut. As recently as 1965 New Jersey had neither an income nor sales tax, but managed to balance its budget every year. Now it has both taxes — its income tax is the 5th highest in the nation — but the state is facing what Stateline.org calls a “staggering budget deficit.” Allied Van Lines reports that the Garden State is now one of the leading places for people to flee.

The latest state to adopt an income tax was Connecticut in 1991, but a new report by the Yankee Institute reveals that the tax has been a calamity. The state has ranked last in employment growth since 1991, losing 240,000 of its native born citizens between 1991–2002. No other state has since enacted an income tax, and lawmakers in Georgia, Missouri, and South Carolina say Connecticut is now the model for how not to run a state economy.

The French Tax Debate

Shocking as it may seem, one of France’s presidential candidates actually is talking about tax cuts. And the current president endorsed a big reduction in the corporate tax rate. No tax cuts have actually been implemented, but perhaps some people in France have finally realized that it is better to reward rather than punish productive behavior.

The Wall Street Journal opines

Ms. Royal’s foray into these waters came, as much else in recent weeks, awkwardly. Socialist Party chief François Hollande, who is also Ms. Royal’s personal partner and the father of their four children, floated a plan to raise taxes on people earning above €4,000 a month. This was quickly panned as a tax hike that soaks the middle classes. Taken by surprise, Ms. Royal tried to distance herself from his proposal, but her campaign was soon put on another back foot when details of their own personal wealth were leaked to the press.

…Mr. Sarkozy has taken advantage. Building on the momentum from his formal nomination by the ruling center-right party last week, and with an emerging lead in the polls, he used a front-page interview in Tuesday’s Le Monde to push for cuts in income taxes and — the real whammy in France — social charges. His proposals are modest, but break a taboo in France — something that this son of Hungarian and Jewish immigrants specializes in.

…Mr. Sarkozy isn’t a Thatcherite by a long stretch, nor would being one help him in the eyes of French voters. He doesn’t dare support revoking the 35-hour workweek; he wants only to relax the law, even though it is widely seen as a failure. When he was briefly finance minister in 2004, he showed an interventionist streak that appeared to betray a lack of true understanding about how a market economy really works.

Switzerland Provides Refuge for Victims of Fiscal Oppression

Tax-news.com reports on the influx of wealthy foreigners seeking to benefit from Switzerland’s attractive tax laws for non-citizens. Driven in large part by competition among cantons, this system enables highly productive people to escape excessive taxation in other nations. High-tax European welfare states despise this policy, not surprisingly, but Swiss lawmakers understandably ignore these complaints. Indeed, as reported by the International Herald Tribune, one Swiss official even explained that there is no such thing as a “just” tax:

“It’s not a question of justice or injustice; there’s no just tax,” said Jean- Daniel Gerber, head of the Swiss State Secretariat for Economic Affairs.

Legendary French music and film superstar Johnny Hallyday and English pop star James Blunt are not unique in their desire to escape the high-tax regimes of their home countries. Switzerland has become a popular haunt for a variety of sports starts, rock stars and tycoons, notably Michael Schumacher, the former Formula One world champion, and Boris Becker, the Grand Slam tennis champion, rock star Phil Collins and Ingvar Kamprad, founder of the furniture chain Ikea.

Well over 3,500 wealthy foreigners have taken advantage of fiscal deals offered by Swiss cantons, paying an average of CHF75,000 each in tax on earnings of CHF300 million annually, according to Swissinfo. While individual deals vary, a typical agreement will see the individual pay tax on a multiple of the the value of their property or living expenses.

Swiss cantons are permitted an unusual amount of freedom from central government to set their own tax rates under the 2001 Tax Harmonisation Act, which has established a direct link between voters and tax policy and has helped to encourage tax competition within Switzerland for wealthy individuals and holding companies.

At least eighteen out of Switzerland’s 24 cantons planned to cut rates of taxation in 2006, led by Obwalden, which cut the corporate tax to 6.6% in January 2006, the lowest rate in Switzerland. Obwalden also cut tax for individuals earning over CHF300,000 by 1% to 2.35% and reduced property tax.

The system has also attracted criticism from the European Union. While Switzerland is not a member of the EU, it is party to a free trade agreement with Brussels dating back to 1972 and the European Commission has told Berne that it thinks certain aspects of Switzerland’s tax system are “incompatible” with this agreement and distort trade within the EU. To date, EC pressure on Switzerland to change its tax system has been firmly resisted by the Swiss government, with President Micheline Calmy-Rey telling the press whilst still Foreign Minister in December that there is “absolutely no room for negotiation,” regarding Swiss tax laws.

Old Dominion GOPers Fall Off the Tax Wagon…Again.

Virginia Republicans have lost seats in the state legislature and lost the governor’s mansion in part because of their propensity to raise taxes. Unfortunately, they do not seem to understand the link between their profligate behavior and their political misfortunes. The Wall Street Journal explains that they now want to raise taxes when the state has a giant budget surplus:

Virginia was once a solidly conservative Republican state, but in recent years it has tilted Democratic. A big reason for the shift is the GOP’s recent love affair with higher taxes. In the 1990s Republican Governors George Allen and Jim Gilmore won sweeping victories running as tax cutters. Then in 2004 Richmond Republicans enacted the largest tax increase in the commonwealth’s history – a $1 billion hike in sales and tobacco taxes. Now they are flirting with another tax hike even though the state has a Blue Ridge Mountain-high $900 million budget surplus. …The Republican plan would spend $1 billion more for roads and cost-inefficient transit programs and pay for it through borrowing, raising taxes and fees on cars and trucks, and giving local governments authority to raise their assessments. …Only 10 years ago the Virginia GOP was riding high after Jim Gilmore was elected Governor on a wildly popular message: “End the Car Tax.” Now the Virginia Republicans want to raise car taxes. Have they learned nothing from the party’s implosion in Washington?

Taxing the Future

Today’s New York Times reports that Illinois is seriously considering selling off its state lottery and converting the future cash flow into a current lump sum plus a smaller cash flow over the next 75 years.  Gambling, of course is not an economic development strategy.  Excess profits exist only because the state restricts entry.  Like the mercantile regimes of old, the state is raising cash by selling off its monopoly.

Given the numbers in the Times, I conducted some present value calculations.  The sale is projected to result in a cash flow of $200 million per year for 75 years to the state (current profits are $430 billion).  The remaining cash flow goes to the winning bidder.  The reported estimated bid for this franchise is approximately $1 billion.  That suggests a return on investment of 20% per year compounded over 75 years.  Seems rather steep to me.  A 5% return would result in a much higher bid of $3.9 billion.

If the $1 billion is an accurate reflection of what an auction would yield, then the market is telling us that there is large risk to investing in a business whose only asset is state restrictions on entry.  This is particularly true because of the possibility not only of actual physical entry in Illinois, which is less likely, but entry through the internet.

Gambling markets are not the only markets whose source of profits is state enforced entry restriction.  Some years ago Richard Sansing and I studied the difference between the lease prices and sale values of taxi medallions in New York City (Journal of Policy Analysis and Management volume 13 issue 3 (1994) pp. 565-570).  We found that the market acted as if there was a 5% chance of deregulation in any year (i.e. the market was pricing the asset as if its cash flow would be zero in year 21).

Why are states selling assets for their cash flows?  Spending a billion dollars now rather than $630 million every year (the current profits of the lottery) allows today’s politicians to appear generous.  But my suspicion is that they are taxing the only thing left to tax i.e. people in the future.  My colleague Jagadeesh Gokhale’s work in entitlement reform argues that Social Security and Medicare are policies that redistribute from all future generations to current and past generations.  Politicians do this because the future is the last unorganized group in society.  I think some of the same politics are behind the Illinois lottery financial proposal.  But ironically the inability of the political system to credibly commit to future policies reduces the value of the sale to the current era because the market includes political risk in its valuation.