Topic: Tax and Budget Policy

It Pays to Waste Money

Despite a long history of political advocacy and fiscal mismanagement, the Legal Services Corporation (LSC) will get a $22 million budget increase if a spending bill recently passed by the House becomes law.

You might recall that the LSC made the news last year when its inspector general revealed that LSC executives were living large on tax dollars — enjoying chauffer-driven limousine rides around D.C., expensive meals, foreign trips, and a posh office suite in Georgetown. And as retribution for exposing those excesses, the LSC almost fired its inspector general.

Now the agency, a target of fiscal conservatives for decades, is poised to receive a 6.3 percent budget increase — from $327 million in fiscal year 2006 to $349 million in FY 2007.

Though the practice of rewarding mismanagement with more funding is commonplace in Washington, Congress had promised to do things differently this year. The spending bill was supposed to simply continue funding the federal government at 2006 levels. 

Unfortunately, it appears that old spending habits are hard to break.

A French Global Warming Tax Against the U.S.?

Al Gore has a new ally in his fight for new taxes and regulations to limit carbon emissions. The New York Times reports that, for all intents and purposes, Jacques Chirac is blackmailing the United States: 

President Jacques Chirac has demanded that the United States sign both the Kyoto climate protocol and a future agreement that will take effect when the Kyoto accord runs out in 2012.

He warned that if the United States did not sign the agreements, a carbon tax across Europe on imports from nations that have not signed the Kyoto treaty could be imposed to try to force compliance.

Trade lawyers have been divided over the legality of a carbon tax, with some saying it would run counter to international trade rules. But Mr. Chirac said other European countries would back it. “I believe we will have all of the European Union,” he said.

A 95 Percent Tax Rate?

Brad DeLong says in the Miami Herald that confiscating and redistributing 95 percent of the wealth generated by entrepreneurs would create “more happiness and opportunity.” Does that mean he wants a 95 percent top rate for the income tax? A top rate of 95 percent for the death tax? Surely he does not really think tax rates should be that high, but his column certainly points in that direction: 

Within each country, the increase in inequality that we have seen in the past generation is predominantly a result of failures of social investment and changes in regulations and expectations. It has not been accompanied by any acceleration in the overall rate of economic growth. For the most part, it looks like these changes in economy and society have not resulted in more wealth, but only in an upward redistribution of wealth — a successful right-wing class war. This kind of inequality should be a source of concern. Bill Gates, Paul Allen, Steve Ballmer and the other millionaires and billionaires of Microsoft are brilliant, hardworking, entrepreneurial and justly wealthy. But only the first 5 percent of their wealth can be justified as an economic incentive to encourage entrepreneurship and enterprise. The next 95 percent would create much more happiness and opportunity if it were divided evenly among U.S. citizens or others than if they were to consume any portion of it. An unequal society cannot help but be an unjust society. The most important item that parents in any society try to buy is a head start for their children. And the wealthier they are, the bigger the head start. Societies that promise equality of opportunity thus cannot afford to allow inequality of outcomes to become too great.

Bush’s Standard Health Insurance Deduction: Tax Hike or No?

National Review’s Ramesh Ponnuru takes the Bush administration’s economist Kate Baicker and spokesman Tony Snow to task for what he suggests is a misleading representation of the President’s proposed “standard health insurance deduction.”

Briefly, under that proposal, most people who purchase health insurance would receive a substantial tax cut.  However, some workers would no longer be able to exempt from taxation the full amount of their health benefits.  Individuals who now receive more than $7,500 in health benefits, and families that receive more than $15,000 worth, would have to pay taxes on the difference. 

Ponnuru writes:

Snow and Baicker are right to say that if the proposal becomes law, compensation packages will adjust, with expensive plans being scaled back and the savings passed on in higher wages. But those higher wages will be taxed. No matter how the compensation package is rearranged, the percentage of compensation that is taxed will go up for these people.

My Cato colleague Arnold Kling concurs.  I disagree.

I think there are ways to avoid a tax increase, though I agree with Ramesh that this New York Times article didn’t do enough to explain how. 

In today’s New York Sun, I discuss the prospect of tax increases on workers with expensive health benefits:

Though that’s troubling, it is by no means certain. In fact, those workers may not face a net tax increase at all, because the President’s proposal would reduce other costs on those same workers. One such “tax” is the higher health care costs that result from the current employer-sponsored system. The President’s proposal would reduce that tax. Another is the current penalty imposed on workers who do not buy coverage through an employer. The President’s proposal would eliminate that tax.

Finally, when premiums exceed the proposed deductions, employers could reduce health benefits and shift the difference to other untaxed compensation, such as contributions to health savings accounts, life insurance, or 401(k)s. That would leave those workers with zero additional taxes. Or they could shift that difference to wages, in which case the workers would pay taxes on it, but their take-home pay would rise.

Of course, it would become more difficult to avoid a tax increase over time.  The deduction amounts would rise with overall inflation, while health insurance premiums traditionally have risen much faster.

I’ll be discussing these issues with Kate Baicker and the Urban Institute’s Len Burman at a Capitol Hill briefing tomorrow.

Hurray for Profits

Good news from the oil industry: ExxonMobil announced a record after-tax profit of $39.5 billion for 2006.

http://news.yahoo.com/s/ap/20070201/ap_on_bi_ge/earns_exxon_mobil

That is great news because it means the company will have more funds to reinvest in exploration, refinery expansion, drilling platforms, chemical plants, and all those other brilliant machines that American families benefit from every day.

The firm invested $20 billion in exploration, structures, and equipment in 2006 and $18 billion in 2005. See here and here.

High profits are a signal to ExxonMobil management, other energy companies, and Wall Street to feed this industry more capital and to continue increasing energy production. That’s good news for U.S. energy security and U.S. consumers.

The bad news with high corporate profits is that governments confiscate so much of them. In 2005, the firm paid current income taxes of $23 billion on pre-tax profits of $59 billion, for an effective income tax rate of 39%. (The firm also paid $31 billion in excise taxes to governments). Of course, Exxon simply collects these taxes on behalf of governments–the ultimate burden falls on individuals.

(In 2006, income taxes were $28 billion on pre-tax earnings of $67 billion, but I couldn’t find the breakdown of current vs. deferred tax)

Anyway, kudos to Exxon for their fine performance!

BBC Story Highlights Moral Bankruptcy of Europe’s High-Tax Politicians

As noted previously, high-tax European governments are upset that taxpayers are fleeing to Switzerland. The economic aspects of this issue are important, but a BBC story raises two interesting philosophical questions. First, the socialist candidate for the French presidency accuses Switzerland of “looting” its neighbor. But this implies that individuals belong to the government and that they do not have the individual freedom and sovereignty to choose where they want to live. Second, the European Union’s Ambassador to Switzerland argues that low tax rates are a subsidy. This argument implies that income belongs to government and it creates a moral equivalence between an interest group that seeks to seize other people’s wealth through the political process and taxpayers who merely want to keep more of their own money. Sounds absurd, but read the BBC report:

Switzerland’s decentralised taxation system is causing irritation among its European Union neighbours. The row was triggered by the decision, late last year, of the French rock star Johnny Hallyday to leave France and take up residence in the Swiss Alpine resort of Gstaad. …In France, where Hallyday is a national icon, there is anger. Advisers to the French presidential candidate Segolene Royal have accused Switzerland of “looting” its neighbours. …Swiss cantons are allowed to set their own taxes and many are now engaging in an internal corporate tax-cutting competition. Canton Obwalden, in central Switzerland, slashed its corporate tax rate to just 6.6% at the start of 2006; it attracted 376 new companies in just 11 months. The European Commission has warned that this may constitute an unfair subsidy under the European Free Trade Agreement. “Talk to any tax expert,” said Michael Reiterer, the commission’s new ambassador to Switzerland. “This is recognised as a subsidy. And there we think Switzerland should think a bit whether behaviour which is clearly outlawed in the EU is the best policy to follow in such a close relationship between two partners.” …Stefan Kux, head of economic development for Zurich, is not the least bit worried by the complaints from Brussels, in fact he sees them as quite positive. “We are profiting from the mistakes of our neighbours,” he explained. “They are making economic promotion for us for free, everyone now knows that Switzerland has an excellent tax system, so I’m very grateful.” …within the Swiss government there is little patience with Europe’s objections over tax. “The Swiss position is on very safe ground,” insisted Adrian Sollberger, spokesman for Switzerland’s office of European policy. “We do not have an agreement to harmonise taxes, none whatsoever, so by definition there cannot be any infringement of any agreement between Switzerland and the EU.” …the Swiss government will not budge; ministers say they view an attack on the tax system as an attack on Swiss sovereignty. The row is sure to simmer on. Meanwhile the businesses and the celebrities just keep on coming.

New Tax Proposal Combines Social Engineering and Class Warfare

Congressional Democrats want to use the tax code to penalize large corporate severance packages. But this should be a matter for stockholders to decide, not headline-seeking politicians. The Wall Street Journal, meanwhile, explains that the middle class often feels the brunt of tax schemes designed to punish the so-called rich:

One of the ways the Senate bill does this is to place a cap on the amount of “deferred compensation” that a company can award its top executives in a given year. The cap is equal to $1 million or the executive’s average salary for the previous five years, whichever is lower. But rather than simply tax any deferred compensation above that threshold as income, it imposes an additional 20% penalty tax on deferred comp above the limit. The Joint Committee on Taxation predicts this provision will bring in $800 million over the next decade. We’ll go out on a limb and predict it brings in an amount closer to $0.

Senate leaders describe this cap on deferred compensation as closing a loophole in the 1993 law that barred companies from deducting from their taxes more than $1 million of salary paid to their CEO and other top execs. Never mind that employee salaries have always been a deductible business expense. This was the last time Democrats ran Congress, and thus the last time they could sock it to the successful.

That 1993 law has itself become a classic example of unintended consequences. The biggest “loophole” in that law was an exemption carved out for performance-based compensation, which was meant to alleviate concerns about Congress setting pay rates in the private sector. Back then, even tub-thumping Senator Carl Levin said “I don’t support the government setting CEO pay in the tax code.” Which he and his mates proceeded to do anyway. And businesses promptly responded by shifting CEO pay away from salary and toward stock options and bonuses to circumvent the cap.

[…]

[T]his time, a much larger pool of people than CEOs could be hit by the new deferred comp cap. People who make a lot less than $1 million have occasion to defer some of their salary, and at many companies even middle managers can do so. If this bill becomes law, those non-millionaires potentially face a 55% tax rate on the income they might otherwise have tried to defer. The tax code is riddled with provisions, such as the Alternative Minimum Tax, the estate tax and any number of phaseouts and caps, that were sold politically as targeting only the “super-rich” but now capture taxpayers of far more modest means.