Topic: Tax and Budget Policy

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.

Democratic Governor in Arkansas Pushes Big Tax Cut

Although national Democrats (and some Republicans) have a love affair with higher taxes, Mike Beebe in Arkansas has convinced legislators to approve a big tax cut. To boost growth and competitiveness, his tax cut should have focused on lower income tax rates rather than cherry-picking certain constituencies, but at least he is reducing the state’s total tax grab. The Wall Street Journal opines:

Arkansas Governor Mike Beebe may not be a man from Hope, but the newly elected Democrat is becoming a voice for tax relief within his party. Last year he campaigned on cutting in half his state’s 6% sales tax on groceries. Last week he made good on the promise by striking a deal with a reluctant Democratic legislature. His compromise also repeals income taxes on the poor and cuts sales taxes that manufacturers pay on their utility bills. All told, taxpayers will save $319 million over two years, or what the Governor calls “the largest tax decrease in the history of the state.” …The Tax Foundation reports that Arkansas is the 27th most taxed state in the nation with a heavier tax burden than neighboring Texas and Tennessee, neither of which has an income tax and rank 44th and 47th. The state is expected to have an $840 million surplus this year and could therefore afford additional cuts in its 6% general sales tax and 7% tax on income over $30,100.

Irish EU Commissioner Understands Benefits of Lower Tax Rates

Charlie McGreevy is a lonely voice in Brussels. Most of his fellow Commissioners believe in bigger government and higher taxes, but McGreevy is from Ireland, and he obviously understands from his own country’s experience that lower tax rates promote growth and create opportunity. Tax-news.com reports:

Internal Market Commissioner, Charlie McCreevy outlined his position on taxation within the European Union, suggesting that ‘higher taxes feed fatter government’. …”Some see taxation as a means of making society more equal. Of levelling down. Of limiting the upside rewards that go with taking risk or working hard. I don’t. …I don’t see taxation as meritorious in its own right. I believe taxes – of all kinds - should be kept as low as possible and that the pressure to get them down should be relentless. I believe also, where there is a choice on how to levy taxes, preference should be given to levying them on spending. Taxes on income are taxes on effort, work and entrepreneurship. Taxes on capital are taxes on investment and risk taking. But it is effort, work, entrepreneurship, investment and risk taking that we need to continue to grow our economic base. And it is that growth that generates the incremental tax revenues that finance sustainable improvements in welfare. It was when taxes on income were raised and the thresholds at which they became payable were lowered that Ireland’s economy and public finances came close to basket case status. When capital taxes on wealth creation and entrepreneurship proliferated non-compliance proliferated with it, and wealth and jobs were driven out. In fact the tax revenues that some of those taxes generated were barely adequate to cover the cost of collecting them.”

Tax Hike Will Accelerate Connecticut’s Decline

Prior to 1991, Connecticut did not have an income tax and the state was competitive and very prosperous. Since adopting the tax, however, the state has suffered the slowest job growth of any state. Now the Governor (who hid her plans while campaigning) wants to boost the tax even higher to fund an orgy of new spending. The Wall Street Journal opines on this self-destructive proposal: 

Connecticut Governor M. Jodi Rell wants to thank constituents for electing her with 63% of the vote by socking them with a 10% hike in the personal income tax rate. Fellow Republicans in the state legislature are understandably scratching their heads. But the proposal has no doubt also left many taxpayers wondering why they even bother to pull the lever for Republicans. Ms. Rell dropped this bombshell last week when she presented her biennial budget. In addition to the income tax increase, which would push the top marginal rate to 5.5% from the current 5% over two years, the Governor also proposes increasing cigarette taxes, hiking bus fares and phasing out a $500 property tax credit. Democrats, who control both houses of the legislature, welcome the plan. So does much of the state’s liberal media, who are hailing Ms. Rell as “brave” and “courageous.” But as Susan Kniep of the Federation of Connecticut Taxpayer Organizations put it to the Associated Press, “Gee, why didn’t we kind of hear about this before we went into the polls?” Governor Rell says a tax increase is necessary to fund more education spending. But Connecticut already spends more money per student on public schools than all but three states. According to the latest Census data, which is from the 2004 school year, Connecticut’s per-pupil spending is $10,788, or more than 30% above the national average of $8,287. …Connecticut adopted its income tax in 1991, and it has since ranked last nationally in employment growth while losing tens of thousands of people to other states. Increasing the income tax rate seems an odd way to reverse these trends. “When looking at states that have growing economies and are thriving,” said Republican state senator David Cappiello in an interview, “they’re the states that either have no income tax or are looking to phase down their income tax. Connecticut is moving in the opposite direction.” …By the way, it’s not as if Connecticut taxpayers haven’t been doing their part; the state will end the current fiscal year with a $600 million revenue surplus. The problem is that the politicians want to spend the money faster than it comes in. Governor Rell’s budget would grow government by nearly 13% over two years and bust constitutional spending caps approved by 81% of voters back in 1992. No wonder she kept her plans secret until after the election. 

Property Rights Promote Conservation

My daily visit to Marginal Revolution continues to pay dividends. Alex Tabarrok comments on a New York Times story that explains how giving people private ownership of trees has improved conservation and led to millions of additional trees: 

Recent studies of vegetation patterns, based on detailed satellite images and on-the-ground inventories of trees, have found that Niger, a place of persistent hunger and deprivation, has recently added millions of new trees and is now far greener than it was 30 years ago. These gains, moreover, have come at a time when the population of Niger has exploded, confounding the conventional wisdom that population growth leads to the loss of trees and accelerates land degradation, scientists studying Niger say. …Another change was the way trees were regarded by law. From colonial times, all trees in Niger had been regarded as the property of the state, which gave farmers little incentive to protect them. Trees were chopped for firewood or construction without regard to the environmental costs. Government foresters were supposed to make sure the trees were properly managed, but there were not enough of them to police a country nearly twice the size of Texas. But over time, farmers began to regard the trees in their fields as their property, and in recent years the government has recognized the benefits of that outlook by allowing individuals to own trees. Farmers make money from the trees by selling branches, pods, fruit and bark. Because those sales are more lucrative over time than simply chopping down the tree for firewood, the farmers preserve them.

Federal Bureaucrats: Same Old Story

The Washington Post reports on a new survey of 221,400 federal workers and their pay and performance.

Among the survey findings are that only 22 percent of federal workers agreed with the statement “pay raises depend on how well employees perform their jobs.”

Despite eight years of Al Gore’s “reinventing government” and six years of similar efforts under President Bush, the federal bureaucracy is still a very ill-functioning “bureaucracy.” Indeed, that will always be the case. Here are some reasons why:

  • Poorly performing federal agencies do not go bankrupt, and thus there is no built-in mechanism to eliminate failures;
  • Government managers face no profit incentive, giving them little reason to proactively reduce costs. Indeed, without profits to worry about, managers favor budget and staffing increases to boost their power and prestige;
  • Without the profit motive, there is little incentive for government workers to innovate and produce better services;
  • The output of much government work is hard to measure, making it difficult to set performance goals for managers and workers;
  • Even if performance could be measured, federal pay is generally tied to longevity, not performance;
  • Disciplining federal workers is difficult, and they are virtually never fired, resulting in agencies carrying heavy loads of poor performers;
  • To prevent corruption, governments need complex and costly regulations and paperwork to carry out routine functions such as procurement;
  • Because of the frequent turnover of political appointees, many agencies experience continual changes in their missions;
  • Congress imposes extra costs on agencies in carrying out their duties, such as resisting closure of unneeded offices in the districts of important members;
  • Agencies get influenced or “captured” by special interest groups that steer policies toward satisfying narrow goals, rather than broad public interest goals;
  • The large size and overlapping activities of federal agencies makes coordination of related functions very difficult. Sadly, we saw the results of this problem with the failures of U.S. intelligence agencies to effectively communicate with each other prior to 9/11.

For these reasons, and many more, the federal government ought to radically downsized with as many functions as possible left to the private sector. See http://www.downsizinggovernment.com/