Topic: Tax and Budget Policy

Bush’s Alternative-fuel Boondoggle

A CBSnews.com column explains how huge ethanol subsidies enrich special interests like Archer Daniels Midland:

Ironically, the president’s call echoes a more severe proposal by his 2004 campaign opponent John Kerry — a recommendation that a National Center for Policy Analysis study found would not “reduce future U.S. dependence on foreign oil.” The president’s plan also proposes an expansion of the so-called Renewable Fuels Standard (RFS), which currently mandates that refineries produce 7.5 billion gallons of ethanol per year by 2012.

But, as Heritage Foundation energy analyst Ben Lieberman points out, “if ethanol were a viable fuel, you wouldn’t have to mandate it in the first place.” Indeed, ethanol — whether made from corn or trendy cellulosic sources like switchgrass — is simply not viable as an alternative for the fundamental reason that a gallon of ethanol only goes 75 percent as far as a gallon of gas.

…For the farm lobby, the renewable mandate is easier to understand. It means money. Lots of money. To make ethanol price-competitive, the federal government subsidizes its production to the tune of 51 cents a gallon, costing U.S. taxpayers $4.1 billion a year.

Fueled by the RFS, Big Ethanol producer Archer Daniels Midland rang up record 2006 profits that would make Big Oil blush. Now Bush is proposing to increase the mandate to a fanciful 35 billion gallons by 2017 (whether consumers buy it or not). And as the federal honey pot grows, it is naturally attracting more flies.

Meanwhile, a Wall Street Journal column notes how the ethanol subsidy has a big negative impact on other users of corn, and even causes harm in other nations:

What we have here is a classic political stampede rooted more in hope and self-interest than science or logic.

…[F]ederal and state subsidies for ethanol ran to about $6 billion last year, equivalent to roughly half its wholesale market price. Ethanol gets a 51-cent a gallon domestic subsidy, and there’s another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it — despite recent high oil prices.

That’s also why the percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years, or about 8.6 million acres of farmland. Reaching the President’s target of 35 billion gallons of renewable and alternative fuels by 2017 would, at present corn yields, require the entire U.S. corn harvest.

No wonder, then, that the price of corn rose nearly 80% in 2006 alone. Corn growers and their Congressmen love this, and naturally they are planting as much as they can.

…[F]or those of us who like our corn flakes in the morning, the higher price isn’t such good news. It’s even worse for cattle, poultry and hog farmers trying to adjust to suddenly exorbitant prices for feed corn — to pick just one industry example.

The price of corn is making America’s meat-packing industries, which are major exporters, less competitive. In Mexico, the price of corn tortillas — the dietary staple of the country’s poorest — has risen by about 30% in recent months, leading to widespread protests and price controls. …Thus is a Beltway fad translated into Third World woes.

…The scientific literature is also divided about whether the energy inputs required to produce ethanol actually exceed its energy output. It takes fertilizer to grow the corn, and fuel to ship and process it, and so forth. Even the most optimistic estimate says ethanol’s net energy output is a marginal improvement of only 1.3 to one. For purposes of comparison, energy outputs from gasoline exceed inputs by an estimated 10 to one.

And because corn-based ethanol is less efficient than ordinary gasoline, using it to fuel cars means you need more [fuel] to drive the same number of miles. This is not exactly a route to “independence” from Mideast, Venezuelan or any other tainted source of oil.

…If cellulose is going to be an energy miracle — an agricultural cold fusion — far better to let the market figure that out. Not that any of these facts are likely to make much difference in the current Washington debate. The corn and sugar lobbies have their roots deep in both parties, and now they have the mantra of “energy independence” to invoke, however illusory it is. If anything, Congress may add to Mr. Bush’s ethanol mandate requests.

NZ’s Richest Woman Escapes High Taxes

Tax competition is a marvelous liberalizing force. Every time a taxpayer leaves a high-tax jurisdiction for a low-tax jurisdiction, bad policy is punished and good policy is rewarded.

New Zealand’s richest woman is the latest tax expatriate, as reported by The Press:

Reclusive Kathmandu founder Jan Cameron has moved to Tasmania after spending more than 30 years in Christchurch, where she built a $275 million business fortune. Starting with a small shop in Linwood, Cameron turned her outdoor-clothing and equipment venture into one of the country’s best-known brands, with outlets in New Zealand, Australia and Britain.

The Press understands Cameron had looked at staying in New Zealand after selling Kathmandu last year and planned to donate a portion of her annual income from her investments to charities. But under the New Zealand tax regime, all the money she gave away over an $1800 threshold would be taxed, so she opted to move to Australia, where there is no limit.

…PricewaterhouseCoopers tax specialist John Shewan said he was not surprised by Cameron’s decision. “It does underline how careful we need to be if we want to retain high-net-worth individuals,” he said. “We need to have a tax-friendly environment. Sadly, we don’t have that at the moment.”

Shewan said Cameron would pay no tax on her overseas investments under new Australian tax rules. ”Australia has stolen a march on us in terms of attracting high-net-worth individuals,” he said.

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.