Topic: Tax and Budget Policy

Targeting Multinationals, the OECD Launches New Scheme to Boost the Tax Burden on Business

By
Daniel J. Mitchell

I’ve been very critical of the Organization for Economic Cooperation and Development. Most recently, I criticized the Paris-based bureaucracy for making the rather remarkable assertion that a value-added tax would boost growth and employment.

But that’s just the tip of the iceberg.

Now the bureaucrats have concocted another scheme to increase the size and scape of government. The OECD just published a study on “Addressing Base Erosion and Profit Shifting” that seemingly is designed to lay the groundwork for a radical rewrite of business taxation.

In a new Tax & Budget Bulletin for Cato, I outline some of my concerns with this new “BEPS” initiative.

…the BEPS report…calls for dramatic changes in corporate tax policy based on the presumption that governments are not seizing enough revenue from multinational companies. The OECD essentially argues that it is illegitimate for businesses to shift economic activity to jurisdictions that have more favorable tax laws. …The core accusation in the OECD report is that firms systematically—but legally—reduce their tax burdens by taking advantage of differences in national tax policies.

Ironically, the OECD admits in the report that revenues have been trending upwards.

…the report acknowledges that “… revenues from corporate income taxes as a share of gross domestic product have increased over time. …Other than offering anecdotes, the OECD provides no evidence that a revenue problem exists. In this sense, the BEPS report is very similar to the OECD’s 1998 “Harmful Tax Competition” report, which asserted that so-called tax havens were causing damage but did not offer any hard evidence of any actual damage.

To elaborate, the BEPS scheme should be considered Part II of the OECD’s anti-tax competition project. Part I was the attack on so-called tax havens, which began back in the mid- to late-1990s.

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Topics: 
Finance, Banking & Monetary Policy, Government and Politics, International Economics and Development, Tax and Budget Policy

Keynesianism and Labor Markets: United States vs. Canada

By
Chris Edwards

Some more from the new Canadian budget: It has some interesting charts (page 38) comparing U.S. and Canadian labor markets (or “labour” markets as the Canadians would say).

The charts, replicated below, show that by every dimension (total employment, unemployment rates, and participation rates) the Canadian economy has done far better than the U.S. economy in recent years.

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Topics: 
Tax and Budget Policy

Corporate Taxes: Low Rates, High Revenues in Canada

By
Chris Edwards

Canada’s federal government introduced a budget yesterday that includes new estimates of corporate tax revenues. I’ve discussed how Canada has cut its statutory corporate tax rate to a fraction of the U.S. rate, yet Canada raises more revenue. The new budget shows that the Canadian federal 15 percent tax raised 1.9 percent of GDP in revenue in 2012, while the U.S. federal tax at 35 percent raised just 1.6 percent, per CBO.

U.S. revenues are below normal levels right now, so let’s look further out at the steady-state projections for the two countries. Canada’s budget projection to 2018 shows that corporate tax revenues under the 15 percent rate are expected to stabilize at 1.9 percent of GDP. U.S. projections by the CBO show that corporate tax revenues will rise to 2.6 percent and then fall back to 2.0 percent in the longer-term. So the Canadian corporate tax will raise 95 percent as much as the U.S. tax even though the Canadian rate is just 43 percent of the American rate. The upshot is that worries about proposed U.S. corporate tax cuts reducing revenues are misplaced. If the U.S. federal government chopped its 35 percent rate, the tax base would expand automatically over time and the government would probably lose little if any revenue.

The following charts compare U.S. and Canadian rates and revenues:

Topics: 
International Economics and Development, Tax and Budget Policy

If the Canadians Can Handle Free Trade in Hockey Equipment…

By
Simon Lester

…then can’t everyone else adopt a little free trade of their own? This is from the NY Times:

Take a walk down an aisle at Pro Hockey Life, an emporium of the Canadian national sport here on the capital’s southern fringe, and a customer comes away with a decidedly non-Canadian feel. Almost every pad, mask, stick and skate is made elsewhere — mostly in Asia, often by foreign-owned manufacturers. Just about the only thing Canadian about buying hockey equipment in Canada has for years been the tariff on imported goods. Now, even that quirk of Canadian hockey history is going away. On Thursday, the finance minister, Jim Flaherty, announced that the Conservative government would end import tariffs on all sports equipment, except bicycles, on April 1. The tariffs were as high as 18 percent.
It may be just a small step (glide?), but it’s good news for free trade nonetheless. So what prompted the change?
The government’s decision to eliminate tariffs that were protecting a largely nonexistent industry seems to have more to do with online shopping and the rise of the Canadian dollar to parity with its American counterpart. For example, many of the skates at Pro Hockey Life priced from $500 to $700, a surprisingly large category, are available from American online retailers at prices that are at least $100 lower because of low tariffs in the United States.
I was a big fan of online shopping anyway. If it can help get rid of tariffs, even better!

Topics: 
International Economics and Development, Tax and Budget Policy, Trade and Immigration

The Laffer Curve Bites Ireland in the Butt

By
Daniel J. Mitchell

Cigarette butt, to be specific.

All over the world, governments impose draconian taxes on tobacco, and then they are surprised when projected revenues don’t materialize. We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and Michigan.

Even the Government Accountability Office has found big Laffer Curve effects from tobacco taxation.

And now we’re seeing the same result in Ireland.

Here are some details from an Irish newspaper.

[N]ew Department of Finance figures showing that tobacco excise tax receipts are falling dramatically short of targets, even though taxes have increased and the number of people smoking has remained constant… [T]he latest upsurge in [cigarette] smuggling … is costing the state hundreds of millions in lost revenue. Criminal gangs are openly selling smuggled cigarettes on the streets of central Dublin and other cities, door to door and at fairs and markets. Counterfeit cigarettes can be brought to the Irish market at a cost of just 20 cents a pack and sold on the black market at €4.50. The average selling price of legitimate cigarettes is €9.20 a pack. …Ireland has the most expensive cigarettes in the European Union, meaning that smugglers can make big profits by offering them at cheaper prices.

I had to laugh at the part of the article that says, “receipts are falling dramatically short of targets, even though taxes have increased.”

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Topics: 
Government and Politics, International Economics and Development, Tax and Budget Policy

Force-Feeding Fiscal Federalism

By
Tad DeHaven

State and local politicians love federal money. Every federal dollar that a state or local politician can spend is a dollar that he or she doesn’t have to ask his or her voters to come up with through taxes or fees.

One problem is that citizens might (erroneously) view local spending that is subsidized by the federal government as being a “free lunch.” Citizens are numbed to the real cost of government and the incentive for them to keep tabs on how state and local officials spend money is weakened.

According to an article in Politico, federal sequestration cuts to state and local subsidies could mean that local taxpayers will be asked by local officials to cover the difference: 

To keep their budgets in order, local officials across the country — many of whom don’t have the luxury of running deficits — say a dysfunctional Congress is forcing them to resort to the type of tax increases that Republicans, in particular, so fiercely oppose. 

…

Some of the hard-hit jurisdictions are obvious. Residents in Fairfax County, Va., which is home to defense contractors and thousands of federal employees, are being warned that property taxes could rise by an average of $262 later this year because of fallout from the sequester.

Heaven forbid that defense contractors and federal employees – already beneficiaries of captive federal taxpayers – might have to bear a greater responsibility for the local government services that they “benefit” from. Perhaps a potential tax increase will cause Fairfax County residents to take a closer look at how local officials have been spending money and decide that additional money isn’t needed. (And perhaps the defense contractors and federal employees in particular will have a better understanding of why some of us don’t want to pay additional federal taxes to help maintain current levels of federal spending.)

Sequestration might not be the ideal way to cut federal spending, but if it results in people appreciating that federal spending isn’t a free lunch, good.

See this Cato essay for more on fiscal federalism.

Topics: 
Tax and Budget Policy

The Ryan Budget: Is Returning to Clinton-Era Levels of Fiscal Restraint Really Asking too Much?

By
Daniel J. Mitchell

It can be very frustrating to work at the Cato Institute and fight for small government.

Consider what’s happened the past couple of days.

Congressman Paul Ryan introduces a budget and I dig through the numbers with a sense of disappointment because government spending will grow by an average of 3.4 percent annually, much faster than needed to keep pace with inflation.

But I don’t even want government to grow as fast as inflation. I want to reduce the size and scope of the federal government.

I want to shut down useless and counterproductive parts of Leviathan, including the Department of Housing and Urban Development, the Department of Education, the Department of Energy, the Department of Transportation, the Department of Agriculture, etc, etc…

I want to restore limited and constitutional government, which we had for much of our nation’s history, with the burden of federal spending consuming only about 3 percent of economic output.

So I look at the Ryan budget in the same way I look at sequestration – as a very modest step to curtail the growth of government. Sort of a rear-guard action to stem the bleeding and stabilize the patient.

But, to be colloquial, it sure ain’t libertarian Nirvana (though, to be fair, the reforms to Medicare and Medicaid are admirable and stem in part from the work of Cato’s healthcare experts).

But my frustration doesn’t exist merely because the Ryan budget is just a small step.

I also have to deal with the surreal experience of reading critics who assert that the Ryan budget is a cut-to-the-bone, harsh, draconian, dog-eat-dog, laissez-faire fiscal roadmap.

If only!

To get an idea of why this rhetoric is so over-the-top hysterical, here’s a chart showing how fast government spending is supposed to grow under the Ryan budget, compared to how fast it grew during the Clinton years and how fast it has been growing during the Bush-Obama years.

Ryan Clinton vs Bush Obama

I vaguely remember taking the SAT test in high school and dealing with questions entitled, “One of these things is not like the others.”

Well, I would have received a perfect score if asked to identify the outlier on this chart.

Bush and Obama have been irresponsible big spenders, while Clinton was comparatively frugal.

And all Paul Ryan is proposing is that we emulate the policy of the Clinton years.

Now ask yourself whether the economy was more robust during the Clinton years or the Bush-Obama years and think about what that implies for what we should do today about the federal budget.

At the very least, we should be copying what those “radical” Canadians and other have done, which is to impose some genuine restraint of government spending.

The Swiss debt brake, which is really a spending cap, might be a good place to start.

Topics: 
General, Government and Politics, Tax and Budget Policy

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