Topic: Tax and Budget Policy

Ex-Im Bank Weakens American Capitalism

One of the policy fissures in the Republican Party is over business subsidies, and the current debate about the Export-Import Bank illustrates the conflict. The Ex-Im Bank is one of many corporate welfare or crony capitalist programs that litter the federal budget. The Bank’s authorization runs out in September, and so Congress must act if it wants to extend the operations of this business subsidy machine.

Veronique de Rugy at Mercatus and Sallie James at Downsizing Government have looked at the Bank’s operations and discussed why the economics of the Bank do not make sense. Veronique says, “the Export-Import Bank is one of the least defensible corporatist boondoggles that taxpayers are forced to subsidize.”

The main problem with corporate welfare programs like Ex-Im is often overlooked. It is that they undermine American capitalism by weakening the recipient businesses. All subsidies can change the behavior of recipients, and nearly always in a negative way. Just like individual welfare programs reduce work incentives, corporate welfare dulls the competitiveness of recipient companies.

Corporate welfare focuses the energy of business executives on Washington and away from the marketplace. It gives companies a crutch, an incentive not to make the innovations needed to remain on the leading edge. It induces recipient businesses to make foolhardy decisions, as we saw with export subsidies for Enron. And corporate welfare often steers business capital into dead-end markets favored by politicians, and away from uses that would be more productive and profitable in the long run.

Here are some of the points made by Veronique and Sallie about Ex-Im:

  • Veronique: The Bank backs less than 2 percent of the value of total U.S. exports.
  • Veronique: The Bank mainly subsidies very large businesses, not small businesses.      
  • Veronique: Taxpayer exposure to possible Bank losses is rising.
  • Sallie: Export subsidies cannot substantially change the U.S. trade balance, even if that were a good idea.
  • Sallie: The Bank’s activities may slightly shift the U.S. employment mix, but they do not raise overall employment.
  • Sallie: The Bank’s aid to some foreign businesses—such as foreign airlines—comes at the expense of U.S. businesses.

For more on the problems with corporate welfare, see my 2012 congressional testimony on Corporate Welfare Spending vs. the Entrepreneurial Economy.

Congress May Hike VA Spending $400 Billion

Last week the Senate voted to greatly increase health care spending for veterans. If the new spending were made permanent, it would cost at least $385 billion over 10 years, as Nicole Kaeding noted. The House version of the bill would cost at least $477 billion if made permanent. The chambers will now work out a compromise bill, and—going out on a limb here—I’m guessing that the compromise is also a budget buster.

The bills would allow veterans to access health services from facilities outside of the Veterans Affairs (VA) system. The VA system needs a fundamental overhaul, but these bills would appear to just throw money at the problem without creating structural reforms.

The CBO score for the Senate bill is here and for the House bill here. For the House bill, CBO says spending would be $16 billion in 2015 and $28 billion 2016. The House bill would authorize the new spending until 2016, but if Congress extends it permanently the total costs would be $54 billion a year and about $477 billion over 10 years.

I can’t remember an instance when Congress has voted so quickly to spend so much money with so little debate and analysis. The CBO cautioned that their numbers are essentially only rough guesses. So the ultimate spending could be even higher than shown in the chart.

Edwards_VASpendingHouse

A Grim Update on European Tax Policy

I wrote the other day that Americans, regardless of all the bad policy we get from Washington, should be thankful we’re not stuck in an economic graveyard like Venezuela.

But we also should be happy we’re not Europeans. This is a point I’ve made before, usually accompanied by data showing that Americans have significantly higher living standards than their cousins on the other side of the Atlantic.

It’s now time to re-emphasize that message. The European Commission has issued its annual report on “Taxation Trends” and it is–at least for wonks and others who care about fiscal policy–a fascinating and compelling document.

If you believe in limited government, you’ll read the report in the same way you might look at a deadly traffic accident, filled with morbid curiosity and fear that you may eventually suffer the same fate.

But if you’re a statist, you’ll read the report like a 14-year old boy with his first copy of a girlie magazine, filled with fantasies about eventually getting to experience what your eyes are seeing.

Let’s start by giving the bureaucrats some credit for self-awareness. They openly admit that the tax burden is very onerous in the European Union.

The EU remains a high tax area. In 2012, the overall tax ratio, i.e. the sum of taxes and compulsory actual social contributions in the 28 Member States (EU-28) amounted to 39.4 % in the GDP-weighted average, nearly 15 percentage points of GDP over the level recorded for the USA and around 10 percentage points above the level recorded by Japan. The tax level in the EU is high not only compared to those two countries but also compared to other advanced economies; among the major non-European OECD members for which recent detailed tax data is available, Russia (35.6 % of GDP in 2011) and New Zealand (31.8 % of GDP in 2011) have tax ratios exceeding 30 % of GDP, while tax-to-GDP ratios for Canada, Australia and South Korea (2011 data) remained well below 30 %.

Catania’s Tax Amendment

On Friday, I waded into the heated debate regarding the D.C. Council’s tax reform package. I noted that the proposal is far from perfect, but it is a good first step towards reforming D.C.’s burdensome tax structure.

Shortly after I released my post, councilmember and mayoral candidate David Catania proposed a compromise: He would maintain the current sales tax exemption for the fitness industry. In exchange, he would change the way the corporate income tax rate is cut.

The original D.C. Council proposal would cut corporate income tax rates from the current 9.975 percent to 8.25 percent in 2019. Catania’s plan would also cut the corporate income tax rate to 8.25 percent, but it wouldn’t reach that level until 2020.

The chart below shows the two competing proposals.

In addition to taking a year longer to reach 8.25 percent, Catania’s plan includes higher tax rates in each and every year. Under this proposal, all corporate businesses would pay higher taxes in order to maintain the sales tax exemption for the fitness industry.

When I made this point a few days ago, supporters of Catania’s amendment said that my characterization wasn’t accurate. But Catania’s own press release on the issue acknowledges that businesses will pay more under this proposal. It says “the difference in the average annual tax savings for small businesses between the current version of the FY15 budget and the Catania Amendment amounts to just $15 or $1.25 per month. When factoring in all businesses—including the very largest—the difference in the total average business tax savings is only $346 annually or just $28.83 per month.”

I don’t have a strong view as to whether these increased taxes are a good swap for maintaining the current sales tax exemption. But I do know that even a D.C. corporate tax rate of 8.25 percent is still far above the U.S. state average of 4 percent.

The Miracle of Modern-Day Prosperity…and the Ideas and Policies that Made it Happen

Why are some nations rich and other nations poor? What has enabled some nations to escape poverty while others continue to languish?

And if we want to help poor nations prosper, what’s the right recipe?

Since I’m a public finance economist, I’m tempted to say a flat tax and small government are an elixir for prosperity, but those policies are just one piece of a bigger puzzle.

A country also needs sensible monetary policy, open trade, modest regulation, and rule of law. In other words, you need small government AND free markets.

But even that doesn’t really tell us what causes growth.

In the past, I’ve highlighted the importance of capital formation and shared a remarkable chart showing how workers earn more when the capital stock is larger (which is why we should avoid punitive double taxation of income that is saved and invested).

But that also doesn’t really answer the question. After all, if a larger capital stock was all that mattered, doesn’t that imply that we could get prosperity if government simply mandated more saving and investing?

There’s something else that’s necessary. Something perhaps intangible, but critically important.

More Companies Escaping America’s Masochistic Corporate Tax System

Last August, I shared a list of companies that “re-domiciled” in other nations so they could escape America’s punitive “worldwide” tax system.

This past April, I augmented that list with some commentary about whether Walgreen’s might become a Swiss-based company.

And in May, I pontificated about Pfizer’s effort to re-domicile in the United Kingdom.

Well, to paraphrase what Ronald Reagan said to Jimmy Carter in the 1980 presidential debate, here we go again.

Here’s the opening few sentences from a report in the Wall Street Journal.

Medtronic Inc.’s agreement on Sunday to buy rival medical-device maker Covidien COV PLC for $42.9 billion is the latest in a wave of recent moves designed—at least in part—to sidestep U.S. corporate taxes. Covidien’s U.S. headquarters are in Mansfield, Mass., where many of its executives are based. But officially it is domiciled in Ireland, which is known for having a relatively low tax rate: The main corporate rate in Ireland is 12.5%. In the U.S., home to Medtronic, the 35% tax rate is among the world’s highest. Such so-called “tax inversion” deals have become increasingly popular, especially among health-care companies, many of which have ample cash abroad that would be taxed should they bring it back to the U.S.

It’s not just Medtronic. Here are some passages from a story by Tax Analysts.

Teva Pharmaceuticals Inc. agreed to buy U.S. pharmaceutical company Labrys Biologics Inc. Teva, an Israeli-headquartered company, had an effective tax rate of 4 percent in 2013. In yet another pharma deal, Swiss company Roche has agreed to acquire U.S. company Genia Technologies Inc. Corporations are also taking other steps to shift valuable assets and businesses out of the U.S. On Tuesday the U.K. company Vodafone announced plans to move its center for product innovation and development from Silicon Valley to the U.K. The move likely means that revenue from intangibles developed in the future by the research and development center would be taxable primarily in the U.K., and not the U.S.

So how should we interpret these moves?

Tax Exiles Flee America: Blame the Greedy Politicians

The U.S. government is driving some of its most productive citizens abroad.  The only beneficiaries are countries such as Singapore and Switzerland, which offer sanctuary to Americans fleeing avaricious Uncle Sam.

Three years ago Eduardo Saverin, one of Facebook’s founders, joined 1780 other Americans in renouncing their citizenship.  Heading overseas allowed him to reduce the federal government’s take when his company went public.

Just 231 people gave up their citizenship in 2008.  Last year the number was 2999.  The first three months of 2014 was 1001, up from 679 for the first quarter of last year. 

Tax flight is not an option for most people.  However, the rich have more choices internationally.  And they increasingly are telling Uncle Sam goodbye.

So are big corporations, such as Pfizer, which is seeking to buy the British pharmaceutical company AstraZeneca.  The acquisition would allow Pfizer to move its headquarters to the United Kingdom, which employs a “territorial” tax system, with taxes collected only where the income is earned, in contrast to Washington’s worldwide levy. 

About 50 firms have moved their headquarters over the last three decades, half of them since 2008.  Last month the Obama administration decried the practice and proposed to increase the share of foreign ownership required for inversions.

Traditionally the entrepreneurial and productive wanted to come to America.  Many still do.  But the choice is no longer so clear-cut.