To Hell With the Facts, We’re Still in This Thing!

Readers will no doubt be relieved that the new US National Intelligence Estimate on Iran has done nothing to dampen literary-critic-cum-Giuliani-foreign-policy-adviser Norman Podhoretz’s enthusiasm for starting another Middle Eastern war.

The Munich analogy and Winston Churchill make prominent appearances. No word, per Podhoretz’s prior comments on what went wrong after Vietnam, on whether gay people are to blame for the NIE.

Will Hungary Join the Flat Tax Club?

Tax-news.com is reporting that Hungary’s governing coalition is considering a flat tax. Tax competition is probably the only reason why this conversation is taking place. The current government, after all, has a dismal fiscal record of higher taxes and higher spending. But four of Hungary’s bordering nations already have flat tax systems, meaning that the competitive pressure for reform must be growing more intense as time passes:

The office of Hungarian Prime Minster Ferenc Gyurcsany has confirmed that the government intends to reduce the tax burden by 0.5% of gross domestic product over the next two years. … Gyurcsany told Euromoney that the convergence plan allowed some room for tax cuts and for the overall tax burden to be cut to 37.6% of GDP by 2010. … [T]he governing coalition has begun to debate a number of tax proposals with the aim of sharpening the country’s tax competitiveness. According to the business daily Vilaggazdasag, four tax packages were under discussion by the governing Socialist Party and its junior coalition partner Free Democrats last Friday: one would cut the ‘tax wedge’ on labour from 29% to about 20%, but increase the top rate of VAT by 2% to 24% and abolish tax allowances; the second would reform the personal income tax system, applying the principle of ‘super grossing’; the third would reduce the tax burden on corporations; and the fourth would introduce a flat tax on personal incomes and/or corporate incomes and VAT.

Conservatism Revealed

What does it say about the Republican Party when the leading fusionist conservative in the field - Mitt Romney, darling of National Review and erstwhile heir to Ronald Reagan - runs and wins a campaign arguing that the federal government is responsible for all of the ills facing the U.S. auto industry, that the taxpayer should pony up the corporate welfare checks going to Detroit and increase them by a factor of five, that the federal government can and should move heaven and earth to save “every job” at risk in this economy, and that economic recovery is best achieved by a sit-down involving auto industry CEOs, labor bosses, and government agents armed with Harvard MBAs to produce a well-coordinated strategic economic plan? That is, what explains the emergence of economic fascism (in a non-pejorative sense) in the Grand Old Party at the expense of free market capitalism?

I have no answer. But it certainly explains the increasing migration of libertarians voters to the Democratic Party. They may be no better, but at least the Dems offer libertarians something in social and foreign policy circles that the Republicans don’t.

Romney Revealed

Mitt Romney’s victory in Michigan’s Republican primary last night throws the GOP race for president wide open. But it should also end once and for all the idea that Romney is the heir to Reagan-style conservatism.

For some reason, Romney has been able to claim the Reagan mantle despite his support for:

  • A health care plan virtually indistinguishable for the one proposed by Hillary Clinton;
  • Support for No Child Left Behind, calls for increased federal education spending, and a proposal to have the federal government give a laptop computer to every schoolchild in America;
  • Calls for increased farm price supports;
  • Support for the Medicare prescription drug benefit; and
  • An undistinguished record on taxes and spending as Massachusetts governor, earning a C on Cato’s governor’s report card, and including support for $500 million in increased fees and corporate taxes.

But in Michigan, Romney pulled out all the big government stops with a call for $20 billion in corporate welfare to revive the state’s struggling auto industry. Romney, who called his proposal “a work-out, not a bail-out,” also promised that as president he would develop “a national policy to help automakers.”

George W. Bush once said, “When somebody hurts, government has got to move.” Mitt Romney echoes that, “A lot of Washington politicians are aware of it, aware of the pain, but they haven’t done anything about it. I will.”

Ronald Reagan must be spinning in his grave.

IMF Concludes Lower Tax Rates Can Yield More Tax Revenue

A new study from the International Monetary Fund looks at what happened in Russia after the 13 percent flat tax was implemented and concludes that there was a Laffer Curve effect. Indeed, the increase in taxable income was so large that it completely offset the impact of the lower tax rate. In other words, this was one of the rare cases of a tax cut “paying for itself” (in the vast majority of cases, lower tax rates generate revenue feedback, but the net result is still less money for government).

Interestingly, the study finds that the additional revenue materialized because people are more willing to obey the law when the tax rate is low, as theory would predict, but did not find an increase in labor supply, which theory also would predict This anomaly aside, it is still good news that the IMF recognizes that there is a Laffer Curve and that high tax rates are needlessly destructive:

Can tax rate cuts increase revenues?

…The Russian flat tax experiment is particularly interesting: after the introduction of flat taxes, and effective personal income tax rate cuts, tax revenues increased substantially and almost immediately. Furthermore, they increased much faster than labor supply and output. The paper explains how tax rate cuts can increase tax revenues through tax compliance spillovers in such a manner.

…This paper shows that endogenous tax compliance responses can be responsible for the massive increase in tax revenues. The key intuition is that tax regimes are prone to spillovers, as the aggregate behavior of taxpayers determines how much time the tax authority can dedicate to the individual taxpayer. In a way, tax evaders protect each other by tying down the tax authority’s limited capacity. Hence, small cuts in the tax rates can lead to much larger changes in the behavior of taxpayers — most importantly, it can make them much more likely to declare their incomes honestly. These spillovers can lead to increasing tax revenues.

…taxpayers evade less tax payments when the tax rate is lower… evasion increases with the tax rate.

…Three cases could be highlighted. First, countries with high official tax rates and relatively weaker tax authorities, such as some of the transition economies, might benefit from tax rate cuts and improving compliance. Second, the model might be also relevant for countries with high tax rates, even if tax enforcement seems to be strong in absolute terms. Third, low tax countries which have particularly weak tax enforcement could also think about improving tax compliance via tax rate cuts.