Another Company Escapes Britain’s Punitive Tax Regime

A major pharmaceutical company is moving its tax domicile to Ireland because the U.K.’s corporate tax systems is too burdensome. This story from the Guardian is a great example of tax competition, of course, but it also highlights the fact that governments are only subject to competitive pressure if taxpayers have the freedom to shift economic activity to jurisdictions with better tax law - and they have the ability to benefit from those better laws. Sadly, American companies no longer have this freedom thanks to “anti-expatriation” or “anti-inversion” laws enacted by greedy politicians:

Shire, the country’s third biggest drugmaker, has intensified the debate over Britain’s corporate tax regime with plans to move its tax base to Ireland from the UK. The FTSE-100 company said it was applying to a court to create a new holding company incorporated in tax-haven Jersey and would become tax resident in Ireland, where corporate tax rates are less than half those in the UK. …its board of directors will hold meetings in its Dublin office once the tax residence move gets court approval. Most importantly, the move means it will be subject to an official corporate tax rate of 12.5%, compared with 28% in the UK. …Business lobby group the CBI said Shire’s decision deepened its concerns about the UK corporate tax system. “We are particularly worried that an uncompetitive corporate tax system is spoiling the UK’s attractiveness as a place to do business, and that other internationally-mobile firms will follow Shire’s path,” said CBI director-general Richard Lambert. Last month, technology giant Yahoo announced it was moving its European headquarters from London to Switzerland to increase competitiveness and deliver “efficiencies”. A recent survey by accountancy firm KPMG blamed complex rules and a mass of legislation for putting the UK in the bottom half of a league table of the most attractive places to do business in Europe. The study ranked Cyprus, Ireland and Switzerland top for their combination of easy-to-understand rules, low tax rates and stable fiscal laws. The UK came 12th out of 22 countries for the attractiveness of their domestic tax regimes.

Berlusconi Wants 10-Percentage Point Cut in Italy’s Top Income Tax Rate

The good news, according to Tax-news.com, is that newly-elected Prime Minister Silvio Berlusconi wants to reduce Italy’s top income tax rate from 43 percent to 33 percent. The bad news is that he made similar promises the last time he held office, but never delivered. One can only hope that this time he is more serious about improving Italy’s economy:

Italy’s evergreen centre-right leader Silvio Berlusconi, is set to return for his third stint as the country’s Prime Minister following his recent election victory, and has promised to reduce Italy’s tax burden… Berlusconi has also pledged to axe other taxes, including an overtime levy, a tax on annual bonuses, and a tax on car ownership, and, before his five year term is out, he wants the top rate of income tax reduced from 43% to 33%. Ultimately, Berlusconi is targeting a reduction in the country’s overall tax burden to less than 40% of gross domestic product from its current level of more than 43%.

Obama’s (Mostly) Irreconcilable Positions

I was pleased a couple of months ago to point out where presidential candidate Senator Barack Obama (D-IL) had distinguished himself and gotten it right on whether driver licensing should be linked to immigration status. The use of driver licensing for immigration enforcement is a major impetus behind the national ID system that our country should rightly avoid.

Such pleasures don’t last. The senator published an opinion piece in the Charlotte Observer this week calling for a “mandatory electronic system that enables employers to verify the legal status of their employees within days of hiring them.”

It is very hard to hold both positions. As I pointed out in my recent paper on electronic employment verification, it is nearly impossible to “strengthen” internal enforcement of immigration law through EEV without creating a national identification system:

[T]he things necessary to make a system like this really impervious to forgery and fraud would convert it from an identity system into a cradle-to-grave biometric tracking system. Almost no way exists to do national EEV that is not a step down that road.

Perhaps Senator Obama would implement an EEV system with a federally issued national ID card rather than the driver licensing system. (That’s not a good option either.) Perhaps he’s devised a credentialing system that allows people to prove eligibility to work under current immigration law without a national ID. (Such things are possible.) Most likely, the senator has expressed two pretty much irreconcilable positions.

Libor Lies

“Libor Fog” is the apt warning above the headline of today’s front-page Wall Street Journal piece by Carrick Mollenkamp, “Bankers Cast Doubt on Key Rate Amid Crisis.” The article is about the interest rate on loans between banks—the London Interbank Offered Rate (Libor). “A small increase in Libor can make a big difference for borrowers,” says the author. For example, “A risky ‘subprime’ mortgage loan might carry an interest rate of Libor plus more than six percentage points.”

An accompanying graph shows the spread between the 3-month Libor and the 3-month Treasury bill rate. The article explains that “the gap between the two stood at 1.58 percentage points Tuesday, and has averaged 1.39 percentage points since the crisis began in August.”

Anyone reading this article surely thought Libor had increased “since the crisis began in August.” Why else would the graph be titled “Costly Credit”? Why else would the article have emphasized the way an increase in Libor affects subprime adjustable rate mortgages?

“On Tuesday [April 15],” the article says, ‘the Libor rate for three-month dollar loans stood at 2.716%.” In July 2007– before “the crisis began in August”–that Libor rate was 5.360%.

The reason the spread between Libor and Treasury bills widened is not that Libor rates have increased but that 3-month T-bill rates fell from 4.95% last July to about 1.2% lately, thanks to Fed easing and a flight to quality. That drop of 3.75 percentage points in T-bill rates since last July was even greater than the 2.65 percentage point drop in Libor, so the spread between the two widened. So what??? You and I can’t borrow at the T-bill rate either.

Like other factually misleading news reports, cutting the Libor rate in half (“since the crisis began in August”) is not what most people think of as a “credit crisis.”

Rebate Folly

I was exploring some old CBO reports for information on dynamic budget scoring and I came across this nugget:

If a tax cut—such as a rebate or a higher standard deduction—does not reduce the tax on income from an extra hour of work, the additional income will create an incentive for people to cut back their working hours and spend more time at home. Not everyone will respond, but some people (especially second workers in a family with one full-time earner) may decide to leave the labor force to care for children or aging parents or to pursue other interests.

(Supplement to CBO’s May 9, 2002, Testimony on Federal Budget Estimating May 2002 CONGRESSIONAL BUDGET OFFICE, page 9)

We are about to receive a rebate in May this year as part of the economic stimulus that Congress passed in February. I suppose the folks at the CBO would have pointed out that although a rebate may stimulate consumer spending, it is also likely to reduce labor supply. The net impact, therefore, would not necessarily involve any increase in national output but it would certainly induce stronger inflationary pressures—adding fuel to the inflationary fire the Fed’s apparently stoking by cutting interest rates so rapidly. So it’s perhaps not surprising that the dollar’s value took a nosedive during February this year.

Higher rebate-induced debt and higher inflation implies higher future interest rates and, therefore, increased cost of financing consumer and investment spending. Rebate recipients will benefit today, but everyone will lose in the long-term as the economy becomes more sluggish.

Bottom line: Politicians gain by appearing to be doing something – and most of us lose!

A Nation at Risk

Cato Unbound is right now hosting a discussion about the legacy of A Nation at Risk, the report that 25 years ago this month famously warned that a “rising tide of mediocrity” in American education was threatening “our very future as a Nation and a people.” The report also, by the way, was invaluable in setting the political stage for the subject of a Cato forum to be held tomorrow, “Markets vs. Standards: Debating the Future of American Education.”

Richard Rothstein, a research associate at the Economic Policy Institute and a former New York Times education columnist, penned the lead Cato Unbound essay, which is responded to by FLOW CEO Michael Strong, Manhattan Institute Senior Fellow Sol Stern, and the American Enterprise Institute’s Frederick Hess. I encourage you to read all the essays, and just thought I’d throw in my two cents.

I should begin by saying that I think Rothstein is right on a couple of points.

First, I agree that A Nation at Risk started a flood of ill-considered railing that the United States was heading to economic irrelevance as a result of our education system. As Rothstein notes, this simple correlation—mediocre education equals nation of burger-servers, great education equals everyone a CEO—ignores myriad variables outside of education that influence economic success. Unfortunately, Rothstein identifies mainly bits of economic kryptonite as the real keys to economic success, especially beefing up protections for labor unions, but his basic point that education is far from the only force shaping the economy is a fair one.

Rothstein is also right to declare that the extent to which American education was in decline in the years leading up to ANAR was somewhat exaggerated, based mainly on a drop in SAT scores that could at least in part be attributed to wider ranges of kids taking the test. In contrast to the impression Rothstein gives, however, slumping SAT scores was far from the only evidence ANAR offered to back its assertion not that American schools were stuck in reverse, but in hopelessly mediocre neutral. ANAR offered a long list of indicators of educational woe, including poor American standing in international comparisons, functional illiteracy among adults, and numerous indicators that 17-year-olds—the final products of American education—were in very poor educational shape, a condition that remains today.

Clearly, stubborn mediocrity and decline are two different things, with the former perhaps a bit more tolerable than the latter. But stagnation is bad, and especially hurts because, as Michael Strong points out, not only have we gone nowhere, we’ve stood pat while hugely increasing education funding:

Richard Rothstein cites evidence that public schools have improved math scores at age 9 and 13, but not age 17. Thus whatever gains are being made in elementary and middle school are being lost in high school. Since 1973, K-12 educational expenditures have more than doubled; on a per-dollar basis, “investing” in public education now shows a thirty-five year trend of steadily decreasing returns.

So while Rothstein is probably right that ANAR—or, more accurately, many of the people reacting to it—somewhat overstated our educational decline, the report’s conclusion about immovable mediocrity is much harder to refute, and the dreadful return on investment undeniable.

One of the highest-profile movements focused on overcoming this seemingly permanent state of mediocrity is school choice, which at its most basic level would let parents choose where their children are educated and attach education money to the kids. Were this universally applied, our recalcitrant, regulation-strangled, special-interest-dominated public schooling system would be bypassed and schools would be forced to compete and innovate. In practice, however, choice has been implemented in very hamstrung forms: choice only among public schools, charter schools that must be approved by government and often remain shackled to rules and regulations, and voucher programs open only to relative handfuls of kids. As a result, choice has not come close to creating the real, innovation-driving, educational free market necessary to truly transform American schooling

In perhaps the most interesting wrinkle of the Cato Unbound debate, Hess offers what seems to be a not-so-veiled critique of co-respondent Sol Stern, whose recent City Journal piece pushing choice to the reform margins has caused a big stir in education policy circles. Hess appears to rebuke Stern for failing to consider all that is needed to get a real market up and running, a problem that bedevils school choice supporters and detractors alike:

[S]ome who were once enthusiastic proponents of “choice” have reversed course and expressed doubts about the viability of educational markets — without ever having stopped to consider all the ways in which simply promoting one-off choice programs falls desperately short of any serious effort to thoughtfully deregulate schooling or promote a coherent K-12 marketplace. Indeed, some have abandoned the choice bandwagon with the same ill-considered haste that marked their initial enthusiasm.

Hess is absolutely correct that for too long choice supporters have touted each and every little voucher or charter school proposal that’s come down the pike, and some have lost their choice enthusiasm when those little programs have produced little change. But the problem is not choice itself. The problem is that choice must be big to overcome well-nigh immovable American public schooling, and getting people to realize that is going to take a lot of time and, probably, a lot more failure.