Will Democrats Impose French-Type Tax Rates on America?

The alternative minimum tax is a wretched system affecting a couple of million taxpayers per year, but the AMT is scheduled to expand dramatically if current law is left untouched. Democrats do not like this tax, largely since it indirectly takes away the state and local tax deduction – and thus aggravates taxpayers in high-tax, Democratic states like New York and California. The AMT should be abolished, but the question is whether the elimination of this built-in tax hike will be “paid-for” with a tax increase on other taxpayers. Steve Moore of the Wall Street Journal opines on the growing possibility that Democrats will try to increase income tax rates on the so-called rich, even if it means that tax rates in America will climb above the oppressive levels found in welfare states like France and Germany:

Democrats want to go after high-income earners, whom they call “rich.” What is surprising is how high rates must be raised to make their plan’s numbers add up. The top AMT rate would increase to 31.5% from 28%. Democratic tax experts also recommend eliminating the lower rate for capital gains and dividends for those subject to the AMT. This would raise the capital gains tax rate to about 31% from its present 15% rate. …The changes in the AMT rate, and the treatment of dividends and capital gains, still leaves Mr. Rangel at least $600 billion short of paying for the AMT fix. House Democrats have acknowledged that to close this final gap, they will have to look to personal income taxes. Rep. Richard Neal of Massachusetts, the head of the Ways and Means tax panel, says this will require raising the top tax rate of 35% by no more than three to five percentage points. Mr. Neal should check his math. Tax experts on Capitol Hill and in the Treasury Department calculate that to get $60 billion a year from the top 1% of income earners would more likely require rate hikes of 10 to 15 percentage points. This would lift the top federal marginal income tax rate as high as 50%. “I can’t think of a better way to throw the economy into recession and end the bull market expansion of recent years than to raise tax rates like this,” warns Michael Darda, chief economist for MKM Partners. It’s hard to argue with that assessment. Overnight, the U.S. would go from being a nation with one of the lowest set of income-tax rates to one of the highest in the developed world. …In countries as diverse as Ireland, China, India, Japan, Russia and Hong Kong, tax rates are flat or falling, part of a world-wide effort to reward growth and get more of it. Yet Reaganomics, alive nearly everywhere else, is dead in the halls of the United States Congress.

HSAs: Goodman vs. Reinhardt

Over at The John Goodman Health Blog, there is an important exchange between Goodman (“the father of health savings accounts”) and Princeton economist Uwe Reinhardt, who writes in the comments section.   

Reinhardt rightly chides supporters of health savings accounts (HSAs) for their obsession with high-deductible health insurance.  Why call HSAs consumer-directed health care if the government tells HSA holders what type of insurance they must purchase?  Reinhardt appears to have missed the fact that Goodman shares this criticism.  In a 2005 paper, Goodman proposes removing all restrictions on what type of insurance HSA holders may purchase. 

Goodman’s proposal remains vulnerable to another of Reinhardt’s criticisms, however.  Goodman would allow people to contribute unlimited amounts of money to an HSA tax-free.  As Reinhardt argues, retaining the tax preference for HSAs would still require Congress “to specify what can and can not be financed out of the tax-favored HSA…If Congress did not specify it, would ‘recuperative’ trips to Hawaii or Monaco qualify?”  The only way to end such silliness is to eliminate all tax preferences for health care.

Unfortunately, Goodman’s proposal does not seem headed in that direction.  Allowing unlimited tax-free HSA contributions would complicate the elimination of such tax preferences in the future (in addition to expanding the economic distortions created by existing tax preferences for health care). 

I have proposed expanding HSAs in a way that would (1) allow individuals to purchase whatever type of insurance they wish, (2) limit the currently unlimited tax preference for health care, and (3) facilitate the elimination of such tax preferences.  Read more about that proposal here, here, and here.  Or register for the May 24 Cato policy forum where Katherine Baicker, Jason Furman, and I will debate that proposal.

Digging Piracy

Something rather astonishing happened on the Internet on Tuesday. Let me start with a bit of background: Hollywood has an encryption system called AACS that it uses to scramble the content on high-definiton home video discs. Like all copy protection systems, it only took a few months before hackers found security flaws in the system. In the process they extracted a 16-byte key (basically, a very long number) that allows programmers to unlock the encrypted content.

This key had been floating around various minor websites over the last couple of months. But last month, the organization that controls the AACS system began sending cease and desist letters to various ISPs demanding that the keys be taken down from websites that were displaying them. In response, people all over the web began posting copies of the key, which is just a 16-character string.

One of the sites that had the key on it is Digg. Digg is a news website in which all of the news stories are chosen by the collective wisdom of readers. Anyone can submit a story, and then other users can vote for (called “digging”) or against (called “burying”) individual stories. The stories that get the most votes get promoted to the front page where they’re viewed by hundreds of thousands of people.

Somebody posted a story containing the AACS key, and Digg got a letter demanding that the story be removed. Digg complied. Princeton computer science professor Ed Felten describes what happened next:

Then Digg’s users revolted. As word got around about what Digg was doing, users launched a deluge of submissions to Digg, all mentioning or linking to the key. Digg’s administrators tried to keep up, but submissions showed up faster than the administrators could cancel them. For a while yesterday, the entire front page of Digg — the “hottest” pages according to Digg’s algorithms — consisted of links to the AACS key.

Last night, Digg capitulated to its users. Digg promised to stop removing links to the key, and Digg founder Kevin Rose even posted the key to the site himself.

Fred von Lohmann has a good rundown on the legal liability Digg could face from allowing the key to be posted on their site. But more interesting, I think, is the light the incident sheds on the broader debate over Internet piracy.

In a sense, Digg is a microcosm of the Internet at large. What makes the Internet so powerful is that we’re finding more and more clever ways to turn tasks that once required a human being over to machines. In the case of Digg, Kevin Rose found a way to automate the editing process. Instead of having a single human being read through all the stories and select the best ones, he created a system in which readers—who are on the site reading stories anyway—could quickly and easily choose stories for him. This has made the site extraordinarily successful.

But technology is amoral. A system that transmits news and information can just as easily be used to transmit pirated music, encryption keys, or even child pornography. Moreover, you can’t fine a computer algorithm or throw it in jail. Which means that as we automate more and more of our information-distribution systems, there are fewer and fewer ways for the legal authorities to exert control over what kinds of information is transmitted.

In the early days of the Internet, people created special-purpose tools like Napster whose primary use was to swap illicit materials. Copyright holders got those tools shut down. But increasingly, illicit information sharing is being done using the same tools we use to share legal content. Napster’s primary use was to share copyrighted music. But one of its successors, BitTorrent, is widely used to exchange legitimate content, including open source software, computer game updates, and even legitimate movie downloads. It would be unreasonable to outlaw BitTorrent, given how many legitimate uses it has.

On Tuesday, Kevin Rose had only two options: He could allow the encryption key to appear on his site, or he could shut his site down. Shutting his site down wasn’t really an option (it’s a multi-million dollar business) so his only real choice was to allow the content to be transmitted. As a society, we face precisely the same dilemma with regard to the Internet as a whole. People use the Internet to transmit information most of us think they shouldn’t be transmitting. But our only alternatives are to cripple the Internet or turn the country into a police state. Nobody wants to do either of those things, so we’re going to have to live with the fact that any information a significant number of people want to share is going to be shared. We’re going to have to find ways to adjust our copyright system to a world in which anyone who’s willing to break the law will be able to get most copyrighted content for free. As a supporter of copyright, this doesn’t make me happy. But there doesn’t seem to be anything we can do about it.

REAL ID Comment Campaign

The comment period on Department of Homeland Security regulations implementing the REAL ID Act ends early next week. A broad coalition of groups has put together a Web page urging people to submit their comments. The page has instructions for commenting, a quite helpful thing given how arcane the regulatory process is.

Feel free to comment – good, bad, or indifferent – on the regs. My views are known, but the Department of Homeland Security doesn’t know yours.

Two Million French Have Escaped France

Anne Applebaum’s Washington Post column discusses the upcoming French election. But most relevant for fans of tax competition, she notes that two million French have fled the high taxes and economic stagnation of their home country. Not surprisingly, a poll reveals that the overwhelming majority of French expats are happy in countries with more opportunity. Applebaum also explains that Europe’s less competitive nations have been trying to export their anti-growth policies in an effort to “make life equally difficult everywhere.”

Standing in the heart of London’s financial district, Sarkozy heaped compliments upon his country’s historic enemy. The British capital was, he said, a “town that seems more and more prosperous and dynamic every time I come here.” More important, it had become “one of the great French cities.” He understood, furthermore, that hundreds of thousands of Frenchmen had moved to Britain because “they are risk-takers, and risk is a bad word” in France. … [E]ven a Sarkozy victory in the final round of voting on Sunday won’t persuade all of the 2 million-plus French exiles to go home. Asked by a French polling company, TNS Sofres, “Are you satisfied with your life abroad?” 93 percent of French emigres surveyed recently said “yes.” … [T]here is nothing odd about the fact that the French now vote with their feet. There are better-paying jobs in London, taxes are lower in London, the economy grows faster in London: C’est la vie – and tough luck for Paris. … For the past decade, French, German and other European leaders have tried to unify European tax laws and regulations, the better to “even out the playing field” – or (depending on your point of view) to make life equally difficult everywhere.

Fed Chairman Explains Benefits of Free Trade, Warns against Protectionism

Federal Reserve Board Chairman Ben Bernanke delivered an important speech Tuesday on the benefits of free trade to our economy and workers. Speaking to an audience in Butte, Montana, Bernanke explained why trade raises our standard of living and backed up his economic logic with up-to-date evidence.

He acknowledged that some workers and companies lose out, at least temporarily, from more vigorous global competition, but he warned that protectionism would be the worst possible policy response.

As the Fed chairman told his audience:

Restricting trade by imposing tariffs, quotas, or other barriers is exactly the wrong thing to do. Such solutions might temporarily slow job loss in affected industries, but the benefits would be outweighed, typically many times over, by the costs, which would include higher prices for consumers and increased costs (and thus reduced competitiveness) for U.S. firms. Indeed, studies of the effects of protectionist policies almost invariably find that the costs to the rest of society far exceed the benefits to the protected industry. In the long run, economic isolationism and retreat from international competition would inexorably lead to lower productivity for U.S. firms and lower living standards for U.S. consumers.

Rather than closing U.S. markets, Bernanke wisely recommends “policies and programs aimed at easing the transition of displaced workers into new jobs and increasing the adaptability and skills of the labor force more generally.”

If you want to understand what free trade really means for Americans, I recommend the full text of his illuminating speech.

Sarkozy Is the Conservative Candidate?

The political spectrum in France is so distorted that a candidate who calls for new taxes, tax harmonization, expanded trade barriers, and restrictions on capital flows is the supposed conservative candidate. The UK-based Times reports on the anti-market views of Nicolas Sarkozy:

At his first EU summit, in Brussels in June, a President Sarkozy would push hard for a new tariff on imports from outside the European Union to protect jobs and discourage firms from moving production outside the area, he said. …Mr Sarkozy said that he would also press for harmonised business taxes — a project long rejected by Britain and other states. It was time to reduce the power of the national veto in such areas, he said. His proposal for a protective “European preference” in trade is also opposed by Britain and conflicts with the Union’s free-trade policies.