Hong Kong to Lower Flat Tax?

Thanks to strong growth, which is in part due to a tax system that minimizes the burden on productive activity, Hong Kong leaders are considering reducing the flat tax to just 15 percent.

Tax-news.com reports:

Donald Tsang has pledged to cut Hong Kong’s individual and corporate income taxes if re-elected as the Special Administrative Region’s Chief Executive next month. Tsang officially announced that he would seek election to a second term of office last week and said that one of his key policies would be to return some of Hong Kong’s fiscal surplus back to the population through a “gradual” reduction in salary and profit taxes to 15%.

Dutch Tax Haven Pressures Greedy Governments

The New York Times has a thorough article today detailing how both individuals and companies are using the Netherlands as a haven for productive activity.

This is good news for all taxpayers. The rich directly benefit, since greedy politicians are unable to seize as much of their money. And the rest of us benefit, since this puts downward pressure on tax rates as governments try to keep the geese that lay the golden eggs from flying away.

[L]ast August, according to details disclosed in documents maintained by the Handelsregister, the trade registry of the Netherlands, Promogroup helped the three [Rolling Stones] performers set up a pair of private Dutch foundations that will allow them to transfer assets tax-free to heirs when they die. Other Dutch shelters that Promogroup has arranged for the three have already paid off handsomely; over the last 20 years, according to Dutch documents, the three musicians have paid just $7.2 million in taxes on earnings of $450 million that they have channeled through Amsterdam — a tax rate of about 1.5 percent, well below the British rate of 40 percent.

The rock powerhouse U2 has transferred lucrative assets to Amsterdam, as have other pop singers and well-known athletes….

While old-school, offshore tax havens — the warm ones with tropical fish, off-the-shelf holding companies sporting post-office-box addresses, and scant regulation or transparency — still attract money, they are largely patronized, tax lawyers and entertainment bankers say, by hedge funds and private equity firms looking to protect lush trading profits from taxes. But for earnings derived from intellectual property such as royalties, the Netherlands has become a tax shelter of choice.

Many of the world’s multinational corporations, like Coca-Cola, Nike, Ikea, and Gucci, have set up holding companies here in recent years to take advantage of tax shelters nearly identical to the ones that the Rolling Stones and U2 use.

The Netherlands is home to almost 20,000 “mailbox companies,” Dutch shorthand for corporate shells set up by foreign companies and wealthy foreigners who use them to relieve taxes on royalties, dividends and interest payments….

Globally, some 1,165 companies use Dutch tax shelters to reduce or eliminate taxes on royalties and patents.

Not surprsingly, international bureaucracies and left wing groups despise tax havens — precisely because tax competition makes it more difficult to increase the size of government. The story in the Times elaborates, including completely unsubstantiated accusations that low taxes somehow facilitate dirty money:

Some experts see a darker side to the emergence of the Netherlands as a sought-after tax shelter. In 2000, the Organization for Economic Cooperation and Development, based in Paris, black-marked the country as one of the world’s top five industrialized tax havens for promoting “treaty shopping” for low-tax jurisdictions.

…In its report last fall, SOMO, the research group, said…that “tax haven features of the Netherlands also facilitate money laundering and attract companies with a dubious reputation.”

Bad-mouthing the Economy

Critics of the Bush tax cuts used to complain that America had a so-called jobless recovery. That’s no longer a tenable assertion, so now they argue that wages are stagnant or that people don’t save enough.
The Wall Street Journal certainly does not give credence to any of these claims:
[T]he current expansion was derided right through 2004 as a “jobless recovery.” We now know the economy has created 7.4 million new jobs since mid-2003, as revisions by the Bureau of Labor Statistics have added hundreds of thousands to its original monthly estimates. Thus the hand-wringers have had no choice but to move on, turning their laments to allegedly “stagnant wages.” Well, that’s now vanishing too.
As for real (inflation-adjusted) wage growth, it averaged 0.6% annually for non-farm workers in the first half of the 1990s compared with 1.5% a year so far in this decade. “This cycle as a whole has witnessed twice the average real wage growth than the first 64 months of the previous expansion,” Mr. Darda writes. For the last 12 months, real wages have risen even faster, at a 1.7% clip.
So moving right along, this week’s bad news is said to be the U.S. “savings rate,” which according to the official measure was “negative” for a whole calendar year for the first time “since the Great Depression,” as Martin Crutsinger of the Associated Press helpfully put it.
As a statistic, however, the official “savings rate” is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, “income” doesn’t measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.
…[T]hese columns long ago began to watch a far more instructive figure known as “household net worth.” That number, released by the Federal Reserve, includes all assets (tangible and financial) held by individuals less their liabilities (mortgage and other debt). At the end of last year’s third quarter, U.S. household net worth had climbed to $54.1 trillion. That was an increase of more than $3 trillion over the previous four quarters.

Endorsing the U.S. Trade Complaint Against China

On Friday, the U.S. Trade Representative initiated a formal challenge of various Chinese tax programs within the dispute settlement system of the World Trade Organization. It was only the third formal challenge of Chinese policies since that country joined the WTO in 2001.

Specifically, the United States alleges that Chinese tax policies that encourage production for exportation and that discourage the use of imported materials and components in the production process constitute subsidies that harm U.S. interests and violate the obligations China undertook when it joined the WTO in 2001.

I have been critical of the administration’s various trade policy errors of commission and omission over the years. Last week I lamented U.S. trade representative Susan Schwab’s failure to articulate the broad case for trade.  Today, I have only kudos for the USTR. Not only was the United States well within its rights to bring this case, it was the right thing to do, politically and economically. 

Free trade purists might disagree, arguing that if China wants to subsidize its exports to the United States, Americans should write the Chinese thank you letters for financially supporting our consumption. And accordingly, we shouldn’t intervene if the Chinese want to squander their resources that way. I think that argument holds water up to a point — a point that we are well beyond and where the costs of the status quo outweigh its benefits. 

Yes, we benefit as consumers from subsidized Chinese production, but only until the consensus for a liberal trading order collapses. At that point, retrograde protectionism threatens not only the benefits of that subsidized consumption, but the benefits of trade more generally, and the conditions that make relatively freer trade possible. Furthermore, the U.S. trade relationship with China is wealth-creating in both countries without need of subsidization. Safeguarding continuation of the flow of the benefits of trade to both countries by expecting China (and the United States) to play by the established rules seems a reasonable compromise to me.

The rules-based trading system has been remarkably successful at promoting trade and investment, and its continued success depends upon adherence to its rules and respect for its institutions — particularly by the world’s large economies.

China has demonstrated that it doesn’t respond well to bilateral threats — if for no other reason than its desire to avoid the appearance of being bullied. China knows what its obligations are. But it also knows that one of the many benefits of its membership in the WTO is that its policies are above board unless and until the dispute settlement body of the WTO finds against them. If China wants to drag its feet with respect to compliance and reform, bringing cases against China within the WTO might become fashionable.  

We are already witnessing a deterioration of support for trade and its institutions in the United States precisely because of perceptions that policymakers are doing too little to enforce the existing rules. I don’t advocate knee-jerk invocation of our rights to dispute settlement — there is plenty of room for deliberation and consultation (which is perpetually in play under the radar). 

To the extent that Friday’s actions serve as a release valve for some of the political pressure that has been building in Congress for unilateral actions against China, it is already a success. By bringing the case through formal WTO channels, Congress will see that there are, in fact, alternatives to dangerous, unilateral sanctions. In that sense, this case could reduce the likelihood that Congress intervenes and mucks everything up and it could actually improve long-term prospects for the U.S.-China trade relationship.

Why 2012?

I’ll chime in with a broader analysis of the new Bush budget later. For now, it’s worth noting one of the big questions it raises: What’s so special about 2012? 

That’s the year the president claims the budget can be balanced while simultaneously renewing the Bush tax cuts. It’s also three fiscal years after Bush leaves office.

What the president could have done is propose a plan to balance the budget in two years. Revenues are on the upswing, so it could be accomplished — assuming you cut spending, that is. 

For a president who is, according to insiders, interested in bequeathing a healthy Republican Party to the 2008 presidential candidate, it seems there would be great value in simultaneously handing them a balanced federal budget while also showing voters there is still some inkling of interest in smaller government within the party. And it would eliminate the Democrats’ ability to use the deficit bogeyman as a reason to kill the Bush tax cuts that expire in 2010. 

Instead, President Bush resorted to increasing spending in almost all categories — in some cases, like the Pentagon budget, massively. It’s not a budget that supporters of small government can really sink their teeth into. It is weak sauce indeed.    

I’m Restraining Spending, But…

Like most politicians, President Bush is addicted to new spending initiatives. His budget message is always: “We need to restrain spending — except for all the exciting new investments and programs enhancements I want.”

It’s more of the same in the president’s new 2008 federal budget. The president wants to get credit for proposing to balance the budget four years after he has left office, yet here is some of the language from the budget’s “Overview”:

  • “Increased funding to combat terrorism and protect the homeland…”
  • “Enhanced diplomatic efforts … with additional resources…”
  • “Increase funding for nuclear detection, more secure borders…”
  • “American Competitiveness Initiative to increase federal investment…”
  • “Significant new resources” for No Child Left Behind, including “more funding to high schools…”
  • “Increases [in] the Pell Grant maximum award…”
  • “Increases [in] Academic Competitiveness Grants…”
  • “Advanced Energy Initiative” to improve energy reliability and increase the use of alternative fuels…

The Budget Overview does provide some details on proposed spending restraint: “In the Budget, each program was closely reviewed to determine if it is among the Nation’s top priorities…. [F]ailure to meet these criteria resulted in proposed termination or reduction of 141 programs for a savings of $12 billion.”

Total federal outlays in 2007 will be $2.784 trillion. Thus, programs that are “top priorities” of the Bush administration account for 99.6 percent of all spending.

Will we ever get a president who wants to make serious cuts and doesn’t have a lengthy spending wish list to send to Congress?