While the Rest of the World Is Lowering Tax Rates, Obama Plans Punitive Soak-the-Rich Policy

As Chris Edwards and I explain in Global Tax Revolution, nations are competing with each other to lower top tax rates thanks to the liberalizing impact of tax competition. This is confirmed by a new study from KPMG, which finds that the average top personal rate is now less than 29 percent in a survey of 87 jurisdictions. Unfortunately, the United States has a top rate of 35 percent, so we are falling behind.

To make matters worse, President-elect Barack Obama wants to move in the wrong direction. He has proposed a top tax rate of nearly 40 percent, but he wants to compound the damage by also imposing Social Security payroll taxes on income above $250,000 – thus dramatically increasing disincentives for productive behavior. As KPMG notes, this means the U.S. is moving in the wrong direction while the rest of the world moves in the right direction:

The picture that emerges is of a slow global decline in top rate personal income taxes, from an average of 31.3 percent in 2003 to 28.8 percent in 2008. …The highest personal income taxes are paid by citizens of the European Union. But it is here that we have seen the steepest falls in average tax rates, from 41.5 percent in 2003 to 36.4 percent in 2008.

…Perhaps the most significant new development in this period has been the introduction of flat rate taxes into Europe, often introduced at a much lower level than the highest variable personal rate. So far, it has been mainly Eastern European states that have taken this step, notably Estonia, where rates have fallen from 26 percent in 2003 to 21 percent in 2008, Slovakia has gone from 38 percent to 19 percent, Lithuania, which in 2007 fell 6 points to 27 percent and this year a further 3 points to 24 percent, and Romania where rates have gone from 40 percent to 16 percent.

…Overall, it appears from our survey that taxes on personal incomes are in slow decline in many countries around the world. We see the same trend in corporate income tax rates as well.

Subsidizing Reckless Behavior

Politicians specialize in bad law, but sometimes they go above and beyond ordinary incompetence in their search for foolish policy. The mortgage bailout is a good example. As an article in the San Francisco Chronicle explains, feckless government policy creates an incentive for people to default on their mortgages:

Should you keep paying your mortgage?

If you have significant equity in your home, absolutely.

If you don’t, it’s getting harder to answer that question, especially when our government keeps giving people who owe more than their homes are worth so many reasons not to pay.

Last week, the government announced a program that will substantially lower payments for many homeowners who have little or no equity, but only if they are at least 90 days delinquent.

Critics say the plan, which applies to loans owned or guaranteed by government wards Fannie Mae and Freddie Mac among others, could encourage people to suspend payments.

…Last year, Congress started removing some financial hazards of default when it passed a bill that temporarily waives the income tax on mortgage debt that is canceled when a homeowner is foreclosed upon, sells a home for less than the remaining debt (a short sale) or gets a loan modification that reduces the principal balance.

…Peter Schiff, president of Euro Pacific Capital, predicts that many homeowners who have little or no equity will stop paying their mortgage and then reduce their income to get the biggest payment cut possible. They could stop working overtime or, if two spouses work, one could quit.After the modification, they could try to boost their income again.

“This is a once-in-a-lifetime opportunity,” Schiff says. “People are going to feel like complete morons if they don’t participate. The people getting punished are the ones who never made an irresponsible decision to buy a house they couldn’t afford.”

The government is offering loan servicers $800 for every homeowner they get into the plan.

Schiff predicts that loan agents “will be cold-calling people trying to get them into it. Just like they encouraged people to overstate their income to get a bigger loan in the first place, now they will encourage them to understate their income to qualify for a smaller loan.”

Cato Today

White Paper: “How Did we Get into This Financial Mess?,” by Lawrence H. White

The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. These poorly chosen policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.

Op-Ed: “Eliminate U.S. Presence,” by Christopher A. Preble in USA Today

Iraq always was, and still is, a war of choice. The U.S. should choose to terminate the mission and refocus its attention — and, where appropriate, its still-strong military — on the enemies who struck on 9/11.

Op-Ed: “Don’t Dump on Free Trade,” by Ilya Shapiro in Legal Times

On Tuesday, Nov. 4, while most of the country understandably had its attention elsewhere, the Court heard argument in United States v. Eurodif. The case is an appeal from a ruling of the U.S. Court of Appeals for the Federal Circuit holding that contracts with foreign companies to enrich uranium are outside the scope of U.S. anti-dumping law (and their corresponding tariffs) because they’re “service” as opposed to “sales” contracts.

The decision reversed the Commerce Department’s determination to the contrary and prompted a petition for certiorari from United States Enrichment Corp., a government spinoff that dominates the domestic enrichment market and would be hurt by competition from abroad. Although the U.S. solicitor general also requested cert (in which circumstance review is not uncommon), Eurodif is the first time the Court has accepted an international trade case in six years (and only the eighth time in the last two decades).

Podcast: “Obama Should Scrap E-Verify,” featuring Jim Harper

The Visa Waiver Program: Our Achilles’ Mouth

Senator Dianne Feinstein (D-CA) and Joseph Lieberman (D-CT) have slammed ($) DHS Secretary Michael Chertoff for certifying the expansion of the Visa Waiver program. Under the expansion, citizens of 34 countries that satisfy certain security and immigration-related requirements do not have to obtain visas to enter the United States for up to 90 days. The seven newly added countries are: the Czech Republic, Estonia, Hungary, the Republic of Korea, Latvia, Lithuania, and Slovakia.

In criticizing Chertoff and the Visa Waiver Program, Senator Feinstein is quoted by National Journal saying, “I continue to believe that the visa waiver program is our Achilles’ heel.”

Achilles is the mythical fighter in Greek and Roman poetry who was killed by an arrow striking his heel where there was a void in his armor. It’s a totally inappropriate metaphor for the security of the United States against terrorism.

The United States is a large and vibrant nation, and our security is nothing like the security of a lone fighter. A lone fighter may die if his armor fails, but there is no realistic strike against our body politic that could do us in. (Never mind what terrorists and their fear-monger allies concoct in their heads.)

The United States is too large and strong to be taken down by anything any terrorist could execute, and our country is too capable of self-repair. (This all assumes that ‘leaders’ like Feinstein don’t attack the mechanisms of self-repair - the nation’s vital organs of freedom, prosperity, and decentralized power - in the wake of any attack).

The error in Senator Feinstein’s thinking is significant because it drives the expectation that any harm coming to the country from terrorists is potentially fatal. This falsehood drives a zero-risk attitude about terrorism that is ultimately self-destructive. Excessive security around our trade and travel will hinder it and deny us its benefits. We hurt ourselves - shoot ourselves in the foot, as it were - if the costs imposed by security measures are greater than the risks they avert.

Restricting travel from countries in the Visa Waiver Program is like Achilles putting armor on his mouth. Doing so forecloses the possibility of being struck by an arrow in the mouth, yes, but it also makes it harder to breath and impossible to eat.

Security is hard, and metaphors like “Achilles’ heel” don’t help people understand the problems.

Secretary Chertoff has done the right thing by starting to re-open the country to trade and tourism. He should be commended rather than skewered. Senators Feinstein and Lieberman are wrong.

What Is an American Car?

Before “loaning” billions more in taxpayer money to some very bad credit risks, simply because they are old American brands associated with Detroit, we might ask what distinguishes these companies from others.

The not-so-big three are certainly are no less global than, say, Honda.  General Motors gets 44% of its revenue from other countries and Ford gets 53%, according to Forbes (April 21).  A German company, Daimler-Benz, still owns a fifth of Chrysler, and a group of affluent private investors owns the rest.

An “American” brand tells you little about where all the parts in a car are made.  I was once at a dinner with Lee Iaccoca where I teased him about my Dodge Stealth, made in Japan by Mitsubishi.  Similarly, today’s Chevy Aveo is imported from Daewoo in South Korea.  Yet Hyundai has a plant in Alabama.

Cars.com found only four cars and six light trucks with a domestic content (meaning US or Canadian) above 75%.  That list includes the Toyota Tundra and Sienna and the Honda Odyssey.  Other Honda’s have a 60-70% domestic content, barely missing the cut.

The “Detroit” metaphor for primarily domestic vehicles is also inappropriate.  Among the remaining seven vehicles with a very high domestic content, three are made outside Michigan —the Chevy Malibu from Kansas and Cobalt from Ohio, and the Ford Explorer from Kentucky.  Ford’s F-150 truck might be made in Michigan or Missouri, the Chevy Silverado in Michigan or Indiana.

The only strictly “Detroit” cars with high domestic content are the Pontiac G6 from Orion MI and the Chrysler Sebring from Sterling Heights MI.  Consumer Reports says, “The G6 isn’t a very good car” and “The Sebring is one of the least competitive family sedans on the market.”   Yet these are the only Detroit-made sedans with a high domestic content.  Does anyone really think taxpayer subsidies can save cars like that?  And why should the federal government offer special deals for uncompetitive cars made in Michigan, thus tilting the playing field against better cars made in, say,  Ohio, Tennessee or South Carolina?

As a Chicago Fed study documents, “the auto industry is increasingly characterized by international carmakers, as well as by parts suppliers that operate in multiple countries. Against a background of global supply chains, it has become quite difficult to identify and label products such as autos by nationality. Overall, the processes of globalization of markets and supply chains have served to noticeably lower prices of new cars for American consumers and businesses. On a quality-adjusted basis, for example, new vehicle prices have been falling at an average annual rate of 0.5% over the current decade. Importantly, higher quality and gains in longevity are among the improvements in today’s vehicles.”

There Is NO Conclusive Evidence NCLB Is Working for Anyone

Having just been reading the animated exchange over at New Talk on the merits of preserving or axing the No Child Left Behind act, I notice that the discussants are missing some key evidence on the law’s effectiveness. The conversation has thus far revolved around results from the National Assessment of Educational Progress (NAEP), but there are two other sources of nationally representative score trends: PISA and PIRLS. On both of those international tests, U.S. performance has either stagnated or declined across grades and subjects over the lifespan of NCLB.

Taking these results into account, it is not possible to say with any confidence that NCLB has improved student achievement at any grade or in any subject.

It’s also worth noting that the federal government alone has spent $1.85 trillion on k-12 education since 1965, and yet the achievement gaps between the children of college graduates and those of high-school dropouts remain unchanged in reading and science. In math, the gap has shrunk by barely 1% of the 500 point score scale.

How can one look at these facts and still believe that the federal government has the power to cure our educational ills?