Topic: Tax and Budget Policy

Another Entrepreneur Escapes French Tax System

One almost feels sorry for the French. Several years ago, supermodel Laetitia Casta escaped to London because of France’s onerous tax regime. This was a a particularly painful blow to French pride since she was selected in 1999 to be Marianne, a symbol of the nation. To add insult to injury, one of France’s most prominent chefs has now escaped to Monaco. The UK-based Times has the details:

France has just lost one of its greatest chefs. Alain Ducasse, the holder of 14 Michelin stars and a worlwide restaurant and hotel empire, has given up his French citizenship for the privilege of becoming a Monegasque, we hear today. Ducasse, 51, whose interests turn over about 160 million million euros a year, has gone into tax exile. He could have chosen Switzerland and kept his citizenship but Ducasse, a southerner by birth, has ties to Monaco, where he owns the three-star Louix XV. Monaco imposes no income or wealth tax on its residents – provided they are not French. …So, the wheeze for French would-be exiles is to become a Monaco citizen – a privilege accorded very sparingly. Prince Albert II has just granted this “sovereign order” to Ducasse.  There are only 8,000 Monaco citizens and there is a long waiting list for French candidates. …Because of the wealth tax plus steep income and social security taxes, many high earners and very well off people moved over the past two decades to London, Brussels and other capitals as well as the traditional haven Switzerland. They are not returning in noticeable numbers, mainly because the wealth tax remains and they do not trust their country to reverse policy at the drop of a hat. Sarko has maintained the Impôt sur la Fortune (ISF) as the 26-year-old annual tax is known (the exiles call it Incitation à Sortir de France). The tax gathers relatively little income and drives capital abroad but the public supports soaking the rich, so scrapping it is politically unacceptable.

But Americans should not be overly amused by this story. At least French taxpayers have the freedom to choose another nation’s tax system. The United States imposes an exit tax (a policy almost always associated with despicable regimes such as the Soviet Union and Nazi Germany), making it very difficult for people to dump the internal revenue code.

Right Message, Wrong Messenger

A column in the Wall Street Journal correctly explains that Senators Obama and McCain have a habit of displaying economic illiteracy. So it is rather ironic that the author is Karl Rove, the man who spent the past seven years steering George W. Bush into one bad economic decision after another.

On many occasions, I visited economists in the administration to complain about their Keynesian fiscal policy (such as rebates), wasteful spending (such as farm bills and Medicare expansion), and senseless regulation (such as Sarbanes-Oxley), and invariably I would be told that the Bush White House was pursuing bad policy but that there was nothing that could be done because Karl Rove’s political strategy shop was calling the shots.

Only in Washington can people disply this amount of chutzpah and still retain credibility:

Barack Obama and John McCain are busy demonstrating that in close elections during tough economic times, candidates for president can be economically illiterate and irresponsibly populist. In Raleigh, N.C., last week, Sen. Obama promised, “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” Set aside for a minute that Jimmy Carter passed a “windfall profits tax” to devastating effect, putting American oil companies at a competitive disadvantage to foreign competitors, virtually ending domestic energy exploration, and making the U.S. more dependent on foreign sources of oil and gas. Instead ask this: Why should we stop with oil companies? They make about 8.3 cents in gross profit per dollar of sales. Why doesn’t Mr. Obama slap a windfall profits tax on sectors of the economy that have fatter margins? Electronics make 14.5 cents per dollar and computer equipment makers take in 13.7 cents per dollar, according to the Census Bureau. Microsoft’s margin is 27.5 cents per dollar of sales. Call out Mr. Obama’s Windfall Profits Police!

…This past Thursday, Mr. McCain came close to advocating a form of industrial policy, saying, “I’m very angry, frankly, at the oil companies not only because of the obscene profits they’ve made, but their failure to invest in alternate energy.” …And do we really want the government deciding how profits should be invested? If so, should Microsoft be forced to invest in Linux-based software or McDonald’s in weight-loss research? Mr. McCain’s angry statement shows a lack of understanding of the insights of Joseph Schumpeter, the 20th century economist who explained that capitalism is inherently unstable because a “perennial gale of creative destruction” is brought on by entrepreneurs who create new goods, markets and processes. The entrepreneur is “the pivot on which everything turns,” Schumpeter argued, and “proceeds by competitively destroying old businesses.”

…Messrs. Obama and McCain both reveal a disturbing animus toward free markets and success. It is uncalled for and self-defeating for presidential candidates to demonize American companies. It is understandable that Mr. Obama, the most liberal member of the Senate, would endorse reckless policies that are the DNA of the party he leads. But Mr. McCain, a self-described Reagan Republican, should know better.

What Do the U.S., North Korea, and the Old Soviet Union Have in Common?

Sadly, the answer to this question is that the United States is in unsavory company because of taxation.

For one thing, the U.S. Internal Revenue Code applies even to citizens who live and work abroad, an approach followed by very few nations other than hell-holes like North Korea. No other developed nation has this “citizenship-based” tax system, largely because it is unfair and anti-competitive. It is unfair because Americans who live and work abroad already are subject to all applicable foreign taxes (much as foreigners who live and work in the U.S. get the pleasure of dealing with the IRS). And it it anti-competitive because this punitive policy makes it harder for U.S. firms to earn a larger share of the market when competing in foreign markets. America’s tax policy is so punitive that some people are giving up their citizenship. But rather than dealing with this problem by fixing the tax code, politicians have decided to impose punitive exit taxes. The Economist has some of the unpleasant details: 

Queues of frustrated foreigners crowd many an American consulate around the world hoping to get into the United States. Less noticed are the heavily taxed American expatriates wanting to get out — by renouncing their citizenship. In Hong Kong just now, they cannot. “Please note that this office cannot accept renunciation applications at this time,” the consulate’s website states. Apart from sounding like East Germany before the fall of the Berlin Wall, the closure is unfortunately timed. Because of pending legislation on President Bush’s desk that is expected to become law by June 16th, any American who wants to surrender his passport has only a few days to do so before facing an enormous penalty.

…Congress has turned on expats, especially those who, since new tax laws in 2006, have become increasingly eager to give up their citizenship to escape the taxman. Under the proposed legislation, expatriates surrendering their citizenship with a net worth of $2m or more, or a high income, will have to act as if they have sold all their worldwide assets at a fair market price.

…That expats want to leave at all is evidence of America’s odd tax system. Along with citizens of North Korea and a few other countries, Americans are taxed based on their citizenship, rather than where they live. So they usually pay twice — to their host country and the Internal Revenue Service. As this makes citizenship less palatable, Congress has erected large barriers to stop them jumping ship. …[I]t may have the opposite effect. Under the new structure, it would make financial sense for any young American working overseas with a promising career to renounce his citizenship as early as possible, before his assets accumulate.

Another embarrassing feature of U.S. tax law is that exit taxes historically have been adopted only by the world’s most reprehensible regimes. As Richard Rahn explains in the Washington Times, the United States should not mimic the Soviet Union by confiscating the wealth of people who displease the ruling elites:

One of [the] old Soviet Union’s actions that was most heavily and correctly criticized by human-rights activists both left and right was its confiscation of the wealth of those who chose to leave the U.S.S.R. The right to emigrate is considered by civilized people to be a basic human right. Regretfully and embarrassingly, the U.S. Congress has just passed a law that places a higher tax burden (and in some cases wealth confiscation) on those who choose to permanently leave the United States, and may make some “tax hostages.”

…People who choose to renounce their citizenship are often looked upon as traitors, both by those in totalitarian and authoritarian states, and unfortunately sometimes by those in democratic societies, even when their intentions are benign. Many who immigrated to America over the last four centuries had some, or most of, their wealth in the old country taken from them in one form or another. This was rightly considered unjust. Yet, the descendants of many of those who suffered just voted to do something similar that differs only in degree, but not in kind or spirit.

…The apologists for Fidel Castro and Hugo Chavez will be able to point to this new U.S. law and ask why this is any different from the property takings by the aforementioned thugs? Yes, it is [a] bit different, but behind it is the same mean-spiritedness and disregard for property rights and the right to emigrate because of political beliefs. Such laws only make the United States look hypocritical to the rest of the world.

More on Medicare’s Stupid Strategies for Reducing Administrative Costs

A recent Government Accountability Office report highlights another way Medicare keeps its administrative costs down: sending checks to providers without bothering to check whether those providers owe back taxes.

According to today’s Washington Post:

Health-care providers are allowed to collect millions of dollars in federal Medicare payments each year despite owing the government more than $2 billion in back taxes, congressional investigators said yesterday.

The Government Accountability Office found that more than 27,000 nursing homes, hospitals, physicians and other providers flouted the tax system while collecting Medicare fees in 2006. That represented 6 percent of all providers [who participate in] Medicare….

Some cases cited in the new report were especially egregious. They included a nursing home operator with a history of asset concealment schemes who filed $15 million in Medicare claims while owing $7 million in unpaid taxes and establishing a charitable foundation that purchased luxury cars for the owner’s personal use.

And there was the hospital that collected $21 million in Medicare fees while owing $15 million in taxes, mostly for failing to forward to the Internal Revenue Service payroll taxes that were withheld from employees’ checks.

What’s that?  This seems more like the IRS’s responsibility than Medicare’s?  Perhaps.  But even taking that into consideration, Medicare is still delinquent:

The IRS has an automated system to hold back a portion of payments to contractors who are delinquent on their taxes. Medicare officials have been slow to join, but Kerry Weems, acting administrator for the Centers for Medicare and Medicaid Services, said that all Medicare payments will be part of the program by October. “We take this issue very seriously,” he said.

Oh, indeed.  Medicare takes this issue as seriously as any government program whose raison d’être is to shovel money out the door.

REAL ID Grant Process Collapses, Money Goes to No-Bid Contract

Mickey McCarter at Homeland Security Today has the scoop on REAL ID grants that the Department of Homeland Security is doling out today.

Yes, REAL ID grants. Ten states have passed legislation to bar themselves from participating. (Arizona was the most recent.) And many more have registered their objections to the national ID law. But the Department of Homeland Security is still trying to revive it — this time, by spreading a little money around.

What’s “a little money”? The estimated $85 million in grants is about 0.5% of the $17 billion that it would cost to implement REAL ID, so it’s just a little. But that’s $85 million that taxpayers won’t be getting back.

It’s interesting to see where the money is going, of course.

The breakdown of awards, obtained by HSToday.us, signifies that AAMVA effectively gains a no-bid contract under the awards, as DHS designates it the sole national centralized database of driver’s license information under REAL ID through a grant award to the state of Missouri… . . A competitive grant process could have resulted in multiple hub awards instead of a sole-source contract to AAMVA, sources argue, decentralizing REAL ID information somewhat and encouraging the rise of the most effective database solution between competing vendors.

With enthusiasm for the program distinctly lacking, DHS abandoned its plan to award grants competitively and just divvied up the money state by state.

[A]lthough many states did submit proposals in response to the REAL ID guidance, according to a source knowledgeable of the evaluation process who requested anonymity, many of the state proposals for REAL ID grants were very poor. Evaluators who examined the proposals received by March 7 were surprised by the number that did not even request the funds for the specific program, instead asking for the money to spend on emergency response equipment and other needs.

No-bid contracts and funds for a program the states don’t want? Congress should not allow DHS to throw this good money after bad.

John McCain’s SimCity Energy Plan

For those of you not in the cultural “know,” Sim-City is a long-standing series of computer games which asks the player to essentially play the role of a Stalinist super-planner. What to build, where to build, and how people are to relate to all those buildings in your custom-designed city is up to you, the all-knowing, all-powerful uber-planner.

It’s all good fun in the privacy of your own home (I guess), but is this the sort of game we want the next President to play? I’m going to go out on a limb and say no. John McCain, however, seems to disagree.

Consider, for instance, John McCain’s call earlier this week for the United States to build 45 new nuclear power plants by 2030 and another 55 sometime after that. The first question that comes to mind is, why 45? Did the McCain brain trust engage in some high level economic computer modeling to discover that the optimum number of new nuclear power plants is not 42, 47, or some other number … but the nice, round number of 45? I’m going to guess that they did not. I’m going to surrender to my cynical alter-ego and posit that, if one were to ask the question, “Sen. McCain, how exactly did you come to the determination that the economically optimal number of new nuclear power plants is 45 new facilities over the next 22 years?” the answer you would get would likely be totally incomprehensible.

There are two ways we can go on energy policy. We can leave the decisions about what to build and when to build to market actors (disciplined as they are by hard costs and incentivized as they are by the pursuit of profit), or we can leave that task to political uber-planners who are not disciplined by either but are disciplined by campaign contributions, polling data, and periodic popularity contests. Call me a crazy ideologue, but I suspect that the economy would prove more efficient with the former rather than the latter approach.

Note: The reason we hear politicians like John McCain talk so much about the need for the federal government to promote nuclear power is because investors in the private sector take one look at the economics and run screaming for the hills. Investment banks tell utilities who want to borrow money to build these things that not one red cent will be coming their way unless and until the federal taxpayer guarrantees that the entire loan will be repaid in case of default. If nuclear power were such a good economic bet, those taxpayer guarantees would not be necessary.

NYT Feigns Concern over Cost Overruns in Massachusetts Health Plan

Today’s New York Times ran my response to the Grey Lady’s recent editorial on the Massachusetts health plan:

Your editorial lauds the Massachusetts health care reforms as “off to a good start” and “heartening.” The editorial addresses the reforms’ higher-than-projected costs thus:

“The shortfall occurred mostly because the state underestimated the number of uninsured residents and how fast low-income people would sign up for subsidized coverage. It is a warning to other states to keep projections realistic.”

I’m sorry, but if states can low-ball the cost of reforms to get them enacted, and still get praised by the paper of record, that’s exactly what they’ll do. Some “warning.”