Topic: Tax and Budget Policy

Dropouts. Starving for a Good Education

“Secretary of Education Margaret Spellings will require all states to use one federal formula to calculate graduation and dropout rates,” reports the New York Times, as part of a campaign to keep more kids in school.

The idea that we can reduce the public school dropout rate simply by measuring it better is misguided. It’s like believing that the North Koreans could improve their economy by more accurately measuring the number of people who are starving. As with the North Korean economy, the problem with U.S. public schooling is that it is a monopoly that takes choice away from families, takes professional autonomy away from educators, and takes normal economic incentives away from everyone.

Meanwhile, there is evidence from a sophisticated nationwide study that inner city minority kids – those most at risk of dropping out – are more likely to graduate, more likely to get into college, and more likely to graduate from college if they attend private instead of public schools – and that’s true after controlling for differences in student and family background. Other small scale studies of the Milwaukee school voucher program show similar results.

We already know how to reduce the dropout rate: ensure that all families can easily afford to choose the public or private schools best suited to their children. Until that happens, expect to see millions of American kids continuing to starve for a real education.

New Zealand Cuts Corporate Tax Rate

The 39.3 percent corporate tax rate in the United States is very high by world standards, exceeded only by Japan. This is very damaging for job creation and prosperity – and it becomes an even bigger problem every time another nation lowers its corporate rate. The latest nation to move in the right direction is
New Zealand, which is dropping its rate to 30 percent, according to Tax-news.com:

An important initiative in the government’s ongoing programme to strengthen the economy takes effect on April 1st, 2008, when the company tax rate drops to 30%, Finance Minister Michael Cullen and Revenue Minister Peter Dunne announced on Monday. “Reducing the company tax rate will allow successful businesses to re-invest a greater share of their profits in new technologies and in further building-up the skill base of employees,” Dr Cullen stated. “We expect that lowering of the company tax rate will serve to strengthen the competitiveness of New Zealand-based companies, and that is good for the long-term interests of all New Zealanders,” Dunne added. The cut to the company tax rate to 30% (from 33% previously) represents the first time the company tax rate has been reduced in New Zealand since 1988.

Will Switzerland Defend Financial Privacy?

The New York Times reports that high-tax nations such as France and Germany are badgering Switzerland to weaken its privacy laws so that flight capital can be tracked – and taxed. Germany’s former finance minister even argues that this would be akin to Switzerland helping to return a stolen car. But this argument is morally and legally wrong. On a moral basis, the German government is the one guilty of taking something it shouldn’t have. Over-taxed Germans are putting their money in Swiss banks because they don’t want the German government to confiscate too much of their money – especially since Germany is guilty of both high tax rates and pervasive double taxation of income that is saved and invested. If Germany wants to reduce tax evasion, it should reform its tax code rather than harrass peaceful neighbors. On a legal basis, nations help each other enforce laws using the principle of “dual criminality,” which means that an action has to be against the law in both nations. Stealing cars is illegal in both Swtizerland and Germany, so cooperation in the battle against car theft is appropriate. Confidential bank accounts, by contrast, are not against the law in Switzerland, so there is no reason for Switzerland the violate its human rights policiy on privacy just to help Germany enforce bad tax law. This upsets the Germans, yet they do the same thing when refusing the extradite suspects who might face the death penalty to America. It’s not their job to enforce American criminal law, so they have every right to say no. But it does indicate that German priorities are a bit strange. They defend the principle of dual criminality when they want to provide refuge to American murderers, but they think the principle should be discarded when politicians think they can grab some money from Swiss banks:

This land of stunning Alpine vistas, which has chosen to remain outside the European Union, has always loomed large in the global imagination as the place where the wealthy stash their money beyond the tax man’s reach. The best estimates suggest that image is true, to the tune of $1 trillion to $2 trillion. The scandal that threatens that lucrative business began when German authorities obtained secret financial data from Liechtenstein, Switzerland’s tiny neighbor with similar banking laws. The information in hand, investigators fanned out across Germany to seize documents thought to be related to tax evasion by hundreds of wealthy Germans. Cases are now being prepared based on the information, a process likely to take years. The fallout has claimed the job of one top executive, Klaus Zumwinkel, who had headed the German postal service, and has given the German left a political boost. But Switzerland is the bigger prize. And its continuing refusal to help other countries catch tax cheats hiding their money there appears to have hardened Europe’s resolve to force change. “If a car is stolen in Germany and taken to Switzerland, the Swiss help find it,” said Hans Eichel, a member of the German Parliament and a former finance minister. “But when it’s about tax evasion — and much larger sums — they do nothing. No one outside Switzerland understands that.” …European officials believe they can seize this moment to rally public opinion against the Swiss, German officials said. France, which will take over the rotating presidency of the European Union in the second half of this year, has agreed to take up the issue. …The concept of bank secrecy is deeply rooted in Switzerland, akin to the confidentiality rules governing doctors and lawyers in other countries, and a 1934 law makes it a crime for bankers to disclose client information. For foreigners, this combination is an effective shield against authorities at home. …Hans-Rudolf Merz, the Swiss finance minister, has brushed aside notions that Switzerland will water down banking confidentiality, a cornerstone of the financial system. Jean-Michel Treyvaud, a spokesman for Mr. Merz, called the debate “a media phenomenon” and declined an interview request.

Real Federalism in Switzerland

An article in the Financial Times notes that the income tax imposed by the national government in Switzerland takes no more than 11.5 percent of a taxpayer’s income, and that most taxation (and spending) takes place at the canton and municipal level. This is genuine federalism, unlike the United States, where the national government is the dominant force in fiscal policy.

A big advantage of real federalism is greater tax competition, which — as the article notes — leads to lower tax rates and less government waste:

The federal constitution gives significant powers both to Switzerland’s 26 regional cantons, and to the individual towns and villages in them. …A handful of cantons have used ultra-low taxation to attract wealthy individuals to stimulate economic growth. Among the best known are Zug and Schwyz, both not far from Zurich. Most recently, Obwalden, a small, mountainous canton near Lucerne, slashed tax rates to match its low-tax rivals.

The cantonal levy is complemented by a local tax, calculated as a percentage of the cantonal level. Again, rates vary dramatically, even between communities in the same canton. For example, in the canton of Zurich, Switzerland’s most populous, local tax ranges from roughly 70 per cent of the cantonal rate in the wealthy and relatively low-tax towns and villages along Lake Zurich’s so-called Gold Coast, to more than 120 per cent in poorer and much more financially stretched communities in the hinterland. The local and communal taxes are capped by a federal tax, payable separately and at a different time of the year, that rises gently to peak at 11.5 per cent for the highest incomes.

Although three levels of taxation might sound expensive, personal taxes in Switzerland are relatively modest compared with much of Europe. Rates in the ultra-low-tax cantons can be as low as 16 per cent. Even “average” cantons tend to charge less than elsewhere in Europe, thanks to the cantonal tax competition that the Swiss say encourages cantons and local administrations to maximise efficiency.

Teachers: “All Your Money Are Belong to Us”

The Georgia legislature is currently considering a scholarship donation tax credit program that would allow individuals and businesses to give money to non-profit scholarship granting organizations that make it easier for parents to afford independent schooling for their kids.

In arguing against the bill, the head of the state’s public school employee organization, Jeff Hubbard, had this to say: “Our opposition is [to] taking state funds, taxpayer income, and giving it over to private schools.”

Umm…. The thing is, state funds and taxpayer income are not interchangeable terms, however much public school employee organizations might wish them to be. You see, you aren’t entitled to all taxpayer income – or even to all state funds – but just to those funds appropriated by the state in taxes and then allocated to the business of running public schools. When taxpayers claim a tax credit for a donation to help low income kids, no money ever enters the state’s coffers. So you see, these are in fact private funds.

For a good discussion of all this, see the Arizona Supreme Court’s ruling in Kotterman v. Killian (.pdf), upholding that state’s scholarship donation tax credit program, in part, on the grounds that the donated funds are not state money.

Paul Krugman’s Fallacious Forecast of a $6-7 Trillion Drop in Housing Wealth

The Case-Shiller index of house prices covers just 20 major metropolitan areas. It shows house prices down by 10.7% between January 2007 and 2008, but that largely reflects the fact that Los Angeles, San Diego and San Francisco account for 27.4% of the index.

In Fortune magazine’s March 17 interview, economist Paul Krugman says “We’re probably heading for $6 trillion or $7 trillion in capital losses in housing.”

Such estimates begin by assuming the S&P Case-Shiller index of house prices (which is now down 12.5% from its peak month) has a lot further to fall, and that it accurately represents the value of all real estate held by U.S. households throughout the 50 states.

The Federal Reserve’s Survey of Consumer Finances (updated with flow-of-funds data by David Malpass of Bear Stearns), shows U.S. real estate worth $22.5 trillion in the fourth quarter—up 2.5% from a year earlier and accounting for 31.2% of household wealth.

If you think the Case-Shiller index will eventually fall by 30% (Krugman said 25%), then 30% of $22.5 trillion would yield an estimate of $6-7 trillion capital losses “in housing.” But the $22.5 trillion is not just single-family homes—it includes commercial property, apartments and farm land. More important, even single-family housing wealth is not located in only 20 major metropolitan areas.

The Office of Federal Housing Oversight (OFHEO) index covers all 50 states, including nonmetropolitan areas, but not the most expensive homes (which is not where Case-Shiller finds the biggest declines). The OFHEO index shows house prices down 3% in January, compared with a year before. But even that average is by no means typical of all housing (much less real estate) in the entire nation.

Between the fourth quarters of 2006 and 2007, house prices rose in all but two of the many states excluded by Case-Shiller, and the increase averaged 3.8 percent.

Economists and journalists who use gloomy predictions about the Case-Shiller index to predict a comparable loss of real estate wealth are making several serious mistakes.

Senator Levin’s War on Taxpayers

In a remarkable display of chutzpah, Senator Carl Levin of Michigan is quoted in the Christian Science Monitor stating that “Tax havens have declared war on honest taxpayers.” This is from a politician who routinely votes for higher taxes and has a rating of “F” from the National Taxpayers Union because he votes against taxpayers 85 percent of the time – a record that puts him below Senators Hillary Clinton and John Kerry. Tax havens, by contrast, have helped taxpayers by forcing governments around the world to lower tax rates. Indeed, a prominent British accountant explains in the story that low tax rates are the appropriate way to deal with global competition. Returning to the theme of chutzpah, an OECD bureaucrat (who receives a tax-free salary!) actually admits that people should have a right to financial privacy – but only if the term is stripped of all meaning by giving governments unlimited snooping rights:

“Tax havens have declared war on honest taxpayers,” says US Sen. Carl Levin (D) of Michigan, who along with Sen. Barack Obama (D) of Illinois is co-sponsoring the “Stop the Tax Haven Act,” introduced last year. … Chas Roy-Chowdhury, head of taxation at Britain’s Association of Chartered Certified Accountants… says… “Governments should open themselves up to the wind of global competition and accept that they need to run efficiently to keep tax rates low.” … Perez-Navarro [of the OECD] adds that individuals should have the right to a certain banking confidentiality, but that when investigators want to see numbers they should be handed over.