Topic: Tax and Budget Policy

Poland to Join Flat Tax Club?

It’s a bit too soon to crank up the unofficial theme song of the flat-tax revolution, but it appears Poland will be the next nation to hop on the flat-tax bandwagon. Because of Poland’s large population and proximity to Germany, this will create additional pressure for better tax policy in Western Europe’s welfare states.

The UK-based Guardian reports:

Poland’s centre-right government plans to introduce a low, single-rate income tax by 2011 at the latest, Prime Minister Donald Tusk said on Friday. …”On Sunday we will announce a specific timetable for launching a flat tax,” Tusk told radio RMF FM. “2010 seems to be the most likely date of introducing the flat tax, 2011 is the worst case scenario.”

Poland now has a progressive personal income tax with three rates of 19, 30 and 40 percent. A source familiar with the matter told Reuters the flat tax would likely be set at 17 percent….

Finance Minister Jacek Rostowski said on Friday that taxes had to be lowered to ensure growth stays high in central Europe’s biggest economy. Tusk led his Civic Platform to an election victory last October by attracting young, educated and urban voters on promises of lower taxes [and] less state intervention in the economy.

The Four Percent Folly

James Jay Carafano’s op-ed in Thursday’s Washington Times, “In Defense of Defense Spending,” exemplifies the illogic of those who want to devote a fixed portion of our national wealth to defense.

Carafano is part of group of think-tankers and Bush administration officials trying to lock in a military budget fattened by two wars. By arguing that we should spend at least four percent of GDP on defense no matter what, they effectively say that whenever we draw down from Iraq, we should take all the war funds and put them into the non-war defense budget — creating a huge increase in base defense spending.

The op-ed is wrong-headed in three ways. It ignores the meaning of the statistic — percentage of GDP — that it hangs its hat on; it implies that changes in threat levels should not affect defense budgets, and it pretends that most U.S. defense spending is related to terrorism.

Carafano’s conclusion:

Defense spending as a percentage of GDP is the appropriate way to measure our national commitment to keeping America safe, free and prosperous. That’s the number policymakers should keep in mind as they look at the president’s budget.

Maybe I have undue faith in government, but I think policymakers can keep in mind more than one number. As my professor at MIT, Cindy Williams, points out, what number you should consider in thinking about the defense budget depends on what you want to know.

Percentage of GDP is useful for historical comparisons of defense’s economic burden. Carafano substitutes the question of what we can afford for what we ought to spend. The United States can afford to spend four percent of its GDP on defense; indeed we can afford to spend far more. That doesn’t mean we should. Whatever your politics, money spent on defense means money not spent on something else: private investment, deficit reduction, infrastructure, a car, etc. The problem is opportunity cost, not economic malaise.

Percentage of GDP is not useful in demonstrating how much we spend on defense compared to the past, however, because GDP grows. Ours is more than six times bigger than it was in 1950, as I wrote here two weeks ago. True, defense’s share of the economic pie has fallen over the last several decades. But that’s because the size of the pie has grown, hiding the absolute increase in spending. The best way to compare defense budgets over time is to look at absolute spending levels adjusted for inflation. That’s what people mean when they say defense spending is the highest that it has been since World War II.

Like most of those who make this argument, Carafano ignores the fact that wealth creation means that he is supporting ever-increasing defense budgets. Why should our grandchildren spend five times more than us on defense just because they are five times richer? Carafano doesn’t say. Nor does he explain why we should spend less on defense next year if there is a recession.

Defense spending should be guided by threats and our plans to deal with them. That this banal idea needs recitation speaks to the poverty of the arguments made by advocates of the drunken-sailor approach to security budgeting. Four percent of GDP forever, capabilities-based planning — these are the desperate justifications of hawks short of threats to inflate. Carafano does not bother to relate the expensive capabilities he promotes with the enemies that they theoretically protect against. Presumably that is because the Cold War is over; China isn’t much of an enemy, plus its growth is likely to taper off far before it can devote close to what we can to its military, and North Korea, Iran and Syria, according to The Military Balance, together spend just above $10 billion on defense, which doesn’t even get you a year’s worth of spending on a faulty missile defense system around here.

What about the “long war”? That’s where Carafano says all this money goes. But the defense budget is buying and operating mostly carrier battle groups, army divisions and fighter aircraft — tools rarely useful in fighting terrorists, and even then, far more abundant than we need. As for the wars in Iraq and Afghanistan, suffice it to say that there is reason to doubt that perennial wars of occupation in Muslim countries serve counter-terrorism. But even counting the wars as counter-terrorism spending, the vast majority of the defense budget is still going toward conventional conflicts, not Al Qaeda.

For a sensible take on these matters and the source of this post’s title, see Bernard Finel’s recent op-ed in Defense News.

Iceland and Taiwan to Slash Corporate Tax Rates

Iceland is known as the Nordic Tiger because of rapid economic growth. Much of the nation’s prosperity is the result of free-market policies, including a 36 percent flat tax on labor income, a 10 percent flat tax on capital income, and a corporate tax rate of just 18 percent (down from 50 percent at the end of the 1980s). But Iceland is not resting on its laurels. The government has just announced a reduction in the corporate tax rate:

The corporate income tax will be cut from 18 per cent to 15 per cent, effective for the 2008 income year and come into force in the 2009 assessment year.

Meanwhile, even though the 25 percent corporate tax rate in Taiwan is already substantially lower than the 39 percent-plus rate in the United States, Taiwanese politicians apparently recognize that globalization and tax competition are powerful arguments for even lower rates. Tax-news.com is reporting that the government therefore plans to slash the corporate rate to 17.5 percent - and also make unspecified reductions to personal income tax rates: 

It emerged this week that the Taiwanese cabinet has approved plans to reduce corporate and personal income tax rates, although the proposed changes must still secure parliamentary approval. The cuts would see the business tax rate reduced to 17.5% (from 25%), and the personal income tax rate slashed, according to reports. No timetable has yet been announced for the introduction of the new lower rates, but according to the International Herald Tribune, ministries likely to be affected by the changes have been asked to revise legislation to accommodate the new rates as soon as possible.

When will American politicians hop on the tax-cutting bandwagon?

Notwithstanding Reprehensible History, Germany Launches Fiscal Attack on Liechtenstein

In a remarkable display of fiscal imperialism, the German government sent spies into Liechtenstein and bribed a bank employee to provide confidential records about German account holders. Unfortunately, this sleazy act of aggression was successful, leading to a series of high-profile raids by German authorities. This has created quite a kerfuffle in Europe, and it should come as no surprise that the bureaucrats at the OECD are using the controversy to push their anti-tax competition agenda. According to a story in the Financial Times:

Pressure grew on Liechtenstein on Tuesday to ease its bank secrecy rules in the wake of a German tax ­scandal centered on the Alpine tax haven. …Angel Gurria, the secretary general of the OECD, said Liechtenstein’s secrecy rules were a “relic of a different time”. …Liechtenstein’s Crown Prince Alois on Tuesday accused Germany of mounting an “attack” on the principality. He condemned as “unacceptable” Berlin’s decision to allow its BND intelligence agency to pay more than €4m ($5.9m, £3.7m) for bank client data allegedly stolen by a former Liechtenstein bank employee. …Jeffrey Owens, the OECD’s chief tax havens expert, said the changes would only make a difference if ­Liechtenstein “were now ready to sign tax information exchange agreements with Germany and other countries.”

This story is troubling on many levels, particularly given Germany’s ugly history of oppression. In the 1930s, Germany had draconian laws to deter citizens from having money outside the country and – like today – it trampled on the sovereignty of its neighbors to get information (see here for more information). Indeed, snooping by the Nazis was the main reason that Switzerland substantially strengthened its privacy laws in the 1930s.

Today’s controversy is motivated by greed for tax revenue rather than anti-Semitism, but the issues are similar. To what extent do nations have the right to compel other jurisdictions to act as deputy enforcers? Most reasonable people understand that there are limits on cooperation between governments. European Union nations, for instance, refuse to cooperate in extradition cases where an American might face the death penalty. Likewise, most nations would never consider helping a totalitarian regime like Saudi Arabia or Iran if it tried to persecute escaped homosexuals.

The tax issue is a bit more challenging because it is easy to demagogue against wealthy people who utilize so-called tax havens (though even OECD officials get a bit squeamish when asked whether financial privacy laws should be totally abolished, since even they recognize that billions of people live in nations that practice some form of religious, political, ethnic, racial, and/or sexual discrimination – not to mention all the people who live in nations that suffer from economic mismanagement, kidnapping, and/or monetary instability).

The head of the OECD considers privacy to be a “relic of a different time.” But why should there be a one-size-fits-all policy? Is there really no room in the world for nations that treat people with dignity and respect their privacy? If politicians from high-tax nations and bureaucracies such as the OECD get to decide, the answer is no. But hopefully Liechtenstein will stand firm against Germany’s vicious bullying. After all, so long as over-burdened taxpayers have safe havens, governments face pressure to improve their tax law. And even the Financial Times was forced to acknowledge, in a schizophrenic editorial that endorsed sending spies into low-tax jurisdictions, that bad tax policy bears part of the blame:

Germany’s problem with evasion is partly the fault of its tax system. Although the abolition of wealth tax has improved matters, marginal income and inheritance tax rates for high earners approach 50 per cent. Tough enforcement will never stop evasion if taxes are punitive.

Air Force vs. Taxpayers

This week’s Air Force Times reports that the Air Force wants an extra $59 million of your tax dollars next year to pay for a campaign to win tens of billions more of your tax dollars.

You see, the Air Force’s research shows that the American public does not appreciate the Air Force as much as the Air Force thinks it should. Air Force generals worry that Americans may conclude that our current wars, which are relatively low-tech, ground power-centric affairs, are a reasonable basis for making procurement decisions. That conclusion may produce budgets that favor the ground forces, thwarting the Air Force’s plan to become the service that runs future wars. And the administration has already refused the Air Force an extra $20 billion for its annual budget.

So the defense budget submitted recently to Congress would more than double the Air Force’s advertising spending to insure that the public doesn’t figure out that platforms like the F-22 are white elephants.

The Air Force defends the funds in this, surprisingly forthright, way (from page 652 of their budget estimate for FY 2009):

Without the funding the ability to educate the American public about Air Force roles and mission will be limited and [sic] ultimately creating a gap between the public and the Air Force that will influence public opinion and the Air Force’s ability to maintain its stature amongst the other Services. Other recruiting programs aided in meeting accession goals but did little to illustrate the Air Force story. This funding purchases capabilities to illustrate the Air Force’s vital role in national defense today and in the future, hi-light the unique capabilities delivered by no other service, depict the most complex and challenging assignments, and show case the USAF.

According to the Air Force Times:

Air Force officials believe Congress and the public are focused on the wars in Iraq and Afghanistan, where the Army and Marine Corps do most of the fighting. Therefore, efforts to expand the Air Force’s high-tech fleet of aircraft and the service’s cyber mission are taking a backseat to the immediate needs of the wars.

If that is what the public thinks, I commend our common sense. Silly op-eds and press releases asserting how essential airpower is to counter-insurgency apparently failed to do the trick.

All the services spend big bucks on recruiting. That’s the point of the $53 million the Air Force spent on advertising last year. And that’s low, relatively speaking. In 2005 (the latest set of complete figures I could find), the Army spent $290 million on recruiting-related advertising, the Marine Corps $67, the Navy $100 million, and the Air Force $57 million. The ground services, which need more manpower and take far more casualties, naturally spend more to woo recruits (not to mention a whole lot more on bonuses).

But the extra money the Air Force wants is not going to recruit new airmen; it is for TV, web, and print advertising meant to win public support and funds. It is, in other words, for propaganda.

True, $60 million isn’t much in a defense budget that will cost nearly three quarters of a trillion dollars. But spending our money to convince us to spend more of our money just grates.

The Air Force already has the Thunderbirds, a traveling air-show, to promote itself. (The similar Blue Angels promote the Navy. The Army employs a Parachute Team, the Golden Knights for PR). It was a $50 million promotional contract for the Thunderbirds that recently landed the top brass of the Air Force in the middle of an FBI investigation – one that, as far as I can determine, is ongoing.

Beyond public funds, the Air Force Association, a non-profit organization, exists to sing airpower’s praises (the Navy and Marines have the Navy League). And of course there are the contractors who lobby on behalf of the Air Force contracts that pay their way.

The Air Force has enough ways to sell itself, and then some, without this new request. Congress should say no.

Inside the Sausage Factory

The cover story of this week’s Washington Post Magazine offers a fantastic look at how lobbyists make a living by helping some people take from others.  Every citizen should read it.  Casual observers of government may be surprised (and nauseated) to see how elaborate, expensive, and disingenuous such efforts have become.  (Students of public choice economics will not be.)  As author Jeffrey H. Birnbaum notes, it’s usually the wealthy who are trying to do the taking.

The article is about the travel industry trying to force taxpayers to fund the industry’s advertising campaigns.  (Birnbaum includes such gems as: “One thing everyone agreed on: The travel industry did not want to pay for the ads itself.”)  But the story could have been written about nearly any of the countless lobbying shops littering the D.C. landscape:

The explosion in the size of K Street, the locus of the lobbying industry, is an extension of the growth and reach of government. The ballooning federal budget has its tentacles in every aspect of American life and commerce. No serious industry or interest can function without monitoring, and at least trying to manipulate, Washington’s decision makers. The penalty for ignoring the federal government can run into the billions of dollars. Just ask Microsoft. The software giant was hit with an antitrust lawsuit by the Justice Department in the late 1990s and, in 2001, agreed to alter the way it packaged its computer operating system. Before then, it had mostly ignored the nation’s capital.

Bad mistake. Chastened by its defeat, Microsoft has built a powerhouse presence in Washington, as have scores of other companies and industries. Lobbyists argue that it’s a relatively cheap investment. The Carmen Group, a mid-size lobbying firm, regularly compares its clients’ costs with the benefits it says they receive from lobbying. In its latest internal assessment, Carmen said it collected $15 million in fees from about 70 clients and delivered $1.5 billion in assistance – measured both in benefits received and in burdens avoided – a return ratio of roughly 1 to 100. Most clients still part with their lobbying dollars grudgingly. But they do part with them, which is why new buildings are going up all the time to accommodate the industry’s growth. Want a former senator to guarantee a meeting with a current senator? No problem. Half the senators who leave Congress for the private sector register to lobby. Need to know the history of a tax law and whom best to ask to change it? Easy. At least half a dozen consulting firms are composed of nothing but former congressional tax aides and Treasury Department officials who know as much as, and probably more than, the current people inside.

And why wouldn’t ex-lawmakers and aides gravitate to K Street? Lobbying jobs pay at least twice and sometimes three times government salaries. Serving in government is now viewed by many on Capitol Hill as a steppingstone to a lucrative career in bending government to the whims of paying clients. In many ways, lobbying now mimics the government it targets. It has become a bureaucracy, with its own language, its own peculiar ways of doing business and, most important, its own instinct to survive.

Indeed, the last thing any lobbyist wants is to win everything his or her client is seeking. That would mean an end to a retainer, the closing of the feedbag. Success for a lobbyist is not outright victory but, rather, just enough progress to justify the creation of an elaborate and well-funded lobbying apparatus. Even outright failure can underscore the need to lobby harder.

Lobbying is Washington’s version of a perpetual motion machine. Once it gets revved up, it rarely stops running. In fact, it tends to grow. 

All of which raises this question: why don’t we see more such stories?  Whatever the reason, Birnbaum deserves kudos for inspecting this small corner of the sausage factory.

Of course, the solution is not to restrict the people’s ability to lobby Congress.  All that sleazy lobbying is nothing more than “petition[ing] the government for a redress of grievances” – a constitutionally protected activity.  The solution, conveniently enough, is to respect the rest of the Constitution too.  Were the People to do that, those sleazy lobbyists wouldn’t get anywhere.

The Free Market Produces Incoherent Headlines

Today’s Washington Post has a story on economic espionage by Chinese interests, most of which have connections to the Chinese government and military. Inexplicably, the headline of the story is “Even Spies Embrace China’s Free Market.”

Government-sponsored economic espionage has little to do with free markets. These are crimes (or at least civil wrongs) sponsored directly or indirectly by over-large governments. Crime and over-large governments are antithetical to free markets, not a part of them.

Evidently, there’s some kind of market failure at the Post. (Note to the economic illiterates at the Post: That’s a joke.)