Topic: Tax and Budget Policy

Korean Tax-Cutter Wins

The corporate tax-cutting revolution may take another step forward with the election of Lee Myung-bak to the South Korean presidency.

Lee has promised to cut the country’s federal corporate tax rate from 25 to 20 percent.

Lee seems to have a very pro-market perspective on fiscal economics: “The ratio of taxation against national income was 17.9 percent under former President Kim Young-sam’s administration, but it increased to 20 percent under the incumbent administration, which almost stops the economy from growing.”

America’s tax ratio is closing in on 19 percent of GDP and our federal corporate tax rate at 35 percent will be 75 percent higher than Korea’s.

The Man with the Plan

The Russian government’s monthly propaganda insert in the Washington Post includes this headline today:

The Man with the Plan/President Putin Has Got the Nation’s Future Mapped Out

It reminded me of an article I wrote a few years ago with the same title, “The Man with the Plan.” (In Liberty, July 1996, or you can read it in my forthcoming book The Politics of Freedom.) I was writing about Clinton adviser Ira Magaziner, whose various planning schemes, while scary, are certainly not as bad as the ones that have been tried in Russia over the past century. Though this idea, expressed by presidential candidate Bill Clinton on the campaign trail in 1992, might come close:

We ought to begin by doing something simple. We ought to say right now, we ought to have a national inventory of the capacity of … every manufacturing plant in the United States: every airplane plant, every small business subcontractor, everybody working in defense.

We ought to know what the inventory is, what the skills of the work force are and match it against the kind of things we have to produce in the next twenty years and then we have to decide how to get from there to there. From what we have to what we need to do.

Five-year plans not having planned out so well, Clinton and Magaziner decided the problem was their short-term focus. Whether Bill or Hillary, Putin or Magaziner, when I hear the phrase “the man (or woman) with the plan,” I think of Adam Smith:

The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.

A Moment of Idiocy, of Real Idiocy

The above title is the correct assessment of the new energy bill that President Bush just signed into law less than 24 hrs after the House approved it by a 314–100 margin. House Speaker Nancy Pelosi, speaking just prior to yesterday’s vote, gave the politicians’ assessment: “You are present at a moment of change, of real change.”

Of course, it’s not that much of a change for politicians to substitute their collective judgment for the private decisions of consumers who have strong incentives (stronger than politicians!) to make the most efficient choices. Still, the new energy bill — assuming Congress sticks to it — will make some changes:

  • The incandescent light will be phased out of existence beginning in 2012.
  • Average fuel economy for new vehicles will move from the current 25.0 MPG to 35.0 by 2020 — a standard that only the Toyota Prius and Honda Civic hybrids currently meet.
  • New government mandates and subsidies will push the domestic ethanol industry to some 36 billion gallons in sales by 2020. (This will actually lessen fuel efficiency because ethanol gets considerably worse mileage than gasoline.)
  • The move to more biofuels will continue to increase food prices as farmland is reallocated to the production of energy stocks.

All this leads to one question: Why are these mandates necessary? If the changes are as sensible as Congress and the White House claim, consumers would make them privately. Indeed, the data indicate that consumer preference for fuel-efficient cars is stronger than what the economics would justify.

So then, what is this energy bill really all about?

ADDENDUM:  Beth Douglas Kelly, a mechanical engineer who specializes in energy R&D, emailed me about a bit of sloppiness in my parenthetical that ethanol gets worse gas mileage than gasoline. My statement is correct but, she points out, it’s not that important — it simply means that a certain volume of gasoline gets you farther than the same volume of ethanol. That fact bypasses the important questions of gasoline’s and ethanol’s costs (understood in a broad sense).

Here are the important comparisons:

  • What is the cost per mile for gasoline vs. ethanol? (Currently, gasoline still beats ethanol when you take into account the loss of gas mileage.)
  • What are the environmental externalities of gasoline and ethanol? (Here, ethanol seems to be better but there’s still some argument.)
  • What are the other externalities of gasoline use vs. ethanol use?
  • Will consumers ever be made to bear (and thus judge between) those costs, or will politicians continue to hide them?

Unfunded State Health Costs: Still $1.4 Trillion

The New York Times and Washington Post report today on a new study by the Pew Center on the States regarding unfunded state and local pension and health costs for retirees.

Let’s just look at the health costs. Pew finds that state governments have promised their workers $370 billion of retiree health care that they have not put money aside for. Unless those benefits are cut, that figure represents the looming hit on future taxpayers.

But Pew only looks at state governments, which employ 4.3 million people, according to Census data. Local governments employ 11.8 million people. If the local health care problem is as big as the state problem, the total state/local unfunded amount would be $1.4 trillion.

Interestingly, that is precisely the figure that Jagadeesh Gokhale and I came up with when we looked at this problem last year. We estimated that state and local governments have racked up about $1.4 trillion in unfunded retiree health costs.

Our study and the Pew study highlight two fundamental problems. First, governments have been irresponsible in making huge promises to workers regarding future benefits, but then not funding them as private benefit plans would.

Second, “public sector employees are far more likely to receive retirement benefits [than private sector employees] and the gulf between private and public sectors continues to grow,” according to Pew. For example, 82 percent of government workers receive retiree health benefits, compared to just 33 percent of private sector workers.

The solution is to cut back sharply on the gold-plated benefits received by government workers, while privatizing as many state and local activities as possible.

Prior posts: here, here, and here.

Universal Coverage Is the Health of the State

California’s health care sector is as bloated and inefficient as the rest of the country’s, meaning that it already bleeds the taxpayers dry.  But that’s just not good enough for Gov. Arnold Schwarzenegger (R). 

He and Assembly Speaker Fabian Nuñez (D) have cobbled – and the state Assembly has approved – a package of health care reforms that would further kneecap the taxpayers, march them down to Death Valley, and bury them up to their necks to be eaten alive by special-interest fire ants.  But perhaps I understate.

Unless the Senate or the voters stop the plan, it will carve up taxpayers by regulating health insurance to protect favored insurers from competition; regulating employee benefits to protect favored employers from competition; imposing enormous taxes on young and healthy Californians; creating taxes and subsidies that seem deliberately designed to keep low-income Californians poor; imposing on all Californians the sort of punitive mandates that never have achieved universal coverage and never will; and fraudulently foisting part of the cost onto taxpayers in other states.  And all in the face of a $14 billion deficit.

Just goes to show what Republicans and Democrats can do when they work together toward a common disaster like universal coverage.

Swiss Canton Voters Overwhelmingly Adopt 1.8 Percent Flat Tax

More than 90 percent of voters in the Swiss Canton of Obwalden have voted for a flat tax of just 1.8 percent. This is positive news for tax competition within Switzerland, and it doubtlessly will put even more pressure on Europe’s welfare states to reform oppressive tax regimes. Presumably voters in other Cantons will now petition for a chance to vote for low-rate flat tax systems, and maybe it is just a matter of time ‘til one of them decides to completely eliminate the income tax. Swissinfo reports:

Obwalden has become the first Swiss canton to adopt a flat income tax rate, with more than 90 per cent of the electorate voting in favour of the move. The decision, announced by the authorities after a vote on Sunday, comes after a court ruled the canton’s previous degressive tax model unfair. From next January Obwalden will impose a rate of 1.8 per cent on all categories. The new model also exempts the first SFr10,000 ($8,700) of income from taxation, a measure designed to benefit those on lower incomes the most. …In Switzerland there is high competition among the cantons to set the lowest tax rates to attract wealthy individuals and companies. …European neighbours have frequently expressed outrage that their rich citizens are opting to empty their pockets into Swiss coffers rather than their own. But Switzerland has defended its position as providing healthy competition.

Bulgaria Now an Official Member of the Flat Tax Club

The Sofia News Agency reports that a 10 percent flat tax has cleared a final hurdle in the Bulgarian Parliament. The article notes that the new tax system requires a signature from the President, but this is expected to be a formality. So it’s time to play the unofficial theme song of the global flat tax revolution and welcome the 23rd jurisdiction to the club:

Bulgaria’s parliament passed on second reading on Monday the amendments introducing a flat tax rate in the country. …The amendments are final and only a veto from president Georgi Parvanov can stop them from becoming law, although he has given no indication he plans to do so. …The leaders of the three parties in Bulgaria’s ruling coalition have agreed in summer on the tax reform, with a flat rate of 10%, the lowest in Europe, replacing the progressive taxation system with three brackets. Since Estonia introduced a flat tax system in 1994, enjoying stable GDP growth, eastern European countries have been attracted to the flat tax that promises to attract foreign investments and increase transparency.