Topic: Tax and Budget Policy

Tax Competition Drives Good Policy in Canada

A National Post report from Canada illustrates how jurisdictional competition pushes policymakers to adopt better tax law. Indeed, both the left and right are fighting over who can make the biggest reduction in the corporate tax rate. As the article notes, this is a remarkable development since politicians used to treat companies as cash cows.

With nations all over the world lowering corporate rates, America’s punitive tax treatment of business is becoming an even bigger obstacle to competitiveness:

Who would have thought federal politics would come to this: Liberals and Conservatives competing over who would lower corporate taxes the most! …That…marks an amazing turn of fortune, an historic reversal of at least half a century of corporate-bashing tax increases, of surtaxes on taxes, of capital taxes piled on surtaxes rolled over from year to year.

…[T]here is certainly much to be said for [Canadian Prime Minister] Flaherty’s corporate tax objectives. First he aims to get the federal tax rate down to 15% by 2012. Then he wants the provinces to join the national corporate tax competition by cutting their rates to 10%, thus lowering Canada’s nationwide corporate tax rate to 25%. That means, said Mr. Flaherty, that “Canada’s corporate tax rate will become the lowest among the major industrialized economies.” It’s a good objective — for the economy, for growth, for innovation — and a sign perhaps that most Canadians have come to appreciate that nations and their citizens get rich by freeing business enterprises rather than by plundering them for instant cash.

…Countries all over the planet are rushing to trim tax rates on business… Jack Mintz, of the University of Toronto, pointed out yesterday that Italy has just slashed that rate by 4.5 percentage points. Other countries are cutting rates in large increments of up to seven percentage points, as in Germany. The new Flaherty cuts are good, says Mr. Mintz, but not good enough. “Why not cut rates right away?” It’s also not clear that 25% is low enough to maximize business activity and attract business investment to Canada. In his recent tax competitiveness study for the C.D. Howe Institute, Mr. Mintz called for a national corporate tax rate of 20%.

…The next needed political transformation: It’s OK to cut taxes on the rich.

Why a Government Spending Freeze is Incomprehensible to Bureaucrats

In today’s Washington Post, columnist David Ignatius takes Congress to task for its failure to pass the appropriations bills – and not just this year but almost every year since 1977.

“The talk among some of my government buddies this week was an obscure term of federal budgeting known as a “continuing resolution.” This is what Congress passes when it hasn’t gotten its act together to pass a real appropriations bill before the start of a new fiscal year. The ‘CR,’ as it’s known, allows agencies to continue operating at the same spending level as the previous year. But it plays havoc with normal management functions such as planning and contracting.”

“[University of Maryland political scientist Roy T. Meyers] summarized the inefficiencies that result from having to run an agency without knowing your budget. ‘When regular appropriations are delayed, uncertainty about final appropriations leads many managers to hoard funds; in some cases, hiring and purchasing stops.’” [Emphasis mine.]

I don’t really have a problem with Congress getting very little done.  And I kinda like CRs, especially if they last all year.  Those sorts of CRs dramatically limit spending, as evidenced by the just-lapsed fiscal year. The budget won’t grow until Congress passes all the appropriations bills.  That’s probably what Ignatius and his “government buddies” don’t like.

When Congress passes a CR, it’s wrong to say that an agency head won’t know what his likely budget will be.  He knows exactly what it will be: last year’s spending level.  This simply means managers have to live within the constraint of a budget that isn’t higher than last year’s.

Of course, businesses have to deal with this sort of thing all the time when their profits dry up.  Perhaps it should be no surprise to the cynical that government bureaucrats – who have a guaranteed “customer base” (read: taxpayers) because anyone who doesn’t “buy” their product (read: tax evaders) can be arrested – don’t like to deal with it.

So Write a Check and Shut Up, Warren

When billionaires piously say that they should pay more taxes, the rest of us should hide our wallets. Warren Buffett, the so-called “Sage of Omaha” says his tax rate is too low. That’s a strange attitude, to be sure, but if Buffett wants to write an extra check to the government, he should go right ahead. Heck, the Treasury Department even has a website with a mailing address for people who are foolish enough to flush more of their money into the Washington sewer. Unfortunately, Buffett’s real agenda is to agitate for higher tax burdens for the rest of us. As the UK-based Guardian reports:

The United States’ second-richest man has delivered a blunt message to the Bush administration: he wants to pay more tax. Warren Buffett, the famous investor known as the “Sage of Omaha”, has complained that he pays a lower rate of tax than any of his staff - including his receptionist. Mr Buffett, who is worth an estimated $52bn (£25bn), said: “The taxation system has tilted towards the rich and away from the middle class in the last 10 years. It’s dramatic; I don’t think it’s appreciated and I think it should be addressed.” … Buffett’s remarks drew a robust response from the US Chamber of Commerce, which said the top 1% of US earners accounted for 39% of tax revenue - and the highest earning 25% of the population delivered 86% of the tax-take.

The Chamber of Commerce correctly notes that the tax code already is heavily biased against rich people, and it certainly is true that higher tax rates will hinder economic performance and make America more like Europe (which would hurt receptionists more than billionaires). But the reporter should have done some simple fact checking and discovered that Buffett has no idea what he’s talking about regarding tax rates. I addressed this issue back in June, in response to another Warren-wants-the-rest-of-us-to-pay-more episode:

It is probably safe to assume that Buffett receives lots of dividend income and that he also declares a considerable amount of capital gains, both of which are subject to a 15 percent tax rate on an individual tax return. What he did not mention, however, is that corporations pay a 35 percent tax before distributing dividends to shareholders, so the actual effective tax rate on that portion of Buffett’s income is closer to 50 percent.

The capital gains tax is another example of double taxation. An increase in the value of a stock is a reflection of an anticipated increase in the future income stream from that stock. Yet that income stream will be taxed (usually two times!) when it occurs. The real effective rate on that portion of Buffett’s income is harder to calculate, but it certainly will be far higher than 15 percent.

Shifting gears, Buffett’s calculations almost surely include Social Security payroll taxes, which only apply to the first $90,000 of income in exchange for not providing huge benefit payments to rich retirees. Indeed, the overall program is highly progressive once benefit payments are added to the equation, so Buffett’s secretary gets a better deal than he does from Social Security (though both would be better off with a system of personal retirement accounts).

Tax-and-Spend or Borrow-and-Spend?

In Virginia,

Pat S. Herrity wants a new elementary school and middle school for southern Fairfax County. Douglas R. Boulter wants to hire more zoning inspectors. Vellie S. Dietrich Hall calls for more and better-paid police. Gary H. Baise promises roads, an expanded auditor’s office and the newly created post of county ethics officer.

And they all pledge to lower property taxes.

Meet the Republicans running for the Board of Supervisors on Nov. 6.

In Virginia, as in Congress, voters get a choice between tax-and-spend Democrats and borrow-and-spend Republicans. As I’ve argued before, there’s a bit of fat in the Fairfax County budget. It’s too bad that voters aren’t offered any candidates who would trim it.

Paul Krugman and the Unbearable Lameness of Partisanship

In a recent appearance on with Mark Schmitt, I expressed disdain for the current spate of conservative-bashing books by Jonathan Chait, Greg Anrig, and Paul Krugman. Now don’t get me wrong: conservativism deserves some fairly spirited bashing these days. But what I objected to about these books was their crude partisanship – specifically, their grossly distorted, black-hats-versus-white-hats version of recent American political history.

I didn’t get a chance there to flesh out my criticisms in any detail, so I’d like to do a little bit of that here. And thanks again to (if you’re not familiar with it, it’s really a terrific site), I’ve got an excellent jumping-off point: an interview of Paul Krugman by none other than Mario Cuomo. Cuomo, it turns out, is an excellent interviewer, carefully drawing out Krugman’s views and gently challenging him at a number of points. And the picture of Krugman that emerges is one of a man completely besotted with ideological enthusiasm.

You have to remember who Paul Krugman is, or at least who he was: an immensely talented economist, winner of the John Bates Clark medal, capable of analytical ingenuity at the most rarefied level and simultaneously a gifted popularizer of complex economic ideas. So how can someone with so much brainpower, with such talent for subtlety and insight, say something like this? Or this?

Let’s focus on these two snippets. In the first, Krugman says that the middle-class society he grew up in (i.e., the American political economy of the quarter-century after World War II) did not evolve by the invisible hand of the market; it was created by FDR and the New Deal. Meanwhile, the “second Gilded Age” we now live in (i.e., the American political economy of the past quarter-century) was created by Reagan and other right-wing politicians.

And in the second clip, Krugman defines liberalism as the idea that we are our brothers’ keepers, and that government needs to ensure a basic minimum for all citizens. Conservatives, on the other hand, believe “you’re on your own.”

In these clips we see, not subtlety or insight or analytical ingenuity, but the Manichean worldview of the true believer: one mass political movement, defined by its noble intentions, accomplishes unalloyed good, while a rival mass political movement, motivated by base and selfish values, works to undo that good.

For an alternative to Krugman’s stick-figure morality play, you can read my book on the coming of mass prosperity and its cultural and political consequences. For present purposes, though, note just a few things that Krugman’s FDR worship/Reagan demonization skips over:

  • the extent to which widespread prosperity was the result of impersonal market competition rather than benevolent politicians
  • the extent to which the “great compression” of the early postwar decades was created by the cataclysms of depression and total war
  • the extent to which the New Deal included policies that most economists today of whatever ideological persuasion would regard as utterly wrongheaded (e.g., the farm subsidies regime of the Agricultural Adjustment Act, and the industrial cartelization attempted by the National Industrial Recovery Act)
  • the heavy reliance of the New Deal political coalition on support from southern segregationists, and the consequences of that reliance for the shape of many New Deal policies
  • the fact that the postwar system of political economy led after a couple of decades to stagflation and a breakdown in productivity growth
  • the fact that one after another unionized American industry proved incapable of keeping pace with foreign competition during the ’70s and ’80s, and thus that business as usual was unsustainable
  • the fact that Great Society social programs were followed, not entirely coincidentally, by an explosion of crime, urban riots, family breakdown, and welfare dependency
  • the fact that Cold War liberal internationalism produced the Vietnam debacle
  • the fact that the New Left and the ’60s counterculture exerted powerful influences on reshaping the character of American liberalism, with important consequences for the appeal of that liberalism to traditionally Democratic working-class constituencies
  • the fact that the sweeping economic deregulation of the ’70s and ’80s enjoyed bipartisan support (much of it occurred during the Carter administration)
  • the extent to which the increase in measured income inequality reflects demographic rather than economic or public policy changes (e.g., more single-parent households, more dual-earner households, more immigration, older population, better-educated population)
  • the fact that, according to virtually every conceivable physical indicator, material living standards for Americans across the board have risen dramatically over the past quarter-century (i.e., the so-called “second Gilded Age”)

How can someone as intelligent and informed as Krugman concoct an interpretation of the post-World War II era that does such violence to the facts? How can someone so familiar with the intricate complexities of social processes convince himself that history is a simple matter of good guys versus bad guys? Because, for whatever reason, he has swapped disinterested analysis and scholarship for ideological partisanship. Here, in a revealing choice of phrase, he paraphrases Barry Goldwater’s notorious line: “Partisanship in the defense of liberty is no vice.”

To be a partisan is, by definition, to see the world partially rather than objectively: to identify wholeheartedly with the perspectives of one particular group and, at the extreme, to discount all rival perspectives as symptoms of intellectual or moral corruption. And the perspective Krugman has chosen to identify with is the philosophically incoherent, historically contingent grab bag of intellectual, interest group, and regional perspectives known as postwar American liberalism.

Of course, over the period that Krugman is addressing, the contents of that grab bag have changed fairly dramatically: from internationalist hawkishness in World War II and the early Cold War to a profound discomfort with American power in the ’70s and ’80s to a jumble of rival views today; from cynical acquiescence in Jim Crow to heroic embrace of the civil rights movement to the excesses of identity group politics to a more centrist line today; from sympathy for working-class economic hardship to hostility to working-class culture and back again. Yet with a naive zeal that leaves even Cuomo visibly nonplussed at several points in the interview, Krugman embraces the shifting contents of this grab bag as the one true path of virtue.

I understand the us-versus-them pleasures of ideological partisanship. In my younger days, I indulged in them with gusto. But at some point, ideology joined Santa Claus and the tooth fairy in my attic of discarded beliefs. Firm values, yes; definite points of view on contested empirical questions, to be sure – but to see a country as diverse, yet blessedly prosperous and stable, as this one as an ongoing war between angels and devils is to live in a fantasy world.

[cross-posted from]

Corporate Tax Cut Revolution Continues

From the Canadian Financial Post:

The Conservative government delivered a mini-budget yesterday that lowered the Goods and Services Tax for a second time and reduced corporate taxes by one-third over the next five years as part of a $60-billion multi-year package of tax cuts…Perhaps the biggest surprise was Mr. Flaherty’s commitment to cut the corporate income tax rate deeper than planned, from its current 22.1% to 15% in 2012.

To put this in context, $60 billion over five years means about $12 billion per year. Since the American economy is about 10 times larger, the equivalent cut here would be about $120 billion per year, which is pretty big cut.

The average federal/provincial corporate tax rate in Canada today is 36%. Thus, cutting the federal rate by 7 points should drop the average combined rate to about 29%. By contrast, the combined U.S. federal/state rate is about 40%.

Here’s the interesting political part:

Liberal leader Stéphane Dion said his party would not oppose the measures, ensuring they receive Parliamentary approval as early as today…The proposal comes as Mr. Dion toured the country arguing for lower business rates and promising, if elected, to take the general corporate rate lower than the 18.5% the Conservative government had initially proposed.

That’s the Liberal party leader, in a country where “liberal” used to mean left-of-center statist. It seems that everywhere but Washington, the times are a changin’.

Halloween Fright From Iowa Tax Collectors

Trick-or-treating just got a bit more expensive thanks to the hobgoblins at the Iowa Department of Revenue. The tax-hungry bureaucrats have decided to tax pumpkins because they are used for decoration instead of food. reports:

The Iowa Department of Revenue is taxing jack-o’-lanterns this Halloween. The new department policy was implemented after officials decided that pumpkins are used primarily for Halloween decorations, not food, and should be taxed, said Renee Mulvey, the department’s spokeswoman. …Previously, pumpkins had been considered an edible squash and exempted from the tax. The department ruled this year that pumpkins are taxable — with some exceptions — if they are advertised for use as jack-‘o-lanterns or decorations.

But in the glorious tradition of bureaucracies everywhere, there is a form to fill out - at least for taxpayers who eat pumpkins:

Iowans planning to eat pumpkins can still get a tax exemption if they fill out a form.

This sounds like added bureaucracy, but Iowa taxpayers should be happy. By this time next year, the bureaucrats will decide that some people are falsely claiming that they are eating pumpkins in order to dodge the tax. So the new form will require families to send in photos of pumpkin pie. The following year, some bureaucrat will decide that some of the pies were actually bought in stores, so tax exemptions will only be allowed if a bureaucrat is invited over for dinner. I’m just kidding, of course. At least I think.

On a more serious note, special tax exemptions for pumpkins based on their use is symptomatic of why the tax code is a mess. It’s a mess in Washington, and it’s a mess in the states. The common thread in all cases is that politicians try to micro-manage the economy (and raise campaign cash) by imposing penalties and creating loopholes. The ultimate victims are the small business owners who now will have even more of their time consumed by bureaucratic nonsense:

Kautz, who has owned his farm for seven years, was particularly dismayed with the notion of requiring customers to fill out a form verifying that they planned to eat the pumpkins they were buying. “It’s another crazy, crazy, stupid thing,” he said. Kautz said he will estimate how many pumpkins were bought for non-food purposes, and then will send the tax on that amount to the revenue department. “It gets unfeasible for people to have small businesses,” he said. … Other Iowa pumpkin sellers also expressed confusion about the new policy. … None said they are asking customers to fill out the tax-exemption certificate.