Cato has released a new study by scholars Duanjie Chen and Jack Mintz on corporate effective tax rates in 2012 for 90 countries. The study provides estimates of marginal effective tax rates, which are an important driver of real investment flows.
The U.S. rate of 35.6% is about double the 18.2% average rate of the 90 countries studied. The U.S. rate is also the highest of the 34 countries in the Organization for Economic Cooperation and Development.
Very few people are willing to admit that they favor protectionism. After all, who wants to embrace a policy associated with the Great Depression?
But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.
In the Belly of the Beast at the European Commission[/caption]
There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.
While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.
Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”
But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.
Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.
In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.
But if the French government wants to track — and tax — that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.
Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.
Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right — at the very least — to charge you the difference between its price and the price at your new station.
Simply stated, you would not be allowed to benefit from lower prices at other gas stations.
So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.
Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.
For more information, here’s my video on tax competition.
And if you want information about the beneficial impact of “tax havens,” read this excellent column by Pierre Bessard and watch my three-part video series on the topic.
P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.
Last week, the House passed the “No More Solyndras Act” on a mostly party-line vote. However, instead of terminating the Department of Energy loan guarantee program that subsidized Solyndra and other boondoggles, the bill allows applicants who filed before the first of this year to still receive handouts.
The DOE will still have $34 billion in remaining lending authority to issue new loan guarantees. And as Taxpayers for Common Sense (TCS) explains, there are going to be plenty of opportunities for taxpayers to get fleeced again:
It was recently revealed that approximately 50 applications sit active in the queue. The projects include an $8.3 billion loan guarantee for nuclear reactor project in Georgia and a nearly $2 billion loan guarantee for a liquid coal facility in Wyoming. There’s a $1.7 billion loan guarantee for a coal gasification plant in Indiana plus more than 15 solar projects in the pipeline!
Some of these applicants are clear losers for taxpayers. This bill would allow a $2 billion loan guarantee for a uranium enrichment project to remain on deck, ready to receive a loan guarantee despite the fact that the company has received a delisting notice from the New York Stock Exchange. Talk about taxpayers striking out, the United States Enrichment Corporation (USEC) is currently in line to receive a loan guarantee for its enrichment facility in Piketon, OH. On the other hand USEC hit a home run with a $100 million giveaway in the continuing resolution.
What’s really disgraceful is that an amendment from Rep. Tom McClintock (R‑CA) that would have completely terminated the loan guarantees wasn’t even allowed to be debated and voted on. According to TCS, the House Rules Committee “sidelined” McClintock’s amendment. Why? Because the Republican leadership was apparently only interested in using the bill to score political points against the administration. Having a bunch of its own members argue and vote against completely killing the notorious corporate welfare program (again) would have been an embarrassment.
As Rep. McClintock said on the House floor, the bill should be renamed “The 50 More Solyndras and Then We’ll Stop Wasting Your Money — Really — We Promise Act.”
Following the House’s passage of a six-month continuing resolution last week (my comments on the CR here), House Appropriations Committee Chairman Hal Rogers (R‑KY) chatted about fiscal policy with a couple of reporters on C‑SPAN. The interview did nothing to change my 2010 opinion that the House leadership handing Rogers the chairman’s gavel was “about as inspiring as re-heated meatloaf.”
While Rogers is correct that domestic discretionary spending represents a relatively small share of total spending (approximately 12 percent) and that entitlement spending is the bigger problem, his comment that “we’ve just about reached the bottom of the barrel” on such spending is a stretch. Domestic discretionary spending has dropped, but after a sizeable increase during the 2000s. And arguably more important than the dollar amount this category represents are the activities being funded. For example, the federal government shouldn’t be spending a dime on the Department of Education, which is mostly discretionary spending.
When it comes to the other side of the discretionary spending coin—military spending—Rogers parrots the standard GOP line that sequestration would be “disastrous.” That’s nonsense. Perhaps Rogers is worried that cuts to the bloated military budget will crimp his ability to dole out the goods to defense contractors back in his district (see, for example, Rogers’s $17,000 drip pan).
That leads to Rogers’s most galling comments. When asked about earmarks, the “Prince of Pork” bemoaned his alleged inability to help shovel taxpayer dollars to his district since the practice was halted two years ago. Rogers said that “it hurts me that I can’t advocate for that governmental unit that’s in some desperate need.” What hurts me is that Rogers has to nerve to cite the Constitution to justify legislative earmarking (i.e., Congress’s “power of the purse”). As my colleague Roger Pilon and I have noted, the debate over the power of the executive versus that of the legislative branch to spend is constitutionally relevant and important. As Roger says, however, “it’s the growth of spending, most on matters unauthorized by the Constitution that is far and away the larger problem.” Federal subsidies to state and local governments largely belong in the unauthorized category.
I’m a big fan of fundamental tax reform, in part because I believe in fairness and want to reduce corruption.
But I also think the flat tax will boost the economy’s performance, largely because lower tax rates are the key to good tax policy.
There are four basic reasons that I cite when explaining why lower rates improve growth.
As you can see, there’s nothing surprising or unusual on my list. Just basic microeconomic analysis.
Yet some people argue that lower tax rates don’t make a difference. And if lower tax rates don’t help an economy, then presumably there is no downside if Obama’s class-warfare tax policy is implemented.
Many of these people are citing David Leonhardt’s column in Saturday’s New York Times. The basic argument is that Bush cut tax rates, but the economy stunk, while Clinton increased tax rates and the economy did well.
The defining economic policy of the last decade, of course, was the Bush tax cuts. President George W. Bush and Congress,
including Mr. Ryan, passed a large tax cut in 2001, sped up its implementation in 2003 and predicted that prosperity would follow. The economic growth that actually followed — indeed, the whole history of the last 20 years — offers one of the most serious challenges to modern conservatism. Bill Clinton and the elder George Bush both raised taxes in the early 1990s, and conservatives predicted disaster. Instead, the economy boomed, and incomes grew at their fastest pace since the 1960s. Then came the younger Mr. Bush, the tax cuts, the disappointing expansion and the worst downturn since the Depression. Today, Mitt Romney and Mr. Ryan are promising another cut in tax rates and again predicting that good times will follow. …Mr. Romney and Mr. Ryan would do voters a service by explaining why a cut in tax rates would work better this time than last time.
While I’ll explain below why I think he’s wrong, Leonhardt’s column is reasonably fair. He gives some space to both Glenn Hubbard and Phil Swagel, both of whom make good points.
“To me, the Bush tax cuts get too much attention,” said R. Glenn Hubbard, who helped design them as the chairman of Mr. Bush’s Council of Economic Advisers and is now a Romney adviser. “The pro-growth elements of the tax cuts were fairly modest in size,” he added, because they also included politically minded cuts like the child tax credit. Phillip L. Swagel, another former Bush aide, said that even a tax cut as large as Mr. Bush’s “doesn’t translate quickly into higher growth.” Why not? The main economic argument for tax cuts is simple enough. In the short term, they put money in people’s pockets. Longer term, people will presumably work harder if they keep more of the next dollar they earn. They will work more hours or expand their small business. This argument dominates the political debate.
I hope, by the way, that neither Hubbard nor Swagel made the Keynesian argument that tax cuts are pro-growth because “they put money in people’s pockets.” Leonhardt doesn’t directly attribute that argument to either of them, so I hope they’re only guilty of proximity to flawed thinking.
But that’s besides the point. Several people have asked my reaction to the column, so it’s time to recycle something I wrote back in February. It was about whether a nation should reform its tax system, but the arguments are the same if we replace “a flat tax” with “lower tax rates.”
…even though I’m a big advocate for better tax policy, the lesson from the Economic Freedom of the World Index…is that adopting a flat tax won’t solve a nation’s economic problems if politicians are doing the wrong thing in other areas.
There are five major policy areas, each of which counts for 20 percent of a nation’s grade.
- Size of government
- Regulation
- Monetary Policy
- Trade
- Rule of Law/Property Rights
Now let’s pick Ukraine as an example. As a proponent of tax reform, I like that lawmakers have implemented a 15 percent flat tax.
But that doesn’t mean Ukraine is a role model. When looking at the mix of all policies, the country gets a very poor score from Economic Freedom of the World Index, ranking 125 out of 141 nations.
Conversely, Denmark has a very bad tax system, but it has very free market policies in other areas, so it ranks 15 out of 141 countries.
In other words, tax policy isn’t some sort of magical elixir. The “size of government” variable accounts for just one-fifth on a country’s grade, and keep in mind that this also includes key sub-variables such as the burden of government spending.
Yes, lower tax rates are better for economic performance, just as wheels matter for a car’s performance. But if a car doesn’t have an engine, transmission, steering wheel, and brakes, it’s not going to matter how nice the wheels are.
Not let’s shift from theory to reality. Here’s the historical data for the United States from Economic Freedom of the World. As you can see, overall economic policy moved in the right direction during the Clinton years and in the wrong direction during the Bush-Obama years.
To be more specific, the bad policy of higher tax rates in the 1990s was more than offset by good reforms such as lower trade barriers, a lower burden of government spending, and less regulation.
Similarly, the good policy of lower tax rates last decade was more than offset by bad developments such as a doubling of the federal budget, imposition of costly regulations, and adoption of two new health entitlements.
This is why I have repeatedly challenged leftists by stating that I would be willing to go back to Bill Clinton’s tax rates if it meant I could also go back to the much lower levels of spending and regulation that existed when he left office.
In his latest column, David Brooks asserts that Americans “spend roughly $11,000 per student” on K‑12 public schooling. This is false. We actually spend about $14,000 per student.
Why is his figure so erroneously low? The answer may astonish and anger you.
The likely source for Brooks’ figure is the last row in column 3 of Table 191, in the Department of Education’s latest Digest of Education Statistics: “Current expenditure per pupil in average daily attendance” for the year 2008-09 (the most recent reported). The value was $11,231. The first and biggest problem with this number is that “current” spending is a subset of total spending—but Brooks didn’t tell you that, did he? He just said “we spend roughly…,” not “our current spending excluding the following items is…”
As it happens, “current” or “operating” expenditures exclude costs like construction and debt service. These, however, are real costs that have to be paid in real dollars (to the extent our dollars are “real” after yet more QE) by real taxpayers. What difference does this make? Just look one column to the left. “Total expenditures” per pupil for the same year were $13,015. Bit of a difference. In fact, on a national level, it’s a difference of over $90 billion annually (see the top two rows of column 9, Table 188).
Of course that was back in 2008-09, when U.S. dollars were worth more than they are now. Adjusting for inflation into today’s dollars ups the figure to about $14,000 / pupil. Moreover, we’re almost certainly spending more today than we were in 2008-09, despite the economic downturn, but for some reason the public school monopoly prefers to release only aged data—as though they were fine cheeses.
So the next time someone claims to tell you what U.S. public schools spend per pupil, ask if they’re just citing you the current operating expenses subtotal. If so, tell them you want your other $90 billion back, since they apparently don’t seem to be using it.
Yesterday, the House passed a continuing resolution that will keep the government funded for the next six months. Republicans and Democrats were eager to avoid a budget fight—and possibly a government shutdown—with little more than a month to go before the elections. With that potential distraction out of the way, the two sides can now focus on convincing voters that their brand of big government is the superior choice.
Politico has a good breakdown of the CR’s contents. Here are a couple of snippets:
[The continuing resolution] restores the higher spending targets set in the Budget Control Act—and with such haste and pique—that billions will go out without any distinction between the merits of different programs. Labor, health, and education spending that’s so often targeted for cuts by the GOP will grow by close to $1 billion. The Commodity Futures Trading Commission budget, the bane of anti-regulatory forces, inches up again, albeit far less than the White House requested…
The new top line for non-emergency appropriations will be $1.047 trillion, an $8 billion increase over what the Congressional Budget Office estimates is the current rate of spending… But in their desire to keep the bill simple—and move fast—Republicans opted to distribute most of the increase, $5.9 billion, through a mechanical formula that automatically ups most accounts by 0.612 percent.
As Roll Call noted earlier in the week, the CR vote represented a test for Republican freshmen, a.k.a., the “Tea Party Class”:
The defining narrative of this Congress has been deficit reduction, pushed mostly by an anti-government-spending class of 87 freshman House Republicans. But as November inches closer, Members will have to balance their promises to slash spending against the reality that a shutdown could be an irreversible gamble in their bid to win back the Senate and White House. For his part, Speaker John Boehner (R‑Ohio) seems optimistic, having recently said the group has “matured.”
After the jump, the table shows that only 28 of the 87 Republican freshmen—32 percent—voted against the CR. (A “yes” means they voted against the CR.) I guess that means that, per John Boehner, those 28 members have maturity issues.
