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The views expressed by Andrew Quinlan and Dan Mitchell on this weblog are solely their own and are not necessarily those of their employers, The Center for Freedom and Prosperity Foundation and The Cato Institute, respectively. |
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The Market Center Blog |
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Observations and insights on the global fight |
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CF&P's Market Center Blog Archives |
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Wednesday, April 30, 2008 ~ 10:53 p.m., Dan Mitchell Wrote: ...a crisis can be salutary, assuming the right policy responses are applied. ...The outlook looks especially grave for France, Italy and Spain. About the only thing the big
"Club Med" economies have going for them is recently elected leaders with fresh mandates for reform. Now if only they'd use them. ...The solution lies in economic rather than monetary policy. Italy is
in the worst shape of any large EU country. Growth has been below the euro-zone average since the 1990s. The Italian state eats up a whopping 48% of GDP, among the highest in the OECD. That's still not enough to
pay the bills: Rome's debt ratio is about 105% of GDP. Pensions are the obvious place to start the mending. The current pay-as-you-go pension system with large mandatory contributions for employers and employees
is a huge drain on the economy. With one of the lowest birth rates in Europe, it can only get worse. ...Red tape and overregulation remain a burden [in Spain] in spite of two decades of liberalization efforts.
It takes 47 days to launch a business in Spain compared with the OECD average of only 15 days. ...In Paris, Mr. Sarkozy rose to power a year ago with the promise of "rupture." He's not lived up to
expectations. At 53% of GDP, French public spending is even higher than Italy's. Labor markets remain overregulated while reforms have been cautious.
Wednesday, April 30, 2008 ~ 10:14 p.m., Dan Mitchell Wrote: [There have been] several successful efforts by Social Democrats to push Ms. Merkel into adopting populist measures. Some of these have reversed
pro-market changes introduced by former Chancellor Gerhard Schröder, himself a Social Democrat. The parties face nationwide elections in the fall
of 2009. In March, the government raised pensions for this year and next, suspending a system Mr. Schröder set up in 2001 that links pension levels
to what Germany can afford in the long term, given its aging population. Last fall, Social Democrats pressured Ms. Merkel into extending unemployment benefits for jobless people over 50 years old, partially
reversing Mr. Schröder's earlier cuts to benefits. Conservatives also gave in to Social Democrat demands for minimum wages for postal workers, despite warnings the policy would cost jobs. ...The March pensions
increase was a marker. Although the extra cost of the pension rise wasn't huge in the short term, "it diluted an important reform and raises doubts
about the government's will to make further long-term reforms," says Eckart Tuchtfeld, an economist at Commerzbank in Frankfurt. Under Mr. Schröder, the Social Democrats cut taxes and welfare entitlements,
privatized industries and deregulated parts of Germany's labor market, although Ms. Merkel argued in opposition that he didn't go far enough. Economists say the changes helped Germany to bounce back from a long
economic stagnation and prosper from the boom in world trade.
Tuesday, April 29, 2008 ~ 2:58 p.m., Dan Mitchell Wrote: Brown's tedious, hour-long speech impudently demanded that we issue a "Declaration of Interdependence" in order to submit to global
governance. That's another way of calling on the United States to repeal the Declaration of Independence. ...Brown wants to increase the power of
the United Nations to become the source of "an international stand-by capacity of trained civilian experts, ready to go anywhere at any time,"
and even be able to exercise "military force." Americans do not intend to cede such authority to the corrupt United Nations. The silliest part of
Brown's ponderous speech was his claim that "a global society" is "advancing democracy widely across the world." In fact, he doesn't even
practice democracy in his own country. Brown refused to allow the British people to vote on whether or not they want to accept the constitution of
the European Union. He acquiesced in the plot of the constitution's author, Valery Giscard d'Estaing, to put the EU constitution into effect by
calling it a treaty so it did not have to be voted on by the people. Brown was chicken about the treaty subterfuge and did not permit a photographic record of his participation. He sent his foreign secretary to
perform the official treaty signing in front of cameras. The EU constitution, now called the Treaty of Lisbon, requires all signers to surrender their sovereignty and democracy to unelected bureaucrats in
Brussels, Belgium, and judges in Strasbourg, France. The EU constitution takes away England's right to pass its own laws, forces England to surrender more than 60 United Kingdom vetoes of EU decisions, and
gives the EU bureaucracy and tribunals total control over England's immigration policy. Instead of a self-governing nation whose democratic system was developed over centuries, England is now ruled by what
former Prime Minister Margaret Thatcher called "the paper-pushers in Brussels."
Tuesday, April 29, 2008 ~ 2:41 p.m., Dan Mitchell Wrote: So Federal Reserve officials are whispering to reporters that they will consider a "pause" after another interest-rate cut this week. Perhaps we
should be more respectful, but this sounds like the alcoholic who tells his wife he'll quit drinking next weekend, after one more bender. What Chairman Ben Bernanke needs isn't a gradual withdrawal from easy
money but membership in Central Bankers Anonymous. Eight months into the Fed's most recent rate-cutting spree, the evidence is overwhelming
that it has been a major policy mistake. Aggressive rate cutting - taking the fed funds rate to 2.25% from 5.25% last September - has had little
effect on the banking crisis it was supposed to ease. ...The Fed's weak dollar policy has also done great harm to overall financial confidence,
which is essential to any growth revival. A main source of the credit crisis is a lack of trust. Investors stop taking risks, bankers stop lending, and
everyone flees to the safety of Treasurys or cash. But how can the Fed expect people to calm down and begin taking risks when it is clearly
debasing the currency? Monetary easing itself also becomes less effective, because without confidence more liquidity is merely "pushing on a string,"
in the famous phrase. ...In fairness to the Fed, it has had many allies in dollar devaluation. The manufacturing lobby promoted it, as ever, to spur
exports and profits, while the Bush Administration has acquiesced in the hope that it would reduce the trade deficit. (Oops.) The housing bubble
was a societal mania brought on by the Fed's subsidy for credit, and no one wanted it to end. Even many of our supply-side friends dismissed
concern about price signals and the falling dollar, focusing too much on the benefits of tax cuts and forgetting the monetary lessons of the 1970s.
Some of these sages are finally coming around, but too late to prevent the economic and policy damage.
Monday, April 28, 2008 ~ 8:31 p.m., Dan Mitchell Wrote: Passed as part of this month's New York state budget was Spitzer's idea to make online businesses like Amazon.com, with no physical presence in the
state, pay the state's sales tax of at least 8%. New York is turning to this because of a severe budget crunch, and the state promises it will mean an
extra $50 million this year and $75 million next year. There's only one problem: the practice is unconstitutional. The Supreme Court has ruled repeatedly that both the Commerce Clause and the Due Process Clause
require that a seller has a physical presence within the state for it to have the right to levy sales taxes. ...if New York gets away with taxing non-New
York businesses you can be sure other states will follow its lead. ...For eight years, 44 states have taken part in the "Streamlined Sales Tax
Project," an attempt to find a way to tax online commerce. New York's move gives it the lead in those efforts. But doing so goes a long way
toward ripping up the Constitution's Commerce Clause, which declares that "Congress shall have power . . . To regulate commerce . . . among the
several states." ...In the age of the Internet, trying to make out-of-state companies pay in-state sales taxes is an unconstitutional outrage; it would
mean government monitoring computer use right out of George Orwell's "1984." Instead of mugging non-New Yorkers with illegal taxation, the
Empire State should consider something Democratic and Republican politicians alike think of as out of the question - cutting spending.
Sunday, April 27, 2008 ~ 6:21 p.m., Dan Mitchell Wrote: Hillary Clinton and Barack Obama have proposed increasing annual federal spending, respectively, by $226 billion and $303 billion - the
Obama total being about a 10% increase. Neither of them as president would likely limit any spending - not entitlements, not earmarks, not farm
subsidies. ...A Democratic administration's tax increases are likely to be substantial: Mr. Obama proposes raising top income tax rates to 39.6%
from 35%, capital gains tax rates to perhaps 28% from the current 15%, dividend tax to 39.6% from 15%, and top estate tax rates back up to 55%.
And he wants to raise substantially or abolish the $102,000 cap on wages subject to the Social Security payroll tax. "He is indeed a redistributionist," said blogger and Obama supporter Andrew Sullivan
after watching Mr. Obama's answer to a tax question in last week's presidential debate. Protectionism will replace free trade as American
policy, even though trade creates domestic jobs. ...Of course higher taxes and broad protectionism are not new ideas, they were tried by Herbert
Hoover and led to the Great Depression. ...The 23% of Americans who identify themselves as liberals may applaud, but for the rest of us it would be an unfortunate outcome.
Saturday, April 26, 2008 ~ 1:50 p.m., Dan Mitchell Wrote: Arizona has been hit hard hit by the real-estate bust, with the average home value down 17% in a year and a record number of foreclosures. So
Democratic Governor Janet Napolitano has devised a clever way to revive the housing market: Raise property taxes. ...In recent weeks, Fairfax County in northern Virginia, Washington state, Chicago and
Memphis have announced proposals to increase residential property tax rates to offset declining revenues. So at the very time that states and cities
are begging for money from Washington to help distressed homeowners pay their mortgages, property tax hikes could push hundreds of thousands of homeowners under water. ...Richard Vedder of Ohio University has
found that, from 1980-90, the 10 states that increased their state and local tax burdens the most suffered a 12% decline in prices versus a 48%
increase in housing values for states that reduced their tax burden the most. His study found that "while property tax changes have the biggest
impact on housing price changes, other forms of taxation exhibit the same effect." Income taxes, for example, chase people out of the state, which
reduces home values for those left behind. Think Michigan, or Ohio. State and city governments lived well - too well - during the housing boom.
From 2000-07 property tax collections climbed by 62%, two-and-a-half times faster than per capita incomes, according to Census Bureau data. Homeowners tolerated the tax hikes as long as the equity in their homes
was rising. But voters may not be so forgiving when values tumble and assessments lag behind this fall in prices. One early sign of voter discontent came last year in Indiana, where 21 incumbent mayors lost
re-election bids due to anger over taxes.
Friday, April 25, 2008 ~ 4:11 p.m., Dan Mitchell Wrote: Those who want the government to provide subsidies to help meet the high cost of college seem not to consider whether government subsidies might
have contributed to the high cost of college in the first place. In any kind of economic transaction, it seldom makes sense to charge prices so high
that very few people can afford to pay them. But, with the government ready to step in and help whenever tuition is "unaffordable," why not
charge more than the traffic will bear and bring in Uncle Sam to make up the difference? The president of a small college once told me that, if he
charged tuition that was affordable, even an institution the size of his would lose millions of dollars of government money every year. ...There
was a time, back in the early 1960s, when my academic career began, when many -- if not most -- colleges had their faculty teaching 12 semester
hours and a few had teaching loads of 15 semester hours. ...But that was then and this is now. Today, a teaching load of more than 6 semester hours is considered sweatshop labor on many campuses.
Friday, April 25, 2008 ~ 3:45 p.m., Dan Mitchell Wrote: Standard & Poor's issued a report last week concluding that Fannie Mae and Freddie Mac are the biggest financial threat to the U.S. government's
AAA credit rating. And on Friday, we found out once again why this is so: The two "government-sponsored" mortgage giants aren't held to the same
standards of accountability as everyone else in American business. A group of former Fannie executives settled with federal regulators Friday,
ending a two-year legal battle over the inflated pay and bonuses they received as a result of fraudulent accounting at the firm. The upshot is that former CEO Franklin Raines will forfeit some underwater stock
options, make a donation to charity and pay $2 million to the government, although that last sum will be covered by Fannie's officers-and-directors insurance. The lawyer for former CFO Timothy Howard called it a
"capitulation" by the government, and it's hard to disagree. ... we rather doubt the government would show similar restraint if Fannie were not a
Washington favorite, and in fact it has thrown the book at executives at other scandal-tarred companies. ... When Fannie went two years without
filing financial reports, the New York Stock Exchange passed the "Fannie rule" to avoid having to delist the stock. And now the three top executives
during the height of Fannie's accounting fraud have walked away with only a token acknowledgement of "managerial" responsibility for a $10
billion scandal. Recall that their huge bonuses depended on reported profits that were later determined to be fanciful. Recall, too, that Mr.
Raines, other Fannie executives and their Wall Street retinue derided those of us who wrote critically about their derivatives accounting before it all
blew up. Friday's paltry settlement shows once again that Fannie and Freddie are dangerous because, as creatures of Congress, they can never
be seen to have failed. So their accounting fraud is explained as merely a mistake, and their former executives keep the bulk of their riches.
"Government-sponsored" capitalism means never having to say you're sorry.
Thursday, April 24, 2008 ~ 1:29 p.m., Dan Mitchell Wrote: The primordial lesson of economic history is that sound money, low taxes on capital, and a regime of laissez-faire with respect to regulation and
trade are the three necessary and sufficient conditions which guarantee long-run prosperity and economic growth. In the aftermath of the Federal
Reserve's orchestration of the Bear Stearns sale, this seminal truth is being forgotten. ...The moment has arrived for a return to clear thinking, which
would evince the need for reversal of the current trajectory of policy response in these three areas... To generate economic recovery as rapidly
as possible, the most important single policy requirement is the return of a strong dollar. Record lows for the dollar against the euro, along with $117
oil and $1000 gold confirm the Fed's recent easy money policies begun back in 2001. Fed policy-makers, still ensnared by the framework of the
Phillips curve trade-off between inflation or recession--a paradigm which has empirically been shown to be invalid for any but the shortest of
timeframes--have pushed real short-term interest rates back into negative territory, and committed half the Fed's balance sheet to new lending.
Additionally the Fed is now prepared to "prop up" failing financial institutions, effectively monetizing bad debt, in the hope that liquidity will
buy time for underwater firms to return to solvency. ...Inflation is pernicious precisely because it distorts these relative prices, causing resources to flow into investments which are not based on real demand,
and thus leads to a job-destroying correction to clear inventories and re-allocate capital which was previously invested in error. Inflationary
booms, in other words, carry the seed of their own busts, spreading misery and hardship in the ensuing correction. ...In sum, U.S. monetary, fiscal,
trade, and regulatory policies are all headed in the wrong direction given the current situation, and together may create the very economic disaster
the political class in Washington says it seeks to avoid. The Fed has unleashed the twin furies of moral hazard and inflation, both of which will
deliver blows in the period ahead. Congress and the Administration, meanwhile, have shown ineptitude, or at least tone-deafness, by advancing policies inimical to economic growth in the long run.
Thursday, April 24, 2008 ~ 12:30 p.m., Dan Mitchell Wrote: Politicians love a "crisis." John McCain, Hillary Clinton and Barack Obama all think that the government should bail out homeowners who
can't pay their mortgages. When they say the government should do this, they mean the taxpayers, including those who are paying their mortgages. They also think the government should regulate the lending and
investment industries further. Why? Because "crisis" justifies making big government bigger. ...The best regulator of economic activity and source
of knowledge is free competition. Of course, government inhibits that in many ways. If we want to avoid disruptions like the current one, let's undertake a wholesale examination of government intervention in the
economy. Freedom, not control, is the ticket to success.
Thursday, April 24, 2008 ~ 11:42 a.m., Dan Mitchell Wrote: The general thrust of human interest stories about people with economic problems, whether they are college students or people faced with
mortgage foreclosures, is that the government ought to come to their rescue, presumably because the government has so much money and these
individuals have so little. Like most "deep pockets," however, the government's deep pockets come from vast numbers of people with much
shallower pockets. In many cases, the average taxpayer has lower income than the people on whom the government lavishes its financial favors.
Costs are not just things for government to help people to pay. Costs are telling us something that is dangerous to ignore. The inadequacy of
resources to produce everything that everyone wants is the fundamental fact of life in every economy -- capitalist, socialist or feudal. This means
that the real cost of anything consists of all the other things that could have been produced with those same resources. ...Prices force people to
economize. Subsidizing prices enables people to take more resources away from other uses without having to weigh the real cost. ...That was the
basic reason why Soviet industries used more electricity than American industries to produce a smaller output than American industries produced.
...This is not just a question about robbing Peter to pay Paul. The whole society's standard of living is lower when resources are shifted from higher
valued uses to lower valued uses and wasted by those who are subsidized or otherwise allowed to pay less. The fact that the Soviet economic system
allowed industries to use resources wastefully meant that the price was paid not in money but in a far lower standard of living for the Soviet people than the available technology and resources were capable of
producing.
Wednesday, April 23, 2008 ~ 10:33 p.m., Dan Mitchell Wrote: ...the Fed is undergoing radical "mission creep." The description of the Fed as the "lender of last resort" is accurate without being informative.
Lender to whom? For what purposes? Last resort before what? Did the bank "lend" $29 billion to Bear Stearns, or did it, in effect, buy some of
the most problematic securities owned by Bear? If so, was this faux "loan" actually to J.P. Morgan Chase? The purpose of the money was to give
Morgan an incentive to buy Bear -- at a price so low that an incentive should have been superfluous. In 1979, when the government undertook to
rescue Chrysler, conservatives worried not that the bailout would fail but that it would work, thereby inflaming government's interventionist
proclivities and lowering public resistance to future flights of Wall Street socialism. It "worked": Chrysler has survived to endure its current crisis.
The fallacious argument in 1979 was that Chrysler was then "too big to be allowed to fail." Today's argument is that Bear Stearns was so connected
to the financial system in opaque ways that no one could guess the radiating consequences of its failure -- the financial consequences or, which sometimes is much the same thing, psychological. ...The Fed has no
mandate to be the dealmaker for Wall Street socialism. The Fed's mission is to preserve the currency as a store of value by preventing inflation.
...After the tech bubble burst in 2000, the Fed opened the money spigot to lower interest rates and keep the economy humming. And since the bursting of the housing bubble, which was partly caused by that opened
spigot, the Fed has again lowered interest rates, which for now are negative -- lower than the inflation rate, which the open spigot will aggravate. ...Republicans and Democrats promise cooperation,
compromise and general niceness using other people's money. If Congress cannot suppress its itch to "do something" while markets are correcting
the prices of housing and money, Congress could pass a law saying: No company benefiting from a substantial federal subvention (which would now include Morgan) may pay any executive more than the highest pay of
a federal civil servant ($124,010). That would dampen Wall Street's enthusiasm for measures that socialize losses while keeping profits private.
Tuesday, April 22, 2008 ~ 11:41 a.m., Dan Mitchell Wrote: ...the Swiss embassy in London says it is getting a lot of enquiries from worried wealthy globetrotters interested in the mechanics of a move to the
alpine tax haven. The British government's introduction of a poll tax of £30,000 ($59,000) on non-domiciled foreign residents (who previously were able to avoid paying tax on their non-United Kingdom income) has
spooked more than a few ... It's less about the money than fear of the unknown. ...Having taken the initial step of imposing a poll tax, where will
it end? ...Equally worrying was another announcement this week from Shire Pharmaceutical, a big British drug firm that announced plans to relocate to Dublin for tax purposes. Ireland is well known for its
12.5-per-cent corporate tax rate, which compares with 28 per cent in the U.K., but what bugs Shire and a host of other companies is Britain's
ungenerous policy on foreign dividend income. Many countries, including Switzerland and the Netherlands, have holding company tax regimes that
enable firms to import dividends tax-free from foreign subsidiaries. Only profits earned within the country are taxed. ...Shire is escaping before the
Gordon Brown government shuts the stable door and the drug firm is following Yahoo, which recently moved its European headquarters from Britain to Switzerland.
Tuesday, April 22, 2008 ~ 10:00 a.m., Dan Mitchell Wrote: Contrary to the remarks of Senator Christopher J. Dodd (D-CT), Chairman of the Senate Committee on Banking, Housing and Urban
Affairs, the purpose of Congress is not to prevent housing foreclosures. Foreclosures, while difficult for many families, are a natural correction to
a market in which home prices were hyper-inflated, lenders were willing to offer mortgages to those without a strong credit history or proof of
income, and people irresponsibly took out adjustable-rate-mortgages, in which the interest adjusts to the market (generally upwards) while putting
no money down on their purchase. Such a combination of factors was a recipe for disaster. In spite of the millions of dollars homebuilders earned
during the market craze, the Senate is now offering to bail them out when times are tough. What if the Senate did this for every industry, every
business? How much would it cost American taxpayers? It is outrageous that the Senate bill would subsidize homebuilders until the housing market
picks up again. Working in a relatively free market as we have in the United States presumes the possibility of difficult periods, even failure,
when demand for one's product is not as strong as it once was. This is a risk businesses take when they enter the market. Those who succeed generally have a long-term plan in which they shore up profits in
expectation of a weaker market.
Monday, April 21, 2008 ~ 3:51 p.m., Dan Mitchell Wrote: Mr. Obama has also said he's open to raising - indeed, nearly doubling to 28% - the current top capital gains tax rate of 15%, which would in fact
be a tax hike on some 100 million Americans who own stock, including millions of people who fit Mr. Obama's definition of middle class. ...The facts about capital gains rates and revenues are well known to our
readers, but we'll repeat them as a public service to the Obama campaign. ...when the tax rate has risen over the past half century, capital gains
realizations have fallen and along with them tax revenue. The most recent such episode was in the early 1990s, when Mr. Obama was old enough to
be paying attention. That's one reason Jack Kennedy proposed cutting the capital gains rate. And it's one reason Bill Clinton went along with a rate
cut to 20% from 28% in 1997. Either the young Illinois Senator is ignorant of this revenue data, or he doesn't really care because he's a true income
redistributionist who prefers high tax rates as a matter of ideological dogma regardless of the revenue consequences. Neither one is a recommendation for President. ...By the way, a higher capital gains tax
rate isn't the only middle-class tax increase that Mr. Obama is proposing. He also wants to lift the cap on wages subject to the payroll tax. That cap
was $97,500 in 2007 and is $102,000 this year. "Those are a heck of a lot of people between $97,000 and $200[,000] and $250,000," said Mr.
Gibson. "If you raise the payroll taxes, that's going to raise taxes on them." Ignoring the no-tax pledge he had made five minutes earlier, Mr.
Obama explained that such a tax increase was nevertheless necessary.
Sunday, April 20, 2008 ~ 4:49 p.m., Dan Mitchell Wrote: Before government hijacked charity in the form of the New Deal and Great Society, compassion and charity began at home. People were to
feed the hungry, clothe the naked, visit prisoners, care for widows and orphans and love their enemies. Those were biblical commands to individuals, not government. Democratic politicians see things differently.
Apparently believing there aren't enough caring people, they want compassion to originate in Washington, depriving it of its true meaning. They define compassion as big and ever-growing government and a
guaranteed check forever with no expectation - or requirement - the recipient will ever better his or her circumstances. Traditionally, Republican compassion has encouraged private charity with government
picking up the leftovers of what religious and other charitable institutions were unable to do. President Bush, through his "faith-based initiative,"
took this one step further by subsidizing religious groups with federal money. This removes the responsibility and privilege from individuals and
turns it over to government. When that happens, religious organizations become one more constituency in the never-ending campaign for political
support. ...When politicians speak of compassion, put your hand on your wallet because they intend to spend your money, not theirs.
Sunday, April 20, 2008 ~ 4:31 p.m., Dan Mitchell Wrote: There was good news in Maryland last week, where the state legislature voted to repeal a widely loathed tax on computer services. Much less
appealing is the way they did it: In place of the tech tax, legislators pushed through a late-night income tax rate surcharge on Marylanders making
more than $1 million a year to 6.25% for three years. Consumers and business groups had fought the tech tax that had many companies considering moving their offices over state lines. Republicans aimed to
offset the computer tax repeal by slowing the rate of growth in state spending to 3.7% from the Governor's planned 5.9%. But Democrats who dominate the legislature jammed through the income tax hike after
defeating five attempts to repeal the tech tax without it. The surcharge continues Maryland's march up the ladder from a low- to high-tax state.
Two years ago Maryland had a low flat tax rate of 4.75% on income of more than $3,000. Last year it made the code more progressive, raising the rate to 5% on single filers earning more than $150,000 and the top
rate to 5.5% on those over $500,000. State pols also raised the corporate tax rate to 8.25% from 7%, and the sales tax to 6% from 5%. ... many of
Maryland's so-called millionaires are actually small businesses that pay taxes through their proprietor's personal tax returns. With the state's
economy struggling, wise money would avoid cudgeling a sector that has grown to more than 440,000 small businesses statewide. They now have another incentive to move to Delaware.
Sunday, April 20, 2008 ~ 3:12 p.m., Dan Mitchell Wrote: Finland's Central Chamber of Commerce on Monday called for a study into introducing flat tax rates in Finland. ...According to the Chamber of
Commerce, the effect of such a reform on middle income groups would be low, except for a decrease in marginal tax rates, which would be liable to
encourage work. The Chamber of Commerce suggests low income groups would be taken care of through a threshold of minimum earnings below which there would be no taxation at all. ...The Central Chamber of
Commerce has calculated that the general tax should be 32.5 per cent for tax revenue to stay at current levels in case there was a 5,000 euro
threshold for taxation. A 10,000 euro tax threshold that favours small income groups would lead to a 41.5 per cent flat tax rate.
Saturday, April 19, 2008 ~ 10:23 p.m., Dan Mitchell Wrote: Like old age, tax complexity has been creeping up on us. We may not notice it one year at a time, but a review of older tax documents compared
to today's forms and instructions reveals just how shockingly complicated taxes have become. In the most recent Fiscal Year (FY), the Treasury
Department reported its paperwork burden, which consists almost entirely of tax forms, at 6.97 billion hours. That is the equivalent of 3.35 million
employees working 40-hour weeks year-round without any vacation. The projection for the Fiscal Year following is over 7.2 billion hours. Individual taxpayers alone will spend an estimated 3.55 billion hours
complying with the income tax laws this year, up from 3.18 billion hours last year. Using an inflation-adjusted estimate from the Tax Foundation
for the average total hourly compensation rate ($26.09), this time is worth $92.6 billion. Individual taxpayers will spend a lot of money, too: an
estimated $27.7 billion this year for tax software, tax preparers, postage, and other out-of-pocket costs, according to a December 2007 Internal
Revenue Service (IRS) regulatory filing. Counting time and money for individual taxpayers, the compliance burden would total an incredible
$120 billion for individual taxpayers alone. Keep in mind that these costs do not account for tax planning or tax minimization strategies, nor do
they account for the huge costs imposed on the nation's economy by high tax rates. When accounting for all taxpayers, from those who file the
simplest 1040EZ to those filing the "long" Form 1040 and many schedules, the IRS now puts the average compliance time at 26.5 hours, up
from 25.4 hours three years ago. Out-of-pocket costs per individual taxpayer are expected to average $207, up from $185 (also three years ago). It is important to remember that out-of-pocket costs include
taxpayers who do their own taxes as well as those who go to paid preparers. ... Seventy-four years ago, the Form 1040 instructions were just two pages long. Even when the income tax became a mass tax during
World War II, the instructions were just four pages. Taxpayers today must wade through 155 pages of instructions, nearly quadruple the number in
1975 and nearly triple the number in 1985, the year before taxes were "simplified." Today's short form, at 47 lines, has about double the number
of lines on the 1945 version of the standard 1040 tax return. ... The Tax Code is so convoluted that no one inside or outside the IRS understands it.
Last year, USA Today asked five professionals to calculate a family's tax bill. And of course, they all got a different answer! After reviewing each
other's work, they couldn't agree on who was right. The newspaper reported, "As the Tax Code turns ever more unwieldy, deciphering it has become more art than science, tax experts say."
Friday, April 18, 2008 ~ 4:22 p.m., Dan Mitchell Wrote: MR. GIBSON: And in each instance, when the rate dropped, revenues from the tax increased. The government took in more money. And in the
1980s, when the tax was increased to 28 percent, the revenues went down. So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected? This exchange is particularly revealing since Senator Obama actually admitted that a tax rate increase might lose revenue, but he held firm to his position that the capital
gains rate should be increased from 15 percent to 28 percent. This reminds me of a conversation I had years ago with an economics professor from an Ivy League
university. He told me that he once asked his left-wing colleagues whether they would support lower tax rates if they knew that tax revenues would rise. Most of them, he
said, shared Obama's viewpoint that punishing success was more important to the statist ideology than increasing revenue for government.
Friday, April 18, 2008 ~ 4:04 p.m., Dan Mitchell Wrote: According to the Bureau of Labor Statistics, between 1996 and 2006, about 15 million jobs were lost and 17 million created each year. That's an
annual net creation of 2 million jobs. Roughly 3 percent of the jobs lost were a result of foreign competition. Most were lost because of technology, domestic competition and changes in consumer tastes. Some
of the gain in jobs is a result of "insourcing". Foreign companies, such as Nissan, Honda, Nokia, and Novartis, set up plants, hire American workers
and pay them wages higher than the national average. According to Dartmouth College professor Matthew Slaughter, "insourced" jobs paid a
salary 32 percent higher than the average U.S. salary. So here's my question to anti-traders: If "outsourcing" is harmful to the U.S., it must
also be harmful to European countries and Japan; would you advise them to take their jobs back home? ... There's great angst over the loss of manufacturing jobs. The number of U.S. manufacturing jobs has fallen,
and it's mainly a result of technological innovation, and it's a worldwide phenomenon. Daniel W. Drezner, professor of political science at the
University of Chicago, in "The Outsourcing Bogeyman" (Foreign Affairs, May/June 2004), notes that U.S. manufacturing employment between
1995 and 2002 fell by 11 percent. Globally, manufacturing job loss averaged 11 percent. China lost 15 percent of its manufacturing jobs, 4.5
million manufacturing jobs compared with the loss of 3.1 million in the U.S. Job loss is the trend among the top 10 manufacturing countries who
produce 75 percent of the world's manufacturing output (the U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada and Mexico). But
guess what -- globally, manufacturing output rose by 30 percent during the same period. According to research by the Federal Reserve Bank of St.
Louis, U.S. manufacturing output increased by 100 percent between 1987 and today. Technological progress and innovation is the primary cause for
the decrease in manufacturing jobs. Should we save manufacturing jobs by outlawing labor-saving equipment and technology?
Friday, April 18, 2008 ~ 2:42 p.m., Dan Mitchell Wrote: Italy's evergreen centre-right leader Silvio Berlusconi, is set to return for his third stint as the country's Prime Minister following his recent election
victory, and has promised to reduce Italy's tax burden... Berlusconi has also pledged to axe other taxes, including an overtime levy, a tax on
annual bonuses, and a tax on car ownership, and, before his five year term is out, he wants the top rate of income tax reduced from 43% to 33%.
Ultimately, Berlusconi is targeting a reduction in the country's overall tax burden to less than 40% of gross domestic product from its current level of more than 43%.
Thursday, April 17, 2008 ~ 3:11 p.m., Dan Mitchell Wrote: By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during
the five years from 1996 to 2000. Still, we stand on the verge of a very large tax increase, one that will occur unless the next Congress and
president agree to rescind it. Letting the Bush tax cuts expire will drive the personal income tax burden up by 25% - to its highest point relative to
GDP in history. This would be the largest increase in personal income taxes since World War II. It would be more than twice as large as President Lyndon Johnson's surcharge to finance the war in Vietnam and
the war on poverty. It would be more than twice the combined personal income tax increases under Presidents George H. W. Bush and Bill Clinton. ...Proponents of bigger government invariably argue that
allowing all or some of President Bush's tax cuts to expire is necessary in the near term to balance the federal budget, and necessary in the longer
term to finance the retirement and health-care promises made to the baby-boom generation. But a tax increase is neither wise nor necessary. As
has so often been true in the past, the economic damage caused by the tax increases and tax avoidance behavior will prevent the promised revenues
from being realized. At the same time, the promise of higher revenues will encourage Congress to continue its profligate spending. As a result, a tax increase won't lower the budget deficit.
Thursday, April 17, 2008 ~ 2:56 p.m., Dan Mitchell Wrote: Shire, the country's third biggest drugmaker, has intensified the debate over Britain's corporate tax regime with plans to move its tax base to
Ireland from the UK. The FTSE-100 company said it was applying to a court to create a new holding company incorporated in tax-haven Jersey and would become tax resident in Ireland, where corporate tax rates are
less than half those in the UK. ...its board of directors will hold meetings in its Dublin office once the tax residence move gets court approval. Most
importantly, the move means it will be subject to an official corporate tax rate of 12.5%, compared with 28% in the UK. ...Business lobby group the
CBI said Shire's decision deepened its concerns about the UK corporate tax system. "We are particularly worried that an uncompetitive corporate
tax system is spoiling the UK's attractiveness as a place to do business, and that other internationally-mobile firms will follow Shire's path," said
CBI director-general Richard Lambert. Last month, technology giant Yahoo announced it was moving its European headquarters from London
to Switzerland to increase competitiveness and deliver "efficiencies". A recent survey by accountancy firm KPMG blamed complex rules and a
mass of legislation for putting the UK in the bottom half of a league table of the most attractive places to do business in Europe. The study ranked Cyprus, Ireland and Switzerland top for their combination of
easy-to-understand rules, low tax rates and stable fiscal laws. The UK came 12th out of 22 countries for the attractiveness of their domestic tax regimes.
Thursday, April 17, 2008 ~ 2:18 p.m., Dan Mitchell Wrote: Congress is disturbed about the bailout risk from the Federal Reserve opening its discount window to borrowing from investment banks and
broker-dealers. That's a reasonable concern, especially with the Fed guaranteeing $29 billion in dodgy Bear Stearns paper. But according to
S&P, the "maximum potential cost" of bailing out Wall Street would be below 3% of GDP, assuming a deep and prolonged recession. That's
painful, but not catastrophic. Guess where the far greater danger comes from? ...According to the S&P study, the taxpayer risk from Fan and Fred, combined with that of other government-guaranteed agencies,
"yields a potential fiscal cost to the government of up to 10% of GDP." With total U.S. GDP estimated at somewhere north of $14 trillion, that
would put the Fan and Fred bailout cost at about $1.4 trillion. ...These are the same two companies, by the way, that have recently had their capital
requirements reduced and their jumbo mortgage lending limits increased to a maximum of $729,750. New York Senator Chuck Schumer, among many others on Capitol Hill, had browbeaten the Bush Administration
until it eased those limits.
Thursday, April 17, 2008 ~ 10:35 a.m., Dan Mitchell Wrote: In 1999, Mr. Obama urged enactment of a federal law prohibiting the operation of any gun store within five miles of a school or park. This
would eliminate gun stores from almost the entire inhabited portion of the United States. As a state senate candidate in 1996, Mr. Obama endorsed a
complete ban on all handguns in a questionnaire. ...As a state senator, Mr. Obama voted against a 2004 bill (which passed overwhelmingly) to give
citizens a legal defense against prosecution for violating a local handgun ban if they actually used the firearm for lawful self-defense on their own
property. Mr. Obama's campaign Web site touts his belief in the Second Amendment rights to have guns "for the purposes of hunting and target
shooting." Conspicuously absent is the right to have firearms to defend one's self, home and family. ...Mrs. Clinton is not exactly a modern-day
Annie Oakley... As first lady, she helped organize the Million Mom March for "sensible gun laws" in 2000. It was led by the shrill gun prohibitionist
Rosie O'Donnell. Mrs. Clinton has repeatedly voted for antigun proposals, and co-sponsored many of them. After Hurricane Katrina, the New Orleans and St. Tammany police confiscated guns from law-abiding
citizens, violating an explicit Louisiana law. In some cases, the confiscation was carried out with the assistance of federal agents, and was
perpetrated via warrantless break-ins into homes. The next year, the U.S. Senate voted 84-16 for a homeland security appropriations rider stating:
"None of the funds appropriated by this Act shall be used for the seizure of a firearm based on the existence of a declaration or state of emergency."
Mrs. Clinton was one of the 16 who voted "no." ...Both Hillary Clinton and Barack Obama voted against legislation to stop mayors from suing
gun manufacturers and gun stores because of gun crime. That legislation banned lawsuits only if businesses had complied with all laws regarding firearms manufacture and sales.
Wednesday, April 16, 2008 ~ 4:37 p.m., Dan Mitchell Wrote: If the argument is that many people are no longer interested in tax rate reductions, that's partly because past increases in tax credits took millions
of households off the income tax rolls. The bottom half of the income distribution pays barely 3% of the income tax. According to the Tax Foundation, over 40% of the population owes no federal income tax, and
about half who owe nothing actually get net refunds. For many, the refundable parts of the Earned Income Credit (EIC) and the child credits
offset much of the payroll tax too. The implications of these existing tax credits, no less than others proposed for the future, need to be squarely faced. For people who pay no income tax, general government is
practically a free good. They embrace higher taxes and more government spending, because someone else seems to be paying for it. A large expansion of family-friendly credits would make matters much worse, and
could tilt the political balance irrevocably toward runaway government. ...The real problem is that government is too big. Instead of expanding one
government transfer program to try to counter the damage done by another, why not do less of both?
Tuesday, April 15, 2008 ~ 6:44 a.m.., Dan Mitchell Wrote: Representatives from Switzerland and the European Commission met in Bern on Tuesday for a third round of dialogue on the EU's assessment of
certain cantonal company taxation arrangements. ... The third round of discussions focused, much like the previous two rounds, on the question of whether the 1972 Free Trade Agreement between Switzerland and the
European Community was applicable with regard to certain cantonal company taxation regulations. The Swiss continued to argue that this "is
by no means the case," and that the country has no obligation to adapt or even do away with these regulations. Following the discussion, the Finance Department confirmed, somewhat unsurprisingly, that:
"Diverging positions remain in this regard." ... The Swiss Federal Council has consistently rejected the EU's interpretation, considering it to be
unfounded, and has consequently refused to enter into negotiations. The Federal Council holds the view that: The tax provisions criticised by the
EU do not fall within the scope of the Free Trade Agreement (The Free Trade Agreement only covers trade in certain goods and does not aim to
harmonise competition law); Switzerland is not an EU member, or part of the Single European Market, and that therefore neither the competition
regulations of the EC Treaty - in particular those on state aid - nor the code of conduct agreed between the EU member states on company
taxation are applicable to it; The tax provisions criticised - even if they were covered by the FTA - do not represent state aid as they do not favour
certain companies or sectors of production, but are in fact open to all economic actors that meet the legal criteria; The provisions do not prejudice the bilateral trade in goods between Switzerland and the EU
because the types of company concerned in Switzerland have no, or at most subordinate, business operations which are taxed normally. The Swiss delegation also informed the EU representatives of reform steps
initiated by Federal Councillor Hans-Rudolf Merz, following the vote on the second series of corporate tax reforms intended to strengthen Switzerland's position in terms of international tax competition.
Tuesday, April 15, 2008 ~ 6:31 ap.m., Dan Mitchell Wrote: Miroslav Kalousek's ambitious tenure leading the Finance Ministry has taken another leap forward, as the ministry has proposed a second,
sweeping set of reforms to the country's taxation and social security system. ...While the proposal seeks to restructure the tax system, it does
not attempt to alter the overall tax rate, which was adjusted as part of the first round of public finance reforms. Those reforms, which came into
effect Jan. 1, introduced a flat 15 percent income tax and the concept of "supergross" wages that include the social security and health insurance
costs paid by companies. The ministry's reforms seek to push this supergross concept further, merging the flat tax with social payments into one combined tax.
Monday, April 14, 2008 ~ 5:09 p.m., Dan Mitchell Wrote: MDF leader Ibolya Dávid called for opposition parties to attend talks on 15 April to work out details of a bill to submit to parliament by May. The
party wants to emulate regional peers such as Slovakia and Romania by introducing a flat 18% personal income tax to reduce a tax burden it
called "unfairly high". The Free Democrats (SZDSZ) and main opposition party Fidesz - along with its ally the Christian Democrats (KDNP) - have
said in the past that they would favour a flat tax. ...The MSZP has only 190 seats in the 386-seat parliament, meaning that the opposition parties
could force through a flat tax bill by banding together. Hungary is ranked as having the second-highest tax burden for single people, behind Belgium,
amongst the members of the Organisation for Economic Cooperation and Development (OECD). Many feel the high burden - made worse in 2006 when the government hiked taxes as part of its economic reforms -
damages Hungary's regional competitiveness. Meanwhile, the Polish government already has promised to implement a flat tax, but a key official has suggested that the new system may be implemented in 2009 rather than
in 2010 or 2011 as originally planned. Because of its size and geography, Poland's shift to a flat tax would be a momentous development and could sharply increase the pressure for pro-growth reforms in Old Europe:
Monday, April 14, 2008 ~ 4:23 p.m., Dan Mitchell Wrote: Ireland has been sent into a political tailspin by France's announcement that it is to push ahead with plans for a harmonised company tax base.
Politicians fear it will affect the outcome of the country's referendum on the EU treaty in June. ...The country's economic boom in the 1990s was
partly due to its low corporate tax rate (12.5%), which attracted high levels of foreign investment into the country. ...Irish Prime Minister Bertie
Ahern reminded parliament that the "unanimous approval" of all member states is needed in this area, adding that he sees "no prospect" for a
harmonised corporate tax base and that the Lisbon treaty "does not change that." Ruairi Quinn, chair of the Irish Alliance for Europe, called
the French proposal "wishful thinking" and a "farcical fantasy" while Europe minister Dick Roche said the comments were "untimely, unhelpful
and inappropriate." But it is no secret that the issue is being considered in Brussels. Laslo Kovacs, EU tax commissioner, on Monday said "there is a
real need for the member states to act together in certain tax policy areas"... Libertas, a new group that is arguing that the treaty will lead to
Ireland being worse off with the Lisbon treaty, also reacted to Ms Lagarde's statement. "A common corporate tax base would destroy the Irish economy. In a challenging economic environment, the stakes could
not be higher," said Libertas chair Declan Ganley.
Sunday, April 13, 2008 ~ 7:09 p.m., Dan Mitchell Wrote: New York state taxes are second highest in the nation at 13.8 percent, according to a 2007 Tax Foundation analysis. Per capita, New Yorkers pay $1,647 more in local taxes and $416 more in state taxes than the national average per year. This combined total of $2,063 "per capita" suggests that families may pay multiples of this figure. New York corporate taxes are third in the nation and more than double the national average. And to top it off, New York has borrowed $5,117 per capita more than the national average. ...It is little wonder why individuals and corporations choose to flee the state for more favorable tax environments. ...The Medicaid program is New York's crown jewel of largesse. The state spends $2,165 on Medicaid per capita, which is two-and-one half times the national average, according to the 2006 National Center for Policy Analysis report, Medicaid Empire. The results of New York's failed fiscal policy are evident. New York ranks 40th in 10-year private sector employment and upstate New York has fared far worse. The U.S. Economic Freedom Index, a measure of regulatory and fiscal obstacles imposed by each state on its residents, ranks New York last. http://www.democratandchronicle.com/apps/pbcs.dll/article?AID=/20080409/ OPINION02/804090328/1039/OPINION
Saturday, April 12, 2008 ~ 1:00 p.m., Dan Mitchell Wrote: Tax competition is a liberalizing force. When politicians worry that jobs and investment have the freedom to cross borders, their reflexive desire to overtax and overspend is at least somewhat curtailed. Tax havens play a valuable role in this process, and this helps explain why income tax rates have dropped by more than 25 percentage points since 1980 and corporate rates have fallen by more than 20 points. These reforms have greatly strengthened the global economy, improving living standards across the board and helping to lift hundreds of millions of people out of poverty. Efforts by bureaucracies such as the OECD to create a tax cartel -- an "OPEC for politicians" -- should be rejected. In his contributions, Mr. Baker largely avoided any debate about tax competition and repeatedly asserted that tax havens were refuges for dirty money. I cited numerous sources that suggest otherwise. I then closed by arguing that: Because of tax havens and tax competition, the world today is much more prosperous and global poverty has been reduced. The OECD should not be allowed to disrupt the world economy by stifling competition and creating an "OPEC for politicians." Every nation has the sovereign right to determine its own tax and privacy laws -- and to control the taxation of economic activity inside its borders. Tax competition is good for America, good for the world, and good for freedom. It will be interesting to see whether the comments in the reader forum http://forums.wsj.com/viewtopic.php?t=2103) will favor one side or the other.
Saturday, April 12, 2008 ~ 12:27 p.m., Dan Mitchell Wrote: The downward trend in corporate tax reductions has not been greeted warmly in all circles. ...In May 2004, for example, French and German
officials denounced the "unfair competition" posed by new EU members' low corporate tax rates and urged the EU to set a minimum corporate tax
rate for all members, but they were unable to secure the unanimous support required for adoption of their proposal. The idea was not a new one in European discussion. In 1975, the European Commission published
a draft directive suggesting harmonization of corporate tax rates in the 45-55 percent range; in 1992, a committee appointed by the commission
recommended harmonization in the 30-40 percent range. Former treasury secretary Lawrence Summers embraced this viewpoint in a December 18, 2007, speech, in which he advocated international cooperation and tax
harmonization. While acknowledging that countries like Ireland have benefited by lowering corporate taxes, he contended that their gains have
come at the expense of other countries. ...Rather than trying to prop up the corporate income tax against competitive pressures, countries around
the world should celebrate its decline and work for its deise. The celebration should be joined even by those who support highly progressive
taxation and extensive redistribution to the less fortunate. They should realize that the corporate tax is not a sensible way to achieve their goals.
Saturday, April 12, 2008 ~ 11:13 a.m., Dan Mitchell Wrote: … the total price tag for America's present wars [is] at least $822 billion, approximately 80 percent of which will be spent on Iraq. That surpasses the cost of the Vietnam War ($670 billion in inflation-adjusted dollars). And the Iraq portion dwarfs the $50 billion to $60 billion cost predicted at the outset of the war by Mitch Daniels, then director of the Office of Management and Budget. …To distract people from the real price tag of a two-front war, the president and Congress have used an unprecedented and fiscally irresponsible budgetary trick: a series of "emergency" supplemental spending bills totaling hundreds of billions of dollars. This scheme has allowed them not only to hide the costs of the conflicts but also to avoid painful budget choices while funneling billions of dollars in unvetted goodies to favored interest groups. Once a small blip among federal outlays, emergency supplementals have exploded since 2002, when the Republican Congress let a key legislative restriction on their use expire. In May 2007, President Bush signed into law the biggest supplemental bill in history, $120 billion, to fund military operations in Iraq and Afghanistan ($100 billion) and pay for hurricane recovery and agricultural disaster relief at home. This came just five months after Congress approved another $70 | ||||||||||