CF&P E-mail Update, January 27, 2005

The Market Center Blog

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Freedom and Prosperity
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22310-9998
202-285-0244

 

Center for Freedom and Prosperity's E-mail Update

1) Washington Update: The fruits of tax competition

2) Flat tax Godfather takes readers on a world tour

3) More evidence that lower tax rates yield big results

4) Even the OECD recognizes the low-tax Irish miracle

5) Tax Cuts Work for the Best ~ Austria & United States

6) OECD urges higher taxes in Japan

7) Administration wants more power for anti-U.S. bureaucracy?

8) Larry Kudlow: Bush Administration may finally get tough on spending

9) Government program subsidizes bad business decisions

10) Walter Williams: Job destruction leads to job creation

11) Jack Kemp: Social Security reform saves money

12) George Will and Tom Sowell on the many benefits of SS reform

13) More taxes on investors and entrepreneurs are not the answer to SS's problems

14) Personal retirement accounts have many benefits

 

1) Washington Update:  The fruits of tax competition.

Today's update illustrates why tax competition is so important. Many of the pro-growth tax reforms around the world are taking place because nations are being compelled to compete. People in these nations are the biggest beneficiaries, of course, but they probably would not be able to enjoy better tax systems if national politicians were not pushed in the right direction. The first stories in today's update are the best evidence of this hypothesis. But every silver cloud has a dark lining, and the update also contains two items about the mischief of international bureaucracies. One story highlights the OECD's call for higher taxes in Japan, and the other item discusses the Administration's puzzling support for a UN scheme to control the high seas. Finally, the update has several items on important economic reforms.

Best regards, AQ

 

2) Flat tax Godfather takes readers on a world tour

Alvin Rabushka of Stanford University's Hoover Institution helped launch the flat tax in the early 1980s. His idea hasn't taken root in America, but Dr. Rabushka explains in the Wall Street Journal that Eastern European nations are providing a great lesson about the benefits of tax reform.

[Excerpt from Dr. Rabushka's WSJ column:]

President Bush has just established another commission of nine distinguished members, but it will encounter the usual obstacles. A new round of hearings is not needed. A better approach is for the members to visit the eight countries in Central and Eastern Europe that have adopted the flat tax in the last 10 years and study their experience. Estonia was first, implementing a 26% flat tax in 1994. The relatively high rate was set to balance its budget, a requirement of its new constitution. Since then, buoyed by strong economic performance, Estonia has eliminated the corporate tax on retained earnings, taxing only distributed profits. This year the rate has been lowered to 24% and will fall to 20% in 2007. Next, in 1995, was Latvia with a 25% rate. But Russia is the big story. It took the tax reform world by storm in 2000 with a 13% flat tax, replacing its previous three-bracket system that topped out at 30%. The results: the economy has enjoyed four years of sustained growth. Real (inflation-adjusted) ruble revenue from the personal income tax rose 25.2% in 2001, 24.6% in 2002, 15.2% in 2003, and 16% in the first half of 2004. At the end of just four years, total receipts have more than doubled -- despite, or rather because of, a reduction in the top rate from 30% to 13%. ...In 2003 Serbia implemented a comprehensive 14% flat tax on personal and corporate income. Not stopping at 14%, Serbia has stated its intention to further reduce tax rates in the near future. Taking a page from Russia's playbook, Ukraine implemented a 13% flat tax in 2004, replacing five brackets ranging from 10% to 40%. Dividends and interest on bank deposits are taxed at an even lower 5% rate beginning 2005. ...In 2004 Slovakia implemented a 19% flat tax on both individual and corporate income. The measure passed by a vote of 85-48, and garnered the support of some opposition deputies. ...Georgia's Mikhail Saakashvili was inaugurated as president on Jan. 25, 2004. Five days later he stated that one of his economic priorities was to introduce a new flat-rate tax system. On Dec. 22, 2004, by an overwhelming vote of 107-11, Georgia's parliament approved a 12% flat tax on personal income, replacing the previous system of four rates from 12% to 20%. The flat tax, which took effect on Jan. 1, 2005, reduced the size and weight of the old code by 95%. ...Trajan Basecu, Bucharest's mayor, won a surprise victory as president of Romania. In his campaign he promised to work for a 16% flat tax on both personal and business income, to replace a complicated system of five rates ranging from 18% to 40% on personal income and 25% on corporate income. The first act of his new government on Dec. 29 was the adoption of the flat tax as pledged, effective Jan. 1. Opposition parties in other Eastern European countries, such as the Czech Republic and Poland, have promised to enact a 15% flat tax if they are elected. ...If the new Bush commission cannot arrange a road trip to Central and Eastern Europe to see firsthand the success of the flat tax, perhaps it might do the next best thing -- invite the finance ministers, prime ministers, and economic experts of these countries to testify.  [Link to full article below:]

January 12, 2005, The Wall Street Journal, By Alvin Rabushka, Flat and Happy . . .
http://online.wsj.com/article/0,,SB110549261681023590,00.html?mod=opinion&ojcontent =otep   (subscription required)

The Market Center Blog, January 13, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#133

 

3) More evidence that lower tax rates yield big results

Two stories show the beneficial impact of lower tax rates. Tax-news.com reports that policy makers have lured $11 billion back to the US economy by lowering the tax rate on repatriated profits from 35 percent to 5.35 percent. And that is money from just one company! And the Wall Street Journal notes that we have even more evidence that lower capital gains tax rates improve economic performance and yield more tax revenue for government. When will the left understand that tax rates are a price - and that it is senseless to impose high prices on productive behavior?

[From Tax-News.com's article]

Pharmaceutical firm Johnson & Johnson has announced in a regulatory filing with the SEC that it will repatriate $11 billion in earnings held overseas as a result of the one-year tax break under the American Jobs Creation Act 2004. The new legislation, passed by Congress in October of last year, ushered in a series of new tax breaks in an attempt to stimulate domestic investment. One of the most significant of these was a one-year 'tax holiday' for US firms, allowing them to transfer earnings from foreign operations back to the United States and pay income tax at 5.35% instead of 35%.  [Link to full article below:]

[Excerpt from WSJ:]

Some people continue to believe, or at least still assert, that tax rates don't influence taxpayer behavior all that much. We therefore direct their attention to the Treasury Department's latest historical data on revenues from taxes on capital gains. ...The evidence is overwhelming...that lower rates induced more taxpayers to realize their capital gains, and thus produced more tax revenue despite the lower rates. The top capital gains rate was cut again in 2003, to 15%, and it is likely that Treasury will also report an increase in revenues in that year and in 2004 as the stock-market rebounded smartly. In each of these episodes, we should add, Congress's Joint Tax Committee predicted more or less the opposite. Wedded to its static models that underestimate the impact of behavioral incentives, Joint Tax predicted revenue losses from tax-rate cuts and revenue gains from tax-rate increases. In recent years Joint Tax has finally acknowledged some "unlocking" effect on capital gains realizations from lower rates, but it still refuses to recognize any revenue impact from faster economic growth or from a stronger stock-market that tax reductions on capital help to promote. The refusal to take control of Joint Tax has been a major failure of the GOP Congress, and should be a priority as it contemplates tax reform that President Bush has said must be "revenue neutral."  [Link to full article below:]

January 24, 2005, Tax-News.com, by Leroy Baker, Johnson & Johnson To Repatriate $11 Billion Under AJCA Tax Break
http://www.tax-news.com/asp/story/story_open.asp?storyname=18654

January 24, 2005, Wall Street Journal, Review and Outlook Editorial, Gaining Capital
http://online.wsj.com/article/0,,SB110651952621733465,00.html?mod=opinion&ojcontent =otep

The Market Center Blog, January 24, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#244

 

4) Even the OECD recognizes the low-tax Irish miracle

The Organization for Economic Cooperation and Development has just admitted that the Ireland is now the world's fourth-richest economy. The Paris-based bureaucrats say this is a "remarkable development," but sensible people see Ireland's growth as the logical consequence of free-market tax policy.

[Excerpt from the Belfast Telegraph]

...an analysis by a major international body last week ranked Ireland as the fourth wealthiest economy in the world, behind Luxembourg, Norway and the US. The rankings, compiled by the Organisation for Cooperation and Development in Europe (OECD) in conjunction with the European Union's statistical agency, were based on Gross Domestic Product (GDP) figures from 2002. The OECD described Ireland's entry into a category of high-income countries as a "remarkable development."  [Link to full article below:]

January 17, 2005, Belfast Telegraph, By Ben Quinn, Ireland wealthier than the US and fourth in global 'richest' league
http://www.belfasttelegraph.co.uk/news/story.jsp?story=601596

The Market Center Blog, January 21, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#214

 

5) Tax Cuts Work for the Best ~ Austria & United States

Part I:  Austria

Tax-News.com reports that foreign investors are plowing money into Austria now that the corporate tax rate has been reduced to just 25 percent. This means, of course, that the "cost" of the tax cut will be far lower than "static" estimates would suggest - meaning that better tax policy is a win-win situation for both the private sector and politicians.

[From the Tax-New.com article:]

Figures published by an Austrian government agency have shown a marked rise in foreign investment in anticipation of the country's decision to cut its corporate income tax rate by 9% this year. According to the Austrian Business Agency, which is the national investment promotion company, there was a 30% increase in successfully concluded investment projects last year compared to 2003, a rise that has been attributed in large part to a cut in corporate tax to 25% from 34% which took effect on January 1. "The business results already reflect the positive impact of the tax reform measures which just took effect," noted Martin Bartenstein, Austrian Minister for Economic Affairs. In addition to the corporate tax cut to one of the lowest levels in the EU, the reforms also contained a number of measures designed to reduce the tax burden on multinational firms using Austria as a base for regional headquarters.  [Link to full article below:]

Part II: United States

U.S. tax cut also yielding beneficial results. President Bush's reduction in the double-tax on dividends is reaping big rewards. Both dividends and investment are increasing, exactly as supply-theory predicted.

[Excerpt from Tax-News.com:]

The 2003 dividend tax cut is prompting US firms to pay out considerably more of their profits in the form of dividends, recent data has revealed. After US companies paid out a record $181 billion in dividend payments to investors last year, the latest estimate from Standard & Poor's predicts that this figure will be surpassed in 2005, with a 12% increase in dividends over the previous year's figures expected. Dividend payments by firms in the S&P 500 dipped significantly between 1980 and 2002, from 469 to 351, as US company bosses generally preferred to reinvest profits within the business. However, the tax cut package passed in 2003, which reduced dividend taxation for qualifying shares to 15%, was seemingly the catalyst for an almost instantaneous reversal in this trend. ...The tax cut also appears to have boosted equity income mutual funds, while specialist mutual funds have been created since 2003 to take advantage of the cut. Last year, a reported $25 billion was placed into equity income funds by investors - almost quadrupling the $6.1 billion channelled into the funds during 2002, the year prior to the tax cut. [Link to full article below:]

January 19, 2005, Tax-News.com, by Ulrika Lomas, Austrian Corporate Tax Cut Sparks Rise In Foreign Investment
http://www.tax-news.com/asp/story/story_open.asp?storyname=18616

January 19, 2005, Tax-News.com, by Mike Godfrey, Tax Cut Continues To Boost US Company Dividend Payments
http://www.tax-news.com/asp/story/story_open.asp?storyname=18611

 

6) OECD urges higher taxes in Japan

The Organization for Economic Cooperation and Development continues to peddle the snake-oil medicine of higher taxes. The Paris-based bureaucracy just released its study on the Japanese economy and - what a surprise - it recommends more money for the government. The analysis is filled with sophomoric analysis, including the statement that, "Addressing the government's budget deficit should be an important aspect of an exit policy as it would help avoid an abrupt rise in interest rates." But if this hypothesis is accurate, why does Japan have very low interest rates even though the nation also has one of the world's biggest budget deficits and debt ratios? The study of the Japanese economy also is filled with inconsistencies that would generate a failing grade in an introductory economics class. It acknowledges that high tax rates cause rampant tax evasion, but nonetheless urges higher tax rates. It even admits that higher tax rates will hurt growth, but the OECD reflexively cannot resist the temptation to advocate higher taxes.

[Excerpt from OECD report:]

Legislation passed in June 2004 to increase the pension contribution rate for the Employees' Pension Insurance from 13.6 to 18.3 per cent by 2017 may help finance rising expenditure. However, already in 2002, the proportion of pension contributions that are evaded was 37 per cent - well above the level assumed in the government's projections - and the increase in the contribution rate may further reduce participation in the system and weaken work incentives. ...fiscal consolidation...will require increases in government revenue... To increase revenue, the government should ...broaden the tax base, thus limiting the extent of tax hikes, which have negative effects on growth. Nevertheless, given the size of additional revenue that is needed, higher tax rates will be necessary, particularly for the consumption tax.  [Link to full article below:]

January 2005, Organisation for Economic Co-operation and Development, Economic Survey of Japan 2005: Achieving fiscal sustainability: What needs to be done to ensure the sustainability of public finances?
http://www.oecd.org/document/53/0,2340,en_17642234_17642806_34287541_1_1_1_1,00. html

The Market Center Blog, January 24, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#245

 

7) Administration wants more power for anti-U.S. bureaucracy?

The so-called Law of the Sea Treaty was rejected by Ronald Reagan more than 20 years ago because it undermined U.S. sovereignty and was based on a big-government approach. Sadly, the Bush Administration now supports this misguided scheme.

[Excerpt from Mr. Gaffney's column:]

Incredibly, even as President Bush was preparing his call for an American foreign policy that would resist tyrants - not rely on organizations they and their friends effectively control - his Administration was being committed to the ratification "as soon as possible" of a treaty that would give unprecedented power to just such an organization. The treaty in question is the UN Convention on the Law of the Sea (better known as the Law of the Sea Treaty, or LOST). It was drafted over twenty years ago at the behest of Soviet bloc and "non-aligned" nations to serve as the centerpiece of their so-called "New International Economic Order," a scheme to transfer wealth from the industrialized world to the developing one. Ronald Reagan objected to LOST's creation of a supranational agency to govern the world's oceans at the expense of U.S. sovereignty and America's capacity to utilize and assure freedom of the seas. When American concerns were ignored or simply voted down, he refused to sign the accord. The treaty has not improved with age, despite claims by its supporters that Mr. Reagan's objections have subsequently been addressed. For example, it still allows an international organization for the first time to collect revenues from American taxpayers as the price for permission to exploit the world's seabeds.  [Link to full article below:]

January 24, 2005, Townhall.com, by Frank J. Gaffney, Jr., Freedom at sea, too
http://www.townhall.com/columnists/frankjgaffneyjr/fg20050124.shtml

The Market Center Blog, January 25, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#254

 

8) Larry Kudlow: Bush Administration may finally get tough on spending

Larry Kudlow explains a strong economy is generating more tax revenue. Combined with a small amount of budget restraint (6.1 percent spending growth - still too much), this is reducing the budget deficit. But it's not the deficit that matters; the size of government is the real economic danger. And as Kudlow (author of an excellent blog, http://www.lkmp.blogspot.com) writes in National Review, the White House finally may get serious about controlling the growth of the welfare state.

[Excerpt from Larry Kudlow's column:]

In the first three months of the fiscal year that began last October, cash outlays by the federal government increased by 6.1 percent while tax collections grew by 10.5 percent. When more money comes in than goes out, the deficit shrinks. At this pace, the 2005 deficit is on track to drop to $355 billion from $413 billion in fiscal year 2004. As a fraction of projected gross domestic product, the new-year deficit will descend to 2.9 percent compared with last year's deficit share of 3.6 percent. ...According to the Washington Post, the Bush budget totals planned for fiscal year 2006 may be essentially unchanged from the totals for fiscal year 2005 (excluding defense and homeland security). According to reporter Jonathan Weisman, the administration's first really tough budget request (due out next month) "would freeze most spending on agriculture, veterans and science, slash or eliminate dozens of federal programs, and force more costs, from Medicaid to housing, onto state and local governments." ...Sen. Judd Gregg, the New Hampshire Republican who is the current chair of the upper chamber's budget committee and a long-time Bush ally, is set to support the administration's new budget discipline. This includes, by the way, Bush's plan to reduce Social Security benefits by replacing wage indexing with a price-level formula and extending the retirement age - one or the other, or both - in return for personal saving accounts. By the way, Treasury Secretary John Snow just completed a Wall Street tour where leading bond traders told him not to sweat the transitional costs for personal accounts. The traders said that an additional $100 billion a year over the next decade for transitional financing will be easily manageable. "A rounding error," one senior trader told Snow. [Link to full article below:]

January 13, 2005, National Review Online, By Larry Kudlow, Psst, the Deficit's Shrinking: Why won't anyone say it
http://www.nationalreview.com/kudlow/kudlow200501131420.asp

The Market Center Blog, January 14, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#145

 

9) Government program subsidizes bad business decisions

Politicians have an unfailing ability to take a bad situation and make it worse. Thirty years ago, they responded to the bankruptcy of some defined-benefit pension plans (which are plans that promise retired workers a specific annual payment, ostensibly financed by setting aside investments) by creating a program to bail out companies that made bad promises. This program, not surprisingly, encouraged imprudent decisions since companies knew they could pass their costs to Uncle Sam. Instead of subsidizing "moral hazard," politicians should have encouraged a shift to defined-contribution pensions, which automatically are stable since individuals own their own retirement assets.

[George Will explains the problem associated with the current system:]

...the 30-year-old Pension Benefit Guaranty Corp...may be necessary, but it causes "moral hazard" and is pertinent to the debate about how to guarantee the benefits of the biggest pension system, Social Security. The PBGC is a government entity created in 1974 after some bankruptcies left thousands of retirees without pensions. The PBGC insures -- but not completely -- companies' pension funds. ...the agency's $8 billion surplus in 2001 has become a $23 billion deficit, a reversal largely the result of the airline industry's crisis, the worst of which is still to come. ...Moral hazard exists when government policy creates incentives that make bad behavior rational. One example is the policy of bailing out countries whose reckless spending policies are encouraged by banks' reckless lending. Another example is a PBGC that assumes substantial responsibility for pension promises that companies have found convenient to make. The PBGC will reduce its potential contribution to moral hazard by increasing fees paid by companies with poor credit ratings. Even more important, the administration wants the PBGC empowered to prevent financially parlous companies from making pension promises they are apt to eventually make a government burden. All this could cause some companies to abandon defined-benefit plans, in which the amount of benefits paid to a retiree is fixed in advance in accordance with the plan's formula.  [Link to full article below:]

January 16, 2005, The Washington Post, By George F. Will, The Perils of Bad Promises
http://www.washingtonpost.com/wp-dyn/articles/A10933-2005Jan14.html

The Market Center Blog, January 16, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#163

 

10) Walter Williams: Job destruction leads to job creation.

A free market system generates wealth and higher living standards by mercilessly encouraging the more efficient use of resources. This means many jobs are lost, leading to protectionist impulses and political demagoguery. Walter Williams explains in his column that interfering with market forces is a prescription for stagnation.

[Excerpt from Dr. Williams' column:]

In 1858, Lyman Blake patented a shoemaking machine that ultimately destroyed jobs hand making shoes. In 1919, General Motors started selling Frigidaire. As Bradley says, "This 'electric ice box' wiped out a whole set of occupations, including ice-box manufacturers, ice gatherers, and the manufacturers of the tools and equipment needed to handle large blocks of ice." ...We could probably think of hundreds of jobs that either don't exist or exist in far fewer numbers than in the past -- jobs such as elevator operator, TV repairman and coal deliveryman. "Creative destruction" is a discovery process where we find ways to produce goods and services more cheaply. That in turn makes us all richer. ...The last election campaign featured great angst over the loss of manufacturing jobs. The number of U.S. manufacturing jobs has fallen, but it has little to do with outsourcing and a lot to do with technological innovation -- and it's a worldwide phenomenon. During the seven years from 1995 through 2002, Drezner notes, U.S. manufacturing employment fell by 11 percent. Globally, manufacturing jobs fell by 11 percent. China lost 15 percent of its manufacturing jobs, and Brazil lost 20 percent. But guess what. Globally, manufacturing output rose by 30 percent during the same period. Technological progress is the primary cause for the decrease in manufacturing jobs.  [Link to full article below:]

January 26, 2005, Townhall.com, by Walter E. Williams, Should we save jobs?
http://www.townhall.com/columnists/walterwilliams/ww20050126.shtml

The Market Center Blog, January 26, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#265

 

11) Jack Kemp: Social Security reform saves money.

There is much discussion about the "transition cost" of creating personal retirement accounts. But while it is true that there is a cash-flow cost of financing promised benefits as payroll taxes are shifted to personal accounts, it is also true that personal accounts dramatically reduce long-term liabilities. In other words, the "transition cost" in the short-term is more than offset by "transition savings" in the long-term. This is why borrowing money as part of a reform is both prudent and reasonable (though, to be sure, the economy would benefit even more if the transition was financed in part by reducing the size of government).

[Excerpt from Sec. Kemp's column:]

To the extent that creates a cash-flow shortage, Congress could have workers lend the federal government whatever funds are needed to pay all current Social Security benefits. In exchange for the loan, the federal government would deposit into the taxpayer's personal-retirement- accounts inflation-protected, interest-bearing long-term federal bonds backed by the full faith and credit of the United States with no restrictions on the right of the account holder to resell the bonds in secondary bond markets. Refinancing the Social Security liability in this way would not cause a short-term shock to the bond market or create upward pressure on interest rates because the government would simply issue new bonds to refinance an old debt obligation as Hamilton did. Nor would this approach threaten financial markets over the long run since the future financial obligation represented by the Social Security liability is already reflected in the current price of federal bonds, and any new forays outside retirement accounts into financial markets would be relatively small compared to the size of the economy. Since new federal bonds issued to personal retirement accounts would simply refinance an already existing liability, no net increase in federal indebtedness results. There are no "transition costs" involved. Refinancing the Social Security liability through new-issue federal bonds would not entail new debt; in fact, it would make it possible to pay off debt and leave Social Security financially sound in perpetuity.  [Link to full article below:]

January 24, 2005, Townhall.com, by Jack Kemp, A Hamiltonian solution to Social Security's bankruptcy
http://www.townhall.com/columnists/jackkemp/jk20050124.shtml

The Market Center Blog, January 26, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#264

 

12) George Will and Tom Sowell on the many benefits of Social Security reform

George Will and Tom Sowell explain why it is vitally important for America's tax-and-transfer entitlement scheme to be shifted to a system of personal retirement accounts.

[Excerpt from George Will's column]

One reason for reforming Social Security is that it is not in crisis compared to Medicare-Medicaid. But the best reasons rise from the philosophy of freedom: Voluntary personal accounts will allow competing fund managers, rather than a government monopoly on income transfers from workers to retirees, to allocate a large pool of money. This will enhance the economic dynamism conducive to an open society. Personal accounts will respect individuals' autonomy and competence, and will narrow the wealth gap by facilitating the accumulation of wealth -- bequeathable wealth -- by persons of modest incomes. [Link to full article below:]

[Excerpt from Dr. Sowell's article]

What is different with the private retirement accounts that the President is proposing, compared to the Social Security system as it exists now? The biggest difference seems to get the least attention: With private accounts, money is invested in the economy, creating additional wealth, from which pensions can be paid. With Social Security, the money is spent as soon as it gets to Washington. Is it better to invest for the future or to keep spending the Social Security taxes now and leave it to someone in the future to figure out what to do when today's young workers retire and there is not enough money to pay them what they were promised? ...There is a legal and accounting fiction called the "Social Security Trust Fund." All that this means is that the Social Security system gets government bonds in exchange for the Social Security tax money that is being spent today instead of being saved. But you cannot spend and save the same money, no matter what accounting gimmicks you use. Government bonds are not an investment that adds to the country's wealth. They are a claim on future taxpayers. ...no matter how much money you have paid into Social Security over the years, and no matter what you were promised when you paid it, the government always has the option to pay you back only what future politicians decide they can afford, given all the other things they might prefer to spend the money on. Owning your own private pension plan means that those who owe you have to pay you what they promised. It also means that if you die without ever using it, you can leave it to your family, instead of having the government keep the money. Liberals are desperate to keep Social Security the way it is, because that means they can keep spending your money as they see fit and keep you dependent on them. That's what the welfare state is all about.  [Link to full article below:]

January 20, 2005, Townhall.com, by George Will, It's time to reform Social Security
http://www.townhall.com/columnists/georgewill/gw20050120.shtml

January 20, 2005, Townhall.com, By Thomas Sowell, Social Insecurity?
http://www.townhall.com/columnists/thomassowell/ts20050120.shtml

The Market Center Blog, January 23, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#233

 

13) More taxes on investors and entrepreneurs are not the answer to Social Security's problems

Amity Shlaes of the Financial Times has a Townhall.com column explaining why the Social Security problem should not be addressed by higher taxes - especially an increase in the amount of income subjected to the payroll tax. She correctly notes that a big marginal tax rate increase on small business entrepreneurs would impose European-type tax rates on a vital sector of the US economy.

[Excerpt from Amity Shlaes' column:]

The cap - as technicians refer to it - is the earnings ceiling above which US workers' income is free of government pension taxes. Currently, workers pay into Social Security 6.2 per cent in tax on only the first $90,000 they earn. Their employer matches that, taking the total contribution to 12.4 per cent. Since the amount of pension higher earners may receive from Washington after they retire is limited, the cap makes sense. ...Here is the scenario that imperils the cap: Republicans will push for privatising a maximum share of the New Deal programme - one, or two, or four percentage points, say, out of the 6.2. ...Still, cutting such a deal would be crazy. For while the marginal tax increase involved sounds minor, it would affect not only households but also engines of small growth such as the "S corporation", a common format for many small companies. Senator Robert Bennett of Utah, an avid cap defender, started a time management company called Franklin Quest a few decades ago as an S corporation. He believes much of its very strong growth was connected with the low marginal income tax rate of 28 per cent set in 1986 by Congress and President Reagan. "Everyone assumes this is about taxing Michael Jordan or Warren Buffett," he tells me. "But really it is a massive hidden tax on small business." ...Lifting the cap would turn the US into a country that is much more heavily taxed - and therefore less enterprising. As the Nobel Prize winner Edward Prescott points out, studies comparing high-tax societies in Europe with the lower-tax US show that workers respond to the incentives supplied by marginal tax rates. Europeans in the market sector, by which Mr Prescott means the taxable private sector, work a full 50 per cent less than Americans. [Link to full article below:]

January 13, 2005, Townhall.com, by Amity Shlaes, Social Security: Defending the cap
http://www.townhall.com/columnists/amityshlaes/as20050113.shtml

The Market Center Blog, January 14, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#144

 

14) Personal retirement accounts have many benefits

An economist from the Social Security reform commission highlights a few of the economic benefits of personal retirement accounts in a Washington Post column.

[Excerpt from column below:]

The Social Security Administration's nonpartisan Office of the Chief Actuary says that a system of private accounts could be centrally administered with annual costs of only 0.3 percent, much cheaper than the average mutual fund. These accounts would come with enforceable property rights, including the right to pass the financial assets to one's spouse and children as an inheritance. Second, personal accounts could improve work incentives. The complexities of the current system make it nearly impossible for the average person to determine how, if at all, another dollar paid to Social Security translates into higher future retirement benefits. By providing a clearer link between individuals' Social Security contributions and the benefits that employees receive, personal accounts could increase the perceived rewards for work and thus boost economic activity. Finally, personal accounts could increase national saving. We are currently poised to heap trillions of dollars of unfunded obligations on our children and grandchildren. We could reduce this burden by saving more today. ...our federal government has shown again and again that it cannot reliably save money for the future. For the past two decades, while Social Security collected more tax revenue than it has needed to pay benefits, the rest of the federal budget consumed these surpluses rather than putting them aside. That's not a flaw in Social Security, but a political reality. To ensure that these surpluses are saved and not spent, we need a "lock box" that actually works. Personal accounts would put the control of these contributions into the hands of individuals, not the government, making it much more difficult for politicians to use these funds to mask increased spending on other programs.  [Link to full article below:]

January 23, 2005, Washington Post, By Jeffrey Brown, Why Personal Accounts Are A Real Benefit
http://www.washingtonpost.com/wp-dyn/articles/A28180-2005Jan22.html

The Market Center Blog, January 24, 2005
http://www.freedomandprosperity.org/blog/2005-01/2005-01.shtml#241

 

Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
President
202-285-0244
quinlan@freedomandprosperity.org
www.freedomandprosperity.org

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