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CF&P E-mail Update, August 10, 2005

Center for Freedom and Prosperity's E-mail Update

1) Lower tax rate attracts more money to U.S. economy

2) The growing evidence for supply-side tax policy

3) 2003 Bush tax cuts on dividends and capital gains show Laffer-Curve effect

4) The difference between good tax cuts and Keynesian tax cuts

5) Will tax reform be a vehicle for tax increases?

6) Tax rate reductions help fuel the American jobs machine

7) Richard Rahn:  Saving Germany and France from the welfare state

8) New Zealand expert highlights inferiority of European social model

9) Walter Williams: Explains why property rights are important

10) State death taxes cripple competitiveness

11) The Sarbanes-Oxley disaster gets worse every day

 

1) Lower tax rate attracts more money to U.S. economy

The United States is one of the few nations to impose "worldwide taxation," which means that American companies and citizens are taxed on income earned in foreign countries. But because that income already is taxed by foreign countries (much as we tax income earned by foreigners in the U.S.), this policy is a clear and unambiguous example of double-taxation. It also is a self-destructive policy since it makes it hard for American firms to compete in the global economy. In the past, policy makers have tried to mitigate this misguided policy by allowing U.S. companies to defer the second layer of tax on foreign-source income if they reinvested the money in their foreign operations. But this second-best policy had the unfortunate effect of discouraging companies from bringing foreign profits back to the U.S. economy. Fortunately, this foolish policy has been temporarily changed and companies can now bring foreign earnings back to America and pay a double-tax of only 5.25 percent instead of 35 percent. Ideally, there should be no double-taxation, but this significant reduction in the tax rate has yielded impressive results.

[Excerpt from LawAndTax-News.com]

Pepsico Incorporated said on Friday that it plans to repatriate up to $7.5 billion of undistributed international earnings, which under the American Jobs Creation Act will incur an estimated $475 million tax expense. Under the AJCA, firms with substantial profits earned abroad are encouraged to repatriate the income at a temporary rate of tax of 5.25% instead of the usual 35%, a move which lawmakers hope will spur domestic investment. ...Other major corporates to make repatriations under the AJCA include drugs manufacturer Eli Lilly ($8bn), and Johnson & Johnson ($11bn). According to some estimates US companies could return around $320 billion in overseas earnings to the US during the year-long tax break. [Link to full article below:]

July 26, 2005, LawAndTax-News.com, by Glen Shapiro, Pepsi Latest Firm To Repatriate Under AJCA
http://www.tax-news.com/asp/story/story_open.asp?storyname=20586

 

2) The growing evidence for supply-side tax policy

Alan Reynolds of the Cato Institute discusses the strong relationship between good tax policy and economic growth. He notes that Nobel Prize winners and various former Chairmen of the Council of Economic Advisers have produced academic evidence illustrating the importance of cutting taxes in the right way - i.e., reducing marginal tax rates on work, saving, and investment.

[Excerpt from Alan Reynolds' column]

The Congressional Budget Office reports that from October through June, "net [tax] collections from individuals were up by $105 billion, or about 18 percent. ...You might think a fan of big government like New York Times columnist Paul Krugman would be delighted. But he seems to look for a cloud behind every silver lining. ...As for Mr. Krugman's hasty dismissal of the Laffer Curve, he has much to learn from the new paper "Dynamic Scoring" by N. Gregory Mankiw, a recent chairman of the President's Council of Economic Advisers, and Matthew Weinzierl, also of Harvard (www.nber.org/papers/w11000). This paper uses a well-established "neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth." The authors explicitly "ignore any short-term effects of tax cuts that arise from traditional Keynesian channels." Assuming quite conservatively that tax rates on labor and capital are only 25 percent, and employing a conventional model of economic growth, Mr. Mankiw and Mr. Weinzierl find "a capital tax cut has a long-run impact on revenue of only 47 percent of its static impact. That is, growth pays for 53 percent of the static revenue loss. A labor tax cut has a long-run impact on revenue of only 83 percent of its static impact, and growth pays for 17 percent of the tax cut." ...Research by another former CEA chairman, Glenn Hubbard of Columbia University, emphasizes the effect of marginal tax rates on entrepreneurship. Yet another former CEA chairman, Martin Feldstein, demonstrates income reported by high-income taxpayers is extremely sensitive to changes in marginal tax rates. ...Among other Nobel Laureates, Ed Prescott (2004) emphasizes the effect of labor taxes on work incentives. Bob Lucas (1995) emphasizes tax incentives to invest in physical capital. James Heckman (2000) and Gary Becker (1992) emphasize how progressive tax rates weaken incentives to invest in schooling and on-the-job training. And the optimal tax theory of James Mirrlees (1996) and Joe Stiglitz (2001) emphasizes both social welfare and tax-revenue (Laffer Curve) gains from low marginal tax rates on highly skilled individuals. [Link to full article below:]

July 24, 2005, The Washington Times, By Alan Reynolds, Lower tax rates, higher revenues
http://www.washtimes.com/commentary/20050723-092114-4549r.htm

 

3) 2003 Bush tax cuts on dividends and capital gains show Laffer-Curve effect

Democrats apparently think it is bad when rich investors pay more taxes in response to lower tax rates. The Wall Street Journal mocks this silly mentality, but also explains that GOP big spenders have created a future fiscal crisis.

[Excerpt from The Wall Street Journal]

John Spratt, the ranking Democrat on the House Budget Committee, seems especially upset that this revenue surge isn't coming from wage income, but rather from investment income--that is, the so-called non-withholding income tax collections, which have skyrocketed by some 30% this year. "These are typically taxes paid on one-time capital gains, bonuses, stock-options income that may not recur," he laments. Well, sure, Congressman, the 2003 reductions in the tax rates on dividends and capital gains seem to be resulting in much higher tax revenues on . . . dividends and capital gains. This is called the Laffer Curve effect, and we thank Mr. Spratt for validating it. If he wants those revenues to "recur," maybe he'll even vote to make those tax cuts permanent. This revenue surge from investment income also rebuts the mantra that the 2003 tax cuts were a giveaway to the rich. Nearly half of all Americans have some kind of stock ownership, and thus have shared in these gains in investment income. And if most of the extra tax income is coming from capital gains and dividend payments, that would have to mean that the rich in America are paying more taxes, not less, as a result of the 2003 tax cut. ...There is a looming budget problem, but it has nothing to do with the Bush tax cuts or insufficient tax revenue. It is a government spending crisis, especially the liabilities that politicians have promised to retirees in Social Security and Medicare. The Congressional Budget Office predicts that spending as a share of our national output based solely on current promises will surge from about 20% today, to 25% in 2025 and to 34% by 2040. [Link to full article below:]

July 15, 2005, The Wall Street Journal, Review & Outlook: Windfall for Washington -- The deficit is shrinking, thanks to the Bush tax cuts.
http://www.opinionjournal.com/editorial/feature.html?id=110006973

 

4) The difference between good tax cuts and Keynesian tax cuts

Contrary to simplistic Keynesian analysis, tax cuts don't boost growth by giving people more money to spend. After all, there is no net increase in purchasing power if politicians borrow the money used to finance tax cuts. Only certain tax cuts boost growth, and that is because they reduce the penalty on productive behavior - as the Wall Street Journal explains.

[Excerpt from the Wall Street Journal]

Unfortunately, President Bush agreed, in part to get 12 Democratic votes in the Senate and in part because some of his advisers also fell for the Keynesian illusion that temporary tax cuts would spur growth. So he agreed to phase in his own marginal-rate income tax cuts over several years, while passing out $500 rebate checks immediately to American families in order to increase demand for goods and services. While this tax cut may have been a political success, it was an economic flop, as growth retreated again in 2002 after a one-time bounce. The tax cut debate resumed in January 2003, however, as Mr. Bush decided to pursue a more supply-side course. This time he aimed his tax cuts directly at the collapse in business investment, proposing to eliminate the double tax on dividends and to accelerate his income tax cuts at the top marginal rates. House Ways and Means Chairman Bill Thomas compromised on a 15% dividend rate but added a capital gains cut to 15% (from 20%). Almost from the very day in May of 2003 when those tax reductions became law, the U.S. has experienced a robust expansion driven by investment and productivity gains, not by consumer spending. ...One lesson in all of this is that not all tax cuts are created equal. Tax rebates and other temporary measures aimed at stimulating consumer demand don't work. Consumers aren't irrelevant, but prosperity is created on the supply side of the economy with the incentives to produce goods or services that people want to consume. So tax cuts in marginal rates that boost incentives to work and invest provide a much bigger bang for the buck. [Link to full article below:]

July 12, 2005, The Wall Street Journal, Review & Outlook: The Tax Cut Expansion
http://online.wsj.com/article/0,,SB112112447027982798,00.html?mod=opinion&ojcontent=otep   (subscription required)

 

5) Will tax reform be a vehicle for tax increases?

Writing in the Washington Times, Chris Edwards of the Cato Institute warns that taxpayers may wind up with the short end of the stick when President Bush's Tax Reform Advisory Panel produces its report. The pitfalls identified by Edwards are largely the result of self-inflicted mistakes by the White House, especially the choice to use "static scoring" - an ideologically biased revenue-estimating methodology that makes it harder to cut taxes since there is an absurd assumption that tax policy has no impact on economic performance.

[Excerpt from Chris Edwards' column]

..."tax reform" has replaced "tax cuts" on the Washington agenda, and that poses dangers for taxpayers. ...The first threat is the alternative minimum tax. The revenues from this add-on tax are expected to explode from $20 billion in 2005 to $112 billion by 2010. The administration says it wants to fix the AMT on a revenue-neutral basis -- but that means surrendering to a tax increase of about $750 billion over the next decade. The president's tax panel has similarly included rising AMT revenues in its baseline, thereby baking a tax increase into the tax reform cake. ...A second tax threat stems from the president's panel using static revenue scoring for tax proposals. This is not an obscure accounting issue. Static scoring will result in a reform raising too much money if enacted because the growth benefits will not be considered as they would be with dynamic scoring. Use of static scoring also means panel proposals will be less politically viable. Consider corporate tax changes. A reform package could include a tax rate cut in exchange for eliminating some inefficient tax breaks. A static analysis might show ending such breaks would raise enough money to reduce the corporate rate 5 percentage points. However, we know a corporate rate cut would lose only about half the revenue a static score would indicate because of the long-run positive growth effects. ...A third tax threat is that a revenue increase might creep into a reform package as it moves through Congress. Legislators might see tax reform as a chance to create a new value-added tax to pay for rising entitlement costs. Unfortunately, President Bush has a record of sending reform-oriented bills to Congress that get morphed into big government bills and then signing them into law anyway to score legislative victories. The 2002 education bill and 2003 prescription drug bill are wonderfully depressing examples. ...The president should be lauded for putting tax reform on the agenda and assembling a distinguished reform panel. But conservative policymakers need to closely watch the process. They should reject tax increases related to AMT repeal. They should ensure Congress dynamically scores the options proposed by the president's panel. And they should derail tax reform if it becomes a vehicle to close the budget gap rather than create a higher-growth economy. [Link to full article below:]

August 8, 2005, The Washington Times, By Chris Edwards, Will tax reform be an increase?
http://www.washtimes.com/commentary/20050807-095658-6757r.htm

 

6) Tax rate reductions help fuel the American jobs machine

Ever since supply-side tax cuts were implemented in 2003, the U.S. economy has grown rapidly and created millions of new jobs, far outstripping Europe and Japan. The Wall Street Journal notes that policy makers in those nations should be emulating America, not vice-versa.

[Excerpt from The Wall Street Journal]

First, more Americans have jobs today than at any other time in history. Second, over the past two decades or so, the U.S. has created more than 40 million jobs -- twice as many as Europe and Japan combined. And third, the U.S. has one of the lowest jobless rates of all developed nations. ...In the past 24 months 3.5 million more Americans have found work, which is the equivalent of a new job for every worker in the entire state of Indiana. Every single job that was lost during the bursting of the technology bubble and stock market collapse of 2000-01 has been matched by a new job, often in a new industry. ...the bottom of the jobs recession hit in mid-2003 -- and the recovery began at the very point that the Bush marginal-rate tax cuts were enacted into law. ...Part of the explanation for this success is that, especially compared to Europe, the U.S. has imposed fewer taxes and regulations (even though we have plenty) that make it onerous for employers to hire and fire workers. A unique feature of the U.S. economy is that Americans move in and out of jobs -- usually to rise up the income elevator -- at a rapid and persistent pace. This is the key to the Great American Jobs Machine, and it explains why Europe and Japan should be more like us, and not the other way around. [Link to full article below:]

August 8, 2005, The Wall Street Journal, Review & Outlook: The Great American Jobs Machine
http://online.wsj.com/article/0,,SB112345310644607010,00.html?mod=opinion&ojcontent=otep   (subscription required)

 

7) Richard Rahn: Saving Germany and France from the welfare state

Bloated governments, high taxes, and suffocating regulations have crippled the economies of many European nations, and France and Germany are perfect examples. The economic crisis in these two nations is so severe that voters may soon elect politicians who believe in more freedom rather than more redistribution. Writing in the Washington Times, Richard Rahn wonders whether new leaders will be able to save their respective countries.

[Excerpt from Dr. Rahn's column]

In times of crisis, some nations find a Ronald Reagan, a Winston Churchill or a Margaret Thatcher. If one looks closely at the increasing political divisions in France, Germany and Italy, it is now possible to imagine a future Continental version of Mrs. Thatcher or President Reagan. In the 1970s, the U.S. and the U.K. were in crisis. Mr. Reagan rode into Washington with vision and optimism. He supported a noninflationary monetary policy, cut tax rates and reined in spending and regulatory growth and the economy boomed. In the U.K., Margaret Thatcher faced even tougher economic problems. Much of British industry had been nationalized under socialist governments. Welfare state spending and the unions were out of control. Britain had become the poor man of Europe. Beginning in 1979, Mrs. Thatcher privatized industry, cut taxes, spending and regulations and broke the unions' hold on the economy. Britain went from the poorest major economy in Europe (in terms of per capita income) to the richest, leaving Germany, France and Italy in the dust. The United States and the U.K. have had twice the rate of economic growth of Germany, France and Italy since the early 1980s. Unemployment rates in the U.S. and U.K. are under 5 percent while Germany and France are in double digits (11.8 percent and 10.2 percent respectively). Worse yet, more than 50 percent of Germany's, and 40 percent of France's unemployed have been out of work a year or more. The comparable number for Britain is 21.4 percent and only 12.7 percent in the U.S. The divergence is increasing, not diminishing, with the U.S. growing almost 3 times faster than France, Germany and Italy over the past four years. ...Now for the good news. Angela Merkel, who is favored to become the new chancellor of Germany this fall, and Nicolas Sarkozy, the current front-runner to replace Jacques Chirac as French president, have both very explicitly recognized Europe's problems. ...Looking at the European political landscape, my own guess is that neither Miss Merkel nor Mr. Sarkozy will have the conditions, luck and spine to do what Mrs. Thatcher and Mr. Reagan did. But what they may be able to do is buy a little more time for Europe until the people understand there is no constructive choice other than following the Anglo-Saxon model of lower taxes, spending and regulation. [Link to full article below:]

August 5, 2005, The Washington Times, By Richard W. Rahn, Hope for Europe?
http://www.washtimes.com/commentary/20050804-083241-3984r.htm

 

8) New Zealand expert highlights inferiority of European social model

In a recent speech, Roger Kerr of the New Zealand Business Roundtable compares the robust performance of Anglo-American economies with the stagnant - and statist - economies of Japan and continental Europe. Kerr cites the work of Olaf Gersemann's Cowboy Capitalism: European Myths, American Realities (http://www.catostore.org/index.asp?fa=ProductDetails&pid=1441214&method=search&t=co wboy&a=&k=&aeid=&adv=&pg=#top) to dispel myths that American success is associated with social costs.

[Excerpt from study]

The big world story of the last two decades of the twentieth century was the demise of communism as an economic system and power bloc, and with it the end of the cold war between East and West. At the same time, another story has been unfolding, not as dramatic as the ending of an entire political and economic system but still of great long-term significance. That story is about the pre-eminent success of the Anglo-American economies (which include not just the United States but also Canada, Australia, New Zealand, Ireland and the United Kingdom) and the relative failure of the various versions of the so-called social market economy or managed capitalism in Continental Europe and Japan. In the last dozen years or so, economies based on free trade, private ownership, light regulation and moderate taxation have opened up what looks increasingly like a decisive lead over economies characterised by active state partnership with business and trade unions in steering the economy, high levels of taxation and social spending, a greater role for banks than for stock markets in corporate ownership and control, and intrusive regulation of business. ...I fully expect American ideas and practices to continue to exert in the twenty-first century the all-pervasive influence they did in the twentieth century and to set the standards by which all societies are judged, however much they may also be resented and subject to bogus criticism. It seems unlikely that hard-working Chinese, Indians and other Asians will be attracted to the European model. [Link to full article below:]

July 18, 2005, New Zealand Business Roundtable, By Roger Kerr, Cowboy Capitalism: European Myths, American Reality
http://www.nzbr.org.nz/documents/speeches/speeches-2005/180705rk_cowboy_capitalism.pd f

 

9) Walter Williams: Explains why property rights are important

Our Founding Fathers certainly understood the essential value of property rights in a free society. Unfortunately, some Americans - including five members of the Supreme Court during the Kelo decision - have forgotten why the right to control one's own property is a human right.

[Walter Williams puts the issue in perspective]

Property rights are human rights to use economic goods and services. Private property rights contain your right to use, transfer, trade and exclude others from use of property deemed yours. The supposition that there's a conflict or difference between human rights to use property and civil rights is bogus and misguided. ...In a free society, each person is his own private property; I own myself and you own yourself. That's why it's immoral to rape or murder. It violates a person's property rights. The fact of self-ownership also helps explain why theft is immoral. In order for self-ownership to be meaningful, a person must have ownership rights to what he produces or earns. A good working description of slavery is that it is a condition where a person does not own what he produces. What he produces belongs to someone else. Therefore, if someone steals my computer, he's violated my ownership rights to my computer, which I earned through my labor, and therefore my human or civil rights to keep what I produce. Creating false distinctions between human rights and property rights plays into the hands of Democrat and Republican party socialists who seek to control our lives. If we buy into the notion that somehow property rights are less important, or are in conflict with, human or civil rights, we give the socialists a freer hand to attack our property.

August 3, 2005, Townhall.com, by Walter E. Williams, Human rights v. property rights
http://www.townhall.com/columnists/walterwilliams/ww20050803.shtml

 

10) State death taxes cripple competitiveness

The Wall Street Journal notes that states like Connecticut and New York are being extraordinarily foolish by imposing punitive death taxes on citizens. If the goose that lays the golden eggs can fly away, class-warfare taxes are a form of economic suicide - and there is powerful evidence that taxpayers migrate away from high-tax states.

[Excerpt from The Wall Street Journal]

Last month Ms. Rell marked her first anniversary as Governor by signing into law a tax bill that might as well be called the "Palm Beach Economic Development Act." The law requires that any resident of the Nutmeg State with an estate of more than $2 million pay a death tax of up to 16%--merely for the privilege of dying in Connecticut. The legislators in Hartford hope that the tax will raise $150 million in revenue each year--money that will come in only if the legislators in Hartford are also planning to build a Berlin Wall around the state. Otherwise, expect a stampede of retirees and family businesses out of Connecticut into the many states without a death tax, such as Florida, which has a constitutional prohibition against estate taxes. Thanks to the Connecticut death levy, a successful small business owner with a $10 million estate can save about $1 million by packing up and heading south. ...A 2004 National Bureau of Economic Research study--"Do the Rich Flee From High State Taxes?"--finds that states lose as many as one of three dollars from their estate taxes because "wealthy elderly people change their state of residence to avoid high state taxes." And that was when states imposed effective estate tax rates that were only one-third as high as they are enacting now. Under these new soak-the-rich schemes, some states could lose so many wealthy seniors that they may actually lose revenue over time. ...Over the past 20 years about 1,000 people every day have been fleeing these high tax blue states, for low tax red states. It's one reason the Northeast has suffered economically, and declined politically in terms of electoral votes. In New York, about one in three tax dollars comes from those with earnings of $1 million or more. A rational policy out of Albany would be to lay down a red carpet to encourage more rich people to move in, or at least to stay there. Instead, with its 16% estate tax, Republican Governor George Pataki has effectively declared: "Invest anywhere but in New York." And that's why you can expect to see thousands of creative people from the Northeast whistling Dixie in the months and years ahead. [Link to full article below:]

August 1, 2005, The Wall Street Journal, Review & Outlook: Estates of Pain -- Connecticut's governor to constituents: Get out of here before you die!
http://www.opinionjournal.com/editorial/feature.html?id=110007043

 

11) The Sarbanes-Oxley disaster gets worse every day.

Bruce Bartlett has a devastating indictment of the "corporate governance" legislation approved in 2002. It seems government has a reverse-Midas touch. Politicians inevitably make things worse by over-taxing, over-spending, or over-regulating.

[Excerpt from Bruce Bartlett's column]

Given the state of the economy and relatively robust corporate profits, one would expect the stock market to be higher. ...one factor holding back the market may be the Sarbanes-Oxley legislation, enacted in 2002 as a knee-jerk reaction to the corporate scandals of Enron, WorldCom and others. Reports suggest that the cost of this legislation is extremely high just in terms of out of pocket expenses. But the intangible costs could be far, far higher. In the May issue of the Yale Law Journal, Prof. Roberta Romano of the Yale Law School excoriates Congress for enacting legislation consisting of little more than a bunch of rehashed proposals that had been kicking around for years, with little, if any, connection to the actual causes of the corporate scandals. She calls it "quack corporate governance." Estimates of the cost of the legislation in terms of higher audit fees and lost productivity have risen every year, as companies learn more about how its provisions. It is now commonly estimated to be about $15 billion per year, or about $1 million per $1 billion of sales. This estimate is pretty consistent among the organizations that have looked at Sarbanes-Oxley carefully, including Financial Executives International, a trade group; Foley and Lardner, a Chicago law firm; and A.R.C. Morgan, a Dutch consulting company. ...Two University of Illinois accounting professors estimated last year that companies had spent 120 million hours complying with Sarbanes-Oxley and that outside auditors had spent another 12 million hours, for a total of 132 million hours. This is equivalent to 66,000 people working for one year on nothing else. But these direct costs pale in comparison to intangible costs. Corporate executive report an enormous amount of distraction from their core businesses as the result of Sarbanes-Oxley, and have become much more conservative in their investment strategies. Sun Microsystems CEO Scott McNealy likened the legislation to throwing "buckets of sand into the gears of the market economy." ...The latest study looks at how the stock market reacted to passage of Sarbanes-Oxley. University of Rochester economist Ivy Zhang found that passage of the bill wiped out $1 trillion of market capitalization. Zhang found no economic benefits to the legislation whatsoever, a view echoed by other analysts such as UCLA securities law professor Stephen Bainbridge. Another intangible cost is the undermining of federalism. Corporate governance historically has always been the province of state law. Now it has largely been taken over by the federal government, despite the oft-stated desire of President Bush and Republicans in Congress to respect federalism. [Link to full article below:]

August 10, 2005, National Center For Policy Analysis, by Bruce Bartlett, Sarbanes-Oxley: Seriously Misconceived
http://www.ncpa.org/edo/bb/2005/20050810bb.htm

 

Best regards,

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

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