CF&P E-mail Update, September 1, 2005

The Market Center Blog

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Center for
Freedom and Prosperity
 P.O. Box 10882
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202-285-0244

Center for Freedom and Prosperity's E-mail Update

1) Steve Moore notes in the the Wall Street Journal the critical role of tax competition

2) Tax competition enhances importance of lower state tax rates

3) Amity Shlaes: Financial Times columnist highlights importance of supply-side tax cuts

4) Washington's inaccurate revenue-estimating process hinders good policy

5) More evidence for the Laffer Curve

6) Lower tax rate lures $billions to U.S. economy

7) American Shareholders Association study confirms benefit of lower tax rates

8) Highly productive citizens flee California's confiscatory taxes

9) OECD admits that high tax rates undermine French economy

10) Dan Mitchell's Article on East European Tax Reform

 

1) Steve Moore notes in the the Wall Street Journal the critical role of tax competition

Commenting on the global flat tax revolution, Steve Moore of the Wall Street Journal Editorial Board explains that flat tax nations are growing faster than high-tax nations. He also has come excellent comments from Steve Forbes about the critical importance of tax competition as a driving force for better tax policy.

[Excerpt from Steve Moore's column]

Ten nations--most from the former Soviet Union, including Russia itself, with its 13% rate--have embraced a flat tax. And the economies of these countries are reaping their reward: They far outpace crusty Old Europe in GDP growth and job creation. China, Germany and Spain could be the next dominoes to fall. Mr. Forbes argues that international competition seems to be driving the flat-tax frenzy. "Countries increasingly recognize that if they don't adopt the flat tax, they will lose jobs, capital and their own ambitious entrepreneurs to more growth friendly nations." He shows that, in virtually all the countries with a flat tax, government coffers overflow with tax receipts. ...Unfortunately, many Americans have lost hope that the tax code really can ever be simplified. It is certainly true that every paralyzing regulation, carve-out, credit and deduction in the code was put there for a special-interest reason and will be difficult to dislodge. The very influence peddlers who tanked the Forbes flat tax in 1996 will fight to preserve their fiefs when the current system is next challenged. The flat tax is indeed what Mr. Forbes calls the ultimate "Washington versus America" battle. [Link to full article below:]

September 1, 2005, The Wall Street Journal, By Stephen Moore, Flat Tax Revolution: An idea whose time has come--just not here.
http://www.opinionjournal.com/la/?id=110007189

 

2) Tax competition enhances importance of lower state tax rates

A column at Nationalreview.com explains that better tax policy is important for jurisdictions looking to grow faster and be competitive. States that move in the right direction, such as New Mexico, reap big rewards.

[Excerpt from column]

...one of the best ways for state governments to maintain spending is by cutting tax rates to levels that will attract business - and thus more tax revenue. ...Tax rates are one factor among many that entrepreneurs taken into consideration when they look to set up businesses - and if tax rates in these states were reduced, it follows that these states would become more competitive. New Mexico's Democratic Gov. Bill Richardson made this argument in his first (2003) address to the state legislature: "We will bring New Mexico's top personal income tax rate down to five percent in four years. After all, Texas and Nevada have no personal income tax at all. Arizona and Colorado already top out in the five percent range. The Democratic-controlled legislature heard Richardson's call and reduced New Mexico's top income-tax rate from 8.2 to 4.9 percent over five years. They also agreed to cut the state capital-gains tax. Richardson said, "I am convinced that by making New Mexico a more tax-friendly place for growth-oriented businesses and entrepreneurs, the cut in rate[s] will be more than compensated for by the increase in taxpayers - and income - in that bracket." He was right. Summer 2005 revenue estimates for New Mexico show the state will receive an additional $216 million this fiscal year, including higher personal income-tax revenues. ...Gov. Martz's successful drive to make Montana's economy more competitive is singularly impressive. She left office after four years of aggressive tax cutting. Under her leadership, Montana's top rate of 11 percent was slashed to 6.9 percent. Cato's authors concluded, "Martz is a rare example of a governor who left office with the state in better shape than she found it." [Link to full article below:]

September 1, 2005, Nationalreview.com By Greg Kaza, America's Tax-Cutting Governors: There's a reason why their states have the competitive edge.
http://www.nationalreview.com/nrof_comment/kaza200509010858.asp

 

3) Amity Shlaes: Financial Times columnist highlights importance of supply-side tax cuts

Writing for Techcentralstation.com, Amity Shlaes explains that the 2003 tax cut boosted growth and tax revenues because it lowered the tax penalty on productive behavior. This is why it is so important to implement the right kind of tax cuts. Tax credits and rebates may allow people to keep more of their own money, but they rarely improve incentives to work, save, and invest - and thus do not improve competitiveness and economic growth.

[Excerpt from Techcentralstation.com]

...the inflows are the direct result of the Bush administration's commitment to a concept: individuals respond to incentives. ...The Bush White House and Congress flattened the steep stair-step progressive rate structure of the income tax, lowering the top marginal rate. They cut the tax on dividends to 15 per cent from 39.6 per cent; 15 per cent became the new (lower) top rate for capital gains. They likewise created a one-time amnesty program for companies repatriating profits. Corporate tax revenues this year increased 42 per cent upon the year before. ...as Stephen Entin of Washington's Institute for Research on the Economics of Taxation notes, we know that the new money relates to non-wage income -- profits of small businesses, dividends, capital gains. Taxable income increased the most where tax cuts were most dramatic. ...Growth and revenues after tax cuts are no fluke. They are not freaky or ancillary. Low rates are the key to the progress of a market economy. [Link to full article below:]

August 24, 2005, Techcentralstation.com, By Amity Shlaes, Reality-Based Tax Policy
http://www.techcentralstation.com/082405F.html

 

4) Washington's inaccurate revenue-estimating process hinders good policy

Richard Rahn's commentary in the Washington Times notes that the political establishment is repeatedly shocked when tax revenues do not rise by as much as forecast when taxes are increased and do not fall by as much as forecast when taxes are reduced. To most people, this "dynamic" response is common sense and should be incorporated into the revenue-estimating process, but politicians have a vested interest in maintaining a system that creates a bias for bigger government.

[Excerpt from Dr. Rahn's column]

...much of the Washington establishment is shocked the deficit is falling rapidly due to surging tax revenues, despite the "massive" Bush tax cuts. The Washington establishment was shocked back in the late 1970s when, as a result of the capital-gains rate tax cut, tax revenues went up rather than down. They were shocked again in the mid-1980s when revenues surged despite the "massive" Reagan tax rate cuts. They were again shocked in the early 1990s when new tax revenues did not pour in after the Bush 41 tax rate increase. In the mid-1990s, they were also shocked when the Republican Congress forced President Clinton to cut the capital-gains tax rate, and revenues soared, leading to an unanticipated budget surplus. ...Taxes affect the willingness of people to work, save and invest which ultimately determines the growth of the economy and the number and quality of jobs produced. The government's tax revenue estimating agencies, primarily the Joint Tax Committee of the Congress and the Office of Tax Analysis in Treasury, have poor records of tax revenue forecasting, particularly long-run, because of inadequate behavioral and macroeconomic analysis. These forecasts drive congressional and administration decisions about how much to increase or decrease tax rates and other major tax policy issues. Bad numbers lead to bad policy, which hurts everyone. [Link to full article below:]

August 28, 2005, The Washington Times, By Richard W. Rahn, Spooked by the obvious
http://www.washtimes.com/commentary/20050827-112004-8644r.htm

 

5) More evidence for the Laffer Curve

The Wall Street Journal analyzes how tax cuts have boosted growth and how this growth has generated more money for the government. This Laffer Curve effect contrasts with the dismal picture in high-tax Germany, where high taxes have crippled economic growth and tax revenues are climbined less than one percent each year.

[Excerpt from The Wall Street Journal]

...the Congressional Budget Office has now confirmed that federal revenues will rise this year by more than $262 billion -- the largest single-year increase in tax revenues in American history. ...at 17.5% of GDP this year, Uncle Sam's tax take is close to the 17.9% postwar average. And CBO estimates that as the economy continues to grow, the tax take will slowly rise throughout this decade to 17.8%. ...a large share of this year's revenue gusher is coming from higher than expected capital gains and dividend tax receipts. Non-withheld personal income tax receipts -- much of which is from capital gains and dividend income -- have exploded by one-third since 2003. This suggests that the lower tax rates on investment income may have paid for themselves. [Link to full article below:]

[Excerpt from Tax-news.com]

German corporate tax revenues have undershot the government's target by over one billion euros in the first seven months of the year, according to a leaked Finance Ministry report due to be released on Friday. The report, seen by Financial Times Deutschland, compares actual tax revenues with mid-year targets set by the government. It reveals that revenues from corporate taxes are 1,006 million euros under expectations. ...The Finance Ministry's report expects tax revenues to be 410.6 billion euros for the entire year, an increase of 0.3% year-on-year. [Link to full article below:]

August 17, 2005, The Wall Street Journal, Review & Outlook: Tax Cut Dividends
http://online.wsj.com/article/0,,SB112424417210915213,00.html?mod=opinion&ojcontent=ote p   (subscription required)

August 17, 2005, Tax-News.com, by Ulrika Lomas, German Corporate Tax Revenues EUR1 Billion Below Target
http://www.tax-news.com/asp/story/story_open.asp?storyname=20832

 

6) Lower tax rate lures $billions to U.S. economy

America has a terrible policy called "worldwide taxation," which means that U.S.-based companies are double-taxed on money they earn when they compete in foreign markets. One aspect of this foolish policy is that there is a 35 percent tax penalty on any foreign-source income these firms "repatriate" to America. Last year, this penalty was reduced (albeit only temporarily) to 5.25 percent, and the results have been dramatic according to a Washington Post report. Hopefully, politicians will learn the appropriate lesson and permanently eliminate "worldwide taxation" and instead shift to the more pro-competitive system of "territorial taxation".

[Excerpt from the Washington Post report]

....A well-organized business coalition, led by pharmaceutical firms and high-technology companies, pushed hard last year to get a long-sought tax holiday into the corporate tax bill moving through Congress... But with bipartisan backing, the business groups prevailed. Most companies with substantial cash holdings overseas have until the end of this year to bring them home at an effective tax rate of 5.25 percent, rather than the standard corporate tax rate of 35 percent. ...Pfizer Inc. has led the pack with a promised $37 billion repatriation. Procter & Gamble Co. intends to bring home $10.7 billion, and Johnson & Johnson Inc. has an $11 billion plan. Schering-Plough Corp. could bring back $9 billion. This week, Hewlett-Packard Co. announced it will repatriate $14.5 billion in the second half of the year, mainly for "strategic acquisitions," said Ryan Donovan, an HP spokesman. ...Companies with operations in countries with corporate tax rates close to the U.S. rate had nothing to gain, since they already can deduct taxes paid abroad from tax bills on repatriated earnings. Companies with profits in tax havens with little or no corporate income taxes stand to gain the most. [Link to full article below:]

August 19, 2005, Washington Post, By Jonathan Weisman, Break on Foreign-Profit Tax Means Billions to U.S. Firms
http://www.washingtonpost.com/wp-dyn/content/article/2005/08/18/AR2005081801926.html

 

7) American Shareholders Association study confirms benefit of lower tax rates

Lowering the level of double-taxation on the foreign-source income of U.S. companies has been a huge success according to a new report from the American Shareholders Association. Nearly $200 billion is being transferred to the U.S. economy following legislation last year to reduce the tax penalty on overseas profits from 35 percent to 5.25 percent. The ASA study explains that this is strong evidence of the need for "territorial taxation" and also points out the the Joint Committee on Taxation was (once again) wildly inaccurate in its estimate of the revenue effect of the bill.

[Excerpt from ASA study]

...data recently released by the International Strategy and Investment Group (ISI) found that 91 companies listed on the S&P 500 have repatriated more than $191 billion of foreign profits back to America for investment in the U.S. ...without the provision, not one of these dollars would have been invested in America, but instead would have been invested in other countries. ...the one time repatriation provision is clearly on pace to reach the $350 billion mark as forecasted by JP Morgan... the initial $135 billion estimate provided by the Joint Committee on Taxation (JCT) has severely underestimated the amount of money being repatriated. JCT's estimate has not only been reached, it is now exceeded by 41 percent. ...America's prohibitive and antiquated system of "worldwide" taxation is leading to less investment and job creation in this country. The reduction in the tax rate and the subsequent overwhelming response by US companies provides the clearest evidence to date on the destructive nature of American international tax law. ...the United States is one of the few industrialized nations with a worldwide tax system, which places American companies at a relative disadvantage to other countries. Concurrently, foreign corporate tax rates are continually being reduced to enhance competitiveness in the global economy and America now has the second highest corporate tax rates in the industrialized world. [Link to full article below:]

August 19, 2005, American Shareholders Association, ASA Repatriation Scorecard:  $200 Billion Repatriated Back to America On Track for $350 Billion Total
http://www.atr.org/content/pdf/2005/aug/081905asa-repat.pdf

 

8) Highly productive citizens flee California's confiscatory taxes

A number of professional athletes have left California to escape high tax rates, according to a story from Sacramento. The class warfare left naively thinks higher tax rates translate into more money to waste on government programs, but this is not true if the "geese that lay the golden eggs" can fly across the border to no-income tax states like Nevada. This is one of the strongest arguments for federalism. When there is an all-powerful central government, it is harder for people to escape bad policy. But when government operates at the state and local level, tax competition (as manifested by the ability to move to other jurisdictions) is a valuable constraint on greedy politicians and interest groups.

[Excerpt from SN&R]

...the state of California won't see a cent of tax revenue from a native daughter's success. That is because Gulbis, like many prominent California-born sports stars, has moved to establish residency in an income-tax-free state before her biggest paydays as a professional athlete. ...Gulbis, of course, is not the only sports star to leave the Golden State in search of less-taxing lands. She is not even the only Sacramento-area golfer to have resettled in Nevada. Scott McCarron, who has spent a decade on the PGA tour and amassed more than $9 million in earnings, resides in Reno. McCarron's agent told SN&R that although the golfer moved to Reno to be closer to his wife's family, taxes "were a consideration." The state's best-known golfer, Tiger Woods, abandoned California for the tax-free confines of Florida when he signed a lucrative $40 million endorsement deal with Nike in 1996. With California's income-tax rate set at 9.3 percent on top earners, Woods saved himself nearly $4 million with the move. ...California is at a "tipping point" where new taxes will drive rich residents to income-tax-free states like Nevada, Florida and Texas. [Link to full article below:]

July 28, 2005, Sacramento News & Review, By Shane Goldmacher, Natalie doesn't live here anymore: Some top athletes flee California to avoid high taxes. Should we reform or say good riddance?
http://www.newsreview.com/issues/sacto/2005-07-28/news.asp

 

9) OECD admits that high tax rates undermine French economy

The Organization for Economic Cooperation and Development is infamous for its anti-tax competition initiative. The Paris-based bureaucracy thinks it is "harmful" when nations have low tax rates, and it is particularly upset that some jurisdictions commit the terrible sin of not taxing income at all (the OECD's position is rather ironic since its bureaucrats are exempt from paying any income tax to any country). So it is amusing that even OECD economists, in a new report, admit that French taxes are too high. It is also worth noting that the OECD report inadvertently provides additional proof for Laffer Curve analysis since it acknowledges that reductions in the corporate tax rate led to higher revenue, while also revealing that high income tax rates collect very little revenue.

[Excerpt from OECD study]

The ratio of total tax revenues as a per cent of GDP is generally used as an indicator for the overall tax burden... The French tax tax-GDP ratio is significantly above the OECD average and the EU 15 average. It is similar as in Finland and Belgium and only Denmark and Sweden have markedly higher tax levels. Despite relatively high level of taxation government revenues have never been sufficient to fully cover spending. ...The personal income tax has been particularly affected by redistributive objectives. The rate structure is highly progressive. ...The top marginal rate is relatively high (48.09% and including social taxes 56.09% for taxable income up from around 48 000 euro in 2004). Among OECD countries only Denmark has a higher rate top marginal tax rate (59%) while Sweden has a similar rate (including local taxes 56.5% for taxable income up from around 48 000 euro). ...only about half of the population pays any income tax and the shares of personal income tax revenues in GDP and in total tax revenues is relatively low. It yields less than 7% of total taxes and around 3% of GDP which is lower than in most other developed OECD countries. ...Despite the cuts in the statutory rate over the past decades the revenues from taxes on corporate income increased over the past decades from around 2% of GDP to around 3% of GDP. ...The French tax system appears to be very complex, which gives rise to high costs, both for the tax administration and for tax payers. ...a tax reform agenda could have the following elements... lower top rates... cutting the corporate tax rate... [Link to full article below:]

July 28, 2005, Organization for Economic Co-operation and Development, by Willi Leibfritz and Paul O'Brien, The French Tax System: Main Characteristics, Recent Developments And Some Considerations For Reform Economics Department Working Papers No. 439
http://www.olis.oecd.org/olis/2005doc.nsf/43bb6130e5e86e5fc12569fa005d004c/0f132fa4452d a208c125704d002c92e4/$FILE/JT00187984.PDF

 

10) Dan Mitchell's Article on East European Tax Reform

[Translated into Italian]

August 20, 2005, Istituto Bruno Leoni Focus, by Daniel J. Mitchell, La rivoluzione della "Ӿat tax" nell'Europa dell'Est
http://brunoleoni.servingfreedom.net/Focus/IBL_Focus_07_Mitchell.pdf

 

Best regards,

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

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