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CF&P E-mail Update, December 30, 2005

Center for Freedom and Prosperity's E-mail Update

1) OECD Attacks Sovereignty of U.S. States

2) European Union stats show that low-tax countries are richer

3) Strong growth thanks to tax cuts

4) Soak the rich with lower tax rates

5) Foreign capital helping America grow

6) Turkish tax cuts show that tax competition continues to produce good result

7) America's self-defeating corporate tax

8) German news magazine highlight Eastern European economic miracle

9) Euro-crats continue corporate tax harmonization drive

10) Luxembourg official opposes tax harmonization

11) Swiss leftists want to undermine tax competition

12) Big success for Romania's flat tax

13) Will government make things worse or better in 2006?

14) Milton Friedman says GOP spending orgy is "disgraceful"

15) New evidence of left-wing media bias

 

1) OECD Attacks Sovereignty of U.S. States

CF&P Press Release: OECD Attacks Sovereignty of U.S. States: Paris-Based Bureaucracy Wants Washington to Force Changes to State Corporate Law Treasury ~ Official at OECD's Melbourne Forum Acquiesces to OECD Demands

[Excerpt from press release:]

In a report (weblink below) issued late last month following the OECD's Global Tax Forum in Melbourne, Australia, the Paris-based bureaucracy reiterated its opposition to market-friendly incorporation laws and – in a swipe at America – urged nations with federal systems to pressure "political subdivisions" into changing their policies in order to help hinder the flow of capital from high-tax nations. The Center for Freedom and Prosperity Foundation and several members of the Coalition for Tax Competition today condemned the Organization for Economic Cooperation and Development (OECD) for attacking America's federal system, and also expressed their concern that the Treasury Department delegation at the Melbourne conference acquiesced to the attack.

Andrew Quinlan, President of the Center for Freedom and Prosperity Foundation, stated: "Since the United States is the only nation with a decentralized system for incorporating companies, it does not take a Sherlock Holmes to figure out that the OECD is targeting Delaware, Nevada, and other states. It is very disappointing that the Treasury bureaucrats at the meeting allowed this attack on America's Constitutional system." [Link to full press release below:]

December 6, 2005, CF&P Foundation Press Release, OECD Attacks Sovereignty of U.S. States
http://www.freedomandprosperity.org/press/p12-06-05/p12-06-05.shtml

 

2) European Union stats show that low-tax countries are richer

This should not be a surprise, but the European Union's statistical agency has released new numbers confirming that low-tax countries enjoy more prosperity. Luxembourg is a very successful tax haven that is more than twice as rich as the European Union average. Ireland, meanwhile, has gone from being the "Sick Man of Europe" to the Celtic Tiger thanks to sweeping tax rate reductions and cutbacks in the size of government.

[Excerpt from Tax-News.com:]

Luxembourg and Ireland - both 'low tax' countries - topped the EU's GDP per capita rankings in purchasing power parity figures in 2004. GDP per capita in the Member States ranged from 43% to 227% of the EU25 average in 2004. GDP per capita in Luxembourg was more than twice the EU25 average, while Ireland was about 40% above average. ...Eurostat points out, a touch sourly, that GDP per capita in Luxembourg is very high partly due to the large share of cross-border workers in total employment. While contributing to GDP, they are not taken into consideration as part of the resident population which is used to calculate GDP per capita. That simply means, of course, that Luxembourg is more successful than the countries around it at attracting workers. [Link to full article below:]

December 28, 2005, Tax-News.com, by Jeremy Hetherington-Gore, Lightly-Taxed EU Countries Top GDP Rankings
http://www.tax-news.com/asp/story/story_open.asp?storyname=22192

 

3) Strong growth thanks to tax cuts

The Wall Street Journal comments on the amazing performance of the US economy. Ever since the 2003 tax cut - which lowered income tax rates and reduced the double-taxation of dividends and capital gains, the economy has been growing by about 4 percent annually. Sadly, the incompetent Republicans seem too timid to make those tax cuts permanent. They have not even been able to extend the expiration date on these pro-growth tax policies:

[Excerpt from The Wall Street Journal:]

October's estimate of 3.8% third-quarter GDP growth was revised upward yesterday to 4.3% ...This represents the fastest expansion since the first quarter of 2004, as well as the 10th consecutive quarter of growth averaging close to 4% on an annual basis. So much for those predictions of recession we heard in the spring, and again in September. ...The other big danger is policy mistakes out of Washington. With President Bush's approval at low tide, all sorts of bad ideas are on the loose -- from "windfall profits" taxes on oil companies to tariffs against China. The Republican Congress is in such disarray that it hasn't been able to extend even for two years -- to 2010 from 2008 -- the 15% tax rates on capital gains and dividends that have contributed so much to this expansion. [Link to full article below:]

December 1, 2005, The Wall Street Journal, Review & Outlook: It Keeps Going, and Going
http://online.wsj.com/article/SB113340232863710916.html?mod=opinion&ojcontent=otep (subscription required)

 

4) Soak the rich with lower tax rates

Bruce Bartlett's Townhall.com column shows that tax revenues rose in both the U.S. and U.K. when top tax rates were lowered under Reagan and Thatcher. As Bartlett explains, there are many left-wingers who hate success so much that they want to impose very high tax rates - even if it means they get less tax revenue:

[Excerpt from Townhall.com:]

...in 1980, when the top statutory income tax rate went up to 70 percent, the share of income taxes paid by the top 1 percent of taxpayers was just 19.3 percent. After Ronald Reagan's tax cut of 1981, which reduced the top rate to 50 percent -- a massive give-away to the wealthy according to those on the left -- the percentage of income taxes paid by the top 1 percent rose steadily. By 1986, the top 1 percent's share of all federal income taxes rose to 25.7 percent. That year, the top statutory tax rate was further cut to 28 percent -- another huge-give-away, we were told. Yet the share of income taxes paid by the top 1 percent continued to rise. By 1992, it was up to 27.5 percent. ...according to Her Majesty's Revenue and Customs, the share of total income taxes paid by the top 1 percent of taxpayers was 11 percent in the United Kingdom in 1979, when the top income tax rate was 83 percent. Prime Minister Margaret Thatcher cut that rate to 60 percent, and by 1987 the share of income taxes paid by the top 1 percent had risen to 14 percent. The top rate was cut again to 40 percent, where it still stands, and the share of income taxes paid by the top 1 percent continued rising to a current level of 21 percent. ...At some point, those on the left must decide what really matters to them -- the appearance of soaking the rich by imposing high statutory tax rates that may cause actual tax payments by the wealthy to fall, or lower rates that may bring in more revenue that can pay for government programs to aid the poor? Sadly, the left nearly always votes for appearances over reality, favoring high rates that bring in little revenue even when lower rates would bring in more. [Link to full article below:]

December 6, 2005, Townhall.com, By Bruce Bartlett, Who pays the taxes
http://www.townhall.com/opinion/columns/brucebartlett/2005/12/06/177875.html

 

5) Foreign capital helping America grow

New Treasury data shows more than $3 trillion of foreign capital helping America grow, including $1.2 trillion from Caribbean banking centers: Information underscores dangers to the US if European tax harmonization schemes succeed ~ December 21, 2005

September 2005, U.S. Treasury, U.S. Liabilities to Foreigners Reported by U.S. Banks, Brokers and Dealers with Respect to Selected Countries
http://www.treas.gov/tic/exhibitsa-d.pdf

 

6) Turkish tax cuts show that tax competition continues to produce good result

A Tax-news.com story explains that Turkey's government is cutting personal and corporate tax rates. These reductions - particularly the 10 percentage point reduction in the corporate rate - are the result of tax competition:

[Excerpt from Tax-News.com:]

Turkish Prime Minister Recep Tayyip Erdogan, announced on Tuesday that the government will seek to bring about a substantial reduction in the country's personal and company tax burden in order to compete more effectively with the European Union and reduce tax evasion. ...the standard rate of corporate tax will be cut by 10% to 20% while the overall tax burden for companies will be reduced to about 28% from the current 37%. ...Turkey is now facing intense tax competition from nearby countries in Eastern Europe that joined the European Union in 2004, some of which are aggressively reducing rates in order to attract foreign businesses. ...Mr Erdogan's announcement was welcomed by the country's stock market, which rose by 2% after the Prime Minister's speech. [Link to full article below:]

December 1, 2005, Tax-News.com, by Lorys Charalambous, Turkish Prime Minister Seeks Substantial Tax Cuts
http://www.tax-news.com/asp/story/story_open.asp?storyname=21941

 

7) America's self-defeating corporate tax

Usually it is nice to be number one, but not when it comes to high tax rates. The Wall Street Journal comments on two studies that reveal America has the  highest corporate tax rate in the developed world. To make matters worse, the U.S. tax system even is imposed on income that U.S.-based companies earn in other countries - even though that income is already subject to tax in those other nations. This is why some companies, in an effort to protect the interests of workers and shareholders, have re-domiciled in jurisdictions with better tax law such as Bermuda and the Cayman Islands. Not surprisingly, politicians want to punish these companies rather than fix the problems with the tax code:

[Excerpt from The Wall Street Journal:]

America now imposes the highest corporate income tax rate among the 30 wealthiest countries. ...the U.S. combined state and federal corporate tax rate of 39.3% is 10 percentage points higher than the OECD average. ...for those who don't think corporate tax rates matter in attracting jobs and capital, consider that Ireland, the nation with the lowest corporate tax rate (12.5%), has become the Hong Kong of the West with the fastest pace of economic growth and jobs in the Eurozone. The two new reports also suggest that the high U.S. corporate income tax rates are economically self-defeating. As the CBO says in its usual academic jargon: "The distortions that the corporate income tax induces are large compared with the revenues that the tax generates . . . Those distortions bring about reductions in economic efficiency." ...When Chrysler merged with a German auto company several years ago, it became Daimler-Chrysler, not vice versa -- a decision based in part on the tax regimes of the two countries. When CEOs find Germany to have a more favorable tax system than the U.S., there is something terribly wrong with our tax code. Oh, and Germany has since lowered its corporate tax rate by 13 percentage points, while ours remains essentially unchanged. There has been a great hullabaloo in recent years about so-called "Benedict Arnold" companies (in John Kerry's phrase) that move facilities offshore to Bermuda, the Cayman Islands and other international tax havens to avoid paying U.S. taxes. That happens because a company incorporated in the U.S. is automatically obliged to make Uncle Sam a one-third shareholder by paying the first 35% of all profits in taxes. Congress has been debating new layers of punitive taxes to impose on those who flee offshore. This will simply ensure that those companies and the profits they make overseas will never come back. Congress had a better idea with the 2004 Homeland Investment Act; it allowed companies to bring their foreign profits back into the U.S. this year at a one-time tax rate of 5.25%. The result: an estimated $300 billion repatriated back to these shores and a $15 billion revenue windfall for the U.S Treasury. [Link to full article below:]

December 28, 2005, The Wall Street Journal, Review and Outlook, Let's Make a Deal
http://online.wsj.com/article/SB113573828329732712.html?mod=opinion&ojcontent=otep   (subscription required)

 

8) German news magazine highlight Eastern European economic miracle

The Spiegel is not known as a market-friendly publication, so it is noteworthy that the German news magazine has a lengthy article reviewing the economic revival in former communist nations. Slovakia and Estonia get much of the attention, and rightly so. These nations have implemented the flat tax and many other free market reforms. Too bad Angela Merkel thinks Germany needs more government. She could learn a thing or two by looking to the East:

[Excerpt from Spiegel Online:]

...the former eastern bloc countries are the latest to capitalize on globalization. ...Their fervor is alarming its old-school neighbors in the West. ...While Franz Müntefering, until recently SPD chairman, garners public approval for condemning the evil power of international capital, the EU newcomers are putting it to profitable use. ...While nearly 5 million Germans are out of work and not a day passes without some company, politician or union griping about the corporate exodus to Eastern Europe, new jobs are being created daily in what were only recently decrepit planned economies. ...Until the end of the 1990s, Slovakia was considered the "black hole" of Eastern Europe, the problem child holding up negotiations for EU membership. Today foreign financiers value the little country as an investment jewel. Last year alone, Sario - the government agency for foreign investment - recorded 47 projects worth EUR1.7 billion, and 35,000 new jobs are being created. With plenty more on the way. In the first half of 2005, some 40 further projects worth EUR2 billion were under negotiation, the agency reported. ...Slovakia's meteoric rise began as late as 1998... Since then, launching a company just takes a matter of days, the national pension system is being supplemented by capital funding, and unemployment benefits are accorded only to those who actively look for work and are willing to do part-time community service - until a real job materializes. But the heart of Slovakia's reforms is a flat tax rate. Since January 1, 2004, a uniform rate of 19 percent has applied to income, corporate and value-added taxes. ...The state and its bureaucrats have beaten a hasty retreat. The Baltic countries, Estonia first and foremost, are viewed around the world as extremely liberal, open-market economies. ...For HWWA analyst Andreas Polkowski, the eastern European countries are "miniature economic laboratories." The popular theories of the neo-liberal economist Milton Friedman and others have been implemented "verbatim," he says. [Link to full article below:]

December 21, 2005, Spiegel Online, By Marion Kraske and Jan Puhl, The Tiny Tigers
http://service.spiegel.de/cache/international/spiegel/0,1518,391649,00.html

 

9) Euro-crats continue corporate tax harmonization drive

The European Commission apparently thinks the solution to slow growth and high unemployment is higher taxes. This sounds insane, but the bureaucrats in Brussels are moving forward with plans to harmonize the corporate tax base (the definition of taxable income). By itself, this is not an awful proposal - particularly since countries are not obliged to participate. But there is no doubt that a harmonized corporate tax base is a first step toward a harmonized corporate tax rate, and that will mean higher taxes and a less competitive Europe.

[Excerpt from Tax-news.com:]

A European Commission spokeswomen stated on Wednesday that the European Parliament's approval in principle of a proposal to harmonise the European company tax base will greatly increase its chances of eventually becoming EU law. ...The UK, Ireland, the Czech Republic, Estonia and Slovakia are opposed to any move towards corporate tax harmonisation. However, Kovacs has indicated that the Commission will forge ahead with its plans to complete legislation towards a single corporate tax base by 2009 regardless, with these countries left out of the scheme. [Link to full article below:]

December 2, 2005, Tax-News.com, by Ulrika Lomas, EU Parliament Supportive Of Plans To Harmonise Tax Base
http://www.tax-news.com/asp/story/story_open.asp?storyname=21952

 

10) Luxembourg official opposes tax harmonization

French and German politicians got more bad news when the head of Luxembourg's Central Bank condemned tax harmonization. As reported by Tax-news.com, he specifically explained that monetary union does not require identical taxes (much as America's single currency does not require all states to have identical taxes). This is a further sign that French and German officials are unlikely to succeed in their efforts to thwart tax competition. It also is a sign that Luxembourg officials finally are defending their self-interest. Luxembourg is one of the world's most successful tax havens, using bank secrecy to attract huge amounts of capital from their over-taxed European neighbors. Yet because the nation is a typical welfare state, the political class has stayed out of the raging debate in Europe between tax harmonization and tax competition:

[Excerpt from Tax-News.com:]

Luxembourg's Central Bank Governor Yves Mersch, stated last week that tax harmonisation is not an essential component of European Monetary Union, and that member states should be allowed to retain control of their own fiscal policies in order to counteract local inflation. ...Mersch went on to observe that there "is no connection" between European Monetary Union and tax harmonisation, and that the latter concept represents one step beyond the former one. ...Mersch also disputed Franco-German fears of 'fiscal dumping' by the new member states in Eastern Europe, which have been sharply cutting company tax rates in order to attract foreign investment, arguing that businesses were more concerned with the overall stability of a country's fiscal system. [Link to full article below:]

December 5, 2005, Tax-News.com, by Ulrika Lomas, Luxembourg Central Bank Chief Sees No Need For EU Tax Harmonisation
http://www.tax-news.com/asp/story/story_open.asp?storyname=21972

 

11) Swiss leftists want to undermine tax competition

Switzerland is one of the world's most astute practitioners of tax competition. Not only does it have strong privacy laws, which have attracted $trillions from around the world, but it also attracts rich people by offering special tax low tax rates. In the spirit of self-hatred, Swiss socialists think this is an unfair policy since foreign governments are deprived of tax revenue. According to Tax-news.com, the Social Democrats want to work with other left-wing European political parties in a war against tax competition for productive labor:

[Excerpt from Tax-News.com:]

The Swiss Social Democratic Party, one of the four parties in the coalition government, is taking a position against tax breaks for wealthy foreigners at a meeting of European centre-left parties in Brussels, Swissinfo has reported According to the article, the party has stated that it wants to help coordinate a Europe-wide campaign against what it calls "increasing competition" among countries seeking to attract the rich and famous. ...It is estimated that around 3,000 wealthy foreigners are currently benefiting from fiscal incentives. Senior party official Matthias Manz told Swissinfo that ... "The problem is... that exaggerated tax competition is a danger for healthy public finances." [Link to full article below:]

December 2, 2005, Tax-News.com, Swiss Coalition Party Argues For End To Special Celebrity Tax Breaks
http://www.tax-news.com/asp/story/story.asp?storyname=21959

 

12) Big success for Romania's flat tax

The evidence for tax reform keeps accumulating. Soon it will be so overwhelming that even American politicians will begin to notice. The Associated Press has a story on how Romania's flat tax is boosting revenue and lowering unemployment. These good results are the natural consequence of a pro-growth tax system that imposes low tax rates on productive behavior:

[Excerpt from article:]

The introduction of a flat tax this year has boosted budget revenues, raised people's incomes and reduced unemployment, Prime Minister Calin Popescu Tariceanu said Sunday. Since Jan. 1, when the government replaced the country's progressive taxation of 18 to 40 percent for individuals with a flat tax of 16 percent, budget revenues grew by 20 percent compared with the same period last year, Tariceanu said. "These figures show the results are much better than our most optimistic evaluations," he said... Unemployment fell from 6.2 percent to 5.5 percent, while inflation also fell from 9.3 percent in 2004 to an estimated 8.5 percent this year. Average income after tax increased from about 600 lei (US$200; euro170) last year to 740 lei (US$250; euro210) per month in September. [Link to full article below:]

December 11, 2005, Yahoo Canada, Romanian Leader Says Flat Tax Helped Reduce Unemployment, Boost Budget Revenues
http://ca.us.biz.yahoo.com/ap/051211/romania_economy.html?.v=1

 

13) Will government make things worse or better in 2006?

The Wall Street Journal comments on the strong economy and wonders whether Republicans will be smart enough to extend the critically important lower tax rates on dividends and capital gains. Given the bad track record of politicians, it may be more likely that they will do things to weaken the economy rather than strengthen it:

[Excerpt from The Wall Street Journal:]

Looking ahead to 2006, the main risks to another good year are likely to come from policy mistakes in Washington. Higher taxes, energy price controls, anti-Chinese protectionism and incipient inflation are always possible when politicians are in session. ...since the investment tax cuts of 2003 were one of the triggers for the surge in asset values, business investment, and job growth, extending the 15% capital gains and dividend tax rates should be Congress's first order of business. Opponents of those lower rates will moan about "the deficit," but the truth is that those tax rates corresponded with a record $284 billion increase in tax revenues in Fiscal Year 2005 and a $100 billion decline in the budget deficit. We'd also like to see Republicans begin a campaign for a simplified and pro-growth tax reform, with New Europe's popular flat tax as a potential model. Finally, it would be nice to see Republicans in Congress start to act as if they truly believe in limited government by putting Uncle Sam on a low-pork budget diet. The most conspicuous blemish on the 2005 economic scorecard was frenetic federal spending, estimated to be up another $180 billion, or 8%. If Congress were to cut that spending growth rate in half, and if the economy continues to spin off tax revenue dividends as in 2005, the budget deficit would fall in half by this time next year. [Link to full article below:]

December 30, 2005, The Wall Street Journal, Review & Outlook, Rodney Dangerfield Revisited:  Will the economy finally get some respect in 2006?
http://www.opinionjournal.com/editorial/feature.html?id=110007749

 

14) Milton Friedman says GOP spending orgy is "disgraceful"

Mincing no words, one of America's great economists says he is disgusted by the reckless big-spending fiscal policy of the Bush White House and Republican Congress.

[Excerpt from The Washington Times:]

Economist Milton Friedman, a strong supporter of President Bush's tax cuts, says the past four years of Republican spending increases are "disgraceful" and a betrayal of the party's principles. "I'm disgusted by it," the winner of the 1976 Nobel Memorial Prize in Economic Sciences told The Washington Times recently. ...Federal spending as a share of the entire economy was 18.4 percent when Mr. Bush took office in 2001. Since then, the government's annual spending levels have grown by $610 billion or to 20.2 percent of the economy. [Link to full article below:]

December 8, 2005, The Washington Times, By Donald Lambro, Economist slams GOP spending levels
http://www.washingtontimes.com/national/20051208-121136-2938r.htm

 

15) New evidence of left-wing media bias

A new study from UCLA confirms that the media veers sharply to the left. Of 20 major news outlets studied, 18 tilt to the left. The worst offenders are the news pages of the Wall Street Journal (in sharp contrast to the pro-freedom views of the editorial page), CBS, and the New York Times. USA Today is the least biased print outlet (and it has a good sports page as well):

[Excerpt from UCLA News:]

Coverage by public television and radio is conservative compared to the rest of the mainstream media. Meanwhile, almost all major media outlets tilt to the left. These are just a few of the surprising findings from a UCLA-led study, which is believed to be the first successful attempt at objectively quantifying bias in a range of media outlets and ranking them accordingly. ...The results appear in the latest issue of the Quarterly Journal of Economics, which will become available in mid-December. ...Of the 20 major media outlets studied, 18 scored left of center, with CBS' "Evening News," The New York Times and the Los Angeles Times ranking second, third and fourth most liberal behind the news pages of The Wall Street Journal. Only Fox News' "Special Report With Brit Hume" and The Washington Times scored right of the average U.S. voter. ...Five news outlets - "NewsHour With Jim Lehrer," ABC's "Good Morning America," CNN's "NewsNight With Aaron Brown," Fox News' "Special Report With Brit Hume" and the Drudge Report - were in a statistical dead heat in the race for the most centrist news outlet. Of the print media, USA Today was the most centrist. [Link to full article below:]

December 14, 2005, UCLA News, Media Bias Is Real, Finds UCLA Political Scientist
http://www.newsroom.ucla.edu/page.asp?RelNum=6664

 

Best regards,

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

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