House Minority Leader Nancy Pelosi has come forward to say that she is willing to give up the $70 million in federal transporation spending headed for her area in order to fund New Orleans. As today's San Francisco Chronicle explains:
House Minority Leader Rep. Nancy Pelosi of San Francisco said Tuesday she was willing to return to the federal Treasury $70 million designated for San Francisco projects in the new highway and transportation bill and use the money to help pay for Hurricane Katrina recovery efforts.
Her counterpart, House Majority Leader Rep. Tom DeLay, R-Texas, said that while he would consider cutting all other domestic discretionary spending to raise the tens of billions of dollars needed for Katrina relief, it was a bad idea to take money from transportation projects.
We commend Ms. Pelosi for her understanding that scarcity exists in government spending and of the number one rule in economics (which is often ignored in politics) that there is no such thing as a free lunch. We hope others will follow her lead and call for spending cuts elsewhere, instead of following the path toward higher taxes that others are suggesting.
During this process of members of Congress identifying what they are willing to give up in order to fund New Orleans' reconstruction, let's hope it brings public attention to the wide array of pork-barrel handouts that occur annually at taxpayer expense.
Despite calls by critics for tax cuts to be shelved as a result of Hurricane Katrina, the White House is planning to make recently passed tax cuts that were only temporary into a permanent fixture. From Reuters via Yahoo News:
The White House on Tuesday played down suggestions from U.S. Treasury Secretary John Snow that an effort to make President George W. Bush's tax cuts permanent would be sidelined by the Hurricane Katrina recovery. "He's saying what we all are -- the Katrina recovery is the top priority, but we remain committed to President Bush's economic program, which has helped create millions of jobs," White House spokesman Trent Duffy said.
The number one thing that we need is for Congress and the White House to be clear on its policy outlook in light of the uncertainty over both the budget and tax policy. Ask any economist, business owner, or investor, and they will tell you that their number one adversary is uncertainty.
We commend the President for keeping with his push for permanent lower tax rates, but what everyone in Washington needs to learn is that tax cuts that are merely temporary are nearly always bad public policy. Temporary tax cuts that merely include the possibility of eventually becoming permanent not only create economic disturbances today, but can create a "boy who cried wolf" scenario later with regards to the reliability of fiscal policy.
Finally, Hurricane Katrina should not put tax reform on the backburner. If anything, these times of economic uncertainty support the case for reforming the confusing tax code we have. Instead of President Bush and Congress rushing to complicate the tax code even further (like they have done with the recent energy bill), they should focus on the economic reality that long-run tax simplification is the best policy path.
Courtesy of the American Council for an Energy Efficient Economy, here are two useful summaries of the numerous complicating tax incentives contained in the most recent energy bill:
• Summary of Energy Efficiency Tax Incentives in the Energy Policy Act of 2005 (PDF)
• Light-Duty Hybrid and Diesel Vehicle Tax Credits in the Energy Bill (PDF)
For more on the many, many flaws in the 2005 Energy Bill see our previous posts here, here, here, here, and here.
Nashville voters turned down by a 70-30 margin a proposed tax hike last Tuesday. Now Atlanta voters will be answering a similar question tomorrow. From the Atlanta Journal-Constitution:
Opponents of a proposed penny-per-dollar increase in the sales tax in Cobb County say it's unnecessary. Supporters say it's critical to the county's continued prosperity. On Tuesday, voters will decide whom they believe.
If approved, the 1 percentage point increase would take effect Jan. 1 and raise an estimated $825 million over its six-year life. It would generate an additional $561 million in matching state and federal transportation money, county officials estimate.
Two points from the article. First, despite what supporters may say, high taxes are not the main sources of regional economic prosperity.
Second, when federal and state governments promise to match tax spending for transportation projects at the local level, this encourages higher taxes at the local level. State and federal governments are essentially telling the local government that their portion of the cost of a transportation project is cut in half, but that they must spend the money or else they don’t get anything. This leads to increased funding in projects that a local government would be unwilling to fund otherwise. At the same time, it increases taxes on everybody.
Why not merely give the money to the local government and allow them to spend it on the priorities they see as most important, and not base funding upon the targeted specifics that federal or state governments think should be at the top of the list?
An old saying contends that the only certainties in life are death and taxes. However, the federal tax code’s instability leads one to believe that the only certainty left in life is indeed death.
Surprisingly, the federal tax code has been relatively stable since the tax cuts of 2001 and 2003. In the few years since those tax cuts, taxpayers and businesses have learned to operate within the confines of the current tax system. But with certain provisions of the tax cuts marked for expiration in the near future, there has been talk on Capitol Hill of allowing the tax cuts to expire. For instance, members of the Michigan congressional delegation are for eliminating the tax cuts. From the Detroit Free Press:
Congress should consider eliminating some of President Bush's tax cuts to help pay for the massive post-Katrina reconstruction of the Gulf Coast and the ongoing war in Iraq, members of Michigan's congressional delegation said Friday.
President Bush, however, stated on Friday that Katrina reconstruction would not be financed by a tax increase. From Reuters:
President George W. Bush, facing alarm from conservatives over the soaring cost of post-Katrina rebuilding, said on Friday the U.S. budget could handle the expense and he would not raise taxes to pay for it.
Although the tax code can be uncertain, it is always certain that governments will levy taxes to fund programs. All taxes -- even the most neutral -- distort economic activity in some way. In addition to tax policies designed with low rates and wide bases, the best way for policy makers to encourage growth and efficiency through the tax code is to leave it alone.
The defenders of Cuno v. DaimlerChrysler assure us that the rule in that case could never be extended to state tax cuts. Looking more closely at a tax cut scheduled to go into effect on October 1 in Washington state, however, makes it more likely that Cuno could indeed be used to strike down state tax cuts.
House Bill 2294, signed into law in Washington state in 2003, was an economic development effort aimed at ensuring the Boeing would assemble its new 787 aircraft at its facilities in Washington state. Part of the package of incentives was a reduction in the rate of Washington’s Business and Occupation (B&O) tax for companies who manufacture airplanes in Washington state. The tax cut would only apply to companies manufacturing airplanes in Washington state.
Cuno v. DaimlerChrysler invalidated Ohio’s investment tax credit because it would only apply to investment made in Ohio. Thus, if Daimler had invested in Michigan, Ohio would not get the credit. In the Sixth Circuit’s reasoning, this impermissibly discriminated against interstate commerce. The Washington B&O tax cut for airplane manufacturers has a similar restriction: it is only available to manufacturers in Washington state (i.e. Boeing), and thus is susceptible to challenge under the Cuno theory of discrimination.
Cuno would only allow the tax cut if it were available to Boeing no matter where they chose to build the 787. It is doubtful that state lawmakers would want to give Boeing a tax break for building a plane in another state. Cuno, therefore, severely harms the ability of Washington state lawmakers to alter their tax code to make Washington state an attractive place for Boeing to do business.
We have written two analyses of the Cuno decision (available here and here) and submitted an amicus brief to the U.S. Supreme Court urging them to review the case.
In a recent Washington Times commentary, Richard W. Rahn, director general of the Center for Global Economic Growth, examines the reasons many small countries’ economies have flourished recently. Historically, small countries generally had lower per capita incomes than larger countries, but many have become considerably wealthier in the past fifty years, including Luxembourg, Hong Kong, Denmark and Ireland.
Rahn asserts that many newly prosperous small countries have one thing in common: increased economic freedom.
Two of the success stories:
Mart Laar, former prime minister of Estonia, was the principle architect of his country's remarkable economic transformation from impoverished vassal of the Soviet Union into one of the world's freest (No. 4 in the world according to the 2005 Index of Economic Freedom) and most dynamic economies. Mr. Laar said he succeeded by following the teachings of Nobel Prize-winning economists F.A. Hayek and Milton Friedman.
Former Iceland Prime Minister and current Foreign Minister David Oddsson detailed how he took a typical, economically stagnate, Scandinavian socialist welfare state and turned it into an economic tiger …. Iceland has been engaged in a massive tax reduction (for instance, the corporate tax rate has been cut from 50 to only 18 percent, and the inheritance tax to a maximum 5 percent). Yet government revenues have steadily increased because of the resulting economic dynamism, and the national debt has fallen from 50 percent of gross domestic product to only 15 percent.
For more on tax reform in other counties, see Tax Foundation Backgound Paper #47, Fundamental Tax Reform: The Experience of OECD Countries.
Oklahoma voters overwhelmingly voted against two gas tax increases at the polls on September 13. The measure, which would have raised the diesel fuel tax by 8 cents and the gasoline tax by 5 cents, was rejected by more than 80 percent of Oklahoma voters.
As our own Jonathan Williams pointed out recently, federal, state and local gas taxes account for nearly 50 cents, on average, of the cost of each gallon purchased at the pump. Given the taxes already paid and the high cost of fuel, it's no surprise that this tax increase was rejected by such a large margin.
Chile has imposed a $2 tax on international flights as part of a United Nations proposal to tax air travel in order to fight worldwide poverty. France and the U.K. have already gone on board with the proposal.
Bloomberg News Reports:
Chile plans to levy a $2 tax on airline flights abroad as of next year, saying that countries need to increase aid to developing nations to help brake an increase in poverty.
Chilean President Ricardo Lagos announced the levy, part of a United Nations funding proposal, today at the United Nations in New York, the Chilean government said on its Web site. The U.K. and France on Sept. 9 agreed to finance aid to developing nations by jointly taxing air tickets.
With airlines in financial trouble all across the world and with governments granting them generous subsidies over the past decade, it seems an odd time to impose a new tax on air travel.
While global poverty is a problem, a tax on air travel isn't likely to alleviate it. Despite what some may perceive as international travel being a necessity due to few substitutes, it is still not perfectly inelastic. Therefore, the tax will hurt both airlines and consumers, and will not simply raise revenue equal to the tax rate multiplied by the current volume of travel. And by discouraging tourism, it may do more harm to poor nations than good.
Today’s Des Moines Register reports that some leaders in the United States Senate think action to repeal the federal estate tax is now inappropriate.
Washington, D.C. — It would appear "unseemly" for Congress to push through a repeal of the estate tax while also coping with the hurricane disaster in the Gulf, Senate Finance Committee Chairman Charles Grassley of Iowa said Wednesday. Until recently, the Senate had been on track to consider a permanent repeal of the estate tax. The tax gradually is being phased out, under tax-cut packages approved by Congress, and would be gone by 2010. But that would last just a year, and the tax would be fully reinstated in 2011. [Full story]
The fact that “sunset” provisions are set to revive the death tax, only adds instability to these uncertain economic times. In the wake of Hurricane Katrina, at the very least, it is important to provide Americans with confidence that the estate tax and other destructive tax policies will be permanently ended.
You can read excellent Tax Foundation research on the estate tax here.
This week, the Senate Judiciary Committee is conducting confirmation hearings for John Roberts to be Chief Justice of the Supreme Court. While much of the discussion will center on social issues, it is important to note that issues of commerce dominate the agenda of the high court. Given the two current vacancies, it is important to consider the possible impact of future decisions concerning taxation, both immediate and down the road.
For starters, one of the first decisions of the new Supreme Court will be to decide whether or not to hear the case of Charlotte Cuno v. Daimler Chryler Corp., which involves the issue of tax competition among states and preserving federalism in our government. The Tax Foundation’s Chris Atkins has filed an amicus brief with the U.S. Supreme Court recommending review.
Beyond the 2005-06 term, issues of authority of taxation are likely to emerge as our economy continues to move into an information age and one in which geography is less a factor in trade. As new technologies emerge, certain “old” taxes may no longer apply or offer significant disadvantages to certain consumers, firms, or governments, forcing the court to mediate.
While we at the Tax Foundation take no position on judicial appointments, we were encouraged by Roberts’ preventing of unnecessary government spending as President Reagan’s Solicitor General in this humorous exchange cited by the New York Times (Registration required):
A persistent entrepreneur, Ray E. Minter of Grand Prairie, Tex., presented Mr. Reagan with a print of an American eagle, for which the president thanked him in a brief note. Mr. Minter took this as an opening to, as he put it in a follow-up letter to the White House, "make a buck" by selling the government thousands of copies of the picture to place in every federal building in the country.
The matter landed on Mr. Roberts's desk in May 1983, and he advised Mr. Fielding: "We appear to have a live one on the line in Mr. Minter, and rather than reeling him in I think it would be better simply to cut the line: no response."
This weekend's German elections are increasingly being seen as a referendum on the economist's darling of single-rate income taxes.
Angela Merkel, the right-leaning opposition candidate from the Christian Democratic Union has been described as "Germany's Maggie Thatcher." In an effort to revive Germany's slumping economy and cut its dismal 10 percent unemployment rate she's endorsed a range of economic reforms—including a single-rate income tax.
Merkel's economic advisor, law professor Paul Kirchhof, ignited a firestorm of controversy recently when he openly endorsed a flat-rate tax system, describing it elegantly in this way: "Each person only has to pay 25 cents out of each euro earned. With the rest, he is set free in the garden of liberty."
Since then Merkel has apparently fallen somewhat in the polls, as her political opponents have attacked her tax reform plans as a "tax for millionaires" and "the Merkel minus," alleging that it will eliminate middle-class tax benefits and cut tax burdens for the wealthy.
This morning's Globe and Mail has a good summary of the German flat-tax controversy, including the rapidly growing trend toward single-rate, broad-based taxes across the globe:
Until this week, it seemed like a tax revolution was sweeping across Europe, from east to west, and possibly headed straight for North America...
The [flat tax] movement began in 1994, when the government of Estonia, desperate to rebuild an economy after communism's fall, decided to adopt an idea that had previously been the preserve of academic economists and fringe politicians. Shortly after introducing a flat tax, Estonia's economy boomed. Fellow Baltic countries Latvia and Lithuania soon followed, succeeded by Russia in 2001 with a flat tax rate of 13 per cent. The last two years have seen a tidal wave of flat-tax conversions: Serbia, Ukraine, Georgia and Romania have outdone one another to introduce lower rates, and Greece, Hungary, Poland and the Czech Republic are in the midst of flattening their taxes.
In Britain, the opposition Conservative Party endorsed the idea this year. It has a strong backing within the U.S. Republican Party, and at least one major newspaper in Canada has used its editorials to campaign for it.
Voters in a Chicago suburb voted earlier this year to request ambulance service for their neighborhood. But when it came to paying for it through an ambulance tax, they voted no. And once again yesterday, they have voted against a referendum for an ambulance tax.
As the Chicago Tribune Reports:
For the fifth time in two years, Beach Park voters rejected a request for an ambulance tax to pay for full-time paramedic services in the far north suburb, unofficial election returns showed Tuesday.
Fire Protection District Chief Paul Tierney said rejection of the emergency referendum means paramedic service to more than 15,000 people served by the agency probably would have to be abolished. "I would say there's a very real possibility that by May of 2006 the service could be entirely eliminated," Tierney said.
The department cut its two full-time paramedics after April's defeat of an identical measure. Ironically, voters approved a companion measure requesting full-time ambulance service.
This is a classic case of what economists call "free-riding". When individuals believe that there is a chance they can get a service without paying for it (or someone else paying a significant portion of it), who would blame them for not wanting to pay?
Unfortunately, this problem is widespread in political economy, and the view seems to be that if one group is free-riding off of you, then you should somehow be entitled to free-ride off of them in order to "even it out." Ultimately, this usually ends up hurting all taxpayers.
Why not avoid the free-rider problem altogether and allow the market to provide ambulance service to this neighborhood instead?
If Sammy Sosa’s season with the Baltimore Orioles hasn’t been bad enough, today it got worse. A story in The Canadian Press reports that Sosa spent a vast sum of money to deal with IRS regulations.
MIAMI (AP) - Sammy Sosa settled a lawsuit Tuesday that alleged the Baltimore Orioles slugger owed more tha $22,000 US for a law firm's work in resolving tax disputes with the Internal Revenue Service, a lawyer said.
This story once again highlights the consequences of tax complexity. Successful individuals like Mr. Sosa are blessed with the resources to afford a high-powered tax law firm to represent them. Unfortunately, most Americans are not in the financial position to afford a $ 22,000 bill to help them deal with the IRS.
With average Americans sacrificing their homes, time and money to help the survivors of Hurricane Katrina, one wonders how soon can we expect our federal lawmakers to sacrifice as well? Sure, they have, thus far, provided over $60 billion in federal money for hurricane relief. But in a year where the federal deficit is expected to top $300 billion, where will this money come from? When can we expect our federal lawmakers to put aside other spending priorities to help Katrina survivors without ballooning the federal deficit?
There are plenty of places to find savings. A good start would be the pork—er, earmarks—in the recent federal highway bill. John Fund, writing for the Wall Street Journal’s editorial page, reports that there were over $24 billion in earmarks in the highway bill, including a couple of bridges in Alaska that look a lot less important than food or water for our brethren in Louisiana and Mississippi.
Another good place to look would be the recent energy bill. A host of tax and spending provisions for energy producers—many of which are questionable from a policy perspective, as reported by our own Andrew Chamberlain—are surely less important than the funds needed to educate children whose schools were blown away by the winds of Katrina. Estimates put the price tag on the energy bill as high as $50 billion.
Finally, our lawmakers should look to the federal budget itself, where we still find it necessary to fund things like the Paper Industry Hall of Fame in Wisconsin and the Inner Harmony Foundation and Wellness Center in Pennsylvania. Can anyone honestly maintain that these activities are more important than helping to rebuild New Orleans?
Many of our federal lawmakers will insist that we can have it both ways. “We can pay for the Paper Hall of Fame and pay for food, water and shelter in New Orleans,” they will say. We should not listen to them. Why not help people in need and pay the cost by cutting less important programs? Why shouldn’t the politicians sacrifice along with other Americans?
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