In yesterday's House hearing, the Treasury Inspector-General was asked if he could list which organizations had been targeted by the IRS for delayed approval or harassing questions. He replied that he could not make that...
The Tax Policy Blog
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?
As expected, Reuters reports that the President's Advisory Panel on Federal Tax Reform will delay the release of its recommendations until the end of October to allow time to complete Hurricane Katrina business before turning to tax reform:
A panel recommending changes to the U.S. tax code will not make its report until the end of October when the public is less focused on Hurricane Katrina, Treasury Secretary John Snow said on Tuesday.
"Their work is so foundational, so critical to where we wanted to go from here, that we wanted it to receive appropriate attention," Snow said after a speech to McDonald's Corp. executives and lobbyists.
With gas prices in the headlines, the Tax Foundation has released a new "Fiscal Fact" with some interesting data on the effect of local, state and federal gas taxes on prices at the pump:
Today, the combined burden of federal, state and local gas taxes costs American drivers an average of 45.9 cents on every gallon purchased... In some states the combined taxes exceed 60 cents for every gallon purchased. In these times of concern over high gas prices, American consumers should remember that gasoline taxes have a significant impact on the amount they spend at the pump.
Just last week at a panel here in Washington, I was shocked to hear a respected scholar assert that the only place in the world where the idea of a single-rate income tax was taken seriously was here in the supposedly radical, free-market United States.
Anyone who's been paying attention to world events in tax policy over the last decade would find that notion absurd. Once considered a sacred cow of tax policy, progressive-rate income taxes are being abandoned in favor of improved economic performance in country after country in recent years.
Since 1994, Estonia, Georgia, Latvia, Lithuania, Romania, Russia, Serbia, Slovakia and Ukraine have all adopted single-rate income taxes ranging from 12 percent to 19 percent. Poland is set to replace its progressive system with a flat rate of 18 percent, and Greece and Italy are both considering single-rate taxes in the range of 25-30 percent.
According to the National Post, Canada may be next in line to join the flat-tax club, possibly putting pressure on U.S. lawmakers to follow suit or risk being left in the dust economically:
With the idea sweeping the newly emerging democracies of central and eastern Europe, and even creeping into the groaning welfare states of Western Europe, the question must be asked: Is it time for Canada to adopt a flat tax on income?
The concept is simple enough. Multiple marginal rates of taxation are collapsed into a single, low rate. Few deductions are permitted and most regulations, exemptions, exclusions, deductions and credits are eliminated, along with the stacks of convoluted tax codes that go with them.
In most jurisdictions that have adopted flat taxes, economic activity has increased and government revenues have risen. The lower rates spur greater investment, and also encourage greater compliance with tax laws, which means government's tax take increases from both a rise in national production and a fall in cheating...
Here in Canada, Alberta adopted a 10% single-rate tax on personal income in 2001. And for those who charge that a one-rate tax is "regressive," hitting low-income workers disproportionately hard, Alberta's results provide ample evidence to the contrary: So long as generous basic personal exemptions are maintained, low-income filers are generally the biggest winners...
[T]he more Canadians know about how well [a flat tax] is working in Alberta and elsewhere, the more they will be inclined to push for one. [Full piece here.]
Although politicians are always behind the intellectual learning curve, there's increasing consensus among economists that single-rate taxes gain an economic system far more in enhanced efficiency than they sacrifice in supposed tax equity. Hopefully the experience of eastern Europe in the coming years will help show that to lawmakers in a concrete way.
A story in today’s Los Angeles Times gives a quality insight into how California's poor business tax climate is prompting tax evasion at the state level.
CARSON CITY, Nev. — Forget complicated wire transfers to the Cayman Islands or secret Swiss deposit boxes. Californians who want to hide their money from tax authorities are increasingly opting for a simpler alternative: socking it away just over the state line.
No need for savvy accountants or high-priced lawyers. Seminars, webcasts and radio advertisements bray that it's easy to slash a California tax bill — or eliminate it altogether — by creating a corporation in Nevada, where there is no income tax on businesses or individuals.
On a recent afternoon, as a hot breeze kicked up the dust outside his storefront office in a Carson City strip mall 25 miles from the California border, Alan Teegardin fielded calls from Californians and other out-of-staters curious about incorporating. Teegardin, a former Marine pilot with law licenses in Ohio and the U.S. Virgin Islands, is general counsel for Resident Agents of Nevada, one of the many incorporation companies that have sprouted in town in recent years.
Teegardin said in an interview that Californians come to him every week looking to legally avoid the state's 9.6% tax on corporate income — and he tells them he can help. [Full piece here.]
Our State Business Tax Climate Index's fiscal year 2004 rankings place California’s business climate at 38th out of the 50 states. Maybe this tax rebellion will serve as a wakeup call for government officials in California to realize that their unfriendly business climate does indeed influence corporate behavior.
Surging gas prices have sparked renewed interest in gas taxes, and the way they exacerbate rising fuel costs at the pump. Bloomberg reports that in the UK—where gas taxes are a staggering 70 percent of retail gas prices—truckers are planning highway slowdowns to protest Britain's onerous fuel taxes:
U.K. truckers plan to protest the government's fuel-tax policy this week with a series of slowdowns on British highways.
Welsh truckers will operate a slow-moving convoy along the M4 motorway in west Britain starting at 7 a.m. Sept. 16. There may be similar protests along the M25 highway that circles London, as well as the M1, M5 and M6, the group Less Tax on Fuel said on its Web site today.
Oil prices surged worldwide after Hurricane Katrina damaged U.S. refineries, pushing U.K. gasoline and diesel prices above 1 pound ($1.83) a liter for the first time. Taxes account for about 70 percent of U.K. pump prices. The Institute of Directors, a British business group, last week called for an ``urgent'' cut in the fuel duty. The government has refused so far.
Apparently, UK truckers aren't alone in their outrage over gas taxes:
There may be protests elsewhere in Europe this week. Italian gas-station operators threatened to strike unless the government takes action. In Belgium, moving van drivers may block streets and taxi drivers say they'll start boosting fares, while truckers in France may block the ports.
Laissez-faire has officially been removed from the French dictionary.
Believe it or not, as a means of trying to lower the price at the pump for its citizens, French Finance Minister Thierry Breton has proposed a special tax on oil companies. That's right...his idea is to lower the price at the pump by raising taxes on gasoline producers. From Yahoo News:
PARIS - French Finance Minister Thierry Breton said Thursday he was considering asking oil companies to lower their prices at the pump and imposing a "special tax" on them to ease the burden of surging prices on consumers.
Breton told France-2 television that he wanted to find ways to return to consumers the extra costs they have shelled out through rising prices in gasoline.
He said the government planned to gather oil industry leaders and ask them to come up with concrete proposals on how to ease the problem.
What they appear not to understand in Paris is that the government taking of profits from oil companies and giving it to buyers will discourage supply over time, while at the same time, encourage more gasoline consumption. Thus, we have made the problem even worse by creating a shortage from de facto price controls.
With policies like this, it's no wonder the OECD's 2005 Economic Survey had the following take on the state of the French economy: "Although a modest economic upturn seems to be established, low growth and, especially, high unemployment characterise recent economic performance."
If haste makes waste and good things come to those who wait, how then can we explain the recent North Carolina budget fiasco? After a legislative session that dragged on through the threat of a government shutdown and two stopgap spending measures that kept the state running in the absence of a budget, legislators finally emerged from the statehouse in August with a budget for the 2006 and 2007 fiscal years—a month and a half into the 2006 fiscal year.
They took their time hammering out the details, but not everyone is happy with the result of their long hours—a budget that increases spending by $1.3 billion, raises taxes by $657 million and, in general, exemplifies poor tax policy. It increases taxes on select groups, delays sunsets, and increases tax complexity.
The budget includes:
- A 600% increase in the cigarette tax.
- A two-year extension of two recent tax increases that were intended to sunset at the end of 2005: a .5% sales tax increase and an 8.25% top income tax rate.
- Sales tax changes: Candy and cable television will be subject to sales tax, and certain farming supplies will be exempt. The annual sales tax holiday will include computer supplies under $250. As we have written before, sales tax holidays are poor tax policy, and numerous tax exemptions and frequent changes increase compliance costs and complexity.
- $400,000 for a teapot museum--one of the budget’s highly criticized pork-barrel projects.
- Allocations for the projected $425 million that a state lottery would generate, ostensibly for public education, even though the legislation establishing a lottery had not passed the Senate. (The House had approved the legislation in April.)
After the budget unveiling, the debate still wasn’t over. The House, in an attempt to ensure additional education funding in the event that the Senate did not approve a lottery, passed a bill authorizing certain counties to raise their sales taxes to increase education funding.
The Senate continued the contentious lottery debate and, at the 11th hour, unexpectedly passed the bill. Many legislators see the lottery as a way to increase education spending without raising taxes, not realizing that the lottery is a tax.
Weary legislators headed home on Sept. 2, but perhaps they should have called it quits a bit sooner.