Instant Analysis of Implicit Tax Rates in New Obama Proposal
The Cato Institute had already scheduled a policy forum for noon today where the Urban Institute’s Gene Steuerle and I will discuss the implicit tax rates in the House and Senate health care bills.
We’ve already been able to calculate the implicit tax rates that President Obama’s new proposal would impose on low- and middle-income workers. We have also been able to calculate the incentives to drop coverage under the president’s proposal. Upshot:
- The president’s proposal would result in higher implicit tax rates on low-wage workers than the House and Senate bills.
- The president’s proposal would result in greater incentives for higher-income workers to drop coverage than under the House and Senate bills. That would cause insurance markets to unravel even faster.
Zip over to Cato right now to hear me present the results – or watch the forum streaming here.
Obama’s Big Tax Hike on U.S. Multinationals Means Fewer American Jobs and Reduced Competitiveness
The new budget from the White House contains all sorts of land mines for taxpayers, which is not surprising considering the President wants to extract another $1.3 trillion over the next ten years. While that’s a discouragingly big number, the details are even more frightening. Higher tax rates on investors and entrepreneurs will dampen incentives for productive behavior. Reinstating the death tax is both economically foolish and immoral. And higher taxes on companies almost surely is a recipe for fewer jobs and reduced competitiveness.
The White House is specifically going after companies that compete in foreign markets. Under current law, the “foreign-source” income of multinationals is subject to tax by the IRS even though it already is subject to all applicable tax where it is earned (just as the IRS taxes foreign companies on income they earn in America). But at least companies have the ability to sometimes delay when this double taxation occurs, thanks to a policy known as deferral. The White House thinks that this income should be taxed right away, though, claiming that “…deferring U.S. tax on the income from the investment may cause U.S. businesses to shift their investments and jobs overseas, harming our domestic economy.”
In reality, deferral protects American companies from being put at a competitive disadvantage when competing with companies from other nations. As I explained in this video, this policy protects American jobs. Coincidentally, the American Enterprise Institute just held a conference last month on deferral and related international tax issues. Featuring experts from all viewpoints, there was very little consensus. But almost every participant agreed that higher taxes on multinationals will lead to an exodus of companies, investment, and jobs from America. Obama’s proposal is good news for China, but bad news for America.
Filed under: General; Government and Politics; International Economics and Development; Tax and Budget Policy
Taxing the Rich Won’t Work
The new budget reportedly hopes to raise $364 billion over ten years by raising the top two tax rates, plus $105 billion by raising the tax on dividends and capital gains to 20% from 15%, and $500 billion through discriminatory caps and limits on personal exemptions and deductions allowed to other taxpayers.
The $364 billion from raising the top two tax rates pales in comparison to the $2.56 trillion from keeping the rest of the Bush tax cuts in place, including $600 per couple (the 10% bracket) for everyone still rich enough to pay taxes (the Obama plan would exempt half of U.S. workers from paying income tax). That contrast between $364 billion and $2.56 trillion is definitive proof that Democrats’ endless complaint about the Bush tax cuts going “mainly to the rich” was one of the biggest big lies of the past decade.
The President’s urge to penalize mature, two-earner educated couples earning more than $250,000 is symbolic populism, having essentially nothing to do with reducing the deficit. Table S-2 of the Budget (p. 147) lists “Upper-income tax provisions dedicated to deficit reduction” as just $34 billion in 2011 — less than 1% of estimated spending of $3.8 trillion. Errors in estimating next year’s deficit have often been much larger than $34 billion, particularly during the early stages of economic recoveries.
Still, the false belief that higher tax rates on the rich could eventually raise significant sums over the next decade is a dangerous delusion, because it means long-term deficits are seriously understated.
Here are just a few reasons why punitive marginal tax rates on high-income families cannot possibly raise even the relatively trivial sums the Budget is counting on:
1. Professionals and companies who currently file under the individual income tax (including most trial lawyers and hedge fund managers) would form C-corporation to shelter income, because the corporate tax rate would then be lower with fewer arbitrary limits on deductions for costs of earning income.
2. Investors who jumped into dividend-paying stocks in 2003 when the tax rate fell to 15% would dump some of those shares in favor of tax-free municipal bonds if the dividend tax went up, and keep the rest in tax-free IRA or 401k accounts. Prices of dividend-paying stocks and funds could be depressed, reducing the yield of the capital gains tax.
3. If faced with a higher capital gains tax next year, investors would rush to realize taxable capital gains (those not in IRAs and 401ks) later this year. After 2010, investors would make greater efforts to avoid realizing gains in taxable accounts unless they had offsetting losses, and they would also make fewer investments in assets subject to the capital gains tax.
4. Many two-earner couples would become one-earner couples, early retirement would become more popular, physicians would play more golf, etc.
That is a small sampling of known behavioral responses which economists call “the elasticity of taxable income” or ETI for short. What that means is this: When the marginal tax rate goes up, the amount of reported incomes goes down. As a forthcoming study by Joel Slemrod, Seth Giertz and Emmanuel Saez concludes, “There is much evidence to suggest that the ETI is higher for high-income individuals who have more access to avoidance opportunities.”
I presented a 60-page paper in 2008 full of graphs and tables, many derived from the tax data of Thomas Piketty and Emmanuel Saez, offering undeniable evidence that static revenue estimates (which ignore or minimize the ways in which people react to higher tax rates) greatly exaggerate potential revenue from higher tax rates on individual salaries, dividends and capital gains.
I concluded, “There is a serious fiscal risk in the future that overly-optimistic revenue estimates based on the assumption of zero or 0.25 elasticity of taxable income could lead the federal government to make long-term spending plans on the basis of phantom revenues from higher tax rates, embarking on major new entitlement programs (in the guise of refundable tax credits) in the false hope that these static or nearly-static revenue estimates are realistic.”
How ObamaCare Would Keep the Poor Poor
Suppose you’re a family of four at or near the federal poverty level. Under current law, if you earn an additional dollar, you get to keep around 60-70 cents.
Under the House and Senate health care bills, however, you would get to keep maybe 38 cents. Or 26 cents. Or maybe just 18 cents.
The following graph (from my recent study, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums”) shows that under the House and Senate bills, the combination of (1) a mandate tax and (2) subsidies that disappear as income rises would impose implicit tax rates on poor families that reach as high as 82 percent over broad ranges of income.
This graph actually smooths out some rather bumpy implicit tax rates that spike as high as 174 percent.
In the 1980s and 1990s, the public saw that too-generous government subsidies can actually trap people in a cycle of poverty and dependence. President Obama and his congressional allies seem not to have learned that lesson.
Filed under: Cato Publications; General; Health, Welfare & Entitlements
Dear Poor People: Please Remain Poor. Sincerely, ObamaCare
In a new study titled, “Obama’s Prescription for Low-Wage Workers: High Implicit Taxes, Higher Premiums,” I show that the House and Senate health care bills would impose implicit tax rates on low-wage workers that exceed 100 percent. Here’s the executive summary:
House and Senate Democrats have produced health care legislation whose mandates, subsidies, tax penalties, and health insurance regulations would penalize work and reward Americans who refuse to purchase health insurance. As a result, the legislation could trap many Americans in low-wage jobs and cause even higher health-insurance premiums, government spending, and taxes than are envisioned in the legislation.
Those mandates and subsidies would impose effective marginal tax rates on low-wage workers that would average between 53 and 74 percent— and even reach as high as 82 percent—over broad ranges of earned income. By comparison, the wealthiest Americans would face tax rates no higher than 47.9 percent.
Over smaller ranges of earned income, the legislation would impose effective marginal tax rates that exceed 100 percent. Families of four would see effective marginal tax rates as high as 174 percent under the Senate bill and 159 percent under the House bill. Under the Senate bill, adults starting at $14,560 who earn an additional $560 would see their total income fall by $200 due to higher taxes and reduced subsidies. Under the House bill, families of four starting at $43,670 who earn an additional $1,100 would see their total income fall by $870.
In addition, middle-income workers could save as much as $8,000 per year by dropping coverage and purchasing health insurance only when sick. Indeed, the legislation effectively removes any penalty on such behavior by forcing insurers to sell health insurance to the uninsured at standard premiums when they fall ill. The legislation would thus encourage “adverse selection”—an unstable situation that would drive insurance premiums, government spending, and taxes even higher.
See also my Kaiser Health News oped, “Individual Mandate Would Impose High Implicit Taxes on Low-Wage Workers.”
And be sure to pre-register for our January 28 policy forum, “ObamaCare’s High Implicit Tax Rates for Low-Wage Workers,” where the Urban Institute’s Gene Steuerle and I will discuss these obnoxious implicit tax rates.
(Cross-posted at Politico’s Health Care Arena.)
Filed under: Cato Publications; General; Health, Welfare & Entitlements
Is Greece’s Fiscal Crisis Caused by too Much Spending or too Little Revenue?
It’s been a rough couple of weeks for Greece, which has been battered by rumors of government default. Interest rates have been climbing, as investors are nervous about state finances, and the country’s debt rating has been downgraded.
Not surprisingly, Greek politicians are dealing with the crisis in large part by further increasing the tax burden. One particularly horrible idea is a 90 percent tax on bank bonus payments. I don’t know if lawmakers in Athens have heard of the Laffer Curve, but they’re about to get a real-world lesson that will teach them how punitive tax rates lead to less revenue.
For those who wonder how Greece got into this mess, here’s a quick chart I put together, based on OECD fiscal data. Don’t be surprised if America has a similar chart in about 10 years.
Filed under: International Economics and Development; Tax and Budget Policy
Emergency Aid to Seniors? No Way
Social Security benefits are indexed for inflation, but because inflation has been roughly zero for the past year, the adjustment formula implies no increase in benefits this year. Nevertheless,
President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.
Obama endorsed the idea, which is expected to cost at least $13 billion, as the administration gropes for ways to sustain an apparent economic rebound without the kind of massive spending package that critics could label a second stimulus act.
This is outrageous on four levels:
1. If the president thinks the economy needs more stimulus, he should say that explicitly and have an honest debate.
2. This is the wrong kind of stimulus. Any further stimulus should consist of reductions in marginal tax rates, such as a cut in the corporate income tax (or better yet, repeal).
3. All Social Security recipients already have a moderate guaranteed income, and many have significant income beyond their Social Security benefits. This kind of transfer has no plausible justification as redistribution for the needy.
4. Sending checks to seniors is a blatant attempt to buy their support for Obamacare, which promises to cut Medicare spending substantially.
C/P Libertarianism, from A to Z
Revenge of the Laffer Curve, Part II
An earlier post revealed that higher tax rates in Maryland were backfiring, leading to less revenue from upper-income taxpayers. It seems New York politicians are running into a similar problem. According to an AP report, the state’s 100 richest taxpayers have paid $1 billion less than expected following a big tax hike. The story notes that several rich people have left the state, and all three examples are about people who have redomiciled in Florida, which has no state income tax. For more background information on why higher taxes on the rich do not necessarily raise revenue, see this three-part Laffer Curve video series (here, here, and here):
Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth.
…[New York Governor David] Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated.
…So far this year, half of about $1 billion in expected revenue from New York’s 100 richest taxpayers is missing.
…State officials say they don’t know how much of the missing revenue is because any wealthy New Yorkers simply left. But at least two high-profile defectors have sounded off on the tax changes: Buffalo Sabres owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and radio talk-show host Rush Limbaugh.
…Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes.
The VAT Debate: Should Politicians in Washington Get a Huge New Source of Tax Revenue as a Reward for Overspending?
Based on five criteria, James Pethokoukis of Reuters connects the dots and warns that President Obama is going to propose a value-added tax.
Does President Obama have a secret plan to raise taxes on middle-class Americans — and,well, pretty much everybody else — with a European-style, value-added tax? Actually, it’s not such a big secret. …Obama’s campaign promise to not raise taxes on households making less than $250,000 a year was always considered a joke here inside the Beltway. …Maybe it was a joke inside the campaign, too. Since being elected, Obama has raised cigarette taxes and has advocated raising healthcare taxes, energy and small business taxes, in addition to corporate taxes. What’s more, economic advisers like Larry Summers seem eager to get rid of all the Bush tax cuts, not just those on so-called wealthy Americans. And it’s also no secret that economists love the idea of a VAT. It promotes savings over consumption, and its hidden nature may mean it has less behavioral impact on taxpayers. …Liberals love the idea of a VAT because it’s, well, so European — also because it does raise tons of revenue to expand government. And that is what Obama wants: more revenue to pay for bigger government. Is a VAT better than the soak-the-rich approach favored by Democrats such as Nancy Pelosi and Charlie Rangel? Sure. Of course, the concern is that a VAT would be in addition to new soak-the-rich taxes.
While the timing is unclear, his prediction is correct. The politicians in Washington want much bigger government, but they know that it will be difficult to achieve that goal without a big new source of revenue. The VAT would be perfect from their perspective. It is a form of national sales tax, but would be hidden in the price of products and therefore easy to increase. Moreover, every time they increase the VAT, they would use that as an excuse to raise income tax rates for “distributional fairness.” It is no exaggeration to say that the VAT is the biggest fiscal threat to the cause of limited government.
One final point about the column. Economists don’t love the VAT, per se, but they do view it as being less destructive – per dollar raised – than the income tax. But less destructive is still destructive. And since the VAT would be in addition to the taxes we have now (and actually create the conditions for higher income tax rates), its enactment would create a lose-lose situation for taxpayers.
More Evidence on America’s Socialism
KPMG has released its annual survey of personal income tax rates around the world. The survey covers 86 countries, including all the high-income nations and many middle- and lower-income nations, such as Brazil, China, and India.
The chart shows the top personal income tax rates in 2009 for national governments, per the KPMG study. The current top U.S. rate is 35 percent, which is substantially above the 86-country average of 28.9 percent. The Obama administration plans to let the U.S. rate jump to 39.6 percent in 2011, which would be almost 11 points higher than the international average.
Worse still, the United States has state income taxes with rates up to 10 percent that are piled on top of the federal tax. Some of the nations in the survey (e.g. Canada) also have subnational income taxes, but many, or most, of them do not.
Finally, note that supporters of government health care expansion have been eyeing further increases in the top U.S. tax rate above 40 percent. Alas, we need more of the Global Tax Revolution to sweep across our shores.
Filed under: International Economics and Development; Tax and Budget Policy
How the Government Broke up the Beatles
Forget the effect on production incentives and GDP growth—Matt Lewis at Politics Daily points to an article in the Times of London arguing that confiscatory tax rates broke up the Beatles, which may be the most heinous crime of government since the liquidation of the kulaks.
Filed under: International Economics and Development; Tax and Budget Policy
Using Gasoline to Douse a Fire? OECD Thinks Higher Tax Rates Will Help Iceland’s Faltering Economy
Republicans made many big mistakes when they controlled Washington earlier this decade, so picking the most egregious error would be a challenge. But continued American involvement with the Organization for Economic Cooperation and Development would be high on the list. Instead of withdrawing from the OECD, Republicans actually increased the subsidy from American taxpayers to the Paris-based bureaucracy. So what do taxpayers get in return for shipping $100 million to the bureaucrats in Paris? Another international organization advocating for big government.
The OECD, for example, is infamous for trying to undermine tax competition. It also has recommended higher taxes in America on countless occasions. And now it is suggesting that Iceland impose high tax increases – even though Iceland’s economy is in big trouble and the burden of government spending already is about 50 percent of GDP:
Both tax increases and spending cuts will be needed, although the former are easier to introduce immediately. The starting point for the tax increases should be to reverse tax cuts implemented over the boom years, which Iceland can no longer afford. This would involve increases in the personal income tax… Just undoing the past tax cuts is unlikely to yield enough revenue. In choosing other measures, priority should be given to those that are less harmful to economic growth, such as broadening tax bases, or that promote sustainable development, such as introducing a carbon tax.
Filed under: International Economics and Development; Tax and Budget Policy
My Question for the President
President Obama will hold a press conference tonight to answer questions about his health care reform proposal. This is what I would ask him:
Mr. President, during your campaign, you said, “I can make a firm pledge…Under my plan, no family making less than $250,000 a year will see any form of tax increase.” You also said that “no one will pay higher tax rates than they paid in the 1990s.”
Your National Economic Council chairman, Larry Summers, has written that employer mandates “are like public programs financed by benefit taxes.” Under the House health reform bill, an uninsured worker earning $50,000 per year, with no offer of coverage from her employer, would face a 15.3-percent federal payroll tax, a 25-percent federal marginal income tax rate, an 8-percent reduction in her wages (to pay the employer penalty), plus a 2.5 percent uninsured tax. In total, her effective marginal federal tax rate would reach 50.8 percent.
Do you stand by those pledges, and would you therefore veto any employer mandate or individual mandate as a tax on the middle class?
(Add it to the questions I posed here and here.)
Filed under: Health, Welfare & Entitlements; Tax and Budget Policy
Obama Says 20 Percent for Government Is Too Much!
While perusing Instapundit, I came across a post suggesting that President Obama thinks investment will suffer if government takes 20 percent of a company’s income. At first I thought this was a form of satire, but there is a real link to a speech that the President gave to the Parliament of Ghana. Indeed, the speech has several good comments:
Development depends on good governance. …Repression can take many forms, and too many nations, even those that have elections, are plagued by problems that condemn their people to poverty. No country is going to create wealth if its leaders exploit the economy to enrich themselves… No business wants to invest in a place where the government skims 20 percent off the top… No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery. That is not democracy, that is tyranny, even if occasionally you sprinkle an election in there. And now is the time for that style of governance to end.
My initial reaction, focusing on the passage about 20 percent being too much for government, is to ask why Obama wants higher tax rates in America? After all, he wants American small businesses to pay 40 percent, which is twice the burden he thinks is excessive for Ghanians. Upon further reflection, though, I wonder if the President is referring to corrupt bureaucrats asking for bribes. But, even if that is the case, why does that matter? Investors and entrepreneurs care about the amount of disposable income that is generated by an investment. Losing 20 percent to the tax collector has a negative impact on incentives, regardless of whether the money winds up in Treasury coffers or a bureaucrat’s pocket. In any event, it is good to see that the President recognizes that the economy suffers when government becomes too much of a burden. We just need to figure out how to convince him that the laws of economics work the same way in America as they do in Ghana.
Filed under: International Economics and Development; Tax and Budget Policy
Socialist Surtax for Health Care
In their desperate bid to find half a trillion dollars or so to fund a health care expansion, Democrats have no shortage of bad ideas. Indeed, their new idea is even worse than last month’s dastardly plan to hike taxes on beer and wine.
The Democrat’s new idea is to slap a special “surtax” on high earners. A surtax is simply a flat additional charge based on adjusted gross income. The model for the new scheme seems to be a four percent surtax proposed by House tax writer Charlie Rangel in 2007.
Elsewhere I’ve explained why tax hikes on high earners is poor economic policy. But politically, what’s striking is how far American economic policy is moving to the left of policies in other major nations.
The chart shows that the current top U.S. personal income tax rate (including the average state rate) is 42 percent, which is the same as the average in the 30 nations of the Organization for Economic Cooperation and Development (OECD).
President Obama already plans to increase the top federal rate from 35 percent to 40 percent at the end of 2010. That would push the combined federal-state rate to 47 percent, substantially above the average of other major industrial nations. Imposing a 4-percent surtax on top would push the top rate to 51 percent, which would be higher than many nations that were traditionally more socialist than America, including France (46%), Germany (48%), and Italy (45%).
Obama and the Democrats chafe at being labeled “socialists”, and it’s true that Republicans are just as socialist when it comes to spending policies. But tax rates higher than France? Tax rates over 50%? Come on Democrats, you’ve got to be kidding!
Filed under: Health, Welfare & Entitlements; Tax and Budget Policy
Obama Adopts the Mikulski Principle
Economists have advanced many theories of taxation. But as usual, the one that seems to explain the policies of the Obama administration best is what I call the Mikulski Principle, the theory most clearly enunciated in 1990 by Sen. Barbara Mikulski (D, Md.):
Let’s go and get it from those who’ve got it.
Just take a look at the myriad taxes proposed or publicly floated by President Obama and his aides and allies:
- Raise the top income tax rates from their current 33 percent and 35 percent rates to 36 percent and 39.6 percent in 2011
- Limit itemized deductions for people paying high rates
- Increase capital gains and dividend taxes by 33 percent for people paying high income tax rates
- Impose a value-added tax (VAT) on all goods and services
- Raise the Social Security tax by lifting the cap
- Raise a variety of business taxes by $353 billion over 10 years, including repeal of LIFO rules, restoring Superfund taxes, seven tax increases on energy companies, and more
- Tax employer-provided health benefits
- Implement a cap-and-trade system for emissions permits, the functional equivalent of a massive new tax
- Tax drivers on their mileage
- Change rules to raise gift taxes
- Restore the estate tax at 45 percent
- Raise cigarette tax by 62 cents a pack
- Raise taxes on beer, wine, liquor, and soda
- Eliminate health savings accounts and flexible savings accounts
- Tax employer-provided cellphones
- Tax AIG employee bonuses
- Raise taxes on overseas corporate earnings
As the links will indicate, not all of these taxes have been formally proposed, and some have already run into sufficient criticism to have become unlikely. But together they illustrate the mindset of an administration and a Congress determined to extract as much money as they can from Americans rather than cut back on expenditures, which have doubled in about eight-and-a-half years.
Indeed, the administration’s programs remind us that today is July 2, the 233rd anniversary of the day on which the Continental Congress voted for American independence, issuing a document that declared, among other things,
He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance.
Tax Oppression Index Ranks America in Bottom Half of Industrialized Nations
A thorough new study of 30 nations from the Institut Constant de Rebecque in Switzerland reveals serious shortcomings in America’s tax system.
The report, entitled “Tax burden and individual rights in the OECD: An International Comparison,” creates a Tax Oppression Index based on three key variables: the overall tax burden, public governance, and taxpayer rights. The good news is that the United States has a comparatively low aggregate tax burden, though America’s score on this measure would be much better in the absence of a punitively high corporate tax rate. The bad news is that corruption and inefficiency in Washington drag down America’s score for public governance. The ugly news is that America has a very low rating for protecting taxpayer rights — largely because politicians have tilted the playing field to favor the IRS, including the fact that taxpayers lose the presumption of innocence provided in the Constitution.
Here is a brief description of the study:
The OECD’s campaign against “harmful tax competition” and “tax havens” has overshadowed the essential issue, namely the important roles that both tax competition and “tax havens” play for capital preservation and formation, leading to higher prosperity and better protection of individual rights throughout the OECD.
The tax oppression index is based on 18 representative criteria measuring fiscal attractiveness, public governance and financial privacy in the 30 member states of the OECD. Switzerland appears as the country with the lowest tax oppression — due to a relatively low tax burden and a more [classical] liberal institutional order, including its citizens’ right to veto legislation, political decentralization, and protection of financial privacy. Germany and France, on the other hand, whose governments have supported the OECD’s efforts, are among the most questionable states in terms of safeguarding their residents’ individual rights.
…The tax oppression index evaluates the 30 OECD member states on three complementary dimensions quantified by 18 representative criteria, on the basis of OECD and World Bank data. The index enables relevant conclusions about the tax burden and individual rights among those countries.
Switzerland earns the top ranking in the report, followed by Luxembourg, Austria, Canada, and Slovakia. Italy and Turkey have the worst systems, followed by Poland, Mexico, and Germany. The United States is tied for 19th, behind the welfare states of Scandinavia. With Obama promising to raise tax rates and increase the power of the IRS, it may just be a matter of time before the United States is competing for the world’s most oppressive tax regime.
Filed under: International Economics and Development; Tax and Budget Policy
Maine’s Supply-Side Democrats
The class-warfare crowd in Washington wants bigger government and higher tax rates, so it’s a bit shocking to see that a group of Northeastern Democrats are slashing tax rates. Yet that is exactly what Maine’s politicians are doing. The Governor even makes the common-sense observation (that so far has escaped President Obama’s attention) that there won’t be any jobs without investors and entrepreneurs. The Wall Street Journal approves:
This month the Democratic legislature and Governor John Baldacci broke with Obamanomics and enacted a sweeping tax reform that is almost, but not quite, a flat tax. The new law junks the state’s graduated income tax structure with a top rate of 8.5% and replaces it with a simple 6.5% flat rate tax on almost everyone. Those with earnings above $250,000 will pay a surtax rate of 0.35%, for a 6.85% rate. Maine’s tax rate will fall to 20th from seventh highest among the states. To offset the lower rates and a larger family deduction, the plan cuts the state budget by some $300 million to $5.8 billion, closes tax loopholes and expands the 5% state sales tax to services that have been exempt, such as ski lift tickets. This is a big income tax cut, especially given that so many other states in the Northeast and East — Maryland, Massachusetts, New Jersey and New York — have been increasing rates. “We’re definitely going against the grain here,” Mr. Baldacci tells us. “We hope these lower tax rates will encourage and reward work, and that the lower capital gains tax [of 6.85%] brings more investment into the state.” …One question is how Democrats in Augusta were able to withstand the cries by interest groups of “tax cuts for the rich?” Mr. Baldacci’s snappy reply: “Without employers, you don’t have employees.” He adds: “The best social services program is a job.” Wise and timely advice for both Democrats and Republicans as the recession rolls on and budgets get squeezed.
President Obama Converts to Supply-Side Economics…Maybe…Sort of
Speaking to Bloomberg News, President Obama explicitly embraces a central tenet of supply-side economics, which is the common-sense observation that a growing economy generates additional tax revenue. That’s the good news. The bad news is that almost all of the policies being advocated by the White House expand the burden of government, thus making it more likely that the economy will experience subpar growth. This, of course, will give the politicians in Washington more excuses to further raise tax rates:
President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam. “One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”
Prime Minister of Finland Commits Gaffe, Admits that Anti-Tax Competition Schemes Are Designed to Enable Higher Tax Burdens
Most politicians and other advocates of tax harmonization are clever enough to pretend that they do not want higher tax rates. Instead, they assert that their proposals are merely ways of reducing evasion and making tax systems more efficient. So it is rather surprising that the Prime Minister of Finland has a column in the Financial Times, where he admits that various governments should conspire to simultaneously raise tax rates in order to finance big government:
The overall tax rate will have to rise as well over the longer term. In some areas that can be done without much consultation between the countries. For example, property taxes or inheritance taxes can largely be determined at the national level without adverse economic consequences. But such taxes will not raise significant amounts of revenue. Only changes in value added tax, various excise taxes or taxes on earned and capital income can make a real difference. However, raising such taxes can have detrimental effects on economic activity. This is especially so when a country acts on its own: capital and people can respond by migrating to jurisdictions with lower rates. Deeper co-operation is therefore necessary if tax revenues are to be increased in a way that truly helps fiscal consolidation. …It is important that different countries do not find themselves with very different tax solutions. We should avoid tax competition and the damage this would cause to Europe’s economic growth. …member countries could agree, for example, to change the levels of certain taxes in parallel. Parallel measures would help all of Europe: tax competition risk would be reduced and the public finances of individual countries would improve. Such co-ordinated tax changes could set also an important global example. In particular, it might encourage the US – with lower tax levels in most areas – to do what has to be done to address its spiralling budget deficit.
In the column, Prime Minister Vanhanen even suggests that the United States might be tempted to join the tax cartel. This has always been a goal of the Europeans since an OPEC for politicians without the United States will not work any better than the real OPEC without Saudi Arabia. One of my first videos — back in late 2007 — was on this topic, and it is embedded below for those who did not have a chance to view it.
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