Freedom Line Blog

Earlier this month, we at CFIF lamented the fact that the U.S. now claims the developed world’s highest corporate tax rate.  Fortunately, as we noted, a bipartisan consensus is emerging in favor of reducing and reforming that rate.

Now, in a letter published by The Economist, twenty leading economists from both academia and the private sector called for a lower rate and illustrated how our current rate discourages employment and thwarts domestic investment:

A high corporate tax rate impairs our ability to attract domestic and foreign investment. Because capital and information flows more freely across borders in the Internet age, disparities in the corporate income tax rate can now have a greater impact on location decisions than in the past. The number of Fortune Global 500 headquarters in the United States decreased from 179 to 133 from 2000 to 2011, while China (25.0 percent tax rate), Switzerland (21.2 percent tax rate), and Korea (24.3 percent tax rate) experienced sizable increases over the same period. De Mooij and Ederveen (2005) found that a one percentage point reduction in a host country’s tax rate increased foreign direct investment by 2.9 percent. The OECD (2011) found that corporate income taxes, of all the different types of taxes, are most harmful to economic growth and capital accumulation.

A high corporate tax rate undermines job creation and reduces wages. According to the Commerce Department, foreign investment supported five million U.S. jobs in 2010. To the extent that our relatively high corporate tax rate discourages foreign investment, it discourages job formation. Moreover, several academic studies have found that much of the burden of the corporate income tax is borne not by capital but by domestic labor, in the form of lower wages. For example, Mathur and Hassett (2010) analyze the relationship between corporate tax rates and the average manufacturing wage for 65 countries over a period spanning 1981–2005; they estimate that a one percent increase in the corporate income tax leads to a one half of one percent decrease in hourly wages. The U.S. Treasury Department assumes that 25 percent of the incidence of corporate tax is borne by workers. Moreover, policies that increase the cost of capital will result in less capital being invested.”

As summarized by former Clinton Administration adviser Elaine Kamark and former Reagan adviser James Pinkerton, “This is another confirmation of the growing consensus among experts and political leaders that the U.S. corporate tax rate is too high and the code too complex.”  They added, “As the experts have established, the current U.S. tax code is an impediment to investment, growth and job creation.”

The intellectual consensus thus continues to coalesce.  Now it’s time for the White House and Congress to act before more harm is done.

As usual, Ezra Klein’s Wonkblog has an interesting series of graphs that show the power of the federal government in granular detail.  Today’s installment, courtesy of the White House, provides a state-by-state assessment of how the coming budget sequester will impact a range of federally-funded, state-run programs.

These include popular spending on initiatives such as teachers and schools, work-study jobs, Head Start, job-search assistance, military readiness, law enforcement, child care, vaccines for children, public health, nutrition assistance for seniors, STOP Violence Against Women Program, and clean air and water.

But while the White House is putting out these details to (ostensibly) convince the public that 10 percent across-the-board cuts in discretionary spending will be devastating to popular programs, there’s also a bit of subtle public shaming thrown in as well.  Reading through the graphs it becomes painfully obvious just how much of modern American life is subsidized by federal tax dollars (and in some cases, also supported by state taxes).  Getting confronted with that reality isn’t comfortable; especially when many people have come to rely on this kind of help.

And yet, something has to change.  We simply can’t raise enough taxes to cover the cost of every liberal social experiment, or even to pay for every good idea.  Instead, we as a country need political and other leaders to think carefully about how to modify the social contract we’ve been under since the New Deal so that the generations to come will not be cheated out of their inheritance.

Much like how they react to any reasonable reform ideas to Medicare (see any number of ‘Medi-scare’ tactics), liberals can’t lead on this modification project because they refuse to acknowledge that America has a spending problem in the first place.  It thus falls to conservatives to improve on what we have, preserving what’s good and making it better.

Part of the reason I’m optimistic about the future is that I don’t believe that details about our nation’s financial problems will shame a majority of citizens into zero-sum taxation.  Rather, I think that once people become aware of how overextended is our current welfare state, they will reward politicians who can show how to scale back the public sector so that the private sector can flourish.

At the risk of being accused of celebrating a bad deal rather than merely arguing that it wasn’t as bad as some conservatives say(I am doing the latter, not the former), I hereby jump into the fray again to request a little logical consistency from fellow conservatives.

Imagine a scenario the direct converse of what just occurred this week.

Imagine that years ago Congress had passed a “temporary” tax hike to pay for a war and its aftermath. Imagine that the hike was scheduled to expire at 12:01 a.m. on a certain New Year’s Day. In other words, by law, taxes would drop on every American on Jan. 1 if Congress didn’t act.

Now, what if Congress suddenly decided it couldn’t “afford” to “lose” those revenues. So it began working to block the expiration of those higher rates.

Regardless of whether Congress acted on Dec. 30 (before the expiration of the higher rates) or on Jan. 1 or 2 (after the expiration), there is not a conservative on Earth who would argue that Congress was doing anything other than raising taxes if Congress indeed intervened. And if Congress had intervened to block the scheduled rate reduction for 99% of Americans, while allowing the lower rates to apply to 1%, there is not a conservative alive who would be celebrating the reprieve for the 1% rather than denouncing Congress for keeping the current rates for the 99%.

In that scenario, every conservative would treat the already-scheduled-by-law rate reduction as the baseline, and any change in that schedule as the intervention.

So why, if the situation is reversed, do conservatives yell that Congress “raised” taxes by acting to avert a scheduled tax hike for 99% of Americans? Why is it that the already-scheduled-by-law rate increase is treated as if it is the intervention, while the change in that schedule, in order to save lower rates for 99%, is treated as the baseline?

…….

The point is that consistency should be required. Deciding whether something is a tax “hike” or a tax “cut” should not be a changeable proposition depending on the political circumstances. Either the law as written is the baseline, or it isn’t. You can’t say that in one case the law as written is the baseline, while in another case the existing rate structure is the baseline no matter what the law says is supposed to happen to that baseline.

Conservatives have every reason to grumble that President Obama refused to act to protect the final 1% (or whatever the exact number is) of Americans from higher taxes. But it is just not fair to blame Republican leaders for failing to act when they indeed already had acted months ago but the Senate and president refused to go along. Yes, yes, there were all sorts of different strategies and tactics that might have achieved better results (from a conservative standpoint) than were actually achieved, but that doesn’t mean that congressional Republicans are guilty of hiking taxes when they strove so mightily (even if ineffectually) to avoid raising even a single dollar of taxes.

The law as written is a mighty powerful instrument. President Obama had the law as written on his side, combined with the media, combined with the polls, combined with the political momentum of a very large electoral victory. For Republican leaders to fail to overcome the law, the media, the polls, and the political momentum might represent a lack of skill, but it is hardly a betrayal of principle. All that is at issue are small degrees of difference as to what was achievable as the best, or least bad, outcome from a very difficult situation. When a party controls only one half of one of the two “political” branches of government, and when the party controlling one-and-a half out of two (including the most powerful one) also has existing law (requiring higher rates as of Jan. 1) on its side, then the first party does not have one heck of a lot of leverage.

Do I think anybody else could have achieved a better outcome than John Boehner achieved? Yes, slightly. But was the final outcome an utter catastrophe, compared to what would have happened if nobody acted at all? Not in the least, as I have explained in other blog posts and columns. And there is something to be said for Boehner’s dogged attempts to avert catastrophe, and certainly something to be said for a result that saved married couples from higher tax rates for another $200,000 in earnings while for the first time inflation-indexing a very large exemption from the death tax.

———————

By contrast, moving forward, the leverage is almost all in favor of conservative goals. Whereas in this week’s deal the alternative of failing to act would have meant a horrible outcome (tax-rate hikes for 100% of Americans), there now remains not a clause in current law that will force any more taxes to rise if Congress fails to act. But if Congress fails to act at all — if it does nothing — then conservative wishes for lower spending will indeed occur. On both taxes and spending, the leverage of doing nothing — and thus of allowing the law as written to proceed — is now in conservative hands.

What remains is for Republicans and conservatives to revamp their strategy, tactics and communications, so they come out better in political terms than they emerged from this fight. The first step needs to be to stop cannibalizing our own side and instead aim fire at the leftist president — and to start by focusing attention on the unpopular$1 trillion in taxes that just went into effect from the unpopular next phase of implementation of the unpopular ObamaCare law.

It’s time to stop bemoaning the past, and to start working to improve the next battles that will be upon us in very, very short order.

Avik Roy:

…despite all of the dramatic hyperbole about the “fiscal cliff,” it’s important to remember that going over the fiscal cliff will reduce the budget deficit by $503 billion in 2013, and $682 billion in 2014, relative to the “solutions” being bandied about on Capitol Hill.

Moreover, since President Barack Obama and his fellow liberals in Congress refuse to link tax increases with entitlement reform, perhaps it’s better to go over the fiscal cliff than accede to some tax increases and no reforms.  At least then Obama & Co. would own the tax-and-spending system their intransigence created.

Stuart Rothenberg perfectly articulates the difficult post-election position of fiscal conservatives:

Republicans may well be correct that the nation’s biggest problem is that “the government spends too much, not that it taxes too little,” but at some point political realities rather than ideological beliefs or past party dogma ought to guide both party leaders and members of its rank and file.

The Roll Call columnist also shows just how much Beltway logic drives his analysis.  If Republicans are right that “the government spends too much, not that it taxes too little,” then Republicans are justified in pushing for reduced spending and resisting tax increases.  And, if Republicans are right, then President Barack Obama and his fellow liberals are wrong to demand the opposite.

That’s not ideology, just math and common sense.  Political calculations may end up trumping both eventually, but that doesn’t mean that fiscal conservatives within the Republican Party are wrong as a matter of logic from defending their position.

In an interview with CFIF, Alex Cortes, Executive Director of Let Freedom Ring, discusses his organization’s effort to influence the fiscal cliff negotiations, called “One Dollar Less,” and why it is important to move the debate from the imaginary spending cuts to actually spending less.

Listen to the interview here.

Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez. 

View more of Michael Ramirez’s cartoons on CFIF’s website here.

Forget the fiscal cliff negotiations.  If you’re a high-earning worker wondering if your taxes will go up in January, Reuters spotlights two new taxes coming your way courtesy of Obamacare:

The 3.8 percent surtax on investment income, meant to help pay for healthcare, goes into effect in 2013. It is the first surtax to be applied to capital gains and dividend income.

The tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI.

The tax applies to a broad range of investment securities ranging from stocks and bonds to commodity securities and specialized derivatives.

The 159 pages of rules spell out when the tax applies to trusts and annuities, as well as to individual securities traders.

Released late on Friday, the new regulations include a 0.9 percent healthcare tax on wages for high-income individuals.

…

Together, the two taxes are estimated to raise $317.7 billion over 10 years, according to a Joint Committee on Taxation analysis released in June.

These two new taxes take effect January 1, regardless of whether President Barack Obama and Congressional Republicans agree to raise other taxes on high-earning Americans.

As the saying goes, if you want less of something, tax it.  You’d think liberals could see that taxing high-earners into extinction very quickly guts the very social programs Big Government types love.

Kudos to Adam J. White at The Weekly Standard for hoisting Warren Buffett on his own petard. Buffett is out with a new New York Times op-ed agitating for — what else — higher taxes. His condescending opening reads as follows:

Suppose that an investor you admire and trust comes to you with an investment idea. “This is a good one,” he says enthusiastically. “I’m in it, and I think you should be, too.”

Would your reply possibly be this? “Well, it all depends on what my tax rate will be on the gain you’re saying we’re going to make. If the taxes are too high, I would rather leave the money in my savings account, earning a quarter of 1 percent.” Only in Grover Norquist’s imagination does such a response exist.

An addendum: only in Grover Norquist’s imagination and Warren Buffett’s biography. White catches him thusly:

Early in his career, Buffett invested heavily—almost one third of his early fund’s capital—in Sanborn Map, a company that mapped utility lines and such. But he soon grew frustrated with the company’s leadership, which “operated more like a club than a business,” and which refused to return greater dividends to investors. So Buffett amassed more and more stock, and with control of the company finally in hand he pressed the board of directors to split the company in two (one for the mapping business, and one to hold the company’s other outsized investments).

Finally, the board capitulated. But with victory finally at hand, Buffett nearly scuttled the deal because of … taxes. As [Buffett biographer Alice] Schroeder recounts, quoting Buffett, one director proposed that the company just cleanly break the company, despite the tax consequences—”let’s just swallow the tax,” he suggested.

To which Buffett replied (as he recounted to Schroeder):

And I said, ‘Wait a minute. Let’s — “Let’s” is a contraction. It means “let us.” But who is this us?  If everyone around the table wants to do it per capita, that’s fine, but if you want to do it in a ratio of shares owned, and you get ten shares’ worth of tax and I get twenty-four thousand shares’ worth, forget it.’

Buffett was willing to walk away from a deal because the taxes would have taken too much of a bite out of it. Fortunately for him, the board gave in and allowed him to structure the deal that he liked, saving him from his own Norquistian response.

So is Warren Buffett an irrational businessman or an irrational policy analyst? All the evidence points in one direction.

Below is one of the latest cartoons from two-time Pulitzer Prize-winner Michael Ramirez.

View more of Michael Ramirez’s cartoons on CFIF’s website here.

Like I said last week, the lame duck Congress will be very active:

Confident that Republicans would retain their majority in the House, Speaker John Boehner, R-Ohio, told POLITICO that GOP lawmakers would reject any new taxes on households in the highest income tax bracket.

“We’re not raising taxes on small-business people,” Boehner said. “Our majority is going to get re-elected … We’ll have as much of a mandate as he will — if that happens — to not raise taxes.”

That anti-tax mandate would be shared by the White House if Mitt Romney wins tonight, of course.

H/T: NBC News

In keeping with my recent focus on the fruits of federalism — the divergence between states based on public policy — I thought I’d pass along the Tax Foundation’s newest numbers on state and local tax burdens. Here are the 10 most confiscatory locales in the nation (as reported by CNS News), represented in terms of the tax burden as a percentage of state income:

New York, 12.8 percent

New Jersey, 12.4 percent

Connecticut, 12.3 percent

California, 11.2 percent

Wisconsin, 11.1 percent

Rhode Island, 10.9 percent

Minnesota, 10.8 percent

Massachusetts, 10.4 percent

Maine, 10.3 percent

. Pennsylvania, 10.2 percent

And here are the 10 lowest:

Alaska, 7.0 percent

South Dakota, 7.6 percent

Tennessee, 7.7 percent

Louisiana, 7.8 percent

Wyoming, 7.8 percent

Texas, 7.9 percent

New Hampshire, 8.1 percent

Alabama, 8.2 percent

Nevada, 8.2 percent

. South Carolina, 8.4 percent

Notice a trend? All of the top 10 high-tax states are consistently blue (Wisconsin and — less likely — Pennsylvania may be in play this year, but those are exceptions to the historical trend). Meanwhile, all of the top 10 low-tax states are reliably red, with the two exceptions of New Hampshire and Nevada, both of which are in play this year, but both of which, regardless of party affiliations, also boast very libertarian political cultures.

The upshot: if you want to increase your take-home pay, move to a red state.

Take it from this Californian — the Golden State is no longer the destination du jour for starry-eyed dreamers looking to turn ambition into fortune. The rest of the west, however, looks pretty good. From the Daily Caller:

If you are looking to start a new business, Wyoming might be a place to consider moving. According to the Tax Foundation’s annual State Business Tax Climate report, Wyoming ranks first among the fifty states for most business-friendly tax code.

Behind Wyoming are South Dakota, Nevada, Alaska, and Florida. Washington, New Hampshire, Montana, Texas and Utah rank in the top ten.

For those of you keeping score at home, that’s eight of the top ten states for business located in the West. And if a pro-energy candidate wins the White House, expect the numbers from those states to become even more impressive, given the tremendous amount of resources in the region.

California has chosen gilded decline and reaped economic disaster. The rest of the west, however, has chosen freedom. And prosperity is following closely behind.

Larry Kudlow: “…reporter Jeffrey H. Anderson uses a Treasury Department study to chronicle the 7-Eleven presidency. In fiscal year 2012, ending September 30, the government spent nearly $11 for every $7 of revenues taken in. The exact figures are $2.5 trillion in tax revenues and $3.5 trillion in spending. In other words, it spent 44 percent more than it had coming in. Previous fiscal years look even worse: The government spent 56 percent more than revenues in fiscal year 2011 and 60 percent more in fiscal year 2010.

“All in all, according to Mr. Anderson, the government under the Obama administration received $6.8 trillion in taxes and spent $10.7 trillion — 56 percent more than it had available.”

Repeat after me: The government doesn’t have a revenue problem.  It has a spending problem.

The Cato Institute came out this week with its Fiscal Policy Report Card on America’s Governors and the results are very good for Tea Partiers. The nation’s top five chief executives in terms of fiscal stewardship are virtually all proud limited government advocates who have followed through on their promises of reining in government:

1 (tie) — Sam Brownback (R-Kansas); Rick Scott (R-Florida)

3 (tie) — Paul LePage (R-Maine); Tom Corbett (R-Pennsylvania)

5 (3-way tie) — Bobby Jindal (R-Louisiana); Jack Dalrymple (R-North Dakota); John Lynch (D-New Hampshire)

Lynch deserves some credit for being the sole Democrat to crack the top of the list, but not nearly as much as the Republicans who swept to huge majorities in the Granite State’s legislature and forced the governor to abide by New Hampshire’s “live free or die” ethos.

And the nation’s worst fiscal leaders? Is it any surprise that it’s a cadre of blue state liberals?:

46. Christine Gregoire (D-Washington)

47. Neil Abercrombie (D-Hawaii)

48. Mark Dayton (D-Minnesota)

49. Dan Malloy (D-Connecticut)

50, Pat Quinn (D-Illinois)

The full report is here.

Kudos to CNN host Erin Burnett for getting Obama campaign spokeswoman Stephanie Cutter to admit that President Barack Obama’s charge that Mitt Romney is campaigning on a $5 trillion tax cut is just wrong.

From a transcript provided by RealClearPolitics:

Erin Burnett, CNN host: So you’re saying if you lower them by 20% you get a $5 trillion tab, right?

Stephanie Cutter: It’s a $5 trillion tab.

[crosstalk]

Burnett: But then when you close deductions it’s not going to be anywhere near $5 trillion, that’s our analysis.

Cutter: Well, okay, stipulated. It won’t be near $5 trillion but it’s also not going to be the sum of $5 trillion in the loopholes that he’s going to close. So it is going to cost someone and it’s going to cost the middle class. Independent economists have taken a look at this. There aren’t enough deductions for those at the top to account for the number of tax cuts that they get because of Mitt Romney’s policy so you have to raise taxes on the middle class. As Bill Clinton said, it’s just simple math.

Burnett: Okay, they’ll just say that you can do that. There are other studies. I know the one to which you’re referring, but there’s also the possibility of economic growth.

Cutter: Prove it. Erin, prove it.

Burnett: We can’t prove either side, that’s all I’m saying, but the one thing that I can say is not true is the $5 trillion tax cut.

Cutter: I disagree with you. You can prove it. So then they should just say that they’re counting entirely on economic growth to pay for a tax cut. Which is an interesting theory because that is what George Bush and let’s look at how that turned out, we had the slowest economic growth since World War II.

Burnett: They’re not saying entirely, they’re saying closing loopholes and economic growth, both. I understand you disagree with it.

Cutter: But that still leaves you at least a trillion dollars short. The math does not work with what they’re saying. And they won’t name those deductions, not a single deduction that they will close because they know that is bad for their politics. Now look, this is the center, this is the core of Mitt Romney’s economic policy. Last night, he walked away from it, said he didn’t have a $5 trillion tax cut. He does. That’s what lowering the rates amounts to.

Don’t confuse them with the facts!

If headlines earn a vice presidential candidate’s stripes, then Joe Biden may merit consideration as Mitt Romney’s most effective attack dog.

A few days ago Biden said the middle class has been “buried” during President Barack Obama’s economic stewardship.  Today, Obama’s self-immolating Vice President confirmed Mitt Romney’s charge that the Democratic incumbent would raise taxes if reelected:

Biden said Romney and other Republicans often say `Obama and Biden want to raise taxes by a trillion dollars.’ Guess what? Yes, we do in one regard: We want to let that trillion dollar tax cut expire so the middle class doesn’t have to bear the burden of all that money going to the super-wealthy. That’s not a tax raise. That’s called fairness where I come from.”

It’s true Biden is gaffe-prone, but these kinds of statements are too true to be unintentional.

Watch yourself, Paul Ryan – Good Ole’ Joe is gunning for your job!

H/T: Fox News

My column this week explains how AARP, formerly known as the American Association of Retired People, exploited its relationship with liberal politicians to reap a $2.8 billion windfall from ObamaCare.  The massive payout comes from regulatory exemptions that help AARP increase its lucrative Medigap endorsement scheme.

But it’s not like President Barack Obama’s landmark health law ushered in a new era of revenues for the premier non-profit advocate for seniors.  With $458 million in revenues for 2011, AARP would rank as the sixth most profitable for-profit health care company, according to a report by staff members to Senator Jim DeMint (R-SC).

This puts AARP just behind Humana and ahead of industry giants like Coventry, Amerigroup and Health Net.

Best of all for AARP, because it designates much of its revenue as “royalty fees” instead of “commissions” for endorsing certain private Medicare plans it gets to avoid paying taxes on millions of dollars in income to the Internal Revenue Service.

An investigation (pdf) by House Ways and Means Committee members has asked the IRS to investigate whether AARP’s reporting practices violate federal law, and for good reason.

The investigators note that “In 1994 AARP paid the Internal Revenue Service (IRS) a one-time settlement payment of $135 million in lieu of taxes, resolving an audit over tax returns for years 1985 through 1993 for failure to fully pay unrelated business income tax (UBIT) on its commercial activities.”  And, “In 1999, the IRS and AARP once again reached a settlement to conclude tax years 1994 through 1998 with respect to the treatment of revenues AARP received from licensing and selling its name and logo to insurance companies.”

Sounds like AARP merits more scrutiny from the IRS.

From Fox News:

Small government and free-market capitalism are about to get put to the test in Honduras, where the government has agreed to let an investment group build an experimental city with no taxes on income, capital gains or sales.

Proponents say the tiny, as-yet unnamed town will become a Central American beacon of job creation and investment, by combining secure property rights with minimal government interference.

“Once we provide a sound legal system within which to do business, the whole job creation machine – the miracle of capitalism – will get going,” Michael Strong,  CEO of the MKG Group, which will build the city and set its laws, told FoxNews.com.

Strong said that the agreement with the Honduran government states that the only tax will be on property.

“Our goal is to be the most economically free entity on Earth,” Strong said.

It’s a fascinating experiment, though we can’t quite call it a novel one — this is, after all, a more extreme version of what Hong Kong does on a larger scale. And therein lies the rub. While there are a few minor shortcomings in the mechanics of this project (there’s already some protectionism in the new city’s labor laws, for instance, with businesses forced to meet quotas for native-born Honduran employees), the bigger concern is that it will be a lonely success.

Hong Kong, for instance, is consistently deemed the freest economy in the world, a trait that has led to it having a higher per capita GDP than the United States. Were this simply an argument on the merits over whether free markets work, the jury would be in. But this is no academic seminar. In less economically free nations, ideology may inform some of the hostility to capitalism, but the bigger issue is that opening up markets takes the power to select winners and losers away from government — a bridge too far for many politicians. Embracing economic freedom in the fashion of the Honduras experiment is laudable. But the hard work is not in allowing capitalism to succeed; it’s in convincing politicians to give it the chance to do so. That’s the biggest accomplishment here.

Dr. Barbara Bellar is running for State Senate in Illinois. That is a real shame for the Romney camp, which certainly could have used her services in the speechwriting department: