Category Archives: Taxes

The Progressives’ Agenda for North Carolina

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As the North Carolina legislative session came to a close yesterday, Forbes recently wrote a summary of the progressive agenda within the Moral Monday crowd for the Tarheel state.  It seems that those protesting in Raleigh, not only want the state legislature to provide a laundry list of government programs for North Carolinians, but also have little regard for bankrupting the state.  The list of demands includes expanding Medicaid, state subsidized child care for all, and state-provided health insurance for all, which would require an almost ten-fold increase in the state corporate income tax.

The difficulties with this policy agenda are numerous, but the most troublesome reality of the Moral Monday protestors’ demands is the faith in government solutions to complicated economic and social issues.  I use “issues” purposely because once we start to call all these resources needs “problems” we open the door to a grand plan for top-down government solutions (and faith that this top-down approach will solve all “problems”).

A fundamental shift is needed, among both the protestors and the policy-makers they seek to influence, in their perspective on the nature what government can and cannot accomplish.  Additionally, economic growth in the state is the only means whereby workers can receive they resources needed to provide for their families and where firms can continue to invest in opportunities for future growth.  Commanding more tax revenue from North Carolina businesses with higher state income tax (on top of one of the highest federal income tax rates in the world), will drive firms to other states further hampering both the state economy and the state budget.

If the recent economic downturn has taught us anything, it should be clear that economic stability (growing firms and subsequent job growth and positive investment opportunities) are not guaranteed by government policy but are the result of profitable incentives and market-driven change.  Let’s set a policy agenda that results in stimulating economic opportunity instead of simply finding ways to extract resources from firms forcing them to look for opportunities elsewhere.

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North Carolina Tax Reform

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The North Carolina Senate GOP recently revealed a plan for far-reaching tax reform.  This major reform will make several changes by lowering marginal income tax rates on both individuals and corporations, as well as begin to shift the burden of taxation to consumption rather than income.  These changes would be financed by a reduction in spending (long overdue) and an increase of taxes on services that are currently exempted.

This is the type of reform that is needed in a state with persistently higher unemployment than seen nationally, and a tax system that penalizes earning.

Moving a greater share of the tax burden to consumption is more efficient and more “fair” by any measure.  Critics argue that consumption taxes hurt those with lower income, yet this belief is based only on the current antiquated tax code.  Income taxes penalize all earners, and these taxes create a disincentive to earn (and for small business owners there is a disincentive in show a profit).  A system that forces any earner to hide and shelter their income is backwards.  In fact, consumption taxes are much more efficient.  They more you consume, the more tax you pay.  Thus, those who earn more income (and who also spend more of that income) will pay more in taxes.

Economists have argued for decades that consumption tax systems are more efficient because they push the individual tax burden into the future.  Younger tax payers will have more incentive to earn today, and then they will consume more in the future (especially after retirement).

Governor McCrory and the NC legislature should move forward on this reform and establish North Carolina as a national leader in tax policy change.

NC Tax Proposal – On the Right Track

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There is controversy from the McCrory administration over the recent tax reform proposal by Senate Republicans, yet the proposed changes are a step in the right direction.  Taxation on consumption rather than income is more efficient, and it creates the right incentives to earn and to locate a business in the state, but McCrory’s top budget officer has concerns.

 

Reforms are sometimes difficult, but eliminating the income tax would go a long way toward stimulating the North Carolina economy.

Should We Be Talking About a Flat Tax?

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The economy has most certainly become the central discussion point for both the Obama and Romney campaigns during this election year.  With the addition of Congressman Paul Ryan to the Romney ticket in August, discussions of the Ryan Plan have reemerged.  Ryan has largely shied away discussing a flat tax option, although he did suggest a flat tax plan in the past, and found some merit it candidate Rick Perry’s optional flat tax plan last October.  On Tuesday, Ryan appeared on GMA where he argued with anchor George Stephanopoulos that a reduction of tax rates was necessary for economic growth.  With all the tax reform talk, it’s left me wondering if the Eastern European model of flat taxes will affect the political rhetoric before the November elections.

Since 1994, 24 countries (the bulk in Eastern Europe) have adopted a flat tax system.  This spread of the flat tax has been quite remarkable during the past 15 years, and it has contributed to the widespread economic growth throughout Eastern Europe.  Additionally, the flat tax in many of these countries has helped create a simple system of revenue collection that saves millions in implementation and collection costs.

Is the European model the ticket to U.S. financial recovery?  Let’s first consider the complexity of the U.S. tax code.  It is estimated that taxpayers and firms spend over 6 billion hours per year attempting to correctly file tax returns.  Not only does this figure represent the equivalent of millions of workers, but it also pulls billions of dollars out of more productive uses.  According to the IRS Taxpayer Advocates, who reported to Congress in 2010, the complexity of the American tax code is driven in part by the continual changes to the system as the federal government attempts to squeeze more and more out of taxpayers.  In the past decade there have been approximately 4,400 tax code changes resulting in an additional 3.8 million words to document the U.S. tax code.

It is clear that this complexity costs billions of dollars each year just for taxpayers to comply with the laws, yet it also costs the Federal government billions in tax fraud and avoidance.  Again, Eastern Europe provides a lesson here where compliance of Russian taxpayers increased by over 30% after the adoption of a flat tax system.

In addition to the massive waste of resources due to complexity, the American tax code is a drag on economic growth and progress.  U.S. households and firms make decisions with their resources that are based not on market returns but on tax sheltering and loopholes.  Foreign firms weigh the costs of locating in the U.S. based on a tax rate that is the second highest in the world.  Congress and the White House are continually using the tax code to regulate.  The tax code has become the primary means of legislation, and the continual additions and changes imposed on the tax system contribute to uncertainty and fear among firms which eventually lead to decisions that hinder economic development.

Objections to a flat tax almost always hinge on fairness rather than economic efficiency or outcomes.  A progressive tax is deemed “fair” because higher income earners pay a higher marginal tax rate, and thus any talk of a flat tax is immediately rejected by those who see unnecessary benefits to the rich.  Yet, with a flat tax the more you earn the more you pay (as with a progressive tax system) and with a true flat tax you no longer have the countless loopholes and deductions to hide behind.  A flat tax system is more “fair” by any economic measure as taxpayers do not have to spend time and resources gaming the system in order to shelter their income (a practice that certainly benefits the rich).

If America wants to move past the stagnation of the previous four years and begin to see consistent economic growth again, tax reform is necessary.  The examples in Eastern Europe demonstrate that flat tax reform is possible and can have a significant economic impact.  What these examples also show, is that strong executive leadership is a crucial component of any successful tax reform.  The Romney-Ryan ticket has a clear opportunity to set the agenda early and champion the necessary reforms to unburden American individuals and firms with an outdated, inefficient, and costly tax system.

Dr. Peter Frank is co-author of a recent study entitled “The Flat Tax: Has its Time Come?” which can be read in its entirety at www.jessehelmscenter.org.  Frank is also the Jesse Helms Free Enterprise Fellow at the Jesse Helms Center and a professor of economics at Wingate University.  You can reach him by email at PeterFrank@jessehelmscenter.org

The Messy Tax Code

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As we enter the final days before IRS filing is due, many are considering the mind-numbing complexity of the U.S. tax code.  It is estimated that taxpayers and firms spend over 6 billion hours per year attempting to correctly file tax returns.  Not only does this figure represent the equivalent of millions of workers, but it also pulls billions of dollars out of more productive uses.  According to the IRS Taxpayer Advocates, who reported to Congress in 2010, the complexity of the U.S. tax code is driven, in part, by continual changes to the system as the federal government attempts to squeeze more and more out of taxpayers.  In the past decade there have been approximately 4,400 tax code changes resulting in 3.8 million words to document the American taxation system.  Since 1913, the tax code has ballooned from 400 to 72,536 pages in July 2011.  Worse yet, the blog Political Calculations expects that number to jump to 74,944 in 2012.

The irony of such an intricate tax system is that complexity is connected to compliance.  This is true both of honest taxpayers and evaders.  A recent report stated that IRS help centers provided wrong answers to taxpayer questions almost 30 % of the time.  Even the 90,000 plus IRS workers are unable to keep up with this ever-changing system.

The obvious question is why the complexity?  Why does the federal government try to increase revenue through such a complex set of rules?  The answer goes back to the fundamental role of government.  If the government wants more of something it subsidizes it, and if it wants less of something it taxes it.  A subsidy to the corn industry helps farmers grow more corn and more ethanol is produced.  A tax on imported sugar keeps sugar growers in America happy by keeping out global competition.  So, Congress uses the tax code to regulate the market in order incentivize specific behavior.  In other words, the complexity of the tax code is due to the unbridled desire for Congress to regulate.  The complexity is not a necessity to ensure Congress replenishes its coffers each year.

Congress loves to provide incentives to the tax code.  Any problem it wants to solve, use the tax code.  Any behavior it wants to change, use the tax code.  Any industry it wants to prop up or diminish, use the tax code.  President Obama’s stimulus package, which passed early in his presidency, added 300 pages to the tax code.  Manipulation of the tax code has simply become de facto government regulation.  This is not a new practice for Congress or the President.  Ever since the 16th Amendment, the federal government has increasingly used income taxes (on individuals and businesses) to regulate, but the ridiculous nature of this ever-increasing complexity is out of control.

Pursued by industry in order to impact individual incentives, federal tax deductions exist for children with an overbite who enroll in clarinet lessons and whaling captains can deduct ship repairs even though whaling in the U.S. is illegal.  The government also provides many additional deductions of impact healthy behavior from quitting smoking to doctor-ordered exercise.  While these may be a benefit to your health, is it prudent to add to the increasing complex system with additional changes, loopholes, and deductions?

Sadly, simplifying the tax code has become a partisan issue pitting those in favor of smaller government versus those who look to government to solve economic and social problems.  This is a mischaracterization of the issue.  Tax complexity is a massive waste of resources.  No matter if you are conservative or liberal, the billions of dollars invested in tax compliance are wholly unnecessary.  There may be differences on how to use the billions of dollars that would be saved with a simple system, such as a flat tax or a consumption tax, but all taxpayers should agree that 90,000 plus IRS workers and $430 billion spent each year on compliance is a colossal waste.  Now let’s convince Congress to change the system.

Obamanomics or Reaganomics?

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My newest op-ed was just published by WND.com.  In it, I discuss the ways in which government needs to “back out of the system” in order to stimulate real growth-much as Reagan did during his years of Presidency.  The op-ed is based on my latest Jesse Helms Fellows white paper  “Research on Reaganomics: Past Contributions and the Future of Economic Growth Policy.”

You can read the Obamanomics or Reaganomics op-ed at World Net Daily’s site or you can read it in its entirety below.

OBAMANOMICS OR REAGANOMICS?

Exclusive: Peter Frank advocates reversal
of ‘government is the solution’ mentality

Published: 12/16/2011 at 1:49 PM

http://www.wnd.com/2011/12/378229/print/

Economic growth is of primary concern for policymakers and the Obama administration as the president continues to tout policy designed at stimulating job creation. The mantra continues that in order to get the economy growing again, and move people into the labor force, government needs to spend more. A jobs bill, a stimulus package, a bridges bill, etc. – all that is needed is more government spending. Congress has all but forgotten, or so it seems, about the growing national debt with a $1.3 trillion budget gap this year alone. So the spending proposals continue. To what end? And has this solution proved effective in the last series of major economic challenges of the late 1970s and ’80s?

The Obama administration recently approved a half-billion-dollar federal loan guarantee to an electric-car company that has decided to manufacture its first line of automobiles in Finland. Is this the path to growth and continued prosperity for Americans? The problem here is not a question of intentions. Surely all legislators and the president desire to put Americans back to work. The problem resides in the basic limitations of government. There is no agency, politician, or bureaucrat that has enough information to efficiently direct resources in order to ensure a particular outcome. Decision-making by market participants informed by the specific knowledge of their complex circumstances is the only way forward. Washington lawmakers are unable to predict U.S. tax dollars fleeing to Finland and employing Finish autoworkers.

Instead of pushing spending bills and stimulus packages, instead of inciting protesters to blame American firms for all the evils in the world, the president should shift his focus to policy of which government can actually predict the beneficial outcome. Tax reform is the solution. Ronald Reagan demonstrated in the 1980s that when government gets off the backs of the people economic change will follow. Reagan pursued radical tax reform for two primary reasons: to lessen the burden of government while promoting the founding ideals of economic and political freedom, and to promote incentives that generate economic growth.

Optimal tax policy is not that which maximizes revenue to the federal government. Government has a limited function to perform, primarily a protective one, yet it is clear that for too many in Washington that the reach of government should have no bounds. Thus, when policymakers view government as the first solution to all economic problems, spending decisions are made irrespective of revenue – which leads to the massive deficits.

In addition to promoting liberty, the unprecedented tax reform ushered in by Reagan set a course for economic growth that was unparalleled in U.S. history. Cutting marginal tax rates for all wage earners and for the highest earners by 42 percent in six years, Reagan changed the incentive to work and earn and thus unleashed frenetic economic activity. This type of leadership and this scale of reform is what America needs today.

The solutions offered by the Obama administration to the economic stagnation that persists in the U.S. economy all reside in a failed ideology. Unlike during the 1980s, the belief in Washington today is that government is the solution and the real problem is tax policy that fails to generate enough revenue for the government to spend. Pulling dollars out of the market economy for government to spend on stimulating the market economy is backwards, yet this is exactly what the president is pushing for.

The time has come for politicians in Washington to pursue radical tax reform in the model of Reagan 30 years ago. Incremental changes in marginal tax rates will not provide the stimulus needed to jump start a sluggish economy, and raising rates on any level of income will only increase (albeit temporarily) the ability for government to spend more using the failed approach of “more spending” as the only solution. A complete change of the tax code will usher in a new decade of prosperity as occurred in the 1980s, but this will only happen if new leadership in Washington governs with the conviction that less government will lead to more “public” prosperity.

Why Democrats Hate a Balanced Budget Amendment

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My latest piece, “Why Democrats Hate a Balanced Budget Amendment” was just published at BigGovernment.com.  You can read my piece about the struggle for a Balanced Budget Amendment at their site or you can read it in its entirety below:

WHY DEMOCRATS HATE A BALANCED BUDGET AMENDMENT

By Peter Frank

http://www.breitbart.com/Big-Government/2011/07/26/Why-Democrats-Hate-a-Balanced-Budget-Amendment

With Sen. Harry Reid (D.-Nv.) leading the charge that killed the Cut, Cap and Balance Act(it apparently was the “worst piece of legislation” he’d ever seen), and a new deal to break the impasse over raising the debt ceiling looming, it’s appropriate to ask why Democrats hate the idea of a balanced budget amendment.

Americans are forced each day to live with a balanced budget – families can only spend more than their income for a short time without ultimately going into default. Firms in a private market must live with a balanced budget or they’ll quickly exit industry.

So, why do Democrats hate the idea of a balanced budget amendment? Such an amendment would force Congress to spend within its means. What’s the problem with forcing expenses and revenue to equal each other? It seems to make sense in the absence of some mechanism (like profits and losses in the private market) to incentivize a prudent use of resources, that politicians should be bound to spend within their means.

It’s not that Democrats don’t believe in fiscal discretion or think there are no consequences to amassing a massive debt for future generations to pay. President Obama has repeatedly stated that deficit reduction is a priority, and he favors a “big deal” to both raise the debt limit and reduce spending by billions. Democrats in Congress have supported these goals of working hard to reduce the deficit over the next decade. Listening to lawmakers speak about their desire to cut spending, one would expect wide-spread bipartisan support for a balanced budget amendment.

Not so fast.

The bottom line for Democrats is that a constitutional law forcing spending and revenue to equate signifies a massive loss of political power. Democrats in Congress claim that a balanced budget will devastate the economy because they will not have the ability to spend discretionary dollars whenever they see fit (i.e. when they deem it necessary for the economy). House minority whip Steny Hoyer (D.-Md.) said they he wouldn’t support it because it would “make it virtually impossible to raise revenue” (i.e. taxes). I’ll let Michelle Malkin handle the fallacies in Hoyer’s reasoning.

Democrats refuse, no matter how fiscally wise, to give up the substantial power that comes with spending taxpayer (and borrowed) dollars. The President and Congressional Democrats want to solve the deficit problem by cutting future program spending while raising the debt ceiling in order to save America from default. Imagine trying to encourage a teenager to pay off his first credit card by increasing the loan limit and telling him that in the future he’ll have to buy fewer clothes. It just doesn’t make sense.

The problem with the Democrats approach is that it fails to force future lawmakers to live within a budget and to provide any long-term incentive to align spending with revenue. The answer is a balanced budget amendment, yet Democrats are unwilling to cede their unmitigated spending power. They’d rather raise the debt ceiling to keep their power safe. The recent financial crisis and the subsequent economic downturn shows exactly how billions of dollars are spent based on congressional “insight,” with little effect.

The problem of knowing where to spend, when to spend, and how much to spend is a problem that is appears unsolvable inside the halls of the U.S. Capitol.

We can expect the many newly elected Republicans in the House to continue trying to limit the power of government (and their power to spend). Limiting power is a tough sell in Washington today, especially when Democrats are looking to swing the election victory pendulum back in their corner.