Thursday, May 14, 2009

BHI in the Boston Globe: Sales tax hike necessary?

BHI Executive Director David G. Tuerck in today's Boston Globe:
On this matter, it is the governor who is right and the bill's sponsors who are being "disingenuous." For one thing, the $900 million estimate apparently ignores the fact that sales taxes drive business to other states and to the Internet. Under the new law, a TV set that could be bought for $1,000 in New Hampshire will cost $1,062.50 in Massachusetts, just another reason to drive an hour to make a big purchase and to stock up, along the way, on liquor, cigarettes, and other items.

The proposed tax hike will have negative consequences for the state economy. We predict a loss of 12,666 private-sector jobs, as stores in Lawrence and Lowell lose business to stores in Salem and Nashua. And because unemployed workers stop paying income taxes, the state will lose revenue from that source even as it gains revenue from the sales tax. In fact, the higher sales tax can be expected to yield only about $674 million in new revenue when losses in other revenues are accounted for.

Before the Legislature decides to inflict a new burden on state taxpayers, retailers, and workers, it would do well to ask just why it wants to enact a broad-based tax increase in the first place. A 25 percent increase in the sales tax would be a panicky response to what was seen just a few years ago as an exercise not in fiscal ruin but in fiscal dexterity.

Thursday, May 7, 2009

Gordon Brown's upcoming pluck of the goose: Britain raises marginal rates

We knew all along that Gordon Brown was no Maggie Thatcher! Here's the unvarnished Brown, class warrior.

JEAN-BAPTISTE COLBERT, Louis XIV’s finance minister, famously said that the art of taxation was like plucking a goose; the aim was to get the most feathers with the least hissing. But tax policy should aim to do more than smother protest: it should also seek to raise the most money with the least distortion to economic activity.

By this measure, Britain’s attempts to fill the fiscal gulf created by recession are a dismal failure and a lesson to cash-strapped governments everywhere. Take marginal income tax rates, announced in the British budget of April 22nd. Once national insurance is added in, effective marginal rates will climb from 31.5% to 41.5% through to 61.5% on those earning just over £100,000 ($147,000), thanks to the withdrawal of the personal tax allowance. After that, the rate will fall back to 41.5%, before rising again to 51.5% on incomes over £150,000.

The bizarre incentives of income tax are only the start. High earners also face the withdrawal of tax relief on their own pension contributions and a tax charge on the “benefit-in-kind” provided by employers’ payments into their schemes. Depending on how much the employer contributes, this will push marginal rates well above 50%. It will also discriminate against employees in defined-contribution, or money-purchase, schemes where employers match what workers put in. But the effect is not uniform; the convoluted rules will mean some high earners will get more tax relief on their contributions than they did before. What a mess.

As recently as 2006, the government drove through a reform of the pensions rules that simplified a notoriously complex system. Employees could, in effect, make pensions contributions when they felt flush and still get tax relief. Those reforms were a much-needed incentive for employees to build up their pensions at a time when many employers were abdicating responsibility for providing a decent income in retirement. The new rules return pensions to the complexity of string theory.

The best tax systems combine low rates with minimal exemptions. Businesses and citizens should be making decisions based on their economic opportunities, not the advice of their accountants. But Gordon Brown is too clever by half. He introduced a sliding scale that made capital-gains tax highly complex, and then reversed himself, introducing a single rate of 18%. The effect was both to raise the tax rates for sellers of small businesses and to introduce a vast discrepancy between the tax rates on capital and income. An attempt to introduce a levy on foreign workers (known as non-doms) was botched, and may yet drive many high-earners out of the country.

These wheezes were designed chiefly with politics in mind: all those nasty plutocrats deserved a hammering. By putting economics second, Mr Brown has made it harder to balance the books. Waste and lower growth because of poor tax policy will only make the fiscal hole harder to fill. The new tax will do little to reduce Britain’s budget deficit. On the government’s own forecasts, which assume the wealthy will not change their behaviour, the assault on the rich will raise just £7 billion. With avoidance, the tax will raise still less
A higher top marginal tax rate of 61.5% above $147,000 is going to sock a lot of people.

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