Interesting Tax Articles – More Reasons We Need Fair Tax

Here are two recent articles that just continue to illustrate why we need the FairTax:

From http://online.wsj.com/article/SB123846422014872229-email.html

Lawrence Summers, President Obama’s chief economic adviser, declared recently that “Let’s be very clear: There are no, no tax increases this year. There are no, no tax increases next year.” Oh yes, yes, there are. The President’s budget calls for the largest increase in the death tax in U.S. history in 2010.

The announcement of this tax increase is buried in footnote 1 on page 127 of the President’s budget. That note reads: “The estate tax is maintained at its 2009 parameters.” This means the death tax won’t fall to zero next year as scheduled under current law, but estates will be taxed instead at up to 45%, with an exemption level of $3.5 million (or $7 million for a couple). Better not plan on dying next year after all.

This controversy dates back to George W. Bush’s first tax cut in 2001 that phased down the estate tax from 55% to 45% this year and then to zero next year. Although that 10-year tax law was to expire in 2011, meaning that the death tax rate would go all the way back to 55%, the political expectation was that once the estate tax was gone for even one year, it would never return.

And that is no doubt why the Obama Administration wants to make sure it never hits zero. It doesn’t seem to matter that the vast majority of the money in an estate was already taxed when the money was earned. Liberals counter that the estate tax is “fair” because it is only paid by the richest 2% of American families. This ignores that much of the long-term saving and small business investment in America is motivated by the ability to pass on wealth to the next generation.

The importance of intergenerational wealth transfers was first measured in a National Bureau of Economic Research study in 1980. That study looked at wealth and savings over the first three-quarters of the 20th century and found that “intergenerational transfers account for the vast majority of aggregate U.S. capital formation.” The co-author of that study was . . . Lawrence Summers.

Many economists had previously believed in “the life-cycle theory” of savings, which postulates that workers are motivated to save with a goal of spending it down to zero in retirement. Mr. Summers and coauthor Laurence Kotlikoff showed that patterns of savings don’t validate that model; they found that between 41% and 66% of capital stock was transferred either by bequests at death or through trusts and lifetime gifts. A major motivation for saving and building businesses is to pass assets on so children and grandchildren have a better life.

What all this means is that the higher the estate tax, the lower the incentive to reinvest in family businesses. Former Congressional Budget Office director Douglas Holtz-Eakin recently used the Summers study as a springboard to compare the economic cost of a 45% estate tax versus a zero rate. He finds that the long-term impact of eliminating the death tax would be to increase small business capital investment by $1.6 trillion. This additional investment would create 1.5 million new jobs.

In other words, by raising the estate tax in the name of fairness, Mr. Obama won’t merely bring back from the dead one of the most despised of all federal taxes, and not merely splinter many family-owned enterprises. He will also forfeit half the jobs he hopes to gain from his $787 billion stimulus bill. Maybe that’s why the news of this unwise tax increase was hidden in a footnote.

THE GLOBAL TAX REVOLUTION

Few policymakers today want to regulate trade and capital flows as countries did in the 1950s, but dangerous movements are afoot to control and limit tax competition. Policymakers in international organizations such as the Organization for Economic Co-operation and Development (OECD), the European Commission and the United Nations (UN) want to turn back the clock and create an OPEC for taxes to insulate governments from tax competition, say authors Chris Edwards and Daniel Mitchell, in their new book, “Global Tax Revolution.”

The good news is that the United States is uniquely situated to protect and advance global tax competition. Edwards and Mitchell recommend U.S. policymakers:

* Use American influence inside the OECD to kill the anti-tax competition project; the United States is the biggest funder of the OECD, providing nearly one-fourth the organization’s budget, meaning that we have the ability to block further attacks by the organization on lower-tax jurisdictions.
* Reject European Union invitations to participate in cartel-like tax initiatives, such as the savings tax directive.
* Block possible UN schemes for global taxes, global tax regulations and a global tax organization; fortunately, the United Nations has not made much progress toward those ends, but these ideas are often discussed and may come to fruition unless tax-payers remain vigilant.
* Oppose efforts to change U.S. tax policies in anti-competitive ways or to expand the reach of the U.S. worldwide tax system; also, efforts to by U.S. policymakers to blacklist low-tax nations and jurisdictions should be rejected.

One way to help ensure that American policies stay on the side of international tax competition is for us to proceed with domestic tax reform. With America’s current tax system, politicians often fret about companies moving profits to the Cayman Islands and the like, and they are susceptible to siding with high-tax countries on tax policy matters. However, if we proceed with major tax reforms and make the United States a magnet for investment and jobs, it will be much easier for policymakers and the public to understand the benefits of open tax competition, explain Edwards and Mitchell.

Source: Chris Edwards and Daniel Mitchell, “Global Tax Revolution: The Rise of Tax Competition and the Battle to Defend It,” Cato Institute, September 2008.
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