Tax Policies in a Small World

The cliché that the "world is small" has increasingly become fact and not merely a clever statement. In fact, one of the most important books on the changes the world has faced in recent years is "The World is Flat" by Thomas Friedman. In it, Friedman points out that the lag time between information and decision making is at a all time low. Not only do people know where the best places are for the best deal on a car or a TV, they know the best states and countries for doing business.

Ireland went from what was practically a "third world" country in Europe to one of the fastest growing economies in the world. That was directly linked to its efforts of pursuing the lowest corporate tax rates in the industrialized world. Meanwhile, in the same time frame, Japan's economic situation has only become more dire as it continued to pursue high tax policies and garnering the dubious distinction as having the worse tax environment for business among modern economies.

The problem facing governments is simple, because in addition to being able to find our information fast on changes in government policies, people are able to move capital at a more rapid rate than any time in history. This is particularly true for the very wealthy (who have the resource to move money), who are always a popular target for high tax policies. The problem is not only among countries, but among regional or state governments (depending on the country).

Take the problem facing Maryland. The Wall Street Journal notes that the state of Maryland was in a terrible fiscal crisis and the government decided to saddle the deficit on the backs of the rich and "created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were 'willing and able to pay their fair share.' The Baltimore Sun predicted the rich would 'grin and bear it.'" The article goes on to point out that a year after the tax increases, "One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller's office concedes is a 'substantial decline.' On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year -- even at higher rates."

There is no doubt that the recession is playing a role in the problem of less revenue coming into the states. However, the amount of revenue that Maryland is losing far out paces the majority of the states in the union. The rich are people and not blocks of wood. Unlike an inanimate object, when people are attacked (in this case "the rich" in the form of high taxes) they "fight" (which is why they join the many other income groups adversely affected by government in protests) or they "flight" (capital leaving to find safer or more profitable places).

Obama has waged a war on those he deems affluent. This is beginning to include those who make less than $250,000 a year as seen in cigarette taxes and Cap and Trade. Even before many of Obama's policies have been put into law, businesses are responding. USA Today reports that Federal tax revenue "plunged" by the largest amount since 1981." There is no question that many of the dollars disappeared due to the recession, but there appears that much may have taken "flight" to safer places.

If the US is serious about increasing its revenues, it will need to develop tax policies that allow it to compete with other countries that are fighting to improve their economic circumstances. Just as companies have to compete with low prices, countries now have to compete with lower taxes.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

It is not About Doing Something, but the Right Thing

The majority I speak to are excited about Barack Obama and his sweeping legislation that is going to possibly change this economy for decades to come. They are excited because they argue that something -- anything -- needed to be done. This type of logic does not serve well in any other aspect of our lives. For example, we don't praise the heroic efforts of the person who poured gasoline on a burning building, or the person who avoided rush hour traffic by driving on a shoulder, or the person who attempts to forget about his problems through alcohol. In the real world, we know there are rules to almost everything. There are also rules to the economy: some things work, other things do not work.

There are two basic views of government. One sees the best government doing as little as possible and being focused on protecting individuals from other individuals and our country from foreign adversaries. The opposite extreme is that government should play a pervasive role in every aspect of our lives and that it should be the primary driver of our economy and society. The vast majority who have an opinion fall some where in between. Far more than those with an actual opinion have no real view at all. Those people are my concern here.

This uniformed majority are the same people who are driving Barack Obama's extremely high approval ratings. They don't really know what they are doing, or what they believe, they are merely very sincere. They think some action is, at least, action. But the actions of this administration will take generations to pay off and they promise to make things far worse than better.

The majority of countries around the world are moving away from more government as an answer to economic problems. Although still Communist, China's economic success has been due to areas of decentralization. This is true, also, for India's famous bureaucratic country. Maybe the best example to the United States is Ireland.

For decades, Ireland was little more than a Third World country. It was uncommon for Europeans to face starvation in the 19th century, but it was a major problem on the Emerald Island. On the economic front, Ireland had the highest tax rates among industrialized nations. This is not the case any more. Ireland dramatically lowered its highest tax rates to around 10 percent and for over a decade it has had one of the fastest growing economies in the world. Countries that have moved towards government solutions and high taxation are only seeing more economic problems. Japan has had chronic economic problems for over two decades (and the highest corporate tax rates in the world). The US now has the second highest and we are quickly catching up in terms of economic woes.

We all know that businesses have to work hard to attract customers, and states have to work hard to attract businesses, but don't countries have the same responsibility as well? Ireland seems to understand that and, in light of the "something" our government did this past week, it is clear the US does not.

Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

Lessons About Taxation Remains the Same

Recently someone sent me a copy of a speech I gave around fifteen years ago in Warsaw, Poland. It appeared in Vital Speeches of the Day. It was funny, "Kevin, did you see this?" Yes, I'm familiar with it, after all I wrote it. His enthusiasm compelled me to sit down and to review to see if there were any lessons garnered then that would be useful now.




The basic thesis of the speech was that freedom works and I pulled many examples from both history and current circumstances (at the time). One lesson that stood out in particular was the miracle story of Japan. At the time I gave that speech in the early 1990s, Japan was the poster child of economic freedom and had one of the fastest growing economies in the world following infrastructural and economic disaster after World War II. The reason for that phenomenon, at the time I gave that speech could be summed up in three things about Japan:

• Japanese management and workers cooperate as a team to succeed in the market place, rather than oppose one another as in the case of labor unions. This is reflected in the fact that the Japanese have company unions rather than labor unions. Company unions are inclusive, when they say "us against them" they mean competitors. When labor unions say "us against them" they mean management. These subtle differences are crucial in the success of Japanese corporations.


• There is great emphasis on savings and investment. The typical Japanese laborer in urban areas saves approximately 20 percent of his income.


• Finally, the tax system encourages economic growth by staying very low. In fact, their taxes are the lowest of any industrialized country in the world.
  

Those who monitor current affairs know that Japan is now known for its economic stagnation and has suffered such for over a decade. Why the change in fortune? One does not need to look any further than point number three. Today, Japan has the highest tax rates of any modern economy. Meanwhile a European economy known for perennial economic weakness -- Ireland -- is one of the fastest growing economies in the world. The reason for its success is due to Ireland reducing its tax rates to among the lowest in the world.

Nothing is more effective in attracting capital and stimulating economic growth than lower tax rates. If the United States is serious about fostering economic growth and prosperity, it will demonstrate such by competing with other countries for businesses and jobs through lower tax rates.


Kevin Price is a syndicated columnist whose articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media. Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at PriceofBusiness.com. Visit the archive of past shows here.

The Real Reason the Europeans Like Obama

Barack Obama was received in Europe like a rock store with thousands of fans showing up to greet him and heads of state were acting like swooning teenagers. Is it because he is young? African American? Handsome? Articulate? Those might all be contributing factors but the most likely reason of all may have been revealed in an interview I had with Steve Moore, Senior Economic Editor of the Wall Street Journal.

On my show today Moore jumped into the discussion many are having through out the country and around the world -- why is Obama so popular. Maybe, instead of the conventional wisdom listed in the examples above, it is actually good old fashion competition. The Europeans believe that Barack Obama could be good for their businesses.

Much of Europe is moving away from excessive taxation that had been so pervasive and crippling on the continent and they are moving towards tax systems that attract businesses. In fact, the only Industrialized country that has more excessive taxes on corporations is Japan. According to the Tax Foundation, the United States has a combined federal and state tax rate that hovers close to 40 percent. While Ireland's is only 12.5 percent (which is why it is also one of the fastest growing economies in the world).

The European governments understand that business owners are their customers. The developing countries, like China and India, haven't attracted business because of the sophistication of their legal systems or better technology, but through cheap labor. Europe is rapidly moving towards lower taxes on wealth creation through flat tax and other predictable and low tax approaches as a way of bringing companies to them. Obama has made it clear, he plans on raising taxes on corporations, that only makes the European countries more attractive.

Obama is popular with Europeans because his policies will benefit them. Maybe he should run for office over there.

Would you like to get a periodical email of the best of Kevin Price's political and economic content? Subscribe to the Houston Business Review at Info@HoustonBusinessShow.com.

Kevin Price is Host of the Houston Business Show (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.