I recently began receiving an email update from the "market center blog" run by Andren Quinlan (Center for Freedom and Prosperity Foundation, and president of CFP organization) and Dan Mitchell (Cato Institute). The Center for Freedom and Prosperity (that logo is on the market center blog page, even though the blog claims that it represents the opinion of the two bloggers and not their organizations) is an organization that talks a lot about "free" markets: it casts itself as fighting against the OECD, which it views as an international tax cartel, and protecting the financial privacy of Americans. As the Wikipedia entry notes (written with a slant that suggests organization members may have had a hand in the drafting or editing), it is a lobbying group for market liberalization that many associate with offshore financial centres. Since it spends a considerable amount of its lobbying energy on tax issues--propagandizing AGAINST progressive taxation and AGAINST cooperation among developed countries in finding reasonable tax systems that can be upheld in a globalized financial environment--, I thought it would be worth considering.
The CFP promotes the idea that tax competition is a per se good--i.e., that it is a positive development when governments attempt to attract businesses to their jurisdictions by lowering tax rates, leading to a 'race to the bottom' in taxes that may well relegate vital government programs to the trash bin. The Center is therefore directly opposed to efforts like that in the OECD to bring nations together in a cooperative endeavor to make tax systems work well, rather than letting tax competition in a globalized financial world reduce tax systems to the lowest common denominator. That antagonism to government cooperation in ending tax haven abuses and the downward spiral of tax competition depends on at least two related assumptions--that smaller government is necessarily better and that tax competition won't starve governments below the amount "really" necessary. Of course, those programs that remain when budgets are cut tend to be those that are favored by people in power or powerful people. The Center doesn't talk much about those issues, but makes what I call the "free market generic argument" that tax competition and small government promote economic growth. See for example this "study" on the benefits of tax competition and smaller government arguing that the agencies of Energy, Education, Commerce, Housing & Urban Development, and Agriculture are illegitimate and that all of Social Security and Medicare should be handled as private functions. The study also claims that the US standard of living is better than in Europe, which is a highly contestable statement, given the uneven distribution of resources and the lack of many of the safety net features available in most European democracies. It promotes the "Rahn curve" --a "theory", much like the Laffer curve-on-a-napkin "theory", that claims there is an optimal low government size as share of GDP for encouraging economic growth, but doesn't distinguish between totalitarian governments and sustainable democracies.
As I've noted in prior postings, reliance on this kind of abstract ideology of a free market minimalizes the important role of government institutions in directly fostering economic growth and indirectly doing so through provision of a stable market environment in the first place, as well as an educated citizenry and much of the infrastructure that supports human commerce (road, utilities, communication systems, etc.). It further trivializes the fact that unmediated commerce may leave a few powerful groups in control of the economic system (not exactly a "free" market) and create gross inequalities that actually hamper the kind of broad-based economic growth on which sustainable democracies can be built.
The Center's "fact sheets" tend to be high on opinion and low on fact. So tax credits, which are designed to protect companies from against over-taxation in a world-wide tax system, are "factually" described by the Center as "offering scant relief because America's corporate tax rate is so high compared to other nations." See the fact sheet on territorial taxation. This is simply not true, since the foreign tax credit is a sought-after benefit that companies very astutely massage to significantly lower their income tax liability on their US source income. Recent legislation permitting substantally more cross-crediting in the calculation of the foreign tax credit makes the credit even more valuable (too valuable, in my opinion, in that it reduces U.S. tax rates when it should not). Interestingly, in other Center materials, the Center admits that the United States is actually a tax haven. Statutory tax rates are just the starting point for determining corporate taxation, and in fact many major public companies have very low federal corporate income tax liability (in part because of the foreign tax credit).
Another example is the Center's propaganda for a flat tax. A flat tax is literally a tax that is charged at a fixed rate rather than at a series of progressive rates depending on the level of income (thus creating brackets of income subject to tax at a certain rate). For several years now, one of the themes of various organizations pushing for radical changes in the federal income tax system, such as the Cato Institute, has been support for a "flat tax" in the United States, in spite of the strong and steady majority support across the country for a progressive tax system. The intent, one guesses, is to erode that support through the use of media bites and "spin" in the way we ordinarily see now in political campaigns.
If the only thing one read were the Center's propaganda on the flat tax, it might be easy to believe that the flat tax is the panacea the Center says it is--something that would reduce complexity, create fairness, ramp up economic growth, and of course further the "free" market. The Center claims that a flat tax is necessarily tied to changing the U.S. tax system from a world-wide income basis to a territorial taxation basis. See the fact sheet on territorial taxation. That's clearly not the case--our current system could be made into a flat tax system by merely removing the graduated taxing provisions.
And of course it makes "Laffer Curve" arguments for the value of a flat tax--if you lower tax rates to a single flat rate, you will generate economic growth and get high tax revenues. What are the flat tax countries cited by the Center and the market center blog? Estonia, Bulgaria, Albania, Montenegro, Slovakia, Macedonia, Kyrgrzstan and other emerging economies for which a simple system may make considerable sense. To suggest that the United States would benefit from an equally simple system, and to disregard the evidence from other developed economies, seems both naive and misleading.
Take another example--the Center sets up Iceland's change to lower flat tax rates as the reason for a recent expansion of economic growth there. See this release. But Iceland is in fact more highly taxed than many countries, and more regressively taxed than is likely good for the long term health of the country. In addition to a labor tax (36%), capital tax (10%), corporate tax (18%), estate tax of 5% and payroll taxes of 6%, it also has a value-added tax of about 25% (see Deloitte's Global Indirect Tax Rates). So perhaps the message should be that high taxes lead to robust economic growth?