8 minute read
Tax Policy
THOMAS MCARDLE was a White House speechwriter for President George W. Bush and writes for IssuesInsights.com. Thomas McArdle
Flat Tax Now
Manchin’s latest U-turn highlights the importance of a flat tax amendment
Those who know the value of freedom most keenly are those who have lived under totalitarianism.
When the Eastern Bloc nations were finally liberated more than three decades ago now, it was no surprise that they sought capitalism like a man lost in the desert yearning for water. But what did astound many was the undiluted form of the free market policies they embraced.
As explained by Estonia’s then-ambassador to the United States, Eerik Marmei, when the country was honored by the nonpartisan Tax Foundation for having the most competitive tax system in the world: “After Estonia regained independence in 1991, the country needed a tax system that was compatible both with the limited experience of the taxpayer who came from the Soviet communist controlled society and effective tax administration. It was essential that the tax system should support economic growth, not impede it.”
Estonia enacted a flat tax rate of 26 percent in 1992, which was then reduced to 20 percent, with reinvested corporate profits not subject to income tax, one of the simplest tax regimes in the world.
“It is important to recognize that simple and clear rules of taxes create confidence among businesses, promote business expansion, capital investment, and most importantly, create jobs,” Marmei said. “One of the strengths of our tax system is its broad tax base which has enabled us to collect enough taxes, thus contributing to retaining the balanced budget and a low level of general government debt. Today, Estonia has the lowest general government external debt level in the European Union.”
Lithuania followed Estonia and adopted its own flat tax in 1994, as did Latvia in 1995, the Russian Federation in 2001, the Slovak Republic and Ukraine in 2004, and Georgia in 2005. Romania set a 16 percent flat tax in 2005 and Albania a 10 percent flat tax in 2008 (later altered to two rates of 23 percent and 13 percent). Hong Kong’s long-established 16 percent flat rate on business and property tax income, a low ceiling of 17 percent on labor income, and no double taxation on individual or reinvested profits, as in the United States, obviously go far in explaining the island’s many decades of immense prosperity.
And as Cato Institute economist Alan Reynolds has pointed out: “Even in the static sense, the U.S. does not have much revenue to show for income tax rates that are at least twice as high as they are in Hong Kong. Over time, there is no contest. Hong Kong’s tax receipts have increased three times as fast as those of Uncle Sam.”
Hong Kong’s position for more than a half-century as the unlikely economic miracle of the Pacific has cemented its tax system in place, and even the political interference and persecution of individual rights by communist China in recent years may not upend it. In the Soviet satellites, the need for swift transition eased the adoption of something with the potency and simplicity of a flat tax. In the United States, unfortunately, a massive bureaucratic state and a large array of special interests have always made radical simplification, such as the three-page, 1,010-word flat federal tax code proposed by presidential candidate Carly Fiorina in 2015, next to impossible.
The last major tax reform—far removed from a flat tax—was more than 35 years ago, and the deal we saw in the last week between Sen. Joe Manchin (D-W.Va.), and Senate Majority Leader Chuck Schumer (D-N.Y.) to impose a new 15 percent minimum tax on big companies, hammer private equity firms by closing a loophole that lets some of their earnings be taxed at the lower capital gains rate, and handing $80 billion to an already heavy-handed and politicized Internal Revenue Service is only the latest evidence that politicians can’t resist cluttering the tax code with new burdens every chance they get—even when we’re on the threshold of recession. Manchin and Schumer even have the audacity to call their new taxes and spending the “Inflation Reduction Act,” a claim that would make a snake oil peddler blush.
In the case of the United States, a low, flat tax rate regime that doesn’t punish success by imposing a higher bracket on entrepreneurs who achieve their objectives and fulfill their dreams will only become a reality if it’s enshrined in our Constitution. That would mean the difficult process of a constitutional amendment—or an Article V constitutional convention of the states, as recently proposed by 2012 presidential candidate Rick Santorum. Either path will take collective political leadership that today seems far from materializing.
In the case of the United States, a low, flat tax rate regime that does not punish success by imposing a higher bracket on entrepreneurs who achieve their objectives and fulfill their dreams will only become a reality if it is enshrined in our Constitution.
ANDERS CORR is a principal at Corr Analytics Inc., publisher of the Journal of Political Risk. He is an expert in political science and government. Anders Corr
China Compromises the Fed
China is paying Fed officials for information and influence
new congressional report reveals that U.S. economic officials have pursued money and positions from China as part of programs that sought “malicious, undisclosed, and illegal transfers of information that seek to undermine the United States.”
The 40-page Senate report, based in part on an internal investigation by the U.S. Federal Reserve System, shows that Beijing has sought for more than a decade to develop a spy network, steal confidential economic information, and “gain influence” within the Fed.
The FBI provided the Fed with a list of necessary counterintelligence measures, but rather than take them seriously, Fed Chairman Jerome Powell second-guessed and cherry-picked the FBI recommendations, according to the report. The Fed itself has demonstrated incompetence by losing some of the materials upon which the investigation was based.
Powell didn’t respond to a request for comment by press time.
According to the Senate report, a Fed economist was detained four times during a 2019 visit to China. Chinese officials forced him into a hotel room in a “frightening” manner, accused him of crimes against China, threatened to imprison him and harm his family, and told him they had monitored his phone for information, including information about his divorce, he said. They wanted him to “say good things about China” in the United States, provide confidential economic information, and ensure his silence about the relationship.
Since 2013, Chinese “talent recruitment programs” have sought inside information on the Fed’s view of the economy and its upcoming policy changes, including tariffs and interest rates, according to the report. In exchange, senior staff within the Fed were offered as much as 1 million yuan (approximately $150,000 by today’s exchange rate), free travel, distinctions, and research expenses to be “experts,” coauthors, and professors at Chinese research institutes and universities.
One 2010 communication from China’s talent program to a U.S. professor and Fed economist discussed the need for “high-level Chinese economists” for “part-time service in China [that] pays a high salary.” The Fed economist applied to China’s Thousand Talents Program, obtained a position at a Chinese university, and collaborated in research with the People’s Bank of China, including the sharing of Fed computer code used for economic prediction.
The report states that another Federal Reserve employee was removed from their position “in large part due to their assistance in attempting to access restricted information at a Federal Reserve bank for a Chinese media outlet (China Global Television Network) designated by the U.S. as a foreign agent.”
The report reproduces a letter from another employee, who was incentivized with a possible $150,000 payment. He gave confidential information on the private views of a Fed chairman about rate hikes, which are the most consequential of Fed actions.
Shanghai’s Fudan University offered another Fed economist a three-year contract, starting in 2018, for an annual salary and research funds of approximately $45,000 (in Chinese yuan), to spend just four weeks annually on a campus in China and host Chinese faculty and students at the Fed in the United States. Bonuses of up to $15,000 per article would be paid for coauthoring with the institution’s regular faculty. This salary was presumably paid on top of the official’s full-time salary at the Fed.
These examples are all part of Beijing’s broader campaign to build a “P-Network,” as the investigation called it, of informants within the Fed who would answer to Beijing. Despite numerous instances of inappropriate disclosures and collaborations with the regime in Beijing, all but one of the 13 individuals retain access to confidential Fed information, according to the report.
Sen. Rob Portman (R-Ohio) is leading the campaign to make the Fed clean up its act and has already been successful in getting the bank to ban payments to its officials from foreign countries such as China.
The Fed was founded in 1913, so this measure is more than a century late.
And much more must be done. Officials who have—at any time—taken money from China, Russia, or any other adversarial nations should be removed for their serious lack of judgment.
Similar steps should be taken by not only other federal and state agencies in the United States but in our most important businesses and academic institutions.
In 2020, Portman sponsored legislation, along with Senate Democrats, called the Safeguarding American Innovation Act (SAIA) to help protect U.S. research and intellectual property from Chinese Communist Party (CCP) spies. SAIA passed the Senate in June 2021.
The current Democrat-controlled House stripped the SAIA from upcoming legislation.
It should be reintroduced and passed immediately, or Beijing’s future IP theft will be the fault of Democrats in addition to the CCP.
The United States is bleeding out. Congress must take action now.
