first steps

Republican Governors Push Taxes on Sales, Not Income

WASHINGTON — Republican governors are moving aggressively to cut personal and corporate income taxes, including proposals that would increase reliance on state sales taxes, setting up ambitious experiments in tax reform that could shape what is possible on a national level.

Even as Washington continues to discuss, if not act, on ideas for making the federal tax system simpler and more efficient, governors, some with an eye on the next presidential race, are taking advantage of the improving economy and a gradual rebound in revenues to act.

In Louisiana, Gov. Bobby Jindal is pushing to repeal the state’s personal and corporate income taxes and make up the lost revenue through higher sales taxes. Gov. Dave Heineman of Nebraska is calling for much the same thing in his state. Gov. Sam Brownback of Kansas wants to keep in place what was supposed to be a temporary increase in the state sales tax to help pay for his plan to lower and eventually end his state’s income tax.

Along the way these governors are taking small first steps into a debate over what kind of tax system most encourages growth in a 21st-century economy. In particular they are focusing attention on the idea, long championed by conservatives but accepted up to a point by economists of all stripes, that the economy would be better served by focusing taxation on consumption rather than on income.

Taxing consumption has the potential to lift economic growth by encouraging more savings and investment. But the shift could also increase inequality by reducing taxes predominantly for the wealthy, who spend a smaller share of their income than middle- and lower-income people.

“The question of whether we should tax income or whether we should tax spending is really a proxy for a different debate,” said Joseph Henchman, vice president for state projects at the Tax Foundation, a conservative-leaning research organization. “Everyone agrees we’ll get more growth with consumption taxes. It’s just that some people prioritize fairness.”

Beyond citing economic growth, the governors and their supporters say their plans would help make their states more competitive in attracting employers and high-skilled workers, simplify their tax systems and curb pressure for more government spending.

For Mr. Jindal and other Republican governors who are considering a presidential run in 2016, there are obvious political benefits to having a robust income tax-cutting record to present to conservative primary voters.

But Democrats say the approach would lead to cutbacks in education, health care and other vital services while shifting relatively more of the tax burden to those who can least afford it.

“These aren’t pro-growth policies — they’re shell games that reward the wealthiest Americans at the expense of everyone else,” said Danny Kanner, a spokesman for the Democratic Governors Association.

Nationwide, sales taxes account for about 46 percent of state revenues, and personal and corporate income taxes for about 42 percent, according to the National Conference of State Legislatures. States with relatively low income tax rates like Louisiana, which raises about $3 billion a year from its personal and corporate income tax system, can more easily shift toward a sales tax-only system than states with much higher rates, like New York or California.

Louisiana already has the nation’s third-highest sales tax, after Tennessee and Arizona. Combined state and local sales taxes average 8.84 percent, according to the Tax Foundation.

It is not clear whether any of the proposals will make it into law; even in states with Republican-dominated legislatures, governors face difficulty as they pursue their proposals because changing the tax code almost invariably creates losers as well as winners. In Kansas, Mr. Brownback wants to pay for lower income tax rates in part by making permanent what had originally been a temporary sales tax increase, but also by eliminating deductions for property taxes and mortgage interest, setting off objections even in his own party.

And just as President Obama has raised income tax rates on upper-income families, Democratic governors including Martin O’Malley of Maryland, Jerry Brown of California and Deval Patrick of Massachusetts have supported or put in place income tax increases on the wealthy.

Article source: http://www.nytimes.com/2013/01/25/us/politics/republican-governors-push-taxes-on-sales-not-income.html?partner=rss&emc=rss

Weak Sale of Bonds Tests Germany’s Stature in Crisis

Analysts cautioned against reading too much into a single bond issue — one of nine this year that has failed to sell out, according to the German Finance Ministry. But the dismal sale results helped push down stocks worldwide and contributed to the atmosphere of fear that prevails in Europe: that the crisis is getting ahead of the political will to solve it.

In the first steps toward the closer political and financial integration that many have come to believe is essential for the survival of the euro, the European Commission proposed Wednesday that countries surrender more power over their national finances to the European authorities, giving Brussels the right to request a rewrite of spending plans that seem too profligate.

The commission, the executive agency of the European Union, also floated ideas for the issuance of bonds backed by all the countries of the euro zone — a measure that, despite German opposition, is gaining acceptance as a means of market reassurance as the crisis persists.

“Without stronger governance in the euro area it will be difficult, if not impossible, to sustain the common currency,” José Manuel Barroso, president of the commission, said in Brussels.

With the debt crisis gaining momentum rather than abating, and threats growing to countries at the core of the currency zone, measures that were politically impossible just a year ago are now being actively discussed, though it remains to be seen whether they will be enough to reassure markets that the crisis has been contained.

“The commission is slowly but surely becoming a European Finance Ministry, one step at a time,” said Sony Kapoor, managing director of Re-Define, an economic research group.

The proposals, which must be approved by E.U. governments, align Brussels with Germany on the issue of budgetary oversight, though they stop short of the veto power that Berlin has urged over profligate spending plans.

They go further toward supporting a common euro zone bond than Germany has so far been willing to go. Chancellor Angela Merkel of Germany, during a budget debate Wednesday in Berlin, reiterated her opposition to the creation of the bonds, but she has not completely ruled out the possibility of issuing bonds based on collective euro zone obligations at some future date.

If Germany’s borrowing costs continue to rise, it would be a blow to the country’s prestige and could profoundly shift the debate about how to cope with the euro crisis. About one-third of a €6 billion, or $8 billion, issue of German bonds found no buyers, twice as much unsold stock as normal, the country’s central bank reported.

In addition, the market yield on German 10-year bonds climbed close to the comparable British security, an unusual development considering that Britain has higher inflation than Germany and is more indebted. Germany has been able to boast that its solid economy and low debt are proof that austerity is the answer to the sovereign debt crisis. But if investor faith in the country slips, Germany’s moral authority could weaken.

“Losing that bargaining power could be massive for Germany,” said Silvio Peruzzo, euro area economist at Royal Bank of Scotland. “That is one of the pillars on which Germany has based its policy approach.”

Another few bad auctions, he said, “could shift the debate to, The austerity is too strong, we need growth.”

The German bond auction was one of several factors weighing down world markets Wednesday. Stocks fell in Asia and Europe after reports that manufacturing activity in China and the euro zone had weakened in the third quarter.

The continuing political crisis in Belgium sent the risk premium on Belgian sovereign bonds over German bonds to its highest level since the creation of the euro. The cost of insuring against default in 15 European governments rose to an all-time high Wednesday, according to data compiled by Markit.

Also Wednesday, a second credit rating agency, Fitch, warned that France could lose its prized triple-A rating because its commitment to the euro zone bailout fund was straining its finances. Moody’s Investors Service has issued a similar warning recently.

Article source: http://www.nytimes.com/2011/11/24/business/global/Euro-Fears-in-Markets-Spread-to-Germany.html?partner=rss&emc=rss

Republican Governors Push Taxes on Sales, Not Income

Weak Sale of Bonds Tests Germany’s Stature in Crisis

Recent News

Partners