Increasingly vocal calls for taxes on sugary drinks and junk food are fueling a behind- the-scenes battle that public health officials say is reminiscent of America's war on cigarettes.

Fueling the debate are revenue-hungry federal, state and local governments officials who are eying a potential $50 billion windfall from taxes on over 10 years.

Take a look at the New York City Department of Health's ad discouraging people from drinking sugary sodas, and let us know whether you think a junk food tax would be good public policy, or an intrusive step too far by the nanny state.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Higher taxes? Lower public spending? Devaluation? Inflation? Investment in green growth?

European governments are pointing in very different directions as they debate an exit strategy from the global financial crisis. Despite European Union efforts to coordinate economic policy, there are clear signs that the main European economies will charge off in disarray towards separate exits.

Germany is stressing an early return to fiscal discipline despite economists’ warnings against a premature withdrawal of fiscal stimulus. Berlin has just amended its constitution to anchor a timetable for a balanced budget, and is holding down labour costs to promote an export-led recovery.

“This means that the German constitution now forces a very harsh austerity stance on Germany for the coming years,” economist Sebastian Dullien wrote on the Eurozone Watch blog.

“For the rest of (the euro area) this means that after the crisis, Germany will consolidate its budget much earlier and much quicker than the rest of Europe,” he said, arguing it would weaken domestic demand and hurt growth.

German and EU officials say the amendment merely enshrines existing European budget rules and note that a get-out clause allows parliament by a simple majority to set aside the target.

By contrast, French President Nicolas Sarkozy outlined plans last week to raise a big public loan to finance investment in “tomorrow’s growth”, despite warnings from the European Central Bank and the Bank of France against any increase in debt.

France’s deficit is set to remain higher than Germany’s. But with an eye to re-election in 2012, Sarkozy explicitly ruled out austerity or tax increases to pay off mounting public debt, although he talked of cutting wasteful spending, controlling health costs and possibly raising the legal retirement age.

In Britain meanwhile, the opposition Conservatives, scenting victory in a general election due within a year, are preparing to roll back public spending to curb a runaway deficit incurred partly to rescue wayward banks and combat the recession.

Conservative finance spokesman George Osborne has been quoted as telling business leaders: “After three months in power we will be the most unpopular government since the war.”

The Europeans face a common challenge — adapting to lower trend growth while coping with mass unemployment, an aging population and overstretched public finances after the deepest recession since the 1930s.

Different national economic cultures, as well as election timetables, explain the wide diversity of policy responses.

Britain has let the pound slide on foreign exchanges to help restore competitiveness after its banks were hard hit by the credit crunch. The British are more sanguine about the prospect of higher inflation after the crisis to work down public debt.

Influential French officials, such as Sarkozy’s political adviser Henri Guaino, see higher inflation as inevitable, and not necessarily unwelcome, and worry about too strong a euro.

Germany is allergic to inflation out of bitter historical experience in the 1920s and wants a strong currency.

Its Bundesbank president, Axel Weber, has said the ECB will not be influenced by politics in withdrawing liquidity once recovery is under way.

ECB President Jean-Claude Trichet has made clear that his institution, which defines its mandate of maintaining price stability as keeping inflation below but close to 2 percent, will not allow prices to surge.

Despite these deep-seated differences, there is one key area on which the Europeans ought to be able to agree.

The EU has taken global leadership in the last decade in moving towards a low-carbon economy based on cuts in greenhouse gas emissions and promoting renewable energy. Under President Barack Obama, the United States is also pushing for the green economy as a source of growth and jobs.

If European leaders joined together in a continent-wide investment and tax incentive programme to promote clean energy, energy efficiency and low-carbon innovation, they could boost the growth potential on which sound public finances depend.

(editing by David Evans)

– Diana Furchtgott-Roth, dfr@hudson.org, former chief economist at the U.S. Department of Labor, is a senior fellow at the Hudson Institute. The views expressed are her own.  –

It’s April 15, and you’ve finished the arduous task of filing your taxes. You’ve found your W-2 form from your employer, your pennies of interest income from your checking account. If you itemize, you’ve tracked down the acknowledgement of your charitable contributions to the church, the Sierra Club, and the local anti-poverty organization.

The system is so complex that it may have contributed to the tax delinquencies of four Cabinet-level Obama appointees (or their spouses) who had to pay up to win Senate confirmation. At least two other Obama choices withdrew because of their tax problems.

President Obama recognizes the problem. Today he asked his Economic Advisory Board, under the leadership of former Federal Reserve Chairman Paul Volcker, to send him recommendations for tax simplification by the end of the year.

Enter Wisconsin Representative Paul Ryan, a member of Congress for 10 years and now the ranking Republican on the House Budget Committee. In H.R. 6110, entitled “Roadmap for America’s Future” (www.americanroadmap.org), he has proposed a radical simplification of the tax code.

Mr. Ryan describes the tax system as “needlessly complex and burdensome.” In contrast, he writes, “a world-class tax system should be simple, fair, and efficient. The U.S. tax code fails on all three counts.”
Under the Ryan proposal, couples would pay tax at a 10 percent rate on their first $100,000 of taxable income ($50,000 for singles), and then 25 percent on any earnings above that. They would pay a 15 percent tax on capital gains and dividends, and no tax on savings. In exchange, they would give up almost all deductions, including home mortgage interest and charitable contributions.

The only deduction allowed would be a refundable $5,000 tax credit for families and $2,500 for individuals to help with the purchase of private-sector health insurance. Health insurance could be purchased in any state, to encourage more companies and plans to participate.

Many efforts to simplify the tax code have failed because people are attached to their deductions — and because Congress seeks to use tax law to achieve social goals, such as home ownership and helping low-income parents with the earned-income tax credit, a stunningly complex provision.

Moreover, charities and universities fear, probably with good reason, that if contributions are not deductible, people will give less.

To disarm the opposition, Mr. Ryan would give taxpayers a choice. Within 10 years of the passage of the law, they could choose today’s system, with its multiple rates and deductions; or they could adopt the simplified Ryan system, giving up the deductions. To prevent people from switching every year if it would benefit them, they could change only once in a lifetime — except in the case of what Ryan calls “a life-changing event,” such as death, divorce, or marriage, when an additional change would be permitted.

Mr. Ryan’s proposal is a variant of the flat, or one-rate, tax suggested in the Reagan era by some economists and advocated in the 1980s by then House Majority Leader Dick Armey, and later by Steve Forbes in his 1996 and 2000 bids for the Republican presidential nomination.

Then, the main attack on the idea was that it is inequitable. However, Mr. Ryan’s tax contains not one but two rates, and it is progressive because it retains standard deductions and personal exemptions. A family of four would start paying tax only after earning $39,000. Further, many upper-income people benefit from existing deductions, and they would lose this benefit if they adopt Ryan’s two-rate tariff.

No tax proposal offered by a minority member of Congress of either party ever has any chance of passage. Political loyalties aside, the American public might want to take a careful look at Mr. Ryan’s proposal, while memories of filling out their tax forms are still fresh.

– Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor.  The views expressed are her own. —

Marriage is hard enough without the tax system making it even harder.

Look at Jeanne’s upcoming wedding to Rick.  Rick owns a plumbing firm and has taxable income of $160,000, and Jeanne’s taxable income as a teacher is $50,000.  Unmarried, he is in the 28 percent bracket and she is in the 25 percent bracket.  When they get married, they will be taxed at 33 percent — rising to 36 percent in 2011 if President Obama’s proposed tax hikes take effect.

By raising taxes on upper-income Americans, Congress would worsen our tax system’s marriage penalty on dual-income married couples, and Jeanne and Rick would pay even more tax married than single.

It doesn’t have to be this way.  Men and women could be taxed on their income separately, as is the case in Britain. Since 1990, British married couples have been taxed independently, with deductions and allowances split between them.

It’s a revolutionary idea.  A married woman has her own tax return, with only her income, deductions, and capital gains.  She pays her own tax and has tax refunds returned to her.  If she makes mistakes, she pays her own penalties.

Rather than moving in the direction of Britain to reduce the marriage penalty, the penalty may rise further in 2011.  In President Obama’s new budget for 2010, he outlined plans to allow the top two tax rates to rise from 33 percent to 36 percent and from 35 percent to 39.6 percent in 2011.

Taxes would rise for singles with taxable income over $172,000 and married couples over $209,000.  Even if Jeanne and Rick weren’t immediately affected by higher rates, those rates might well hit them when they earn more.

Unless, of course, Jeanne and Rick decide to have children, and Jeanne left the workforce to care for them.  Say that Jeanne’s taxable income rose to $60,000, so she and Rick had a combined income of $220,000, placing them in President Obama’s new 36 percent bracket.  But with Jeanne at home looking after the children, their federal tax rate would be 28 percent.

Tax systems shouldn’t make it harder for women to work.  The penalty falls most heavily on married women who have invested in education, hoping to shatter glass ceilings and compete with men for managerial jobs, and the Obama plan would exacerbate the penalty.

When mothers take jobs, earnings are reduced by taxes paid at their husbands’ higher rates, in addition to costs for childcare and her transportation. This discourages married women not just from working, but also from striving for promotions, from pursuing upwardly-mobile careers.

Mothers are more affected by the marriage penalty than other women because they are more likely to move out of the labor force to look after newborn children and toddlers, and then to return to work when their children are in school.

Labor Department data show that as average number of earners per household rise, so do income levels.

One characteristic of the highest-earning one-fifth of households is that they have an average of two earners per household.  The middle fifth averages 1.4 earners per household, and the lowest-earning fifth averages half an earner per household—more part-time and unemployed workers, or retirees.  More married working women, more households in the top fifth of the income distribution. (See BLS Consumer Expenditure survey in pdf format.)

For President Obama to announce that he is raising taxes on those at the top end of the scale adversely affects the married working women who voted for him by a substantial majority.  There has to be a better way.

Diana Furchtgott-Roth can be reached at dfr@hudson.org.

John Kemp is a Reuters columnist. The views expressed are his own.

LONDON, Dec 8 (Reuters) - China’s decision on Friday to link domestic fuel prices to the international price of crude oil, but increase consumption taxes on gasoline and diesel sharply to spur more efficient use of energy in the medium term, raises the question whether the incoming Obama administration might be tempted to do the same.

China is taking advantage of a cyclical pull back in energy to push through a permanent structural increase in taxes and prices. The aim is to combine a short-term boost to the economy with longer-term and more consistent incentives for improving energy efficiency.

By consolidating a series of tolls and administrative charges into a single, easy to collect consumption tax, the government is simplifying the tax system, creating a new source of revenue, and ensuring the change will have no impact on the politically sensitive inflation rate.

More importantly, it creates a fairly simple mechanism for raising energy costs further in future to spur additional efficiency gains, irrespective of cyclical changes in the crude oil price.

Once short-term economic weakness is past, the government can easily raise the consumption tax progressively over the next few years.

In effect, the tax breaks the link between the government’s energy efficiency programme and short-term oil-market movements.

NEW ADMINISTRATION PRIORITIES

Across the Pacific, the incoming Obama administration has made clear improving energy efficiency is also one of its highest priorities.

The president-elect’s future national security adviser, General James L. Jones, has been working on energy issues for an affiliate of the U.S. Chamber of Commerce since retiring as NATO’s supreme allied commander in Europe. He made clear in a recent interview improving energy security would be one of his central objectives, marking an unusual extension of the adviser’s traditional role.

The incoming administration faces several related challenges, however:

• It needs to maintain the recent trend towards smaller and more fuel efficient motor vehicles, even though retail gasoline prices have halved in less than six months.
• It needs to find a way to increase the volume of ethanol blended in the gasoline supply, even though ethanol is now more expensive than fossil-fuel gasoline, and mandated volumes are running up against the technical limits of the U.S. car fleet (the “blending wall”).
• And it needs to find a way to continue providing incentives for developing alternative energies (such as advanced biofuels and oilsands) as well as alternative power sources (fuel cells, electric vehicles).

VOLATILITY DEGRADES PRICE SIGNAL

The common problem is that short-term price volatility threatens long-term strategic planning by both energy producers and consumers.

Adam Smith’s theory of the “invisible hand” has price changes acting as a signal to ration demand and encourage supply.

Policymakers have long accepted that inflation can interfere with these signals by making it hard for consumers and producers to distinguish between a relative change in prices and incomes (to which they should respond) and a general rise in the price and income level (to which they should not).
Inflation introduces “noise” into the price mechanism, making it hard to extract signals correctly.

Extreme price volatility can have the same impact. Large price movements and repeated price reversals leave producers and consumers uncertain about the correct response.

The problem is worse in sectors such as energy where changes in consumption and production involve long-time lags and costly investment.

The oil price surge in 2006-2008 was widely interpreted as a response to the threat of a long-term shortfall in supply (since there was no actual shortage of physical crude oil in the near term). It appeared to send a strong signal about the need to develop substantial new oil reserves, invest heavily in alternative fuels, and achieve massive increases in energy efficiency.

The subsequent collapse, including long-dated prices, seems to be signalling that these long-term high-cost investments will not be needed.

Producers and consumers are struggling to work out whether the market was right in JulY 2008; whether it is right now; or whether the world really has changed that much in less than six months.

A HELPING HAND FOR ADAM SMITH?

The incoming administration’s public announcements indicate senior policymakers believe all these new and alternative fuel supplies will be needed. The question is how to maintain the efficiency drive and incentives for long-term investment during a period of price weakness.

Following China’s example and raising fuel taxes is probably the most attractive mechanism.

By raising the long-term floor for domestic gasoline and diesel for any given level of international crude prices, it sharpens efficiency incentives and would maintain the pressure towards smaller and more fuel efficient vehicles.

Crucially, it could solve the problem of the blending wall. Most U.S. vehicles are able to run on a maximum 90-10 gasoline-ethanol blend (E10) that will limit the overall amount of ethanol blended into the fuel supply to around 12-13 billion gallons per year, and is likely to become binding in the next 18 months.

To meet the longer-term objective of blending as much as 36 billion gallons into the fuel supply by 2022, the administration will need to increase the number of vehicles taking higher 15-25 percent blends, or shift an increasing proportion of the car fleet to flexible-fuel vehicles running on a 15-85 gasoline-ethanol blend (E85).

The problem for policymakers is whether to go for a big-bang approach (pushing for widespread adoption of E85-adapted vehicles) or a gradualist one (increasing the standard blend to 15 percent, then 20 percent, etc).
Widespread adoption of E85 requires investments in an expensive pipeline infrastructure and new cars.

Neither is likely unless distributors, pipeline companies and motor manufacturers can be guaranteed sufficient minimum demand for the fuel and associated cars.

The question is how to promote widespread adoption of higher 15-20 percent fuel blends and E85. One possibility is to make production of E85 vehicles a condition of any government rescue package for the major auto makers.

But rolling out E85 vehicles does not guarantee they will actually be filled up using E85 fuel. Federal agencies have been obliged to buy E85-capable vehicles since the early 1990s. Most are filled up with regular gasoline, owing to the lack of filling stations carrying E85 in most areas outside the Midwest. And at low gasoline prices, there is no guarantee ethanol will be competitive.

There must be a temptation to impose a sharply differential tax rate on the fossil fuel and ethanol components of gasoline to encourage higher blend rates or E85 vehicles, creating clear long-term incentives for switching to more ethanol use.

The main factor restraining policymakers is fear of advocating any tax increases at a time when households are struggling with mortgage payments and falling employment.

But the big pull back has created some headroom to raise tax rates and long-term energy costs while still allowing pump prices to fall in the short term.

Raising fuel taxes will therefore be a very tempting option for the new administration. It could be presented as part of an integrated energy efficiency, climate change and national security strategy, raising useful revenues to pay for some of the massive stimulus and speed the return to fiscal discipline in the medium term.

The question is less whether fuel taxes will rise substantially, but when.