The Index of Economic Freedom is my favorite annual publication from the Heritage Foundation. It’s a rich source of information, using dozens of data sources, about economic liberty around the world.
I first wrote about the Index back in 2010 and shared the bad news that the U.S. score dropped dramatically in Obama’s first year.
Well, the new Index lets us see the net effect of Obama’s entire tenure. The worse news is that the U.S. score has dropped to 75.1 on a 0-100 scale. And the worst news is that this represents America’s lowest score in the twenty-plus years that the Index has been published.
The United States is ranked #17 in the latest Index. We’re only in the “Mostly Free” category, behind Luxembourg and the Netherlands and tied with Denmark.
The top-ranked jurisdiction, once again, is Hong Kong. And what’s really amazing is that Hong Kong actually increased it score. Indeed, all five nations in the “Free” category managed to increase overall economic freedom.
By the way, Cuba jumped 4.1 points last year, so maybe Fidel’s death is the beginning of some much-needed liberalization.
America’s best score is for “regulatory efficiency,” which helps to explain why the U.S. gets a top-10 score from the World Bank’s Doing Business.
Let’s close by comparing the United States with Hong Kong. This charts shows how our scores have changes over time, and also shows the average score for the entire world.
The biggest takeaway is that the U.S. basically is halfway between Hong Kong and the world average.
The great unknown, of course, is whether America’s score will go up or down under Trump.
I’m not a big fan of Donald Trump, mostly because I fear his populist instincts will deter him from policies that we need (such as entitlement reform) while luring him to support policies that are misguided (more federal transportation spending).
And, for what it’s worth, I’ll freely acknowledge that Trump’s election is having a very good effect on my leftist friends. Because they fear the new occupant of the White House, they’re now much more sympathetic to the notion that there should be limits on the power of the federal government and they’re acknowledging that maybe federalism isn’t such a bad idea after all.
Indeed, some of them are so supportive of limiting the impact of Washington that they’re considering secession! The L.A. Daily News reports on a growing campaign in the Golden State.
“Yes California,” a pro-secession group, filed paperwork with the state attorney general in November for a proposed 2018 ballot measure to strike language in the state constitution binding California to the United States. …If its ballot measure succeeds, Yes California would pursue a 2019 vote to declare the state’s independence. …Talk of California secession is nothing new. But it gained momentum after Donald Trump’s election. Hillary Clinton got 62 percent of California’s vote in defeating Trump… According to Yes California, a path to secession exists through the U.S.-ratified United Nations charter.
By the way, I thought cozying up to Moscow was a bad thing now. But since the Yes California crowd is even trying to establish relations with Putin-land, I guess coziness is in the eye of the beholder.
…the group announced the opening of a “cultural center” in Moscow.
Anyhow, the folks at Salon are somewhat supportive of “CalExit.”
…it’s time for the media to stop dismissing the idea as a zany left coast response to the newly elected Republican federal government. …secession could be a reality in our lifetime. …Californians could expect to initiate advanced-level progress in racial justice…free of restriction an independent California could actually demonstrate the success of progressive values in action… It’s difficult to say whether California’s rich Democrats in coastal enclaves would be down with paying reparations if the independent nation were scrapping its ties to the U.S. and its colonial past.
But a column in the L.A. Times by Conor Friedersdorf says statist values would suffer if California became independent.
Blue America would lose its biggest source of electoral votes in all future elections. The Senate would have two fewer Democrats. The House of Representatives would lose 38 Democrats and just 14 Republicans. The U.S. 9th Circuit Court of Appeals, among the most liberal in the nation, would be changed irrevocably. And the U.S. as a whole would suddenly be a lot less ethnically diverse than it is today. For those reasons, Trump, Senate Majority Leader Mitch McConnell, Speaker of the House Paul Ryan, Republicans with White House ambitions, opponents of legalizing marijuana, advocates of criminalizing abortion and various white nationalist groups might all conclude –– for different reasons –– that they would benefit politically from a separation, even as liberals and progressives across America would correctly see it as a catastrophe.
Which may explain why many folks on the right are cheering for secession. Here are some excerpts from another column in the L.A. Times.
…judging by the letters we’ve received from across the country on the burgeoning secessionist movement known as “Calexit,” some readers would be happy see us go — or at least take pleasure in watching our deep-blue state suffer… I have some advice to the sane citizens of California: Members of the middle class should start planning their own exit. When California loses all those billions from the federal government, the politicians are going to need to find money elsewhere, and you know Hollywood’s millionaires aren’t going to provide it. They’ll move to their mountain homes in Wyoming or elsewhere. You think all those new billionaires in Silicon Valley will eagerly part with their money? Think again. They’ll hide their wealth in tax shelters. The refugees and illegal immigrants on the receiving end of California’s generous benefits aren’t going to provide needed tax revenues, so the politicians will target the middle class.
Simply stated, you can’t have a cradle-to-grave welfare state unless the middle class is so over-taxed that they have to rely on government for healthcare, education, retirement, and just about everything else.
Let’s keep our focus on California secession, which I support both as a matter of self-determination and as a matter of public policy.
With regards to policy, I think it will be very interesting to see how a state with huge natural advantages (coast, weather, mineral resources, agricultural land, etc) can endure bad policy.
And there’s already plenty of bad policy in the state.
A big part of the problem is that the public sector in California is wildly overcompensated. Kevin Williamson explains.
State and local government spending adds up to nearly 20 percent of California’s economic output, while thriftier states such as Texas and New Hampshire spend less than 15 percent. …California’s government, like the federal government and most other state and local governments, spends its money on salaries, benefits, pensions, and other forms of employee compensation. The numbers are contentious — for obvious political reasons — but it is estimated that something between half and 80 percent of California’s state and local spending ultimately goes to employee compensation. …The first and smaller problem is that many government workers are paid too much. …The second and larger problem with public-sector workers is that there are a whole lot of them. …When politicians talk about “investments,” we think they mean bridges and research laboratories and canals to bring water to central California. But what they are investing in is dependency. In California, that means creating a lot of full-time jobs for Democrats.
But it’s not just that there are too many bureaucrats and that they are overpaid. They also become a big burden when they retire.
Here’s some additional evidence of the mess in California.
California is already paying $5.38 billion to the California Public Employees’ Retirement System this year, and in fiscal year 2018 the state will need to add at least $200 million more. By fiscal year 2024 the annual tab will increase at least $2 billion from current levels. This all comes on top of increases already scheduled under the system, according to Governor Jerry Brown’s finance department. …California’s revenue is volatile because it draws a large share of taxes from wealthy residents whose incomes are tied closely to the stock market. The top 1 percent of earners — who tend to own shares — accounted for nearly half of the state’s personal income-tax collections in 2014.
And the big tax hikes that will be imposed on the middle class will add to the misery they already suffer. Here’s more evidence of how the middle class is being eviscerated.
…the gap between what Californians pay versus the rest of the country has nearly doubled to about 50%. This translates into a staggering bill. Although California uses 2.6% less electricity annually from the power grid now than in 2008, residential and business customers together pay $6.8 billion more for power than they did then. …“California has this tradition of astonishingly bad decisions,” said McCullough, the energy consultant. “They build and charge the ratepayers. There’s nothing dishonest about it. There’s nothing complicated. It’s just bad planning.”
Victor David Hanson bemoans the outlook for his state.
The state is currently experiencing another perfect storm of increased crime, decreased incarceration, still ongoing illegal immigration, and record poverty. All that is energized by a strapped middle class that is still fleeing the overregulated and overtaxed state, while the arriving poor take their places in hopes of generous entitlements, jobs servicing the elite, and government employment. …Go to a U-Haul trailer franchise in the state. The rental-trailer-return rates of going into California are a fraction of those going out. Surely never in civilization’s history have so many been so willing to leave a natural paradise. …What makes the law-abiding leave California is not just the sanctimoniousness, the high taxes, or the criminality. It is always the insult added to injury. We suffer not only from the highest basket of income, sales, and gas taxes in the nation, but also from nearly the worst schools and infrastructure. We have the costliest entitlements and the most entitled.
Little wonder, as Hans Bader explains, businesses continue to flee the state.
Nestlé USA, “the maker of Häagen-Dazs, Baby Ruth, Lean Cuisine, and dozens of other mass brands,” is moving its U.S. headquarters from California to Virginia. It is among many businesses that have left California in recent years. In 2010, Northrop Grumman Corp. moved its headquarters out of California, leaving the state that gave birth to the aerospace industry without a single major military contractor based there. Last Spring, the parent company of Carl’s Jr., founded in Anaheim, California, 60 years ago, relocated its headquarters to Nashville, Tennessee, where there is no state income tax. …reported the San Jose Mercury News in June 2016. “During the 12 months ending June 30, the number of people leaving California for another state exceeded by 61,100 the number who moved here from elsewhere in the U.S., according to state Finance Department statistics. ‘They are tired of the expense of living here. They are tired of the state of California and the endless taxes here,’ said Scott McElfresh, a certified moving consultant. ‘People are getting soaked every time they turn around.’” …For businesses, the worst is yet to come. California is increasing its minimum wage over the next several years to $15 per hour. …the increase will ultimately cost California 700,000 jobs. An economist at Moody’s calculated that 31,000 to 160,000 California manufacturing jobs will be lost. California taxes may rise further, to deal with a rising state budget deficit over the next decade. The deficit is rising in part due to California’s unusually high state welfare spending which grew about twice as fast in California in 2016 as in the U.S. as a whole. California also spends its transportation dollars very poorly, and it is wasting billions on a high-speed rail boondoggle that few people will ride.
So unless the politicians in Sacramento decide to erect a barbed wire fence around the border (maybe we shouldn’t joke), the state’s feudalistic economic system will be unsustainable.
Though there is an alternative scenario. Perhaps independence will have a sobering effect on the state’s kleptocrats and they’ll recognize the importance of quasi-sensible policy once California is an independent nation.
When there are lots of competing jurisdictions, there’s pressure on all politicians to be rational stationary bandits rather than predatory roving bandits.
Since I’m always reading and writing about government policies, both in America and around the world, I’m frequently reminded of H.L. Mencken’s famous observation about the shortcomings of “tolerable” government.
If you take a close look at the world’s freest economies, you quickly learn that they are highly ranked mostly because of the even-worse governments elsewhere.
Even places such as Switzerland have some misguided policies.
But there’s a silver lining to this dark cloud. The incompetence, mendacity, and cronyism that exists all over the world means that I’ll never run out of things to write about.
So let’s enjoy a new edition of Great Moments in Foreign Government.
We’ll start with the utterly predictable failure of an entitlement program in the United Kingdom.
The government must stop ‘nannying’ British parents and do away with universal free childcare, a new report has urged. Families most in need of help are not getting it because Government subsidies are poorly targeted, the Institute of Economic Affairs publication said. Many families on average earnings are spending more than a third of their net income on childcare, the report claimed, saying too much regulation in the sector has hiked prices. …One study has estimated that keeping parents in work costs £65,000 per job, the report claimed, describing current policy as ‘costly and inefficient’. …home-based childminders are priced out of the sector, it said. Co-author of the report Len Shackleton, an editorial research fellow at the Institute of Economic Affairs, said: ‘Government interventions in the childcare sector have resulted in both British families and taxpayers bearing a heavy burden of expensive provision.
I’m totally shocked, just like Inspector Renault in Casablanca.
I’m still waiting for an example of a government “solution” that makes a problem better rather than worse.
Let’s now turn to Germany. I’ve previously referenced the country’s intelligence community because the BND managed to lose the blueprints for its costly new headquarters building.
But apparently the incompetence goes well beyond architecture. Another German intelligence division, the BfV, had an Islamic terrorist on staff. Here are some excerpts from a report in the Washington Post.
German intelligence agents noticed an unusual user in a chat room known as a digital hideout for Islamic militants. The man claimed to be one of them — and said he was a German spy. He was offering to help Islamists infiltrate his agency’s defenses to stage a strike. Agents lured him into a private chat, and he gave away so many details about the spy agency — and his own directives within it to thwart Islamists — that they quickly identified him, arresting the 51-year-old the next day. Only then would the extent of his double life become clear. The German citizen of Spanish descent confessed to secretly converting to Islam in 2014. From there, his story took a stranger turn. Officials ran a check on the online alias he assumed in radical chat rooms.
And they found out that the terrorist had a rather colorful past.
The married father of four had used it before — as recently as 2011 — as his stage name for acting in gay pornographic films. …which could cast a fresh light on the judgment and vetting of the German intelligence agency at a critical time.
These revelations have generated some concern, as one might expect.
News of the case sparked a storm of outrage in Germany, even as critics said it raised serious questions about the country’s bureaucratically named domestic spy agency, known as the Federal Office for the Protection of the Constitution (BfV). …“It’s not only a rather bizarre, but also a quite scary, story that an agency, whose central role it is to engage in counterespionage, hired an Islamist who potentially had access to classified information, who might have even tried to spread Islamist propaganda and to recruit others to let themselves be hired by and possibly launch an attack” against the domestic intelligence agency, said Hans-Christian Ströbele, a member of the Parliamentary Control Committee that oversees the work of the German intelligence services.
You won’t be surprised to learn that the German government is not alone. The U.K. government also has hired terrorists to work in anti-terrorism divisions.
The only saving grace is that terrorists sometimes display similar levels of incompetence, as illustrated in the postscripts of this column.
Let’s close with a trip to Canada. Our friends to the north generally are a sensible bunch, but you can find plenty of senseless policies, particularly in the French-speaking areas.
And I’m not sure whether to laugh or cry about this example of bureaucratic extortion.
A Camrose man is ticked about his ticket — a $465 traffic violation issued by Edmonton police — for having a cracked driver’s licence. Dave Balay admits he’s guilty of having a small crack in his licence. But he doesn’t think the penalty fits the crime. He was returning home from visiting a friend Wednesday evening when he was pulled over on Anthony Henday Drive. …He gave the officer his driver’s licence, registration and insurance card. …”He came back, and the younger policeman said he was going to give me a ticket for my driver’s licence being mutilated,” said Balay. “I said, ‘Mutilated? I didn’t even know there was such a thing.’ Then he gave me a ticket for $465.” The mutilation referred to was a crack in the top left corner of Balay’s licence. “Maybe not even quite an inch long,” said Balay, adding the crack doesn’t obstruct any pertinent information. …”I think I outright laughed, and said, ‘Seriously? Four-hundred-and-sixty-five bucks for this crack?’ [The officer] said, ‘It’s a mutilated licence.’ …”Had I scratched out my eyes or drawn a mustache on my face, or scratched out the licence number or something, then, yeah, give me a ticket for that. That should be an offence.”
But the local government says Mr. Balay should be grateful that he was treated with such kindness.
Edmonton police released a statement Friday suggesting the officer actually gave Balay a break. According to the statement, the officer had grounds to lay a careless driving charge, which carries a fine of $543 and six demerit points. But because Balay was co-operative, the officer issued a lesser fine for a cracked driver’s licence.
Though Mr. Balay doesn’t think he’s been given a break.
Balay said he won’t pay the fine, even if that means serving jail time or community service. “I don’t have $465,” he said. “…I do some part-time substitute teaching, supply teacher. It’s a week’s wage.”
Good for Mr. Balay. Hopefully the publicity that he’s getting will force the revenue-hungry bureaucrats in Edmonton to back down.
Meanwhile, this story adds to my ambivalence about Canada. On the minus side of the ledger, there are absurd policies granting special rights to alcoholics, inane harassment of kids selling worms or lemonade, fines on parents who don’t give their kids carbs at lunchtime, and punishment for kids who protect classmates from knife-wielding bullies.
Then again, Canada is now one of the world’s most economically free nations thanks to relatively sensible policies involving spending restraint, corporate tax reform, bank bailouts, regulatory budgeting, the tax treatment of saving, and privatization of air traffic control. Heck, Canada even has one of the lowest levels of welfare spending among developed nations.
Though things are now heading in the wrong direction, which is unfortunate for our northern neighbors.
One of the unfortunate features of Washington is that people often wind up in places that bring out their worst behaviors.
The classic example is Jack Kemp, who did great work as a member of Congress to push a supply-side agenda of low marginal tax rates and less double taxation. Indeed, it’s no exaggeration to say that the Reagan tax cuts were made possible by Kemp’s yeoman efforts. But when President George H.W. Bush brought Kemp into his cabinet back in 1989, it wasn’t to head up the Treasury Department. It was to be Secretary of Housing and Urban Development, a department that shouldn’t even exist. And because Kemp was weak on spending issues, he predictably and unfortunately presided over an expansion of HUD’s budget. If he was at Treasury, by contrast, he may have been able to stop Bush’s disastrous read-my-lips tax deal.
Another example is that Republicans members of Congress from farm states generally favor small government. So if they wind up on committees that deal with overall fiscal issues, they usually are allies in the effort to restrain Leviathan. Unfortunately, they more often wind up on the Agriculture Committee, which means they accumulate power and expertise in the area where they are least likely to favor free markets and limited government. They net effect is that they may still have a decent voting record, but their actual impact on public policy will be harmful. The same thing happens with Republicans who get on the transportation committees.
Today’s example is Attorney General Jeff Sessions. When he was Chairman of the Senate Budget Committee, he was an ally in the fight against big government. He favored decentralization. He supported rolling back the welfare state. He favored entitlement reform. He supported tax cuts. He used his power and position to try to do the right thing. But when Trump asked Sessions to join his cabinet, it wasn’t to head the Office of Management and Budget, a position that would have been a good fit. Instead, Trump picked him to be Attorney General, which is problematical because Sessions is an advocate of the failed War on Drugs. And he’s also a supporter of “asset forfeiture,” which occurs when governments steal money and property from citizens without convicting them of any crime. Or sometimes without even charging them with a crime.
I’m not joking. This happens with distressing regularity. It’s called “policing for profit.”
In poor nations, a corrupt cop will stop motorists to shake them down for pocket change. In the United States, we’ve legalized a bigger version of that sleazy behavior. George Will shared a reprehensible example last December.
The Sourovelises’ son, who lived at home, was arrested for selling a small amount of drugs away from home. Soon there was a knock on their door by police who said, “We’re here to take your house” and “You’re going to be living on the street” and “We do this every day.” The Sourovelises’ doors were locked with screws and their utilities were cut off. They had paid off the mortgage on their $350,000 home, making it a tempting target for policing for profit. Nationwide, proceeds from sales of seized property (homes, cars, etc.) go to the seizers. And under a federal program, state and local law enforcement can partner with federal authorities in forfeiture and reap up to 80 percent of the proceeds. This is called — more Orwellian newspeak — “equitable sharing.” No crime had been committed in the Sourovelises’ house, but the title of the case against them was “Commonwealth of Pennsylvania v. 12011 Ferndale Street.” Somehow, a crime had been committed by the house. In civil forfeiture, it suffices that property is suspected of having been involved in a crime. Once seized, the property’s owners bear the burden of proving their property’s innocence.
The good news is that there’s a growing desire to stop governments from stealing.
Indeed, Will points out that there was “a 2015 Senate Judiciary Committee hearing on forfeiture abuses.”
Unfortunately, not everybody at the hearing agreed that it’s wrong for governments to arbitrarily engage in theft.
…one senator said “taking and seizing and forfeiting, through a government judicial process, illegal gains from criminal enterprises is not wrong,” and neither is law enforcement enriching itself from this. …this senator asserted an unverifiable number: “Ninety-five percent” of forfeitures involve people who have “done nothing in their lives but sell dope.” This senator said it should not be more difficult for “government to take money from a drug dealer than it is for a businessperson to defend themselves in a lawsuit.” In seizing property suspected of involvement in a crime, government “should not have a burden of proof higher than in a normal civil case.”
The Senator who made these statements was Jeff Sessions.
And, as George Will explains, the then-Senator missed a few points.
In civil forfeiture there usually is no proper “judicial process.” There is no way of knowing how many forfeitures involve criminals because the government takes property without even charging anyone with a crime. The government’s vast prosecutorial resources are one reason it properly bears the burden of proving criminal culpability “beyond a reasonable doubt.” A sued businessperson does not have assets taken until he or she has lost in a trial, whereas civil forfeiture takes property without a trial and the property owner must wage a protracted, complex, and expensive fight to get it returned.
The Wall Street Journal also opined about the new Attorney General’s indefensible position.
The all-too-common practice allows law enforcement to take private property without due process and has become a cash cow for state and local police and prosecutors. …Assets are often seized—and never returned—without any judicial process or court supervision. Unlike criminal forfeiture, civil forfeiture doesn’t require a criminal conviction or even charges. According to the Virginia-based Institute for Justice, which tracks forfeitures, 13% of all forfeitures done by the Justice Department between 1997 and 2013 were in criminal cases while 87% were civil forfeitures. And 88% of those forfeitures were done by an administrative agency, not a court. …The lack of procedural protection coupled with financial incentives has turned policing for profit into a slush fund for governments hungry for cash, and the payouts too often come at the expense of civil liberties. We’d like to hear what Mr. Sessions thinks of the practice today.
Sadly, it doesn’t appear that President Trump is on the right side either.
In a new column on the topic, George Will addresses this unfortunate development.
There is no reason for the sheriffs to want to reform a racket that lines their pockets. For the rest of us, strengthening the rule of law and eliminating moral hazard are each sufficient reasons. Civil forfeiture is the power to seize property suspected of being produced by, or involved in, crime. If property is suspected of being involved in criminal activity, law enforcement can seize it. Once seized, the property’s owners bear the burden of proving that they were not involved in such activity, which can be a costly and protracted procedure. So, civil forfeiture proceeds on the guilty-until-proven-innocent principle. Civil forfeiture forces property owners, often people of modest means, to hire lawyers and do battle against a government with unlimited resources. And here is why the sheriffs probably purred contentedly when Trump endorsed civil forfeiture law — if something so devoid of due process can be dignified as law: Predatory law enforcement agencies can pocket the proceeds from the sale of property they seize.
The folks at Reason have a new video on Trump’s support for theft-by-government.
By the way, I hold out some hope that Trump may not be completely bad on the issue. It’s possible that he’s never considered the issue and doesn’t understand that it involves over-the-top government thuggery. He may simply think it’s some sort of procedural issue involving good cops against bad crooks.
So perhaps when he is briefed on what the issue really means, he’ll be in favor of protecting Americans from the kind of horrible abuse that the Dehko family experienced. Or the mistreatment of Carole Hinders. Or the ransacking of Joseph Rivers. Or the brutalization of Thomas Williams.
I could continue, but I think you get the point.
Let’s close, though, with some good news. I wrote two years ago about the case of Charles Clarke, who had $11,000 that was stolen by government. Thanks to the Institute for Justice, that stolen money has been returned.
Charles Clarke, the college student who was robbed of $11,000 in cash by cops at the Cincinnati/Northern Kentucky International Airport two years ago, will get his money back with interest under an agreement he reached with the Justice Department this week. …To keep the money, the government theoretically had to show that it more likely than not came from selling drugs or was intended to buy them. But that burden applied only if Clarke had the means to challenge the forfeiture once the government had taken his savings. Innocent owners often find that standing up for their rights costs more than the value of the property they are trying to get back. Luckily for Clarke, he had the Institute for Justice in his corner.
And the other bit of good news is that New Mexico has curtailed the disgusting practice of asset forfeiture. Hopefully Trump won’t try to destroy the careers of the lawmakers who decided the Constitution was more important than lining the pockets of the bureaucracy.
I don’t have strong views on global warming. Or climate change, or whatever it’s being called today.
But I’ve generally been skeptical about government action for the simple reason that the people making the most noise are statists who would use any excuse to increase the size and power of government. To be blunt, I simply don’t trust them. In Washington, they’re called watermelons – green on the outside (identifying as environmentalists) but red on the inside (pushing a statist agenda).
But there are some sensible people who think some sort of government involvement is necessary and appropriate.
George Schultz and James Baker, two former Secretaries of State, argue for a new carbon tax in a Wall Street Journal column as part of an agenda that also makes changes to regulation and government spending.
…there is mounting evidence of problems with the atmosphere that are growing too compelling to ignore. …The responsible and conservative response should be to take out an insurance policy. Doing so need not rely on heavy-handed, growth-inhibiting government regulations. Instead, a climate solution should be based on a sound economic analysis that embodies the conservative principles of free markets and limited government. We suggest…creating a gradually increasing carbon tax…, returning the tax proceeds to the American people in the form of dividends. And…rolling back government regulations once such a system is in place.
A multi-author column in the New York Times, including Professors Greg Mankiw and Martin Feldstein from Harvard, also puts forward the argument for this plan.
On-again-off-again regulation is a poor way to protect the environment. And by creating needless uncertainty for businesses that are planning long-term capital investments, it is also a poor way to promote robust economic growth. By contrast, an ideal climate policy would reduce carbon emissions, limit regulatory intrusion, promote economic growth, help working-class Americans and prove durable when the political winds change. …Our plan is…the federal government would impose a gradually increasing tax on carbon dioxide emissions. It might begin at $40 per ton and increase steadily. This tax would send a powerful signal to businesses and consumers to reduce their carbon footprints. …the proceeds would be returned to the American people on an equal basis via quarterly dividend checks. With a carbon tax of $40 per ton, a family of four would receive about $2,000 in the first year. As the tax rate rose over time to further reduce emissions, so would the dividend payments. …regulations made unnecessary by the carbon tax would be eliminated, including an outright repeal of the Clean Power Plan.
They perceive this plan as being very popular.
Environmentalists should like the long-overdue commitment to carbon pricing. Growth advocates should embrace the reduced regulation and increased policy certainty, which would encourage long-term investments, especially in clean technologies. Libertarians should applaud a plan premised on getting the incentives right and government out of the way.
I hate to be the skunk at the party, but I’m a libertarian and I’m not applauding. I explain some of my concerns about the general concept in this interview.
In the plus column, there would be a tax cut and a regulatory rollback. In the minus column, there would be a new tax. So two good ideas and one bad idea, right? Sounds like a good deal in theory, even if you can’t trust politicians in the real world.
However, the plan that’s being promoted by Schultz, Baker, Feldstein, Mankiw, etc, doesn’t have two good ideas and one bad idea. They have the good regulatory reduction and the bad carbon tax, but instead of using the revenue to finance a good tax cut such as eliminating the capital gains tax or getting rid of the corporate income tax, they want to create universal handouts.
They want us to believe that this money, starting at $2,000 for a family of four, would be akin to some sort of tax rebate.
That’s utter nonsense, if not outright prevarication. This is a new redistribution program. Sort of like the “basic income” scheme being promoted by some folks.
And it creates a very worrisome dynamic since people will have an incentive to support ever-higher carbon taxes in order to get ever-larger checks from the government. Heck, the plan being pushed explicitly envisions such an outcome.
The libertarian approach to crime is both simple and sensible.
In other words, be “tough on crime,” but make sure there’s a morally just system.
And I should consider adding a fourth principle, which is that laws shouldn’t be a way for governments to pad their budgets with unfair fines and other cash penalties.
With this in mind, let’s explore a practical example of why it’s a good idea to make sure governments respect due process and civil liberties. I wrote last year about how the Justice Department wrongly asserted that it has the right, without following due process, to reach outside America’s borders to obtain personal information.
In part, the bureaucrats at DOJ are exploiting an old law that doesn’t provide clear guidance on how to deal with modern electronic communication and data storage. Fortunately, that’s something that should be easy to fix.
Veronique de Rugy of the Mercatus Center correctly identifies the key issue in a column for Reason, starting with the fact that courts fortunately are not giving the feds a blank check.
…the Justice Department…asserted that a U.S. search warrant should carry jurisdiction over the data of an Irish citizen being stored on a server in Ireland simply because it is owned by Microsoft, an American corporation. Thank goodness the federal appeals court has now rejected the government’s attempt… The outcome affirms a landmark defense of privacy rights against law enforcement overreach and clearly establishes that the U.S. government does not have jurisdiction over the entire world. It also removes a major threat to the competitiveness of U.S.-based multinational companies, which must operate under the privacy rules of the countries in which they operate. Many of those countries unsurprisingly take a dim view of U.S. government efforts to pry into the lives of their citizens.
But it would be good if lawmakers modified the law so that it reflects today’s world.
Members of Congress, however, shouldn’t count on either the courts or the Trump administration. Instead, they could address the fundamental issue. The root of the problem is a common one. A law—the Electronic Communications Privacy Act—was enacted in 1986 to address issues raised by the technology at the time, and Congress never bothered to update it despite significant advancements in the decades since. …This has also resulted in massive privacy blind spots—such as the ECPA’s considering emails held by a third party for over 180 days to be abandoned, allowing them to be accessed with a simple subpoena instead of a judge-issued warrant. Also of concern is that the process for working with foreign governments when investigations cross jurisdictions—through mutual legal assistance treaties, or MLATs—has been seen by officials as too cumbersome to pursue. Excessive bureaucratic red tape, in other words, has encouraged investigators to engage in a troubling power grab.
And there was legislation last Congress to address these problems, with a new version already introduced in the new Congress.
…a bill, the International Communications Privacy Act, that sought to resolve both of these issues. It would have updated privacy rules to acknowledge modern technological reality by doing away with such silly provisions as the 180-day rule. It also would have streamlined MLAT procedures to make international cooperation more practical. Another bill, the Email Privacy Act, was just reintroduced in the current Congress and would also update the ECPA.
Amazing the House already has approved the legislation.
The House of Representatives today approved by voice vote the Email Privacy Act (H.R. 387) to protect Americans’ privacy and public safety in the digital age. …a statement from House Judiciary Committee Chairman Bob Goodlatte (R-Va.) applauding passage of the bill. …“The U.S. Constitution protects Americans’ property from unreasonable searches and seizures and we must ensure that this principle continues to thrive in the digital age. …As technology has far-outpaced the Electronic Communications Privacy Act of 1986, the Email Privacy Act modernizes this decades-old law to establish a uniform warrant requirement to acquire stored electronic communications in criminal investigations. These updates to the law will better safeguard Americans’ constitutional rights while also protecting law enforcement’s ability to fight crime. As the House again has overwhelmingly approved this bill, it’s time for the Senate to take up this bipartisan legislation and send it to the President’s desk to become law.”
The tech community is happy about this progress, though it’s also concerned the Senate once again will be the stumbling block.
…the reintroduced Email Privacy Act easily passed the House via a voice vote, showing that our Congressional Members still recognize how important this is. Of course, now it gets to go back to the Senate, and we saw how well that worked last year. And then we have to believe that President Trump will sign the bill. …It’s great that Rep. Kevin Yoder, along with Reps. Jared Polis, Bob Goodlatte, John Conyers, Ted Poe, Suzan DelBene, Will Hurd, Jerry Nadler, Doug Collins and Judy Chu keep pushing this bill. …the fact that they’re willing to support basic 4th Amendment concepts for email is worthy of recognition. Now, hopefully, the Senate won’t try to muck it up again.
I guess we’ll see whether there’s progress this year or next year.
In the meantime, let’s hope that lawmakers are guided by the three principles of good criminal justice policy.
P.P.S. Since courts almost always grant search warrants, I’ve never understood why law enforcement officials want to get around this constitutional principle. Moreover, I’ve never seen any evidence that the fight against real crime somehow is compromised by having to comply with the 4th Amendment. So now, perhaps, you’ll understand why I’m willing (albeit only on one occasion) to side with Ruth Bader Ginsburg over Clarence Thomas.
When I debate one of my leftist friends about deficits, it’s often a strange experience because none of us actually care that much about red ink.
And folks on the left want bigger government, so they argue for tax hikes to enable more spending and redistribution.
I feel that I have an advantage in these debates, though, because I share my table of nations that have achieved great results when nominal spending grows by less than 2 percent per year.
The table shows that nations practicing spending restraint for multi-year periods reduce the problem of excessive government and also address the symptom of red ink.
I then ask my leftist buddies to please share their table showing nations that got good results from tax increases. And the response is…awkward silence, followed by attempts to change the subject. I often think you can even hear crickets chirping in the background.
I point this out because I now have another nation to add to my collection.
From the start of last decade up through the 2009-2010 fiscal year, government spending in the United Kingdom grew by 7.1 percent annually, far faster than the growth of the economy’s productive sector. As a result, an ever-greater share of the private economy was being diverted to politicians and bureaucrats.
Beginning with the 2010-2011 fiscal year, however, officials started complying with my Golden Rule and outlays since then have grown by an average of 1.6 percent per year.
And as you can see from this chart prepared by the Institute for Fiscal Studies, this modest level of fiscal restraint has paid big dividends. The burden of government spending has significantly declined, falling from 45 percent of national income to 40 percent of national income.
This means more resources in private hands, which means better economic performance.
Though allow me to now share some caveats. Fiscal policy is only a small piece of what determines good policy, just 20 percent of a nation’s grade according to Economic Freedom of the World.
So spending restraint should be accompanied by free trade, sound money, a sensible regulatory structure, and good governance. Moreover, as we see from the tragedy of Greece, spending restraint doesn’t even lead to good fiscal policy if it’s accompanied by huge tax increases.
Fortunately, the United Kingdom is reasonably sensible, which explains why the country is ranked #10 by EFW. Though it’s worth noting that it gets its lowest score for “size of government,” so the recent bit of good news about spending restraint needs to be the start of a long journey.
P.S. The United States got great results thanks to spending restraint between 2009-2014. It will be interesting to see whether Republicans get better results with Trump in the White House.
What best symbolizes France’s statist political culture?
Those are good examples, to be sure, but I’ve actually already shared an everything-you-need-to-know story dealing with lavish perks for France’s protected bureaucrat class.
But there’s no rule that says I can’t have multiple everything-you-need-to-know anecdotes.
Here’s a story that reveals why France is in trouble. The Wall Street Journal reports that a French presidential candidate is arguing people shouldn’t get upset that he used taxpayer money to give his wife a no-show job because a big chunk of the money then went back to the government because of punitive taxes.
François Fillon…apologiz[ed] to the country for having employed his wife and children as parliamentary aides while rejecting accusations the jobs were phony. …Mr. Fillon characterized it as unfair for media reports to state his wife received nearly a million euros over a 15-year period, saying after taxes her monthly average income came to only €3,677 ($3,964). …The privileges traditionally available to France’s ruling class were exposed with rare candor.
So I guess Fillon wants people to think it’s okay to divert funds to family members if they “only” pocket about $48,000 per year after paying taxes.
This is disgusting. At least Fillon should have wasted taxpayer money more elegantly, like France’s current president, who doesn’t have much hair but still gave his stylist big bucks.
What makes Fillon’s story especially amusing is that he is the candidate trying to appeal to French voters who want to reduce the role of the state.
Considering that two of his major opponents are Marine Le Pen, a big-government populist, and Benoît Hamon, a socialist who favors a taxpayer-provided basic income for everyone, maybe Fillon actually is the only choice for French voters with libertarian impulses, but that’s a rather sad commentary on the state of French politics. So I don’t even know if I’ll endorse a candidate like I did back in 2012.
What makes the situation particularly tragic is that the fiscal mess in France has become so bad that even parts of the government are concluding that some market-based reforms are necessary.
Corporation tax in France is too far above the European average, according to a report by the French Court of Auditors. The experts said a cut from 33.3% to 25% would allow companies to compete with their European counterparts. EurActiv France reports. The amount of tax paid by businesses in France has been steadily climbing for the last two decades. Today, they pay the highest rates in Europe. But this growth has not been good for the country, according to a report published by the Court… France has not always been a high tax jurisdiction, compared to other EU countries. In 1995 it was more or less at the European average. But it has steadily increased over the last 20 years. At the same time, other EU member states have been moving in the opposite direction. According to the report, most member states have lowered tax on business revenues, or have imminent plans to do so. The UK, for example plans to cut corporation tax to 17% by 2020. The average tax rate paid by EU companies fell from 33% in 1999 to 25% in 2015.
France’s suicidal fiscal regime is why – with my tongue planted firmly in cheek – I agreed with Paul Krugman back in 2013 that there is a plot against France. But I pointed out the conspirators against France were the nation’s politicians.
P.S. Actually, perhaps the story that tells you everything you need to know about France was the poll last decade revealing that more than half the population would flee to America if they had the opportunity.
Today, let’s look at a practical, real-world example.
I wrote a column for The Hill looking at why Greece is a fiscal and economic train wreck. I have lots of interesting background and history in the article, including the fact that Greece got into the mess by overspending and also explaining that politicians like Merkel only got involved because they wanted to bail out their domestic banks that foolishly lent lots of money to the Greek government.
But the most newsworthy part of my column was to expose the fact that “austerity” hasn’t worked in Greece because the private sector has been suffocated by giant tax hikes.
…the troika…imposed the wrong kind of fiscal reforms. …what mostly happened is that Greek politicians dramatically increased the nation’s already punitive tax burden. The Organization for Economic Cooperation and Development’s fiscal database tells a very ugly story. …on the eve of the crisis, the tax burden in Greece totaled 38.9 percent of GDP. This year, taxes are projected to reach 52.0 percent of economic output. Every major tax in Greece has been dramatically increased, including personal income taxes, corporate income taxes, value-added taxes, and property taxes. It’s been a taxpalooza… What’s happened on the spending side of the fiscal ledger? Have there been “savage” and “draconian” budget cuts? …there have been some cuts, but the burden of government spending is still a heavy weight on the Greek economy. Outlays totaled 54.1 percent of GDP in 2009 and now government is consuming 52.2 percent of economic output.
For what it’s worth, the spending numbers would look better if the economy was stronger. In other words, Greece’s performance wouldn’t be so dismal if GDP was growing rather than shrinking.
And that’s why tax increases are so misguided. They give politicians an excuse to avoid much-needed spending cuts while also hindering growth, investment and job creation.
Let’s close by reviewing Greece’s performance according to Economic Freedom of the World. The overall score for Greece has dropped slightly since 2009, but the real story is that the nation’s fiscal score has dramatically worsened, falling from 5.61 to 4.66 on a 0-10 scale. In other words, during a period of time in which Greece was supposed to sober up and become more fiscally responsible, the politicians engaged in an orgy of tax hikes and Greece went from a failing grade for fiscal policy to a miserably failing grade.
Here’s a the relevant graph from the EFW website. As you can see, the score has been dropping for a decade, not just since 2009.
This is remarkable result. Greek politicians should have been pushing the nation’s fiscal score to at least 7 out of 10, if not 8 out of 10. Instead, the score has gone in the wrong direction because of tax increases.
Though I don’t expect Hillary and Bernie to learn the right lesson.
P.S. For more information, here’s my five-picture explanation of the Greek mess.
Back in the 1980s, I would get very agitated when folks made excuses for brutal communist regimes by asserting that the United States also did bad things. This “moral equivalence” argument is now being recycled by Donald Trump, who basically excuses Putin’s brutality because America supposedly isn’t in any position to throw stones.
Here’s the interview, set to start at the point where Trump discusses Putin.
This is wrong. Absurdly wrong.
Though let’s start by acknowledging that the United States is far from perfect. Our history includes black eyes such as slavery, mistreatment of native populations, incomplete legal rights for women, internment of Japanese-Americans, Jim Crow laws, persecution of gays, and other sins.
Even today, we have plenty of bad policies that restrict human liberty, often exacerbated by examples of thuggish actions by government.
But, at the risk of sounding jingoistic and patriotic, the United States began with a wonderful set of ideals and our history largely reflects a struggle to extend those ideals to the entire population.
Now let’s look at Putin.
When I tweeted my column about Russia’s flat tax, I screwed up by making a joke about the Trump-Putin “bro-mance.” I got savaged on Twitter by people who accused me of somehow endorsing (or at least accepting) the many repressive policies that exist in Russia.
The silver lining to Trump’s disturbing interview is that it gives me an opportunity to make clear my disapproval of both Putin and the silly doctrine of moral equivalence.
With regards to Russia’s president, do we have any reason to believe that he is motivated by the principles of classical liberalism? Does anyone think he wants to make Russia a free society? That he respects human rights and the rule of law?
Heck, even Trump didn’t dispute the premise that he’s a killer.
Moreover, how can anyone believe in moral equivalence when there’s a huge gap between the United States and Russia on measures of liberty.
Consider, for instance, the Human Freedom Index. As you can see, the United States is far from perfect. We’re ranked #23 for overall freedom, #28 for personal freedom, and #16 for economic freedom.
But we look good compared to Russia, which is #115 for overall freedom, #110 for personal freedom, and #102 for economic freedom.
And the Freedom House rankings show an equally dramatic difference.
The United States has a score of 90 on a 0-100 scale, with the highest rating for political rights and civil liberties.
Russia, by contrast, only has a score of 22 and gets the next-to-last rating for political rights and civil liberties.
To conclude, some folks sometimes say the continuing imperfections in the United States mean that there’s only a “difference in degree” between us and Russia.
My response is that if the “difference in degree” is large, then you also have a “difference in kind.”
There is no moral equivalence.
P.S. On a separate topic, you won’t be surprised by this report from the Washington Times.
More than half of IRS employees found to have intentionally cheated on their taxes last year were allowed to keep their jobs, according to numbers released by the inspector general that suggest the agency is still reluctant to punish its own staffers for breaking tax laws.
Yet another example of hypocrisy in government. I’ve noted the IRS has thieving employees, incompetent employees, thuggish employees, brainless employees, protectionist employees, wasteful employees, and victimizing employees. Now it has slapped-on-the-hand employees.
I’m obviously a big fan of a simple and fair flat tax.
But I also am very much motivated by the moral case for tax reform. It offends me that we have 70,000-plus pages of special favors for the friends and contributors of politicians. I value the rule of law, so I want everyone in America to play by the same rules.
And I confess that I’m jealous that other nations have adopted this common-sense reform while we’re still stuck with a punitive and unfair internal revenue code.
But the silver lining to this dark cloud is that we can learn from the experiences of other nations.
A recent report looks at what’s happened in Russia following the introduction of the flat tax.
On December 23, 2016, in his annual end-of-year press conference, Russian President Vladimir Putin said that despite his “many doubts” at the initial stage of introducing a flat 13-percent personal income tax in 2001, tax reform in Russia has been a major success. …Putin claimed that in 2001, when the tax reform was introduced, he was “concerned that the budget would lose revenue, because those who earn more would have to pay less.” He said he was also concerned “whether social justice would be ensured and so on.” However, as the reform gained traction, “personal-income tax collection has increased – pay attention – seven times,” Putin said. …Daniel Mitchell, a senior fellow at the Cato Institute, told Polygraph.info that two factors contributed to a significant increase in personal income tax revenue: “the low rate made tax evasion and avoidance much less attractive, and increased incentives to earn income.”
I appreciated the chance to talk to the reporter and get quoted in the story, but I am naturally suspicious about the claims of government officials. So I wondered about Putin’s claim about a seven-fold increase in income tax receipts.
I know there were good results in the first few years after reform. I authored a CF&P study last decade, and there was data at the time showing an impressive increase in revenues from the personal income tax. That data certainly bolstered the argument for tax reform.
But we now have almost another full decade of data. Has the Russian flat tax continued to produce good results? Is the low tax rate continuing to encourage both the earning of income and reporting of income?
To answer these questions, I had my intern cull through various IMF Article IV consultation reports on Russia to get up-to-date data on personal income tax receipts in Russia. And what did I learn? Was Putin wrong?
Yes, Putin’s claim of a seven-fold increase in tax receipts was completely misleading. There was actually a 10-fold jump in personal income tax revenue.
In other words, the flat tax is a success. In today’s Washington, you would say the Russian government is winning bigly.
But there are caveats.
Let’s look at another example. Writing for Forbes, Fahim Mostafa explains that the Hungarian flat tax also has been a big success.
A fair number of Eastern European nations have…chosen this system of taxation over its progressive counterpart. Among the latest to join this club is Hungary, replacing progressive rates from 17% to 32% with a flat tax of 16% on income effective from 2012 onward… There is reason to believe that the implementation of this system has largely benefited the Eastern European nation. …The results from the following years have been remarkable. Total government revenue in 2015 (the last year for which OECD data is available at this time) stood at 23.8% higher than the maximum prior to the flat tax reform… According to the OECD, public debt in Hungary has been decreasing steadily since 2011. Increased revenues allow for this debt to be paid. …The flat tax has boosted consumption in Hungary, greatly increasing taxes collected from sales. Total tax revenue has shot up despite the massive cuts made to income tax. Politicians seeking to implement this policy in their own nation would do well to point out the example of Hungary.
I’ll add two comments.
First, the same caveats I applied to Russia apply to Hungary. The country is ranked #57 from Economic Freedom of the World, so it’s great that there’s a successful flat tax, but a lot more reform is needed for Hungary to become a role model for overall market-friendly reform.
Second, the author should probably make a change to the column. Instead of writing that “tax revenue has shot up despite the massive cuts,” it might be more accurate to write that “tax revenue has shot up because of the massive cuts.”
Yes, every so often you can find examples of nations being on the downward-sloping portion of the Laffer Curve, either because tax rates are ridiculously high (the U.S. before Reagan) or because a nation is developing or transitioning and needs low tax burdens to boost growth and encourage compliance.
It’s never my goal to boost revenue for governments, of course, but there’s surely a lesson to be learned about the benefits of low tax rates when both taxpayers and the government wind up with more money.
I’m glad that Donald Trump wants faster growth. The American people shouldn’t have to settle for the kind of anemic economic performance that the nation endured during the Obama years.
But does he understand the right recipe for prosperity?
That’s an open question. At times, Trump makes Obama-style arguments about the Keynesian elixir of government infrastructure spending. But at other times, he talks about lowering taxes and reducing the burden of red tape.
I don’t know what’s he’s ultimately going to decide, but, as the late Yogi Berra might say, the debate over “stimulus” is deja vu all over again. Supporters of Keynesianism (a.k.a., the economic version of a perpetual motion machine) want us to believe that government can make the country more prosperous with a borrow-and-spend agenda.
At the risk of understatement, I disagree with that free-lunch ideology. And I discussed this issue in a recent France24 appearance. I was on via satellite, so there was an awkward delay in my responses, but I hopefully made clear that real stimulus is generated by policies that make government smaller and unleash the private sector.
For today, though, I want to focus on Keynesian economics and the best way to “stimulate” growth.
The question I always ask my Keynesian friends is to provide a success story. I don’t even ask for a bunch of good examples (like I provide when explaining how spending restraint yields good results). All I ask is that they show one nation, anywhere in the world, at any point in history, where the borrow-and-spend approach produced a good economy.
Simply stated, there are success stories. And the reason they don’t exist is because Keynesian economics doesn’t work.
Though the Keynesians invariably respond with the rather lame argument that their spending schemes mitigated bad outcomes. And they even assert that good outcomes would have been achieved if only there was even more spending.
Since you’re probably laughing after reading that, let’s close with a bit of explicit Keynesian-themed humor.
I’ve always thought this Scott Stantis cartoon best captures why Keynesian economics is misguided. Simply stated, it’s silly to think that the private sector is going to perform better if politicians are increasing the burden of government spending.
But I’m also amused by cartoons that expose the fact that Keynesian economics is based on the notion that you can become richer by redistributing money within an economy. Sort of like taking money out of your right pocket and putting it in your left pocket and thinking that you now have more money.
Expanding on this theme, here’s a new addition for our collection of Keynesian humor. It’s courtesy of Don Boudreaux at Cafe Hayek, and it shows the Keynesian plan to charge the economy (pun intended). You don’t need to know a lot about electricity to realize this isn’t a very practical approach.
Is this an unfair jab? Maybe, but don’t forget that Keynesians are the folks who think it’s good for growth to pay people to dig holes and then pay them to fill the holes. Or, in Krugman’s case, to hope for alien attacks. No wonder it’s so easy to mock them.
P.S. If you want to learn more about Keynesian economics, this CF&P video I narrated is a good place to start.
P.P.S. And if you like Keynesian videos, here’s the famous video showing the Keynes v. Hayek rap contest, followed by the equally entertaining sequel, which features a boxing match between Keynes and Hayek. And even though it’s no longer the right time of year, here’s the satirical commercial for Keynesian Christmas carols.
House Republicans, as part of a generally laudable tax reform plan, want to replace the corporate income tax with a “destination-based cash-flow tax.”
I’ve addressed that topic a couple of times.
I had a chance to speak about the DBCFT to a gathering put on by the Washington International Trade Association. I hit on all my main reasons for being worried about the border adjustable provisions.
For those who want additional information, I was preceded on the panel by Gordon Gray of the American Action Forum and followed by John Veroneau of Covington and Burling (and formerly with the Office of U.S. Trade Representative). You can watch the entire event by clicking here.
Regarding my remarks, I think the most relevant thing I said was when I shared new data from the Congressional Budget Office and pointed out that we can simultaneously balance the budget within 10 years and have a $3 trillion tax cut if politicians simply exercise a modest bit of spending restraint and limit annual budget increases to 1.96 per year.
And the most important thing that I said was when I warned that proponents of good policy should never do anything that might create the conditions for a value-added tax in the United States. Some people say the most important rule to remember is to never feed gremlins after midnight, but I think it’s even more important not to give politicians a new source of revenue.
Unless, of course, you want bigger government and more red ink.
In 2016, there were three very worthy candidates for the highly coveted Politician of the Year Award.
Well, we now have an early contestant for the 2017 prize. And it’s going to be a group award. Romania’s Social Democrats have just voted to legalize abuse of power. I’m not joking, Here are some excerpts from a report by the EU Observer.
Romania’s left-wing government scrapped some anti-corruption rules, in a move likely to allow leading politicians to avoid criminal persecution. The cabinet of social democrat Sorin Grindeanu…passed an emergency measure to decriminalise some offences. Abuse of power will no longer be prosecuted if it is deemed to have caused financial damage of less than €44,000. …Changes will enter into force within 10 days, without need for approval by the parliament.
Wow. This is so absurd that I wonder whether there’s more to the story.
For instance, I wrote two years ago about the nation of Georgia getting rid of an entire division of the national police force, which sounds like a move to enable crime. But there was a story behind the story. It turns out that lawmakers in Tbilisi got rid of highway cops because the force was pervasively corrupt, basically doing nothing other than extorting money from motorists. So eliminating the force was actually an anti-corruption step.
In the case of Romania, though, I haven’t found any sign of mitigating circumstances. It appears that politicians simply want get-out-of-jail-free cards.
For what it’s worth, many Romanians are not happy that their politicians have made stealing legal.
Some 10,000 people gathered outside the government’s headquarters, calling the government “thieves” and “traitors” and imploring the cabinet to resign. …critics say the measure will clear several leading politicians who are under investigation or on trial in abuse-of-power cases. …Romania’s centre-right president Klaus Iohannis said he would refuse to swear in anyone with a criminal record. On Tuesday, Iohannis announced “a day of mourning for the rule of law”. “The government ignored the dream of millions of Romanians who want live in a country free of corruption,” he posted on Facebook. Laura Codruta Kovesi, the chief prosecutor at Romania’s National Anti-corruption Directorate (DNA), said she had only seen a draft of the bill, but its contents would render the fight against corruption in Romania “irrelevant”.
By the way, political corruption appears to be a non-trivial problem.
According to Transparency International, Romania is ranked #57 in the Corruption Perceptions Index, which is the weakest score of any EU nation other than Italy, Greece, and Bulgaria.
But let’s close with some good news. I’ve written (over and over and over again) that big government facilitates corruption. Simply stated, politicians in places like Romania (or the United States!) wouldn’t have favors to sell if the government didn’t have favors to dispense.
So if you want less corruption, shrink the size of the public sector.
And Romania is moving in the right direction. After decades of horrific communist tyranny, it became a transition economy when the Soviet Union collapsed. Ever since, like many other countries in the region, Romania has been trying to shed the shackles of statism so that a market economy can function.
There’s been some success. Romania is one of the many flat tax nations in Eastern Europe. And it ranks #22 in Economic Freedom of the World, which is rather impressive (though it only ranks #61 for the size-of-government category, so there’s obviously room for improvement).
The continuing challenge, not only in Romania, but all over the world, is convincing politicians to reduce the size and scope of government when that means they’ll have less opportunity to line their own pockets. Sort of like asking foxes to guard henhouses.
And it’s not just the fault of politicians. What can really sabotage a nation is when a sufficiently large share of the overall population decides that it’s morally acceptable to loot and mooch. In that case, politicians are simply a reflection of societal rot.
It’s much easier to restore physical capital than it is to restore cultural capital.
This article appeared on Inside Sources on January 30, 2017.
Republicans appear committed to reforming the corporate tax code — an act that is long overdue. The current system, with its high marginal rates on businesses and global reach, makes it extremely difficult for American companies to compete internationally. Unfortunately, Republicans also seem determined to finance part of that reform effort with a new tax on consumers that is, to say the least, a very bad idea.
House Speaker Paul Ryan and Ways and Means Chairman Kevin Brady, R-Texas, want to replace the current corporate income tax with a “border adjustable” system, also called a destination-based cash flow tax (DBCFT). They believe the estimated $1 trillion in revenue this will bring over 10 years is needed to pay for the rest of the tax reform plan. In reality, the true costs are likely to be much higher than they anticipate.
The DBCFT exempts export-generated income from taxation and doesn’t allow any deduction for the cost of imported inputs, which is the same as taxing them. On the surface, this means shifting the tax burden more heavily onto importers, which tend to be retailers. These costs will be passed on to consumers in the form of higher prices.
Not to worry, supporters tell us, because the dollar will strengthen as a result of this new trade dynamic and offset the higher prices.
A recent analysis published by the Center for Freedom and Prosperity, titled “Political and Economic Risks of a Destination-Based Cash Flow Tax,” identifies three primary problems with the argument for a border adjustable system. One is the reliance on the silver bullet of quick and perfect dollar appreciation. The second is the opportunities that will likely be afforded to future politicians to raise tax rates easily and grow government. And third is that destination-based systems undermine the ability of tax competition to serve as a check on political greed.
The hope that the dollar will rise enough to offset completely consumer price hikes is a speculative basis on which to hang the welfare of millions of Americans. There’s evidence enough to question whether the dollar will jump the full amount needed to offset the tax. Even if it does, the result will be huge losses in value for American holders of foreign assets. This is probably why President Trump recently commented that the idea was “too complicated.”
Significant risk also comes from the plan’s similarities with a VAT, or value-added tax. VATs are pernicious because they have a large tax base and are hidden from consumers. Increasing the VAT rate often thus becomes too alluring a prospect for politicians to pass up and undermines any chance for fiscal discipline. The imposition of VATs goes a long way toward explaining the more explosive growth of European governments compared to that of the United States over the last half-century.
The DBCFT isn’t precisely a VAT, but it comes very closely to being one. It just exempts labor compensation from the tax base while VATs do not. But even that difference might not last.
It’s debatable whether the tax would pass muster at the World Trade Organization. If the WTO does rule against it, then the easiest and thus most likely political response will be for whoever is in charge at the time to turn it into a full VAT.
Even if that concern proves unfounded, the DBCFT may be doing enough already to contribute to the future growth of government.
Tax competition helps protect taxpayers from excessive taxation because politicians who attempt to impose onerous burdens will see their base flee for better jurisdictions. That can’t happen with a destination-based system, which is why the tax has been championed by a prominent academic on the left like Alan Auerbach. He touts that the DBCFT “alleviates the pressure to reduce the corporate tax rate,” and celebrates that the new system will be “more progressive.”
A recent survey from the U.S. Consumer Coalition reports that voters would prefer tax cuts be offset by spending reductions instead of new taxes in other areas. So if Republicans insist on starting from the erroneous assumption that pro-growth tax cuts need to be “offset,” then they should move the tax cut alongside some or all of the $10.5 trillion in cuts reportedly desired by the administration. Else, they risk enabling the left to achieve something they have thus far only dreamed of: a European tax system capable of fueling European levels of government spending.
It’s also a daunting task. Fixing the sprawling regulatory state is the modern version of cleaning the Augean stables and I’m not brimming with confidence that Trump and his appointees have Herculean powers.
That being said, if they’re deciding where to focus their deregulatory efforts, cost-benefit analysis would be a very useful guide. Simply stated, go after the red tape that imposes the highest costs while yielding the fewest benefits.
And if that’s the approach, so-called anti-money laundering regulations should be on the chopping block. Banks and other financial institutions are now being forced to squander billions of dollars in order to comply with laws, rules, and red tape that require them to spy on all their customers. The ostensible purpose of AML policies is to discourage criminal behavior, but experts have concluded that this approach has been a failure.
To the extent that AML policies have had an impact, it’s been negative. In addition to high costs and inefficiency, the laws and regulations have disproportionately harmed poor people.
Richard Rahn, in a column for the Washington Times, says AML laws are the modern version of prohibition, well-meaning in theory but counter-productive in practice.
Money laundering fits under the definition of vague law because, unlike murder or robbery, it is not a crime of an act but one of “intent.” …This leads to many problems and substantial prosecutorial abuse. It is not only banks and financial institutions that are supposed to know the source of their clients’ funds, but also such diverse people as car dealers, pawnbrokers, real estate agents, and on and on. Often, it is not considered good enough to know the source of a customer’s funds (often a near-impossibility), but the source of the funds of the customer’s customer. …The result is that banks and other financial institutions increasingly refuse to open accounts for low-income people… There is a very high fixed cost for banks and others to do “due diligence” on their customers — the costs being roughly the same for a $5,000 deposit, a $500,000 deposit or a $5,000,000 deposit. Given the massive penalties banks and other financial institutions are subject to for making even an unintentional mistake, their safest course of action is to drop small customers. …Recent academic and think tank studies show the situation only getting worse — all cost and no gain. …the poor, including poor countries, and the honest pay a huge price for all of the additional compliance costs, which reduces productive global capital formation and real incomes.
And the price isn’t trivial for the nations that get targeted, as I pointed out in testimony to the Organization for American States.
A working paper from the Center for Global Development digs into the numbers.
The past fifteen years have seen an unprecedented level of attention on anti-money laundering…issues by financial regulators…the total value of fines levied by regulators peaked at $15 billion in 2014 in the US alone. …Between 2010 and 2015, the Financial Action Task Force (FATF), an international group tasked with setting common AML standards across the globe, added over fifty different countries to an internationally-recognized list of high risk countries. …there are growing concerns that this increase in regulatory activity is leading to a chilling effect on cross-border economic activity as banks limit their exposure to high risk clients or jurisdictions, a process known as ‘de-risking’… This contraction of the correspondent banking network has sounded a number of alarm bells, as these services are seen as being crucial for most cross-border services… The ICC survey reported that over 40% of respondents felt that AML and know-your-customer (KYC) requirements were a significant impediment to trade finance, with nearly 70% reporting they declined transactions that year…a large number of money transfer companies in the US, the UK and Australia have lost access to banking services as a result of banks’ desire to reduce their exposure to regulatory risk, potentially leading to a reduction to a decrease in formal remittances to developing countries, a critical source of development finance… The combined effect of all of these pressures should be leading to declines in the aggregate flow of cross-border payments.
And here are the results of the new empirical research in the study.
The combination of large scale fines, higher compliance costs and international naming-and-shaming has – anecdotally – led many banks to withdraw from certain lines of business or geographic areas, to the potential detriment of cross-border economic activity. …We find evidence that greylisting by the FATF is consistent with up to a 10% reduction in the number of payments received by an affected country. …Issues of economic impact aside, these results suggest there is more work to be done on assessing both the effectiveness and the efficiency of the global AML/CFT regulatory regime. …First, the reduction in payments received by countries subject to greater regulatory scrutiny raises the spectre of potential losses to these countries. Second, that there is either no effect or a positive effect of FATF greylisting on the number of payments leaving a designated country suggests that increased scrutiny may not do much to prevent illicit money from leaving high risk countries and entering the international financial system at large.
In other words, lots of costs, mostly borne by poor people and poor nations, but no evidence that criminals and terrorists are being stopped.
Rather than imposing lots of red tape and requiring banks to spy on everybody, it would be much better if the government followed normal rules in the fight against crime. By all means, it should investigate real crimes, collect evidence and build cases (within proper limits), and work to punish those who inflict harm on others.
But don’t squander resources in ways that aren’t effective.
Some have suggested that it would make sense to have banks monitor a discrete list of potential bad guys rather than promiscuously spy on all customers.
That might be a step in the right direction, but this story from the UK-based Times shows that this approach leaves something to be desired.
A controversial “blacklist” used by British banks to identify terrorists and potential money launderers has grown so bloated that it includes details of a three-year-old member of the royal family… World-Check, a database of more than two million “high-risk” individuals including criminals and senior politicians, is used by 49 of the world’s 50 biggest banks to carry out compliance checks on existing and potential clients. Customers who are flagged up face extra scrutiny and their accounts…hundreds of individuals were included partly on the basis of unverified blog posts and even far-right or extremist websites.
Wow. Since some of my leftist friends consider International Liberty a “far-right” and “extremist” website, this doesn’t bode well for me. I guess I’m lucky that I still have a bank account.
Here’s more from the story.
Thousands of others were listed on the database, which dates from 2014, only because they were relatives or friends of minor public figures. …Maud Windsor…was listed at nine months old. The apparent justification was that she was a family member of a “politically exposed person” (PEP), a reference to her father, who is the son of Prince Michael of Kent and 43rd in line to the throne. …Other British PEPs on the database include Sir Neil Cossons, a historian and former chairman of English Heritage. …Heather Wheeler, a Conservative MP listed on the database, told parliament this year that her bank of 30 years informed her that she was “high risk” and that it “would not deal with me anymore and that it was closing my account.”
These absurd results are driven by government policies that force financial institutions to treat all customers as potential crooks.
And given the huge fines that are being levied on banks and other firms, you can understand why they drop customers and charge high fees. They are forced to act defensively.
Thomson Reuters, the media company that makes millions of pounds compiling and selling the database, does not inform individuals if they are included and banks have no obligation to tell clients why they have been denied services. …Many financial institutions have become risk-averse… “You have an arms race where there’s this immense pressure to build a ‘robust’ database,” one expert on World-Check said. “They’ll pack this database with as many names of individuals as possible. You end up getting a ton of false positives.”
And some of those “false positives” are mentioned in this video I narrated for the Center for Freedom and Prosperity.
P.S. Statists frequently demagogue against so-called tax havens for supposedly being hotbeds of dirty money, but take a look at this map put together a few years ago by the Institute of Governance and you’ll find only one supposed haven among the 28 nations listed.
In one of my periodic attempts to create themes for these columns, I developed a “fiscal fights with friends” category.
Today’s column could be considered Part IIIb since I’m going to revisit the case against energy taxes. Except it’s not going to be a friendly assessment. That’s because there’s a legitimate case (made by Jerry) for a carbon tax, based on the notion that it could address an externality, obviate the need for command-and-control regulation, and provide revenue to finance pro-growth tax cuts.
But there’s also a distasteful argument for such a tax and it revolves around crony capitalists seeking to obtain unearned wealth by imposing costs on their competitors.
Tesla Motors Inc. founder Elon Musk is pressing the Trump administration to adopt a tax on carbon emissions, raising the issue directly with President Donald Trump and U.S. business leaders at a White House meeting Monday regarding manufacturing.
But what the article doesn’t mention is that such a tax would make his electric cars more financially attractive. It’s rather unseemly (and I’m bending over backwards for a charitable characterization) that a rich guy is pushing a tax on the rest of us as a way of lining his pockets.
What’s ironic, though, is that he’s probably being short-sighted because a carbon tax presumably would hit coal, and that’s a common source of energy for electrical generation. So while regular drivers would pay a lot more for gas, Tesla drivers would pay more at charging stations.
Some big oil companies also are flirting with an energy tax for cronyist reasons. An article in the Federalist notes that some of those firms support carbon taxes because they want to create hardships for their competitors.
…carbon taxes do not affect all fossil fuels equally. So just as some fossil fuels are much more carbon-intensive than others, here we can begin to understand how, beyond the benefits of predictability, a carbon tax might actually help some fossil-fuel providers… As a recent National Bureau of Economic Research working paper illustrates, for example, in the United States a tax on carbon would disproportionately impact the use of coal relative to natural gas for energy production. …Don’t be surprised, then, if some domestic producers of natural gas end up promoting a carbon tax, not only out of concern for regime stability but also out of a concern to make their product more competitive in the energy marketplace.
To be fair, I suppose that Musk and the energy companies might actually think energy taxes are a good idea, so their support may have nothing to do with self-interest.
But it’s always a good idea to “follow the money” when looking at how policy really gets made in Washington.
Even more depressing, the adoption of one bad policy may lead to the expansion of another bad policy. More specifically, some proponents of energy taxes admit that ordinary taxpayers and consumers will be hurt. But rather than realize that a new tax is a bad idea, they decide to match a tax increase with more spending. Here is a blurb from a report by the American Enterprise Institute.
Using emissions and other data from 2013 and 2014, we also find that the revenue from the carbon tax could be enough to expand the EITC to childless workers and hold other low income households harmless, combining a regressive tax with progressive benefits.
Though the central theme of the discussion was whether Trump had good ideas for American jobs and business competitiveness.
Given my schizophrenic views on Trump, this meant I was both supportive and critical, and I hope certain people in the White House paid attention to my comment about there being no need for the “stick” of protectionism if Trump delivers on the “carrot” of tax cuts and deregulation.
For today, though, I want to elaborate on why protectionism is the wrong approach. I mentioned in the interview that the long-run outlook for manufacturing employment wasn’t very good, but that we shouldn’t blame trade. So I decided to find a chart that illustrated this point, which then gave me the idea of using a Q&A format to share several charts and tables that make very strong points about trade and protectionism.
Did you know…that manufacturing employment is falling because of productivity growth rather than trade?
The bad news (at least for certain workers) is that manufacturing employment has fallen. And it will continue to fall. But as illustrated by this chart from Professor Don Boudreaux, manufacturing output is at record highs. What’s really happening is that productivity improvements enable more to be produced while using fewer workers. And this is happening all over the world.
Did you know…that there’s a strong relationship between trade openness and national prosperity?
One of Professor Boudreaux’s students augmented one of his charts to show the link between pro-trade policies and per-capita economic output.
Did you know…that you can’t hurt importers without also hurting exporters?
Many of the major multinational firms engage in considerable cross-border trade, meaning that they are both major importers and major exporters. Here’s a very illuminating chart from the Peterson Institute of International Economics.
Did you know…that protectionism imposes enormous losses on consumers and therefore is a net job destroyer?
There has been considerable research on the results of various protectionist policies and the results shared by Mark Perry of the American Enterprise Institute inevitably show substantial economic costs, which means that the jobs that are saved (the “seen“) are more than offset by the jobs that are lost or never created (the “unseen“).
Last but not least, did you know….that economists are nearly unanimous in their recognition that trade barriers undermine prosperity?
There are plenty of jokes (many well deserved!) about economists, including the stereotype that economists can’t agree on anything. But there’s near-unanimity in the profession that protectionism is misguided.
P.S. I wrote a few weeks ago about former President Obama’s dismal legacy. I then augmented that analysis with a more recent postscript citing Ramesh Ponnuru’s observation that Obama failed in his effort to be the left’s Reagan. Now it’s time for another worthy postscript. The Wall Street Journal reviewed the new numbers for growth in 2016 and opined on what this means for Obama’s overall record.
…growth for all of 2016 clocked in at 1.6%, the slowest since 2011 and down from 2.6% in 2015. That marks the 11th consecutive year that GDP growth failed to reach 3%, the longest period since the Bureau of Economic Analysis began reporting the figure. The fourth quarter also rings out the Obama era with an average annual growth rate of 1.8%, which is right down there with George W. Bush for the lowest among modern Presidents. Mr. Obama inherited a deep recession, but that makes the 2.1% growth average since the recession ended all the more dismaying. You have to work hard to suppress growth after a deep downturn, and Mr. Obama did that by putting income redistribution ahead of growth as a policy priority.
If so, the genetic descendants of the Bourbons are now in charge of Europe.
What’s far more noteworthy, though, is that even the Europeans are waking up to the fact that the continent faces a very grim future.
For instance, the bureaucrats in Brussels are pessimistic, as reported by the EU Observer.
…the report warns of a longer term risk for the EU economy. “As expectations of low growth ahead affect investment today, there is potential for a vicious circle,” the commission’s director general for economic and financial affairs writes in the report’s foreword. “In short, the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis), ” Marco Buti writes.
The people of Europe share that grim assessment.
Pew has some very sobering data on angst across the continent.
Support for European economic integration – the 1957 raison d’etre for creating the European Economic Community, the European Union’s predecessor – is down over last year in five of the eight European Union countries surveyed by the Pew Research Center in 2013. Positive views of the European Union are at or near their low point in most EU nations, even among the young, the hope for the EU’s future. The favorability of the EU has fallen from a median of 60% in 2012 to 45% in 2013.
Here’s the relevant chart.
Establishment-oriented voices in the United States also agree that the outlook is rather dismal.
Writing in the Washington Post, Sebastian Mallaby offers a grim assessment of Europe’s future.
…since 2008…, the 28 countries in the European Union managed combined growth of just 4 percent. And in the subset consisting of the eurozone minus Germany, output actually fell. …most of the Mediterranean periphery has suffered a lost decade. …The unemployment rate in the euro area stands at 9.8 percent, more than double the U.S. rate. Unemployment among Europe’s youth is even more appalling: In Greece, Spain, France, Croatia, Italy, Cyprus and Portugal, more than 1 in 4 workers under 25 are jobless.
The bottom line is that there’s widespread consensus that Europe is a mess and that things will probably get worse unless there are big changes.
But the key question, as always, is whether the changes are positive or negative. And this is why I started with a reference to the Bourbon kings. European leaders today also are infamous for learning nothing and forgetting nothing.
Indeed, the proponents of bad policy want to double down on the mistakes of bigger government and more centralization.
The International Monetary Fund called on Thursday for the creation of a fund…in the euro zone… Managing Director Christine Lagarde said… “countries would be pooling budgetary resources in a common pot which could be used for projects and certain operations”
Lagarde says the new fund should have strings attached, so that nations could access the loot if they complied with the EU’s budget rules, and also if they use the money for structural reform.
That sounds prudent, but only until you look at the fine print.
The current budget rules are misguided and are more likely to encourage tax hikes rather than spending restraint. And while many European nations need good structural reform, that’s not what the IMF has in mind.
Lagarde told a news conference the new fund could pay for projects related to migration, refugees, security, energy and climate change.
Germany, Estonia and Luxembourg are the only EU countries that have posted budget surpluses since 2014. Lagarde said the pooling of budgetary resources could put these surpluses to good use.
But the problem goes way beyond an international bureaucracy led by someone from Europe. This is the mentality that is deeply embedded in most European policymakers.
Simply stated, the people who helped create the European mess by pushing for bigger government and more centralization agree that the time if right for…you guessed it…bigger government and more centralization. Here’s an excerpt from a report by the Delors Institute.
…a true economic and monetary union still needs to be built. It will have to be based on significant risk sharing and sovereignty sharing within a coherent and legitimate framework of supranational economic governance. This third building block includes turning the ESM into a fully-fledged European Monetary Fund.
The bureaucrats in Brussels predictably agree that they should get more power, as noted in a story from the EU Observer.
The EU should raise its own taxes and use Brexit as an opportunity to push for the idea, a report by a group of top officials says. …”The Union must mobilise common resources to find common solutions to common problems,” says the document, seen by EUobserver. …The paper also proposes a EU-level corporate income tax that would be combined with a common consolidated corporate tax base… Other proposals include a bank levy, a financial transaction tax, or a European VAT that would top national VATs. …The new budget EU commissioner Guenther Oettinger said that the report was “of great quality”.
And the senior politicians in Brussels are also beating the drum for added centralization.
…divergence creates fragility… Progress must happen…towards a genuine Economic Union…towards a Fiscal Union…need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions…some degree of public risk sharing…including a ‘social protection floor’…a shared sense of purpose among all Member States
Wow. I don’t know if I’ve ever read something so wildly wrong. As Nassim Nicholas Taleb has sagely observed, it is centralization and harmonization that creates systemic risk.
And all this talk about “common resources” and “public risk sharing” is simply the governmental version of co-signing a loan for the deadbeat family alcoholic.
Yet Europe’s ideologues can’t resist their lemming-like march in the wrong direction.
What makes this especially odd is that there is so much evidence that Europe originally became rich for the opposite reason.
It was decentralization and jurisdictional competition that enabled prosperity.
Matt Ridley, writing for the UK-based Times, drives this point home.
…the leading theory among economic historians for why Europe after 1400 became the wealthiest and most innovative continent is political fragmentation. Precisely because it was not unified, Europe became a laboratory for different ways of governing, enabling the discovery of regimes that allowed free markets and invention to flourish, first in northern Italy and some parts of Germany, then the low countries, then Britain. By contrast, China’s unity under one ruler prevented such experimentation. …Baron Montesquieu…remarked, Europe’s “many medium-sized states” had incubated “a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce”. …David Hume…mused…Europe is the continent “most broken by seas, rivers, and mountains” and so “the divisions into small states are favourable to learning, by stopping the progress of authority as well as that of power”. …the idea has gained almost universal agreement among historians that a disunited Europe, while frequently wracked by war, was also prone to innovation and liberty — thanks to the ability of innovators and skilled craftsmen to cross borders in search of more congenial regimes.
But now Europe has swung completely in the other direction.
The European Commission’s obsession with harmonisation prevents the very pattern of experimentation that encourages innovation. Whereas the states system positively encouraged governments to be moderate in political, religious and fiscal terms or lose their talent, the commission detests jurisdictional competition, in taxes and regulations. The larger the empire, the less brake there is on governmental excess.
Ralph Raico echoes these insights in an article for the Foundation for Economic Education.
In seeking to answer the question why the industrial breakthrough occurred first in western Europe, …what was it that permitted private enterprise to flourish? …Europe’s radical decentralization… In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions. …Instead of experiencing the hegemony of a universal empire, Europe developed into a mosaic of kingdoms, principalities, city-states, ecclesiastical domains, and other political entities. Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator”.
In other words, the “stationary bandit” couldn’t steal as much and that gave the private sector the breathing room that’s necessary for growth.
But today’s politicians in Europe want to strengthen the ability of governments to seize more money and power.
That strategy may work in the short run, but bailouts, redistribution, easy money, and statism are not a good long-run strategy.
So perhaps it’s appropriate that we conclude with a warning. As reported in a column for the UK-based Telegraph, one of the architects of the euro fears that bailouts are crippling the continent-wide currency.
The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned. “One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist… Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said. The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. “…Market discipline is done away with by ECB interventions. …The no bailout clause is violated every day,” he said… Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all.
For what it’s worth, I fully agree that Greece should have been cut loose.
But European politicians and bureaucrats, driven by an ideological belief in centralization (and a desire to bail out their big banks), instead decided to undermine the euro by creating a bigger mess in Greece and sending a very bad signal about bailouts to other welfare states.
And keep in mind that the fuse is still burning on the European fiscal crisis.
As the old saying goes, this won’t end well.
Yesterday was “Australia Day,” which I gather for Aussies is sort of like the 4th of July for Americans.
To belatedly celebrate for our friends Down Under, I suppose we could sing Waltzing Matilda.
But since I’m a policy wonk with a special fondness for the nation, let’s instead acknowledge Australia Day by citing some very interesting research
Economists at the Australian Treasury crunched the numbers and estimated the economic effects of a lower corporate tax rate. They had several levers in their model for how this change could be financed, including increases in other taxes.
Corporate income taxes are one of the most destructive ways for a government to generate revenue, so it’s not surprising that the study concluded that a lower rate would be desirable under just about any circumstance.
But what caught my attention was the section that looked at the economic impact of a lower corporate tax rate that is offset by a reduction in the burden of government spending. The consequences are very positive.
This subsection reports the findings from the model simulation of a company income tax rate cut from 30 to 25 per cent, leaving all other tax rates unchanged and assuming any shortfall in revenue across all jurisdictions is financed by a cut in government spending. …Under this scenario, GNI is expected to rise by 0.7 per cent in the long run (see Chart 9). …the improvement in real GNI is largely due to the gain in labour income. Underlying the gain in COE is an estimated rise in before-tax real wages of around 1.1 per cent and a rise in employment of 0.1 per cent.
For readers unfamiliar with economic jargon, GNI is gross national income and COE is compensation of employees.
And here’s the chart that was referenced. Note that workers (labour income) actually get more benefit from the lower corporate rate than investors (capital income).
So the bottom line is that a lower corporate tax rate leads to more economic output, with workers enjoying higher incomes.
And higher output and increased income also means more taxable income. And this larger “tax base” means that there is a Laffer Curve impact on tax revenues.
No, the lower corporate tax rate isn’t self-financing. That only happens in rare circumstances.
But the study notes that about half of the revenue lost because of the lower corporate rate is recovered thanks to additional economic activity.
…After second-round effects, it is estimated that government spending must be cut by 51 cents for every dollar of direct net company tax cut. It is also estimated that 13 cents of every dollar cut is recovered through higher personal income tax receipts in the long run, while 14 cents is recovered thorough higher company income tax receipts. In the long run, the total revenue dividend from the company tax cut is estimated to be around 49 cents per dollar lost through the company tax cut
Here’s the relevant chart showing these results.
And the study specifically notes that the economic benefits of a lower corporate rate are largest when it is accompanied by less government spending.
A decrease in the company income tax rate financed by lower government spending implies a significantly higher overall welfare gain when compared with the previous scenarios of around 0.7 percentage points… As anticipated in the theoretical discussion, when viewed from the standpoint of the notional owners of the factors of production, the welfare gain is largely due to a significant improvement in labour income due to higher after-tax real wages.
By the way, the paper does speculate whether the benefits (of a lower corporate rate financed in part by less government spending) are overstated because they don’t capture benefits that might theoretically be generated by government spending. That’s a possibility, to be sure.
In the conclusion, the report sensibly points out that higher productivity is the way to increase higher living standards. And if that’s the goal, a lower corporate tax rate is a very good recipe.
Australia’s terms of trade, labour force participation and population growth are expected to be flat or declining in the foreseeable future which implies any improvement in Australia’s living standards must be driven by a higher level of labour productivity. This paper shows that a company income tax cut can do that, even after allowing for increases in other taxes or cutting government spending to recover lost revenue, by lowering the before tax cost of capital. This encourages investment, which in turn increases the capital stock and labour productivity.
This is spot on. A punitive corporate income tax is a very destructive way of generating revenue for the government.
Which is why I hope American policy makers pay attention to this research. We already have the highest corporate tax rate in the developed world (arguably the entire world depending on how some severance taxes in poor nations are counted), and we magnify the damage with onerous rules that further undermine competitiveness.
P.S. By world standards, Australia has a lot of economic freedom. But that’s in part a sad indictment on the global paucity of market-oriented nations. There are some very good policies Down Under, but the fiscal burden of government is far too large. The current government is taking some small steps in the right direction (lower corporate rate, decentralization), but much more is needed.
P.P.S. In the interest of being a good neighbor, the Australian government should immediately put an end to its crazy effort to force Vanuatu to adopt an income tax.