Archives: 12/2007

More Cheerful Evidence of Tax Competition

Gordon Brown’s greed for more tax revenue is probably going to backfire. Britain’s “non-doms” bring considerable prosperity to London, but the Financial Times reports that there already is evidence that they are moving to Switzerland - and taking the UK’s hedge-fund industry with them - because of the Labour government’s compulsive desire for bigger government:

Scores of London-based hedge fund managers are moving part of their operations to Switzerland in readiness for a proposed UK tax crackdown on non-domiciled residents, according to Kinetic Partners, an investment management consultancy. London has become a popular base for the industry, with the city’s 950 or so hedge fund firms managing about 80 per cent of European hedge fund assets. But according to David Butler, founding member of Kinetic, at least 40 per cent of the founders of the consultancy’s 300-plus hedge fund clients are non-domiciles and they are reportedly getting increasingly jittery about the likelihood of a harsher tax regime. … From next April, non-doms who have lived in the UK for more than seven years will face a £30,000 a year levy if they choose to keep their offshore income and gains out of the tax net. However, a greater threat to the hedge fund industry comes from proposals to crack down on offshore trusts that also allow non-doms to escape tax on their investments. “Remove this [exemption] and the general view that is starting to prevail is that £30,000 is the thin end of the wedge,” said Mr Butler. … “There will come a time when people are using the UK just for their finance and back office operations. The key value operations will move offshore.”

This is why tax competition is so important. Politicians (at least some of them) are learning that the geese with the golden eggs can fly across the border. This means that there is growing pressure to lower tax rates and reduce the tax bias against saving and investment. So long as international bureaucracies such as the OECD and European Commission do not succeed in their efforts to cripple tax competition, more and more governments will implement better tax policy. Not because they want to, but because a competitive global economy is forcing them to do the right thing.

Food Fight

My post mocking Senators Harkin and Murkowski for micro-managing school menus has triggered a bit of chatter. Matthew Yglesias and Ezra Klein saw a reference to the post on Andrew Sullivan’s site and they both argue that somebody should monitor what kids eat. But they completely miss the point. The debate is not about whether kids should be allowed to eat junk food all day. As a parent, I worry about what kids will eat without appropriate guidance (heck, I worry about what I eat in the absence of adult supervision). Instead, this is a federalism issue. Should these decisions be made by parents and local school boards, or by headline-seeking politicians in Washington? The good news is that at least one presidential candidate is saying no to federal food police:

Fred Thompson wants the government to keep its hands off your dinner plate. …”I’m telling you, I don’t think that it’s the primary responsibility of the federal government to tell you what to eat,” Thompson said to applause when asked if his health care plan included any details on preventative care, a priority for Democratic candidates. “The fact of the matter is we got an awful lot of knowledge,” said the former Tennesse senator. “Sometimes we don’t have a whole lot of will power, and I don’t know of any government program that’s going to instill that.” Thompson, ever a fan of small government, said healthy living should be the responsibilities of families first.

Based on these sentiments, Thompson presumably does not want Congress micro-managing school cafeteria menus. But what about the other GOP candidates? Ron Paul surely is on the right side. Does anybody know where Giuliani, McCain, Huckabee and Romney stand on this issue?

A “Bombshell” on Iran

It has taken me about 36 hours to digest the implications of the new National Intelligence Estimate (NIE) on Iran (.pdf), but I have finally come to some preliminary conclusions. The NIE is, in the words of Washington Post columnist David Ignatius, a “bombshell,” that was “as close to a U-turn as one sees in the intelligence world.”

How to explain this U-turn? Beyond the increased focus on collection from both human sources and intercepted communications, a focus that produced a windfall of new information that, according to a senior official, “unlocked stuff we had, which we didn’t understand fully before,” Ignatius offers some additional insights:

The most important finding of the NIE isn’t the details about the scope of nuclear research; there remains some disagreement about that. Rather, it’s the insight into the greatest mystery of all about the Islamic republic, which is the degree of rationality and predictability of its decisions.

For the past several years, U.S. intelligence analysts have doubted hawkish U.S. and Israeli rhetoric that Iran is dominated by “mad mullahs” – clerics whose fanatical religious views might lead to irrational decisions. In the new NIE, the analysts forcefully posit an alternative view of an Iran that is rational, susceptible to diplomatic pressure and, in that sense, can be “deterred.”

“Tehran’s decisions are guided by a cost-benefit approach rather than a rush to a weapon irrespective of the political, economic and military costs,” states the NIE. Asked if this meant the Iranian regime would be “deterrable” if it did obtain a weapon, a senior official responded, “That is the implication.” He added: “Diplomacy works. That’s the message.”

Who knew? (Hint: Ted Galen Carpenter and Justin Logan, among others.)

Bravo to the intelligence community. Analysts have been singled out (I think unfairly) for criticism on Iraq, but they are to be commended this time around. Some of the credit goes to Director of National Intelligence Mike McConnell and his chief deputies who, according to the lead story in today’s Washington Post, “compelled analysts working on major estimates to challenge existing assumptions when new information does not fit.”

As Ignatius notes, such advice is consistent with that of Sherman Kent, the godfather of U.S. intelligence analysis, who warned “When the evidence seems to force a single and immediate conclusion, then that is the time to worry about one’s bigotry, and to do a little conscientious introspection.”

I am reminded of a comment by John Maynard Keynes, one that has been quoted so often that it has become clichéd: “When the facts change, I change my mind. What do you do, sir?”

Were that question to be posed to George Bush, that most incurious of modern presidents, it appears we already know the answer, at least based on the President’s public remarks. As the Post reported, “Bush defended his approach [toward Iran] during a televised session in the White House briefing room, saying ‘our policy remains the same’ regardless of the new intelligence.” This would seem to confirm that the President does not employ intelligence to inform policy.

But former CIA officer Robert Baer offers a different, and more hopeful, take: while the President will continue to talk tough, Baer says, military action is off the table. Baer suggests that the President himself pushed the NIE to the surface as cover for a 180-degree turn in U.S. policy, and to face down the hawks who are calling for war.

Let’s hope Baer is right.

More Tax Harmonization in Europe

In an unfortunate development, Luxembourg has finally surrendered to demands from other European governments and agreed that online retailers in the tiny duchy should be deputy tax collectors for other European nations. This means that shoppers in countries with high value-added taxes no longer will be able to buy goods and services and benefit from Luxembourg’s 15 percent VAT. This episode is illustrative of the anti-tax competition mentality in Europe, but America faces the same danger. Politicians from high-tax states want to impose a similar scheme (see here and here) in the United States. The International Herald Tribune has the sad details:

Plans to apply sales tax in the country in which services are consumed, rather than the location of the company that sells them, are the latest assault on Luxembourg’s ability to act as a tax haven. …With its low rates of sales tax, or value added tax, Luxembourg has attracted many of the biggest names in online sales, including companies like Amazon.com, Skype and PayPal. Luxembourg levies VAT at 15 percent, the minimum allowed under EU rules. But most EU countries have a higher rate, making the small but prosperous duchy an attractive location for companies offering electronic services. …Until Tuesday, Luxembourg had blocked proposals to levy sales tax at the place of consumption, saying the change would cost it €220 million, or $324 million, a year, equivalent to 1 percent of its economic activity. Taxation matters require unanimous agreement within the EU, but a country like Luxembourg - which has a population of only 429,000 - finds it difficult to withstand pressure from other countries if it isolated. …The deal was welcomed by larger countries, which stand to increase their revenue.

Peru May Become Latin America’s Next Success Story

The Senate passed the free trade agreement with Peru on Tuesday and it could not have come at a better time. That’s because Peru is increasingly distinguishing itself in the region as a successful market democracy. More than five years of sustained high growth (Peru grew 8 percent last year) are transforming the economy and spreading development to regions of the country that have traditionally benefited little from past progress. Unlike other countries in the region such as Argentina or Venezuela that are also experiencing rapid growth, Peru’s growth is characterized by widespread investment and wealth creation as opposed to redistribution or the mere effects of high world commodity prices.

Why is Peru succeeding? Again, unlike various other South American countries, it has sustained the far-reaching market reforms of the early to mid 1990s, has deepened some of them, and maintained sound macro-economic polices. The policies of openness and stability are paying off. Anybody who has been visiting Peru during the past 15 years as I have has noticed vast improvements in countless areas of national and everyday life, including notable progress in the past several years. The center of Lima, notoriously crime-ridden and dirty, has become safe and attractive. That kind of revitalization has occurred throughout the city and in major cities and towns of Peru. Consumer goods and services—cell phones, household appliances, and private education, for example—previously unavailable or in short supply have proliferated and serve all markets, rich and poor.

A change in values more oriented to a modern society may also slowly be taking place. The majority of Peruvians supported the FTA with the United States. The quality of service and attention to detail seems to have improved among Peruvian workers and management across a broad array of businesses. Peruvian writer Mario Vargas Llosa recently noted that he was now much more hopeful about Peru, not because of Peru’s positive economic indicators, but rather because “something profound seems to have changed in the culture of the country. One would have to be blind not to see that.”

In his excellent and new book, La Revolución Capitalista en el Perú (The Capitalist Revolution in Peru), leading Peruvian journalist Jaime de Althaus carefully details some of the changes in Peruvian society.

Traditional and non-traditional exports have boomed, with the latter experiencing higher growth. Peru has now become an exporter of software, to the tune of $20 million last year and growing at a rate of 25 percent.

The middle class is growing. The gap between the rich and the poor and between Lima and the rest of the country has also shrunk. Income gains have been proportionately greater for the poor than for the rich.

Peruvian companies—many of them new—have become successful nationally and internationally, not only exporting abroad, but setting up plants and offices abroad in areas as diverse as textiles, soft drinks, mining, milk products, clothing, banking and detergents. Some Peruvian companies have seen their businesses nationalized in Evo Morales’s Bolivia.

Vast areas of the Peruvian coast that have long been desert have turned green as a result of the “silent agroindustrial revolution” that has also taken place in some parts of the interior. Peru’s produce is now diverse, ranging from sugar cane to paprika to asparagus.

Personal credit as a share of total credit has tripled in the past ten years and now accounts for about 24 percent of total credit.

Department stores and other businesses now regularly cater to the “popular” classes. Enormous malls have been built and are now thriving in some of the poorest sections of Lima.

President Alan Garcia, whose first term in office during the second half of the 1980s was a disaster, is building on this progress and—I never thought I would say this—is so far turning out to be pretty good. In recent weeks he has written two articles in El Comercio, the country’s leading newspaper, in which he sets out a bold vision of promoting growth that has set off an intense national debate and spurred the leading news magazine, Caretas, to put “The Turn to the Right” on a recent cover.

Garcia has called for Peru to grow at Asian levels for years to come. He has accused bureaucrats, NGOs, environmentalists and special interests of blocking important policy changes that would increase growth and reduce poverty. He has made specific proposals to allow private investment in large parts of the jungle so as to export wood and to better protect the region from those who illegally log it; he has called on the private titling of large areas of land so that those with resources can exploit that land; he has called on dramatically increasing private investment in mining and other natural resources in Peru; he has called for allowing more private investment in the fishing industry; he has called for hydro-electric dams to built throughout Peru by private capital, rather than the state; he has called for the state to give up property that it does not use and give up functions that are better performed by others. And so on.

Peru is experiencing market success and may still see more of it. Thus also it has become an embarrassment for Hugo Chavez, who has neighboring Bolivia and Ecuador as client states and is pouring a lot of resources into the Peruvian countryside in a campaign to promote his anti-capitalist ideology. Peru has become a key country in Latin America’s ideological battle between the modernizers and the populists.

A lot still needs to be done in Peru before it can be declared a success story. For example, property and land still needs to be titled in the mountains, taxes are still very high, bureaucratic regulations remain onerous, labor laws are extremely rigid, the educational system is terrible. But the free trade agreement will help because it will give permanence to trade policy; and policy stability and competition have been key to Peru’s success thus far. If Alan Garcia can complete Peru’s unfinished agenda, he will have finally pushed the country into modernity and would go down not only as one of the greatest presidents of Peru, but also of Latin America at a critical time in the region’s history.

Supreme Court and GITMO

Today, the Supreme Court will be hearing oral arguments in the case of Boumediene v. Bush  The case represents an important battle over the constitutional doctrine of separation of powers and the “Great Writ” of habeas corpus.

This isn’t the place to lay out all the details, but I will try to boil it down.  The case is about two things: (a) the power of government to put people in prison; and (b) a power clash between the three branches of our government. 

President Bush says the entire world, including every inch of U.S. territory, is a battlefield.  As Commander-in-Chief, Mr. Bush and his military and intelligence agents will decide who must be imprisoned (sometimes the prisoners are called “enemy combatants,” “POWs,” “high value detainees,” or “imperative security detainees”) and the courts should not “second guess” the calls made by members of the executive branch. 

There is a Supreme Court precedent called Eisentrager that says the courts do not have jurisdiction over prisoners–so long as they are non-citizens who are kept in facilities abroad.  Guantanamo was selected as the site, in part, for that legal reason.  The Bush administration has tried to keep any legal claims by prisoners out of federal court.  When the Supreme Court ruled that a federal statute permitted claims in federal court, Bush went to Congress to change that law.  We now have the Military Commissions Act, which tries to withdraw federal habeas corpus jurisdiction from the federal courts–for any case arising out of Guantanamo.  The Court will be hearing arguments on the constitutionality of that law today.

In my view, Guantanamo gets so much media attention that most people end up losing the big picture.  What if the Supreme Court says habeas petitions from Guantanamo can be heard in federal court?  In an ironic twist, such a ruling might prompt Mr. Bush to announce, “I am closing of Guantanamo!” (footnote: The prisoners, however, will be moved to Abu Graib or some other facility).  What then?

“Jurisdiction” refers to the power of a court to decide a case.  Territory is usually a key factor in deciding jurisdiction.  If a prisoner in a California prison sends a habeas petition to a court in Maine, the Maine court will quickly toss it out because it has no jurisdiction.  It does not matter if the Maine judge is convinced of the prisoner’s innocence. 

The Bush administration says it should win the Boumediene case because federal courts do not have jurisdiction over non-citizen prisoners who are beyond U.S. borders.   And they refer us back to the terms of the Military Commission Act and the Eisentrager case.

I believe the Bush administration should lose this case.  The Framers of the American Constitution called the writ of habeas corpus the “Great Writ” because it is the fundamental check on the power of government to put people in prison.  In law, we say this writ “cuts through all forms,” such as territorial jurisdiction.  The courts do have jurisdiction over the “power of control,” which is the President.  The writ operates upon the jailer, not the prisoner.  Thus, if a habeas petition has merit, the court orders the jailer to release his grasp. 

The Supreme Court needs to protect the role of the judiciary in habeas litigation by invalidating the habeas removal provisions of the Military Commission Act.  Once jurisdiction is established, federal courts can move on to the “merits” of the petitions.  Whether any particular prisoner can persuade a court that his imprisonment is a mistake remains to be seen. 

The Cato brief in this case can be found here.  To watch or listen to me debate George Mason University professor Jeremy Rabkin, go here.  I am also participating in an on-line debate over at the Federalist Society.

In U.S. vs. the World, the World Keeps Winning

Last week, I wrote a bit about the latest results from the Progress in International Reading Literacy Study (PIRLS), which showed U.S. fourth graders losing ground against kids in competitor nations. Well, yesterday another report came out — the Program for International Student Assessment (PISA), which examines high school-aged kids’ math and science literacy — and the news was bad again. (PISA, by the way, usually assesses reading in addition to math and science, but the U.S. had a bit of a test-booklet malfunction this time around, invalidating our scores. Apparently, we lag behind other nations in standardized-test quality control, too.)

Let’s look first at science literacy. In 2000, the first year the PISA assessment was conducted, U.S. students’ average science score was 499 on a scale of 0 to 1000, just about equal to the 500 average for countries belonging to the Organization for Economic Cooperation and Development (OECD), a group of leading industrialized nations. In 2003, the next year PISA was administered, we fell further below the OECD mean of 500 with an average score of 491. Finally, in 2006 (the year covered in the latest report), we averaged 489, our lowest relative score yet.

How about mathematics literacy? In 2000, we were below the OECD average of 500, hitting 493. In 2003 we dropped further, with an average score of 483. And 2006? The OECD average was 498 and ours was 474, which, as in science, was our biggest deficit in PISA history.

So what does all this mean? As I wrote last week, one test does not a final verdict make, but combine PISA with PIRLS and other bad, recent testing results, and one can’t help but conclude that U.S. education is going in the wrong direction, and the biggest name in education reform—the No Child Left Behind Act—is a significant part of the problem.