Tag: mont pelerin society

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

Happy Birthday Walter Williams

Today marks the 75th birthday of one of the greatest champions of liberty in American history, Walter E. Williams.  Like his good friend the late Milton Friedman, Williams is a brilliant economist who specializes in making economics understandable to the layperson.  The John M. Olin Distinguished Professor of Economics at George Mason University in Fairfax, Virginia, Williams has long been an adjunct scholar at Cato.  He is the author of nine books, one of which, South Africa’s War Against Capitalism, Cato published in 1989.  No sooner did Williams publish his autobiography this year, Up from the Projects, than he published a terrific new book, out this month, Race & Economics:  How much can be blamed on discrimination?  Like many Cato scholars, he is a member of the Mont Pelerin Society.

On issues ranging from deregulation of the economy to legalizing drugs, Walter Williams is a passionate, laissez-faire libertarian.  His libertarianism greatly improves The Rush Limbaugh Show where he is a frequent guest host.  Williams rubs elbows with the movers and shakers in America, being a member in good standing of the secretive Bohemian Grove.  Even more secretive is his participation in the influential, Washington, D.C.-based Politically Incorrect Boys Club among whose members are included Cato’s Beloved Founder Ed Crane, and senior fellows Richard Rahn and Dan Mitchell.

All of us at Cato wish our dear friend Walter a very Happy Birthday!

Entrepreneurship for Good

At last week’s Mont Pelerin Society meeting in Stockholm, Deirdre McCloskey argued that it was important for society to affirm entrepreneurship.  How right she is.

The economic benefits of the new technologies and processes constantly created by people with new economic ideas is obvious.  But the social benefits of such inventions also are enormous.

Consider James C. Marsters, who helped end the isolation of the deaf around the world.  The Wall Street Journal reported on his death:

As an orthodontist, a licensed pilot and a sometime-professional magician, James C. Marsters mastered fields challenging for anyone, even more so for a profoundly deaf person such as himself.

His greatest feat was to conjure the text telephone, or TTY, which for the first time gave deaf people independent access to the telephone via teletype machines. It was the first in a string of technologies that help deaf people communicate.

Mr. Marsters, who died July 28 at 85 years old, defied the isolation many deaf people of his generation experienced. He willed himself into the mainstream long before there were technologies and programs to help deaf people do so.

People like Marsters exemplify how the market encourages people to do good while doing well.  Markets are not perfect, nor are the entrepreneurs who drive them.  But then, human beings are not perfect.  However, human liberty – in the form of economic freedom in this context – is the best environment in which to foster a society that is both prosperous and good.

Do You Like Swedish Models?

No, not these kind. Instead, I’m in Stockholm for a meeting of the Mont Pelerin Society, and this gathering of classical liberals (i.e., the Adam Smith types that believe in freedom, not the modern liberals that favor collectivism) has featured some discussion of the Scandinavian social welfare state - often referred to as the Swedish Model.

What is particularly interesting is that Sweden is not the left-wing paradise that some imagine. Yes, government is far too big, consuming about 50 percent of economic output. But Sweden also has an extensive system of school choice. Equally remarkable, Sweden has a system of personal retirement accounts. Indeed, if one removed fiscal policy variables from the ratings, Sweden would be more free market than the United States in the Economic Freedom of the World rankings.

But even in the area of fiscal policy, Sweden is making progress. In recent years, policy makers have abolished both the death tax and the wealth tax. And the corporate tax rate has been reduced significantly below the U.S. level.

Sweden often is cited as an example of a nation that proves a big welfare state is not an obstacle to being a rich society. But as I wrote in my study comparing the United States and the Nordic nations:

Many prosperous nations in Western Europe have large welfare states. This leads unsophisticated observers to sometimes assume that high tax rates and high levels of government spending do not hinder growth. Indeed, they sometimes even conclude that bigger government somehow facilitates growth. …This analysis puts the cart before the horse. It is possible for a nation to become rich and then adopt a welfare state. …A poor nation that adopts the welfare state, however, is unlikely to ever become rich. Before the 1960s, Nordic nations had modest levels of taxation and spending. They also enjoyed—and still enjoy—laissez-faire policies and open markets in other areas. These are the policies that enabled Nordic nations to prosper for much of the 20th century. Once their countries became rich, politicians in Nordic nations focused on how to redistribute the wealth that was generated by private-sector activity. This sequence is important. Nordic nations became rich, and then government expanded. This expansion of government has slowed growth, but slow growth for a rich nation is much less of a burden than slow growth in a poor nation.