Topic: International Economics and Development

Life without Farm Subsidies

When the House passed a massive farm bill last month, supporters justified ongoing subsidies as a “safety net” for family farmers. But a story in the New York Times this morning on the New Zealand dairy industry shows that farmers can survive and thrive in a free market without subsidies.

The story begins by describing how technologically sophisticated the country’s export-oriented dairy industry has had to become to meet global competition.

Dairy farming in New Zealand was not always this sophisticated. But ever since a liberal but free-market government swept to power in 1984 and essentially canceled handouts to farmers — something that just about every other government in an advanced industrial nation has considered both politically and economically impossible — agriculture here has never been the same.

The farming community was devastated — but not for long. Today, agriculture remains the lifeblood of New Zealand’s economy. There are still more sheep and cows here than people, their meat, milk and wool providing the country with its biggest source of export earnings. Most farms are still owned by families, but their incomes have recovered and output has soared.

For more on the lessons we should learn from New Zealand’s successful reforms, check out a Free Trade Bulletin we published in 2005 titled, “Miracle Down Under: How New Zealand Farmers Prosper without Subsidies or Protection.” The Kiwi example also featured prominently in an online debate I had in May with the chief economist of the American Farm Bureau.

The New Zealand dairy industry and our own fruit and vegetable sectors prove that farmers can thrive without government subsidies and trade protection. Yet it looks like we will be saddled for another five years with an expensive and anti-market farm bill.

A Correction

In my post last week on the House farm bill, I quoted a Congressional Quarterly article that said that “[chairman of the Agriculture Committee, Representative Collin] Peterson also worked to stave off a last-minute revolt by Congressional Black Caucus (CBC) members by dedicating $1 million [sic] in extra funding for historically black universities and for black farmers.” (link requires subscription).

Further reporting has disclosed that the figure dedicated to those causes was $100 million (see here). Apologies.

Japanese Voters Send Anti-Tax Signal

Elections in Japan do not have much ideological or philosophical content, but the recent defeat for the Prime Minister’s party in upper-house elections was a clear sign that voters do not want higher taxes. As reported by Tax-news.com, Prime Minister Abe has been advocating a big hike in the value-added tax to finance more transfer spending, but the election results mean that Japanese voters may be spared this irresponsible outcome. The one distasteful element of the story is that the reporter refers to Abe’s commitment to reform. In the real world, raising taxes to finance more spending is a way of dodging reform:

Japanese Prime Minister Shinzo Abe’s plans for fiscal and tax reform have been dealt a blow after the opposition Democratic Party, which opposes a hike in consumption tax, won a substantial majority in Upper House parliamentary elections on Sunday. While the Democrat Party’s victory does not give it control over the government, analysts expect their influence in the upper house to raise a barrier to an early rise in consumption tax - thought to be central to the ruling Liberal Democrat’s plans to raise the revenue it needs to meet growing spending requirements and balance the budget. It was thought the government would legislate to increase the tax in 2008, with the hike going into effect in 2009, but this is now an increasingly distant prospect. … However, despite the electoral setback, Abe resolved to forge ahead with fiscal reforms.

Bulgaria Announces 10 Percent Flat Tax

According to Bulgarian news sources, the coalition government in Bulgaria has agreed to implement a low-rate flat tax starting next January. This is good news for Bulgaria, but also good news for the rest of Europe since it means further pressure for tax-rate reductions and tax reforms. The global flat tax revolution is picking up so much steam that the time has come to propose a theme song. I realize I’m showing my age, but Another One Bites the Dust seems appropriate. Perhaps the song could be piped into the European Commission and the Organization for Economic Cooperation and Development, adding to their angst about the market-based reforms sweeping the world?

At an operative cabinet meeting Sunday attended by the top brass from the three parties it was decided to retire the current three-bracket personal income tax rate system and replace it with a flat rate of 10%. …The government also decided on a 10% pension increase from October 2007, enabled by a 20% budget revenue overperformance by end-July, and a 3% cut in the social security burden.

House Farm Bill: “A Major Achievement?”

On Friday, the Democratically controlled U.S. House of Representatives passed a massive new farm bill. In a front page story on Saturday, the Washington Post reported:

The House yesterday passed a far-reaching new farm bill that preserves the existing system of subsidies for commercial farmers and adds billions of dollars for conservation, nutrition and new agricultural sectors.

Passage of the 741-page bill by a vote of 231 to 191, after partisan battling unusual for farm legislation, was a major achievement for the new Democratic leadership.

“A major achievement?” It says a lot about the political culture in our nation’s capital that passing a bill that basically continues more than 80 years of failed farm policy with minimal reforms is considered a major achievement.

In Washington, achievement is measured by how much legislation is passed and how much money is spent, not by whether the nation’s interests are advanced. For reasons we have outlined in great detail at Cato, the policies contained in the House farm bill benefit a small number of farmers at the expense of the vast majority of Americans.

Some achievement.

Parliament of Whores, Indeed

Those hoping for reform of the outdated and economically damaging farm bill have cause for disappointment today, after the House defeated, by a margin of three votes to one, an amendment that represented some hope for change. (The roll call can be viewed here). That amendment, whilst by no means close to sufficient reform, included important changes to income eligibility requirements and payment limits for subsidies, and would have closed a loophole allowing producers to manipulate the marketing loan program.

Unscathed passage of the House Agriculture Committee’s bill (see my colleague Dan Griswold’s brief criticism of the House bill here) looked in doubt just a few days ago, but House majority leaders managed to sway Rep. Jim McGovern (D., MA), originally in the reform camp, to vote for the farm bill by promising about $840 million to his pet cause, overseas food aid. The Congressional Black Caucus agreed to support the farm bill after a promise to spend $1.1 million on settling racial discrimination claims from the 1990s.

As if the House proposal for the “new” farm bill wasn’t insult enough for the taxpayer and consumer, the proposal for funding some of the largesse is beyond the pale. The $4 billion increase in food stamps and nutrition programs, which could presumably be paid for by cutting the subsidies to farmers of chosen crops, will instead be financed by taxing “inshoring” companies — U.S.-based subsidiaries of foreign companies who employ American workers.

For a Congress supposedly concerned that international trade is threatening American jobs, taxing employment of American workers seems perverse — not to mention violative of tax treaties. Business groups and Treasury Secretary Henry Paulson have expressed their deep dissatisfaction with the tax increase. Some Republicans, including the ranking member on the House Agriculture Committee Robert Goodlatte (Va.), have indicated they would vote against the farm bill (up for a final vote today) because of the tax increase. I’ll believe that when I see it.

On a more positive note, the proposed tax increase has led the administration to issue a veto threat, albeit of the less-than-clear “his senior advisers will recommend that the president veto this bill” variety.

Politicians Seeking Pro-Growth Tax Cuts to Lure Successful People Back to France

The International Herald Tribune reports on the tax-cut battle in France. The President and his Finance Minister are seeking to cut taxes and change the French attitude about wealth creation. In another sign that tax competition is a valuable tool for better policy, the articles explains that a key selling point is the need to make the country attractive once again to the numerous French tax exiles living and working in nations with lower tax rates:

In proposing a tax-cut law last week, Finance Minister Christine Lagarde bluntly advised the French people to abandon their “old national habit.” …Citing Alexis de Tocqueville’s “Democracy in America,” she said the French should work harder, earn more and be rewarded with lower taxes if they get rich. …The government’s call to work is key to its ambitious campaign to revitalize the French economy by increasing both employment and consumer buying power. Somehow it hopes to persuade the French that it is in their interest to abandon what some commentators call a nationwide “laziness” and to work longer and harder, and maybe even get rich.
France’s legally mandated 35-hour workweek gives workers a lot of leisure time but not necessarily the means to enjoy it. Taxes on high-wage earners are so burdensome that hordes have fled abroad. (Sarkozy cites the case of one of his stepdaughters, who works in an investment banking firm in
London.) In her National Assembly speech, Lagarde said that there should be no shame in personal wealth and that the country needed tax breaks to lure back the rich. “All these French bankers” working in London and “all these fiscal exiles” taking refuge from French taxes in Belgium “want one thing: to come back to France,” she said. “To them, as well as to all our compatriots who are looking for the keys to fiscal paradise, we open our doors.”