Topic: International Economics and Development

Despite Losing Business to Flat Tax Neighbors, Hungarian Politicians Clinging to High Tax Rates

The Budapest Times has a feature story noting that many of Hungary’s neighbors have simple and fair flat tax system and wondering whether the nation can afford to retain a system base on high tax rates:

Bulgaria and Albania joined Russia, Slovakia, Romania and nine other Central and Eastern European countries by adopting a flat tax system at the beginning of the year. Four of Hungary’s seven neighbours have already chosen the flat tax option. In fact, flat tax is now the preferred system among the post-communist economies of Central and Eastern Europe. Is Hungary – already suffering the lowest rate of economic growth of the new EU member states – in danger of being left behind? …To western Europeans, this may sound like the utopian stunt of a madman, but in fact flat tax policies – until recently little more than a theoretical notion dreamt up by economists – have rapidly caught on in the developing economies of central and Eastern Europe since Estonia opted for the novel system in 1994.

In addtion to explaining how the flat tax improves tax compliance, the article notes that many companies are relocating in Slovakia because that country’s tax system is much more conducive to productive activity. The Hungarian fiscal system, by contrast, is very punitive:

With a flat rate of tax, regardless of how much a person earns, he pays the same proportion of his wage to the state. With progressive tax, a pay rise can lead to an increase in the percentage claimed by the government. …a simple, low-rate tax which is easy to collect and difficult to evade is likely to raise more money than a high-rate tax system that is full of loopholes and which nobody fully understands. …Compare Hungary with Slovakia. Hungary’s northern neighbour has opted for the purest of flat tax systems. Employers’ and employees’ income tax contributions are fixed at 19%, as is corporate tax and even VAT. Thousands of Hungarian companies have already relocated their headquarters to Hungarian-speaking southern Slovakia – not only are taxes lower, but accounting has been made child’s play. Hungarian employers must pay 16% income tax and 29% social security on payroll, while employees pay between 18% and 36% income tax plus a host of social and other contributions. The net result of this is that the government receives up to double what the employee takes home. 

Even though Hungary’s growth rate is sluggish and the nation is losing jobs and investment to other nations with better tax systems, the politicians are stubbornly refusing to join the flat tax revolution. This is bad news for Hungary’s workers:

The small, conservative opposition party the Hungarian Democratic Forum has long been calling for the adoption of a flat tax model. Party leader Ibolya Dávid argued last year, when the Czech Republic chose to follow its southern neighbour Slovakia into the flat tax world, that Hungary risks losing out in the battle for foreign investment and lagging behind if it does not follow suit. …Earlier this year, it was reported that two of four possible alternatives included the adoption of a flat tax model. However, last week Magyar Hírlap reported that the cabinet working group had ruled out any such move.

WaPo’s Marc Fisher on O’Malley’s REAL ID Misstep

Today Washington Post columnist Marc Fisher takes Maryland governor Martin O’Malley (D) to task for needlessly committing his state to implement REAL ID, the national ID law.

Fisher recognizes that REAL ID will not prevent illegal immigration, but will merely foster deepened criminality: “Maryland’s highways will soon gain tens of thousands of unlicensed motorists, thanks to an abrupt reversal by Gov. Martin O’Malley.”

O’Malley backtracked on campaign commitments to keep Maryland an immigrant-friendly state when he announced that the state would link driver licensing and immigration status. Somehow O’Malley and his secretary of transportation, John Porcari, convinced themselves (and apparently Fisher) that REAL ID requires them to refuse licenses to illegal immigrants, and that moving toward REAL ID compliance would allow them to avoid standing out:

Porcari says Maryland was forced to reject the two-tier system [in which the state would still license illegal immigrants] not because the governor is suffering from low popularity and wants to glom onto the anti-immigrant movement but because “the national landscape is shifting” and Maryland could have found itself nearly alone in resisting Real ID. But seven states are refusing to comply with Real ID, and 17 have condemned the law, which was passed after the 9/11 attacks and requires states to conduct time-consuming identity checks.

States can issue licenses to anyone consistent with REAL ID. Licenses that don’t meet the federal law’s strictures would simply have to be labeled as such.

On O’Malley’s pre-commitment to REAL ID, there are two possibilities. One is that Governor O’Malley and Secretary Porcari actually don’t understand what REAL ID requires and are ignorant of sentiment about the law among sister states. The other is that O’Malley, indeed, has abruptly reversed his professed friendliness toward immigrants.

Will the UK Chase Away the Geese with the Golden Eggs?

Allister Heath has an excellent column in the Spectator explaining how Gordon Brown’s class-warfare policies will discourage successful foreigners from moving to the United Kingdom.

London will be hit particularly hard because the attack on “non-domiciled residents” will be augmented by higher capital gains taxes and policies to discourage British expatriates from spending too much time (and money) in the city.

But some people will benefit. Swiss realtors are probably delighted with Brown’s self-destructive proposals, since many highly-productive people will now be looking to relocate to tax-friendly jurisdictions:

[T]he Treasury now admits that 3,000 non-dom expats will leave Britain in April, when the changes, including a £30,000 annual poll tax, are due to kick in. This is a truly remarkable admission, of which far too little has been made. Given how hard all economies, including Britain, strive to attract high-net-worth investors and the highly skilled these days, it is difficult to fathom why any government in its right mind would wish suddenly to begin penalising those it has sought to woo for so long. What is most absurd about this is that the Treasury readily acknowledges, in the very same document laying out its tax hike plans, that ‘in an increasingly globalised economy it is crucial for the UK’s competitiveness that the UK continues to attract international talent to this country’.

…[T]he assault on the non-doms is going hand in hand with a hike in capital gains tax, a rise in corporation tax on small companies, and a crackdown on the 29,000 non-residents who commute most weeks from Monaco or the Isle of Man. All of these changes add up to a simple message to the skilled, hard-working and above all footloose international talent to which today’s Britain owes so much of its success: don’t bother coming here, we don’t value you any longer.

…Tax lawyers are starting to warn their clients seeking to relocate to Britain that the current volley of tax hikes is likely to be merely the thin edge of a much more punitive wedge. Brown’s attack on the non-doms could easily become Brown’s very own Sarbanes-Oxley, the ultra-onerous piece of post-Enron legislation in America which chased away hundreds of companies to more welcoming shores. But what is most distressing to non-doms currently based in the City, and to many of those considering moving here, is that the Tories support an almost identical policy.

Mon Dieu! Smaller Government in France

In a step that could have a damaging effect on the jokes I tell when giving speeches, the Prime Minster of France has announced a plan to freeze government spending for five years. Some of the details are a bit unclear. As the Financial Times notes, Minister Fillon did not state whether spending would be frozen at current levels, or frozen after adjusting for inflation. A hard freeze would be the best option, but either choice would shrink the aggregate burden of government in France. To their credit, policy makers in Paris seem to understand the problem:

France is planning to freeze public spending for five years under its biggest programme of social and economic reform since the late 1960s, according to François Fillon, the prime minister. …The government has said it wants to eliminate its deficit and reduce spending as a share of national output – the highest in the EU at 53.5 per cent – during Mr Sarkozy’s first five-year term… Mr Fillon did not say whether he was planning a real-terms or nominal freeze, nor whether it would encompass France’s indebted social insurance system. He admitted that France would only eliminate its deficit “if we do the underlying structural reforms, which would allow us to reduce in a much more significant way public-sector employment and public spending”. …Mr Fillon has been credited with keeping Mr Sarkozy’s government focused on repairing France’s precarious public finances and cutting welfare and pension costs.

Assuming Sarkozy’s government fulfills this pledge, France will take a big step in the right direction. With any luck, maybe American politicians then would do something similar. The same policy, if adopted in America, would reduce the burden of federal government spending from more than 20 percent of GDP today to 15.9 percent of GDP (with a hard freeze) or 17.8 percent of GDP (with an inflation-adjusted freeze) after five years.

Europeans Want Asian Financial Centers to Join Savings Tax Cartel

Politicians from Europe’s high-tax governments recognize that saving and investment are escaping to jurisdictions with less-punitive tax regimes. But rather than lower their oppressive tax rates, they are trying to gain the ability to track – and tax – flight capital.

A couple of years ago, they implemented the so-called savings tax directive, but this system is ineffective (from the perspective of politicians) since many financial centers are not part of the cartel and many types of investment vehicles are not covered. Not surprisingly, politicians from nations such as France and Germany want to expand the tax cartel to cover more nations and to capture more forms of saving and investment.

Fortunately, as Tax-news.com reports, the Asian financial centers are not favorably disposed to serving as tax collectors for Europe’s inefficient welfare states. As such, high-tax nations may feel compelled to reduce tax rates to keep capital from fleeing:

Senior EU tax officials, including European Tax Commissioner Laszlo Kovacs, are preparing to make a fresh approach to Asian financial centres, in a bid to have them included within the ambit of the European Savings Tax Directive. According to a report from Reuters, Kovacs is scheduled to visit Hong Kong later this month, while other senior officials will launch a new charm offensive in the territory of Macau and the city-state of Singapore. The directive, which extends to a number of ‘third countries’ such as Switzerland, the Channel Islands and Caribbean offshore territories, facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory, so that interest earned can be taxed in the resident investor’s home state. …

[W]hile the EU was effectively able to bully smaller territories such as those in the Caribbean with colonial links to member states like the UK and the Netherlands, the Asian territories have no such ties binding them to Europe. Unsurprisingly, EU officials have already received frosty responses from Hong Kong and Singapore regarding the issue, and little is expected to have changed. In the case of Hong Kong, signing up to the savings tax directive could mean altering the Basic Law which safeguards the future of its financial centre under Chinese rule.

Singapore on the other hand, is known to be staunchly opposed to the idea of sharing bank account information with the EU, and has rejected European overtures to include information exchange provisions within a broader economic agreement. The European Commission is currently reviewing the operation of the savings tax directive and is likely to make several recommendations for tightening up the legislation that would make it harder for EU-based investors to legitimately side-step the law - for example by moving assets from bank accounts to vehicles such as companies and trusts - which weren’t included in the legislation - or by shifting money to accounts based in territories out of the reach of the directive’s information sharing provisions.

It Hurts to Be Called Ugly by a Frog - Especially When the Frog is Right

European politicians are complaining that government spending in the United States is too high according to the EU Observer. Since government consumes a bigger share of economic output in almost every European nation than it does in America (see Table 25), they are throwing rocks in a glass house. But that doesn’t change the fact that they are right. Government is too big in the United States, and it wastes too much money. The EU’s Economy Commissioner, Joaquin Almunia, also is right to brag about the performance of the European Central Bank. Compared to the Fed’s easy-money policy, the ECB is Friedman-esque rock of price stability:

The European Commission has pointed to unhealthy public spending in the US as the main cause of the current global market turbulences and urged Washington to cut expenditure and boost savings, while praising Europe’s own “solid and sound” economy and the positive effect of the common currency. …Mr Almunia suggested that US policy-makers should tackle the current crisis with measures that would secure “reducing the external deficit and the fiscal deficit, and increasing domestic saving in the US both in the public and the private sectors.” He maintained that Europe’s own previous reforms and pressure for cuts in public finances have paid off, leaving the fundamentals of the bloc’s economy - in contrast to the situation across the Atlantic - as “solid and sound”.

Freudian Slip by the WaPo?

A telling penultimate sentence in an article Friday in the Washington Post (online) about proposed changes (and none of them good) to U.S. sugar policy.

But the top Senate Republican in the negotiations, Saxby Chambliss (Ga.), represents a major Savannah refinery that could be hurt by the proposed agreement, sources said. (emphasis mine)

And here I was thinking that Sen. Chambliss represents the state of Georgia.