Topic: International Economics and Development

Senate Farm Bill By the End of the Week?

The Senate re-commenced debating the farm bill on Friday, after Democrats and Republicans struck an agreement over the amendments process (see my earlier blog entry here). Senate leaders are hoping that they can get a bill passed by the holiday recess, and on to conference early in the new year.

Although President Bush has threatened to veto the bill that emerged from the Senate Agriculture Committee (the bill being debated now), as well as the House Farm Bill passed in July, powerful members of Congress don’t seem too rattled. According to a recent article, Colin Peterson (chair of the House Agriculture Committee) is fairly confident that he and President Bush can get together, just the two of them nice and cozy, and come to an agreement. The money quote:

…if we can get all of these other people out of this thing and just sit down and say, ‘Look, for the betterment of the country, hopefully we can work this out.’ That’s my plan.

By “all these other people”, Mr Peterson presumably means you and I, and anyone else who is unhappy with the current state of agriculture policy in America. So sit tight, everybody, and wait for the check (currently $288 billion worth).

Thomas Sorensen Avoids High Taxes

The International Herald Tribune does a great job describing tax competition in action in the European labor market.

Young Danes, often schooled abroad and inevitably fluent in English, are primed to quit Denmark for greener pastures. One reason is the income tax rate, which can reach 63 percent.

Denmark has fairly pro-market economic policies, ranking 15 in Economic Freedom of the World, and is enjoying solid economic growth. However, “success has given rise to an anxious search for talent among Danish companies, and focused attention on émigrés like Sorensen…The problem, employers and economists believe, has a lot to do with the 63 percent marginal tax rate paid by top earners in Denmark - a level that hits anyone making more than 360,000 Danish kroner, or about $70,000.”

The high taxes are driving out young and skilled Danes, many to London.

Danish taxes also contrast sharply with those in nearby London, often jokingly referred to among Danes as a Danish town, because so many of them live there. Lower taxes on high earners have been a centerpiece of the policy mix that has fed the rise of London as a global financial center since the 1980s.

Second Video Experiment

Many of you were kind enough to comment on the first video I narrated, which discussed the importance of a more competitive corporate tax system. Because of popular demand (perhaps a slight exaggeration), a second video has been released. This one discusses the vital role of tax competition as a constraint on government. Based in part on your suggestions, this new video was filmed in a real studio with professional equipment. And I even put on a coat and tie since a few people thought the casual look detracted from the message in the corporate tax video.

The message, of course, is what really matters in these videos. Regular readers of Cato-at-liberty surely have noticed that Chris Edwards and I regularly comment on the dramatic tax policy changes that are taking place all over the world. We would like to claim that this is because politicians are reading our papers, but a bigger factor is tax competition. Simply stated, because of globalization, it is much easier for the geese that lay golden eggs to fly across the border. This means governments are being forced to lower tax rates and reform tax systems.

This video, as well as a book that Chris and I are writing, explains this liberalizing process. But it’s not all good news; both the video and our future book warn that statist politicians want to curtail tax competition.

I would be very interested in receive feedback on this new video. Is the message compelling? Are footage and graphics being used effectively? Any thoughts or suggestions would be welcome.

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.

Why Do European Politicians Want Tax Harmonization?

While it is possible that European politicians have a genetic predisposition for statist policies, I’ve never thought this is why they support tax harmonization. Self interest is a far more reasonable answer. More specifically, European nations generally have high fiscal burdens. For instance, government spending consumes nearly half of economic output in EU countries, compared to one-third of GDP in the United States.

Not surprisingly, this translates into a higher tax burden, which means jobs and investment generally flee Europe. Tax harmonization is an attempt to stop labor and capital from escaping by creating, for all intents and purposes, a “fiscal fence.” But European politicians also want to undermine tax competition because they know the situation is going to get worse. According to a new report, demographic changes almost certainly are going to result in an even bigger welfare state in the future. This means increasingly harsh tax rates on the remaining productive people - which means politicians will try even harder to prevent taxpayers from escaping. The EU Observer reports on the key statistic that is causing angst for Europe’s political class:

According to demographic predictions, the EU’s population will not only shrink by almost 20 million people by 2050, but its make-up will also change dramatically. While there are currently about four working people of working age for each person of pension age in the EU’s 27 member states, there will be fewer than two people to support every elderly person by 2050, with the population gradually ageing.

The Right Way to Engage China

The United States and China reached an agreement yesterday on a dispute over alleged Chinese export subsidies. In exchange for the U.S. government dropping a case it was pursuing through the World Trade Organization, China agreed to end subsidies that the U.S. claimed were promoting exports and hindering imports of steel, wood, IT products, and other manufactured goods.

Details of the case aside, the announcement shows how trade disputes with China can be resolved without resort to threats of retaliatory tariffs. This is not the first time China has changed its trade laws in response to pressure from the United States through the WTO. In 2004, China dropped a discriminatory tax refund on domestically produced semiconductors after the U.S. government filed a complaint.

Today’s announcement is another vindication of resolving trade disputes with China through a rules-based system rather than through threats of unilateral retaliation. China’s accession to the WTO in 2001 not only committed China to lowering trade barriers on a broad range of goods and services; it also brought China into the generally effective WTO dispute settlement mechanism.

In two weeks, Treasury Secretary Paulson, U.S. Trade Representative Susan Schwab and other cabinet members will meet with their Chinese counterparts in Beijing as part of the ongoing Strategic Economic Dialogue. As today’s announcement verifies, the SED represents the right approach to encouraging China to continue its evolution toward a more free and open economy.