Topic: International Economics and Development

OECD Tax Bureaucrat Admits Tax Competition Leads to Better Tax Policy

The Organization for Economic Cooperation and Development is infamous for its anti-tax competition campaign. Acting on behalf of uncompetitive nations such as France and Germany, the Paris-based bureaucracy even has a blacklist of low-tax jurisdictions and wants those “tax havens” to be subjected to financial protectionism. Yet a top OECD tax official just confessed that tax competition is driving tax policy in the right direction by pressuring governments to lower tax rates, as noted in this Thomson Financial News report on the Forbes website:

Chistopher Heady, head of the OECD’s centre for tax policy and administration said…whilst corporate tax rates have fallen in Europe, revenues have not. ‘It is likely that corporate tax revenue will eventually start falling,’ he said at the Brussels Tax Forum. He said that combined with decreasing tax income from high earners…this could lead to a combination of taxes which would be more beneficial for GDP growth. ‘The pressures of tax competition may lead to a tax mix that is better for growth,’ he said.

The OECD logic is remarkable. The bureaucrats admit that tax competition is producing positive results. Heck, an earlier OECD report admitted that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.” Yet rather than celebrate tax competition as a liberalizing force, the bureaucracy wants to sanction and penalize jurisdictions with pro-growth tax systems.

Shameless, Feckless Cowards

Further to yesterday’s post, rather than have a vote on the U.S.-Colombia Free Trade Agreement within 90 legislative days (as set out by law), House Speaker Nancy Pelosi announced that she will change House rules to avoid having a vote on the agreement before the November elections. It’s not yet clear to me how that can be done, but such action will speak volumes about the rudderless Democratic Party.

Apparently, the leadership hasn’t decided whether supporting the agreement—supporting export opportunities, encouraging and deepening business ties, promoting investment in Colombia, supporting an ally in a hostile region, and preserving the value of U.S. credibility—is worth more votes than union money can buy.

If members of Congress don’t want to be held accountable to the electorate, they shouldn’t seek office in the first place. But as we’ve seen time and again, it’s never about good policy. It’s only about holding onto power. No wonder Americans have such contempt for Congress.

A Defining Moment for Democrats and Trade

Mark Penn thought he could support the U.S.-Colombia Free Trade Agreement out of the right side of his mouth, while he opposed it out of the left. That controversy lost Mark Penn his firm’s contract with the Colombian government and his role with the Clinton campaign. Now it just may be metastasizing and moving up to Capitol Hill.

Congressional Democrats are getting hysterical over President Bush’s decision yesterday to send the U.S.-Colombia Free Trade Agreement up to the Hill for a vote. They claim that the president’s circumvention of protocol (not getting a final blessing from Congress first) now renders passage of the agreement virtually impossible.

The truth is that Congress was never going to give the administration an official green light and the president exercised the only real choice at his disposal.

But since when do Democrats cry for want of a successful trade agreement? I think there’s a little more to the story, which I address in this NRO oped today.

The long and short of it is that by sending the deal to Congress now, legislative intransigence before the November election is no longer an option. Democrats have 90 legislative days (until the end of September) to decide once and for all, in plain view of the electorate, the unions, the business community, and the international community, how they really feel about trade. The vote and the debate leading up to it could expose some deep fissures in the party, and could raise serious questions about America’s credibility and capacity to lead on matters of trade and economics.

Will Hungary Finally Join the Flat Tax Club?

Unlike most of its neighbors, Hungary is still saddled with a discriminatory tax regime, leading to high tax rates on productive behavior and a big underground economy. Fortunately, the collapse of the current Hungarian government may pave the way for a flat tax:

Small Hungarian opposition party the Hungarian Democratic Forum Thursday said it would attempt to force the introduction of a flat tax after a coalition split this week raised the prospect of a minority government. “The withdrawal of the (junior coalition) Alliance of Free Democrats has opened up the possibility of introducing a flat tax from 2009, since this gives the parliamentary majority for the decision,” the party said in a statement. Free Democrat leader Ibolya David called for opposition parties to attend talks on April 15 to work out details of a bill to submit to parliament by May. The party wants to emulate regional peers such as Slovakia and Romania by introducing a flat 18-per-cent personal income tax to reduce a tax burden it called “unfairly high.” The Free Democrats and main opposition party Fidesz - along with its allies the Christian Democrats - have said in the past that they would favour a flat tax. …The Socialist Party has only 190 seats in the 386-seat parliament, meaning that the opposition parties could force through a flat tax bill by banding together. Hungary is ranked as having the second-highest tax burden for single people, behind Belgium, amongst the members of the Organization for Economic Cooperation and Development (OECD). Many feel the high burden - made worse in 2006 when the government hiked taxes as part of its economic reforms - hits Hungary’s regional competitiveness. …The tax burden also credited with maintaining the huge black economy. Estimates of the size of the black economy vary from the official figure of 18 per cent of gross domestic product to as high as 50 per cent among some analysts.

An Argentine Mess

The decision of Argentina’s president Cristina Fernández to raise the export taxes on grain producers has sparked protests all over the country, putting the country once again in international headlines. But punishing exporters is not the main story, it’s the economic mess that the last two administrations have created in that beautiful country.

The previous government of Nestor Kirchner–Fernandez’s husband–thought that he could devalue his way out of the crisis of 2001. Since that year, the Central Bank of Argentina has consistently applied a weak peso policy, which along with a massive increase in public spending, has resulted in runaway inflation. Last year, the Argentine peso was the only Latin American currency that didn’t appreciate against the U.S. dollar; in fact it depreciated slightly. The weak peso thus served as a subsidy to exporters, including the farmers now protesting the tax hike.

So we actually have the Argentine government subsidizing and confiscating agricultural exporters at the same time, while creating inflation (which has led to price controls, bans on exports, and other economic beauties). And now, in response to the protests, the Fernández administration has announced new subsidies to farmers.

Only in Argentina.

April Fools for Skilled Workers

Quite appropriately, today exposes another facet of the foolishness that is U.S. immigration policy. April 1st is the day each fiscal year when employers are allowed to begin filing petitions with the US Citizen and Immigration Services for highly skilled workers to be given what are known as H-1B visas. For the second consecutive year, the quota of these visas was reached on this first day of eligibility.

H-1Bs allow employers to hire foreign workers in certain professional occupations. They are good for three years and can be renewed for another three. Though an H-1B cannot lead to a green card, it’s still a pretty good deal.

The problem is that, even in this apparent economic downturn, there aren’t enough visas: Congress limits the number of annual H-1Bs grants, and that magic number has been set at 65,000 for five years now. Before that, and in response to the technology boom of the late ’90s, Congress temporarily raised the H-1B cap to 195,000. But that expansion expired in 2004, and the cap has been reached earlier and earlier each year since.

In 2005, that meant August. In 2006, May 26. Last year, by the afternoon of April 2, 2007 (April 1 was a Sunday), USCIS had received over 150,000 H-1B applications. Officials quickly announced that they would randomly select 65,000 petitions from all those the agency had received in the first two days of eligibility.

Last week, with demand for the prized work permits only increasing, the powers that be decreed that this year’s lottery would accept all entries received in the first five business days. USCIS simultaneously promulgated a rule prohibiting employers from trying to game the lottery by filing multiple petitions for the same employee.

As for the vast majority of employers and employees who will be out of luck, the immigration laws say, like so many “rebuilding” baseball teams this opening week, “wait till next year.” Except, in this case, next year means putting your business or career on hold until October 1, 2009—the day people who secure H-1Bs for fiscal year 2010 can start work.

If only this were all a bad April Fools’ joke.

Read more on this in the article I have up on National Review Online today.