Topic: International Economics and Development

Tax Competition Drives Good Policy in Canada

A National Post report from Canada illustrates how jurisdictional competition pushes policymakers to adopt better tax law. Indeed, both the left and right are fighting over who can make the biggest reduction in the corporate tax rate. As the article notes, this is a remarkable development since politicians used to treat companies as cash cows.

With nations all over the world lowering corporate rates, America’s punitive tax treatment of business is becoming an even bigger obstacle to competitiveness:

Who would have thought federal politics would come to this: Liberals and Conservatives competing over who would lower corporate taxes the most! …That…marks an amazing turn of fortune, an historic reversal of at least half a century of corporate-bashing tax increases, of surtaxes on taxes, of capital taxes piled on surtaxes rolled over from year to year.

…[T]here is certainly much to be said for [Canadian Prime Minister] Flaherty’s corporate tax objectives. First he aims to get the federal tax rate down to 15% by 2012. Then he wants the provinces to join the national corporate tax competition by cutting their rates to 10%, thus lowering Canada’s nationwide corporate tax rate to 25%. That means, said Mr. Flaherty, that “Canada’s corporate tax rate will become the lowest among the major industrialized economies.” It’s a good objective — for the economy, for growth, for innovation — and a sign perhaps that most Canadians have come to appreciate that nations and their citizens get rich by freeing business enterprises rather than by plundering them for instant cash.

…Countries all over the planet are rushing to trim tax rates on business… Jack Mintz, of the University of Toronto, pointed out yesterday that Italy has just slashed that rate by 4.5 percentage points. Other countries are cutting rates in large increments of up to seven percentage points, as in Germany. The new Flaherty cuts are good, says Mr. Mintz, but not good enough. “Why not cut rates right away?” It’s also not clear that 25% is low enough to maximize business activity and attract business investment to Canada. In his recent tax competitiveness study for the C.D. Howe Institute, Mr. Mintz called for a national corporate tax rate of 20%.

…The next needed political transformation: It’s OK to cut taxes on the rich.

Anti-Immigrant Opinions are Weakly Held

I didn’t watch Tuesday’s Democratic debate – watching politicians from either party outbid each other on faux outrage and how much of my money they would spend is too annoying – but I did get the after-action report on the Newshour. And it seems Senator Clinton was drawn into the vortex New York Governor Eliot Spitzer (D) created with his recent flip-flop on driver licensing and public safety.

His original decision to de-link driver licensing and immigration status for public safety reasons was right, but it was pounced on and demagogued by anti-immigrant groups. Spitzer backed down, and pledged his state to implement the REAL ID Act, pleasing nobody. (When the costs of this national ID law to New York are discovered, he’ll flip-flop again, earning quiet, broad-based appreciation.)

Watching the excerpts of the candidates bumbling around this issue, it appeared to me that they knew giving licenses to illegal immigrants is the right and practical thing to do, but also that they would get demagogued if they said so.

Well, here’s my advice: Go ahead and say it.

Having watched this issue, and having heard from lots of angry people, I know that anti-immigrant views are a classic weakly held opinion. Angry as people are about the rule of law and “coming to this country the right way,” that anger melts when they learn more. Stuff like this:

“We haven’t permitted anywhere near enough legal immigration for decades. You can sit back and talk about legal channels, but the law has only allowed a smidgen of workers into the country compared to our huge demand. Getting people through legal channels at the INS has been hell.

“America, you’re going to have to get over what amounts to paperwork violations by otherwise law-abiding, honest, hard-working people. And that’s what we’re talking about - 98% honest, hard-working people who want to follow the same path our forefathers did, and who would be a credit to this country if we made it legal for them to come. Our current immigration policies are a greater threat to the rule of law than any of the people crossing the border to come here and work.”

This kind of argumentation will be met with vicious demagoguery, which will weaken, and weaken, and fade and fade and fade. The people I hear from – and I regularly do because of the educating I’ve been doing nationwide on the REAL ID Act – immediately soften when I pull them from their echo chambers. The “rule of law” hand is a low pair compared to this full house: “honest, hard-worker from impoverished circumstances, denied legal channels other than a narrow chance of navigating an incompetent bureaucracy.”

There’s one Democratic candidate who is well suited to make this kind of argument. It’s a way to draw attention, look principled, do the right thing, and vanquish a loud but weak pressure group. New Mexico’s uninsured driver rate dropped by two-thirds – from 33% to 11% – when that state delinked immigration status and driving in 2003.

Expanded Trade Adjustment Assistance Passed in House

Following on from my earlier post, the U.S. House of Representatives just passed the Trade and Globalization Assistance Act of 2007, although with insufficient votes to override a veto, as threated in yesterday’s Statement of Administration Policy (available here). The new legislation would roughly double the level of federal spending on the trade adjustment assistance program, by expanding the income and health care benefits to new categories of workers and increasing training (keep in mind this is the same program that the Government Accountability Office has admitted was “ineffective”).

TAA moves on to the Senate next, where we might see a bit more of a fight: the Chair and Ranking Member of the Senate Finance Committee are at odds over possible changes to the program.

[Hat tip: Our crack Government Affairs team.]

Arabic Lamp of Liberty Re-Lit!

Arabs have had almost no access to the literature and the ideas of liberty….until now. The Misbah al Hurriyya (“Lamp of Liberty”) project of the Cato Institute is bringing Adam Smith, John Stuart Mill, Ludwig von Mises, F. A. Hayek, Milton Friedman, and many more thinkers to the Arab public. The team behind the Lamp of Liberty, notably Editor Fadi Haddadin and Business and Promotions Manager Ghaleb Hijazi, have outdone themselves with a newly redesigned website for the project: www.misbahalhurriyya.org.

It’s got more than a new look, though. Now you can see the incredible success of Ghaleb’s syndication of hundreds of articles to the Arab press, find information on Misbah al Hurriyya books, including John Stuart Mill’s On Liberty, Ludwig von Mises’s Economic Policy, F. A. Hayek’s The Road to Serfdom, Johan Norberg’s In Defense of Global Capitalism, and the Economic Freedom of the World Report, and browse through hundreds of studies, articles, and essays. The site also features Mudawwanat al Hurriyya (“Blog of Liberty”), an interactive map of economic freedom (in the bottom left corner), policy debates, video streaming of interviews, online books, and much, much more.

Even those who can’t read Arabic will appreciate the ingenuity and brilliant design of the site. And when you know that it’s presenting a positive alternative to the violence, oppression, and poverty that have plagued so much of the Middle East and North Africa, you will know that the positive attractions of what Adam Smith called “the simple system of natural liberty” – rather than more violence and military force – are a powerful response to the ideas of statism and intolerance. Ideas aren’t generally defeated with mere force; ultimately, it takes another idea.

The re-designed Arabic Lamp of Liberty will be joined soon by its Kurdish [www.chiraiazadi.org] and Persian [www.cheragehazadi.org] sister projects. They’re all part of Cato’s Center for Promotion of Human Rights family of projects, including the existing Spanish [www.elcato.org] and Russian [www.cato.ru] projects (each with books, podcasts, websites, and more) and forthcoming Portuguese, Azeri, French, and African (in English, French, and Portuguese) initiatives. Ten team members of the African initiative will meet in Tanzania at the African Resource Bank meeting in a few weeks. Anyone who’s interested in supporting the promotion of libertarian ideas and policies around the world should contact the Institute. (Any funds specified for a particular language or region will be spent only on works in that language or region.)

When Protectionists Meet Welfare Kings

Yesterday the House Ways and Means Committee approved by a margin of 26-14 a bill (H.R. 3920) to expand and extend (until 2012) the Trade Adjustment Assistance Program, which provides extra welfare and training to workers who lose their jobs as a consequence of import competition or outsourcing. The new bill would expand trade adjustment assistance to cover more workers beside those who work in the manufacturing industry, including service employees, who currently cannot get benefits under TAA if their jobs are moved overseas. It also increases the benefits and training available to trade-displaced workers, and the “incentives” for states to increase unemployment insurance coverage. It is still unclear just when this bill will face the full House, or what any alternatives will be.

I have a trade briefing paper, forthcoming soon, on this topic and I wrote an op-ed yesterday, arguing that TAA should be cancelled rather than extended. Here’s why: first, fewer than 1 in 30 unemployed people can point to import competition or outsourcing as the reason for their unemployment. Changes in consumers’ tastes, changes in technology and increasing productivity is far more likely to be a cause of unemployment (more from my colleague Dan Griswold here). So TAA is yet another example of special interests receiving special treatment.

Second, while TAA for workers cost a “mere” $800 million or so in 2006, we can expect that cost to rise as more workers are included (more than 80 percent of American workers work in the services sectors, although many of those are non-tradeable) and Congress sees fit to spend more of your money on wage insurance, training and the like.

Third, although hints have been made that the preferential trade agreement with Peru is predicated on passage of TAA extention, the historical bargain between free-trade advocates and workers–that any trade liberalization would be accompanied by extra welfare benefits for those who lose their jobs– is no longer certain. For sure the bilateral deal with the most to offer economically, that with South Korea, looks all but doomed.

The moral case for TAA is dubious at best. A lack of prospects for commercially meaningful trade liberalization tips the balance.

Although Government Revenues Are at Record Levels, New York Times Complains About a “Dearth of Taxes”

In a remarkable editorial, the New York Times complains that revenues in America are too low. This is a stunning claim since a cursory look at budget numbers shows that revenues are at an all-time high in both nominal dollars and inflation-adjusted dollars. But the most remarkable part of the editorial is that the Times actually argues that low taxes mean that America is “ill prepared to compete”:

…the taxes collected last year by federal, state and local governments in the
United States amounted to 28.2 percent of gross domestic product. That rate was one of the lowest among wealthy countries - about five percentage points of GDP lower than Canada’s, and more than eight points lower than New Zealand’s. …the meager tax take leaves the United States ill prepared to compete. From universal health insurance to decent unemployment insurance, other rich nations provide their citizens benefits that the U.S. government simply cannot afford. …revenue will prove too low to face the challenges ahead.

The editorial conveniently forgets to explain, though, how America is less competitive because of supposedly inadequate taxation. Is it that our per capita GDP is lower than our higher-taxed neighbors in Europe? No, America’s per capita GDP is considerably higher. Is it that our disposable income is lower? It turns out that Americans enjoy a huge advantage in this measure. Is our economy not keeping pace? Interesting thought, but America’s been out-performing Europe for a long time. Could higher rates of unemployment be a sign of American weakness? Nice theory, but the data show better job numbers in the United States.

But give the New York Times some credit. It is not easy to argue that higher taxes are good for growth. So if you’re going to make a fool of yourself, you may as well cast evidence to the side and jump into the deep end of the pool.

Will Poland Become the Next Flat Tax Country?

Germany’s statist politicians must be a bit uneasy about the recent election results next door. While they are probably happy that the populist-oriented incumbent government - which periodically got into disputes with Germany - was defeated, they will be very dismayed if the victorious Civic Platform Party follows through on promises to implement a 15 percent flat tax. As the biggest “new” member of the European Union, Poland would add considerable fuel to the tax-competition fire if it adopted a simple and pro-growth tax system. The Financial Times reports on the election and the market-oriented reforms advocated by the nation’s new leaders:

Foreign leaders and Poland’s business community on Monday welcomed the victory of the liberal Civic Platform party in Sunday’s parliamentary elections, predicting the revival of contacts iced up under the previous government and the restart of much-delayed economic reforms. …With more than 99 per cent of ballots counted, Civic Platform had 41.4 per cent of the vote, translating into 209 seats in the 460-member parliament. …Civic Platform is likely to form a coalition with the smaller Peasants party, which will have 31 seats. …Some of the most specific comments, concerning the party’s economic policies, were made by Zbigniew Chlebowski, a potential economy minister. He talked of introducing a flat 15 per cent tax by 2009 and said the government would privatise more energetically than its predecessor.