Topic: International Economics and Development

The Czechs Adopt a Flat Tax

The lower house of the Czech parliament passed legislation earlier today implementing a 15 percent flat tax on personal income. The new tax system will take effect on January 1, 2008, and the rate is then scheduled to drop to 12.5 percent in 2009. The legislation also reduces the corporate tax rate from 24 percent today to 19 percent by 2010.

The reform, which was narrowly passed by 101 members of the 200-member parliament, now goes to the upper house, where the government has a massive majority and no obstacles are expected. Once the reform clears that hurdle, it will then be signed into law by the Czech President Vaclav Klaus, who is a free-market economist. That act would make the Czech Republic the 20th country to adopt a flat tax. (The Bulgarian government has agreed to introduce a flat tax by January 2008, but the measure has not yet passed through the Bulgarian parliament.)

The opposition socialists have stated that they will repeal the law if or when they return to power and may even raise constitutional objections to it. For now it seems, however, that the legislation will come into force.

The Czech flat tax is a big step in the right direction, and another sign that tax competition is having a positive effect. But the legislation is not perfect. One of the salient features of a pure flat tax is the elimination of tax exemptions, deductions and loopholes. The Czech legislation is less ambitious and many of the bad features of the current system will remain in force. Also, the 15 percent tax rate will be levied on gross income, including payroll taxes. This means the tax rate is not directly comparable to nations that impose the flat tax only on net income, such as Slovakia.

A Timely Reminder on Trade

From the Wall Street Journal’s ‘The Informed Reader’ blog today is a timely reminder that the stalled Doha round does not necessarily mean the end of trade liberalization efforts. According to the article, only 25 percent of tariff cuts between 1983 and 2003 were as a result of negotiated multilateral trade agreements. About 66 percent of tariff reductions came about from unilateral policy changes: from a recognition of the damage that tariffs do to one’s own economy through higher prices and lower productivity growth.

Unfortunately, there does not seem to be much political appetite for unilateral reductions in tariffs in the United States today (see here and here, for example) so a Doha agreement would have been welcome, to say the least. For one thing, subsidies (which are particularly prevalent in agricultural markets) are pretty much impossible to reduce on a bilateral or regional basis. But the expiration of trade promotion authority does not necessarily mean the end if lawmakers could get off the mercantalist bandwagon.

British Tories Bungle Tax Cut Message

The Conservatives in the United Kingdom have been lost in the wilderness ever since the Thatcher years, and recent efforts to recapture the tax issue illustrate the Party’s incompetence. As reported by the BBC, a working group has proposed some decent tax reforms, including an attack on Britain’s death tax. The head of the group even made a pro-growth argument for the reform, but the Party’s Shadow Chancellor then confuses the message by stating that any tax cuts must be financed by tax increases (the Tories, like American Republicans, are unwilling to control the size of government):

A Conservative government should abolish inheritance tax because it penalises too many middle-income families, a policy group recommends. …Led by former Cabinet minister John Redwood, the Competitive Challenge working group says the government has introduced many “stealth taxes” since Labour came to power 10 years ago. …Mr Redwood told BBC Radio 4’s Today programme his proposals would not require cuts in public services because they would help the economy grow. …”Any reductions in specific taxes will have to be balanced by tax increases elsewhere, most notably green taxes,” [Shadow Chancellor George Osborne] added.

The Labour Party instantly seized on the mistake. As noted in the Guardian, the Tories are now being criticized for supporting “crippling” tax hikes:

A bitter war of words has broken out over Tory proposals for £21 billion in targeted tax cuts. Labour warned that the plans, put forward by former Cabinet minister John Redwood, would require “crippling” increases in fuel duty and other charges for homeowners, businesses, holidaymakers and motorists.

Solution Already in Place for Chinese Product Safety Problems

The recent spate of recalls involving products manufactured in China has elicited cries from the public for better regulatory oversight and glee from protectionists who seek to demonize all trade with China. But increased government screening or an outright import ban would be unnecessarily intrusive and prohibitively expensive. The solution that makes the most sense is already working.

There is nothing more immediately deleterious to the bottom line than the kind of bad publicity that connotes wanton disregard for the vulnerable and innocent. Think Exxon Valdez and oil-drenched, arctic sea mammals; think Kathy Lee Gifford and allegations of sweatshop labor; and now, think Mattel and sick children. Companies pay dearly even for the perception that they have transgressed.

Large quantities of poisonous products ending up in consumers’ toy chests, medicine chests, and refrigerators constitute serious transgressions, which should be punished and relegated to the very rare occurrence. For its recent woes, Mattel is being punished. The company’s stock value took a hit, its revenues are projected to decline as we head into the holiday buying season, it will incur huge costs refunding and replacing purchases of tainted toys, and it will be spending hundreds of million of dollars to improve its safety audits. Meanwhile, Chinese factories that compete for Mattel’s business have every financial incentive to clean up their own acts.

If Mattel fails to win back the confidence of American parents, it could be facing extinction. But allowing Americans to decide whether they will purchase Mattel products, or other products made in China, is preferable to Congress or the administration making that decision for them.

What Price (Restricted) Freedom?

About six months ago, I did an elegant back-of-envelope calculation about the Western Hemisphere Travel Restriction Initiative’s cost in terms of lost freedom and commerce. I came up with an estimate of about half a billion dollars (net present value).

If that estimate was a little too airy, here’s a clearer cost of WHTI: $944 million over three years. That’s the direct cost we’re paying through the State Department for the WHTI rules.

So now we’re at around $1.5 billion. Will $1.5 billion+ in damage to the United States’ people, possessions, infrastructure, and interests be averted thanks to WHTI? No. As a security measure, it’s Swiss cheese.

WHTI does more harm than good. It is a self-injurious misstep - precisely what the strategy of terrorism seeks to cause.

Siding with Governments over People, Pope Criticizes Tax Havens

It is rather disappointing that so many religious figures think that compassion should be a function of the state and that bigger government is good for the less fortunate. This approach not only undermines personal responsibility, but it also is anti-empirical because of the ever-growing body of evidence showing that high tax rates and excessive spending hinder growth and thus make it harder for poor people to climb the economic ladder.

Notwithstanding this real-world evidence, the UK-based Times reports that the Pope is about to attack tax havens as part of broader call for more redistribution. Not surprisingly, Italy’s Prime Minster is delighted that his nation’s taxpayers are being told to behave like sheep:

In his second encyclical – the most authoritative statement a pope can issue – the pontiff will denounce the use of “tax havens” and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole. …In it the pontiff focused on “those peoples who are striving to escape from hunger, misery, endemic diseases and ignorance and are looking for a wider share in the benefits of civilisation”. He called on the West to promote an equitable world economic system based on social justice rather than profit. …[Italian Prime Minister] Mr Prodi asked, adding: “If memory serves, St Paul exhorted the faithful to obey authority.”

IMF Wants Higher Taxes in Japan

The International Monetary Fund is urging higher taxes in Japan, though this is not exactly newsworthy since the IMF routinely endorses higher taxes in its country reports (Article IV consultations). To be fair, the IMF does say that it would be a good idea to control spending. And the international bureaucracy wants taxes to be raised in a less-destructive manner. Nonetheless, the notion that Japan will be more prosperous with a higher tax burden (which would be used to finance a bigger government) is rather fanciful. Tax-news.com reports:

The International Monetary Fund (IMF) last week published the conclusions reached by its assessment team during the recently completed Article IV consultation with Japan. …The Article IV report continued: “Most Directors considered that given the size of the task at hand, additional revenue measures will be needed, including for base broadening. They indicated that revenue measures could be best identified in the context of a broad reform of the tax system that addresses the challenges posed by Japan’s aging society and globalization. Among possible measures, increasing the consumption tax has the benefit of being less detrimental to growth and equitable across generations. Some Directors, however, viewed the authorities’ focus on expenditure adjustments as broadly appropriate at this juncture.”

This story, which is so similar to hundreds of other reports on IMF-endorsed tax hikes, raises an interesting question: Does anybody know if the IMF has ever recommended that a country reduce its tax burden?