Topic: International Economics and Development

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.

Escaping Ireland’s High Personal Tax Rates

While Ireland has a very attractive 12.5 percent corporate tax, the tax treatment of individuals is much less benign. The top tax rate on personal income is 42 percent, and capital gains are hit with a 20 percent levy. As a result, more than 3,000 of Ireland’s most productive people have become non-residents for tax purposes, including at least half of the nation’s wealthiest citizens. The Sunday Business Post reports:

Although Ireland’s tax rates are relatively low by international standards, an increasing number of high-net-worth individuals are deciding to leave the country of their birth and move to places with more welcoming and forgiving tax regimes. …New figures prepared by the Revenue Commissioners finally reveal just how many tax exiles have decamped Ireland for other jurisdictions. According to new figures obtained by The Sunday Business Post, there are 19 high-net-worth individuals who are Irish domiciled but who are legally non-resident for tax purposes. The figures, from the Department of Finance, only includes individuals whose net worth (their assets less their liabilities) is valued at more than €50 million. …Of the top 20 individuals on the Irish Rich List, at least half are tax resident outside Ireland. John Magnier and JP McManus, the Irish horseracing tycoons, are both based in Geneva, as is Hugh Mackeown, the chairman of the Musgrave Group, the €4.6 billion Cork retail giant. Michael Smurfit, the packaging magnate, is the honorary Irish consul to Monaco, while dancer Michael Flatley also pays his tax in the principality. Billionaire financier Dermot Desmond officially resides in Gibraltar. …The 19 names on the list are just the top of the tax exile iceberg, however. According to the Department of Finance, it only includes individuals who filed an annual return in Ireland for the 2005 financial year. …It is not just the high rollers who are relocating to tax-efficient economies. According to the Revenue Commissioners, Ireland now has more than 3,000 tax exiles who claim non-residency. Many of these individuals are not in the top 250, but have serious wealth nonetheless.

European Politicians Want China to Adopt a Welfare State

Guided by the mercantilist superstition that imports somehow are bad, politicians in Europe are trying to figure out how to reduce the amount of Chinese goods available to European consumers. To their credit (to offer a back-handed compliment), the policies they are advocating - for China to adopt European-style levels of income redistribution - would be very effective. High tax rates and excessive levels of government spending would hamstring China’s economy. The EU Observer reports on European efforts to export bad policy:

EU top officials along with employment and social affairs commissioner Vladimir Spidla on Friday went to Beijing to advocate improvement of social welfare and worker protection. … “If we talk to them about health and safety at work, about social security and they see themselves that there is a necessity to change things in order to have a sustainable economy in the long-term that will also decrease possibilities for social dumping,” said Mr Spidla, according to AFP. ”If they decide to copy the European pension model, it means they consider it to be the best,” he continued. Social dumping – when countries with weak labour and safety standards export cheap goods to a state with more rigorous legislation and protection – is a strong point of contention between Brussels and Beijing. …Mr Spidla said he hoped the EU’s dialogue would “help China develop modern systems of social security.”

Financial Times Gives Publicity to Swiss Canton’s Radical Low-Tax Policies

Regular readers know that Canton Obwalden recently voted to implement a 1.8 percent flat tax. That reform, combined with other supply-side policies, is garnering some favorable publicity for the sparsely-populated canton. The Financial Times reports on the pro-growth changes, and acknowledges the vital role of tax competition:

…in recent months, Obwalden, whose population accounts for just 34,000 of Switzerland’s 7.5m total, has been punching above its weight. Desperate to stem a haemorrhage of business and wealthier residents to more cosmopolitan places, the Christian Democrat-dominated cantonal government has turned to taxation to stop the slide. …the government [adopted] an ultra-low, flat-rate tax – that took effect on January 1 this year. The move has attracted attention beyond Switzerland’s borders. The European Commission has taken issue with its most prominent non-member on the allegation that Switzerland’s differential cantonal taxes put European Union companies at a disadvantage. Some EU countries have also been riled by Switzerland’s ability to attract high-profile millionaires through one-off tax deals. Last year, Johnny Halliday, the ageing French rock star, became the latest in a stream of foreigners to up sticks. …Proponents argue that allowing cantons, and even individual towns and villages, to set their own rates stimulates competition and keeps taxes down by boosting efficiency. …The reduction in corporation tax to 6.6 per cent, and a further cut to 6 per cent from January 1, has led to a fivefold increase in the number of new companies setting up in both 2006 and 2007. While Mr Wallimann concedes many are just letterbox operations, some have created genuine jobs. He says there has been no rancour with other cantons or accusations of beggar-thy-neighbour policies. “Everyone in Switzerland understands tax competition. It keeps everyone on their toes.

Economic Retardant Package

Whether you have faith that a blast of demand-side fiscal stimulus can jump start the economy or not, policymakers are moving with dispatch to rig up a defibrillator. 

A couple hours ago, President Bush announced his support for a $140 billion “tax relief” package (scare quotes because, as Chris Edwards points out, we’re talking about money borrowed by the Feds on our and our children’s credit to be repaid by us and our children with interest), which amounts to about 1 percent of GDP.

The president is leaving to Congress the details of which citizens in which income groups get checks and how much. Chances are good that the Democratic Congress will produce a plan to get bigger checks into the hands of those who are most likely to spend it all and quickly — lower- and middle-income Americans. But if getting lower- and middle-income Americans to spend more is the key to reversing our slowing economy, why is the next big item on the House Ways and Means Committee’s docket antagonistic trade legislation that would make Chinese-produced goods more expensive? The committee is reportedly planning to put together a “China Bill” from the dozens of pieces of legislation introduced in the first session, including bills aimed at Chinese subsidization, dumping, and currency misalignment.

Think about it. Americans spent about $325 billion on imports from China in 2007 (actually, that figure is the customs value at the U.S. port, so U.S. consumers probably spent 10 to 20 percent more than that after factoring in the transportation, selling, and administrative expenses and profits reflected in the final prices). Lower- and middle-income Americans likely accounted for the majority of that spending.

Since the Chinese yuan was unhitched from a pure dollar peg in July 2005, it has appreciated against the dollar by almost 15 percent. Theory suggests that U.S. imports should decline in light of the higher relative prices to U.S. consumers, but they haven’t. Between July 2005 and July 2007, the yuan appreciated by about 10 percent against the dollar, yet imports from China increased by 36 percent between January-July 2005 and January-July 2007. (This paper goes into more detail about currency values and trade flows).

If, in 2008, the yuan increases in value 25 percent against the dollar (which is what many in Congress would like to see and is the object of some of the pending legislation) and U.S. demand is identical to 2007 (no new demand and old demand remains unresponsive to higher Chinese prices), then imports from China would total about $406 billion. In other words, $80 billion ($406 – $325) of the $140 billion “tax relief” package would go down the tubes, not supporting an ounce of additional U.S. economic activity.

So, is Congress not working at cross-purposes when it doles out cash to Americans to support economic activity and then limits the activity that can be supported by pursuing other policies that devalue that cash? Some might say that spending money on imported consumables doesn’t support U.S. economic activity, but they would be wrong. There is plenty of U.S. value-added in an import purchased on American retail shelves AND some percentage of the revenue that goes to China will be devoted to purchasing U.S. exports.

Perhaps the slowing U.S. economy juxtaposed against surging U.S. exports to a growing world economy will give Congress a fresh perspective on the benefits of trade.

Let Them Go Barefooted

Just about every American needs to buy socks every year, while a relatively tiny number of U.S. workers actually MAKE socks for a living. Yet the Bush administration may decide by this Friday whether to sock it to the many for the temporary benefit of one small and dwindling industry.

Under a provision of the Central American Free Trade Agreement approved by Congress in 2005, the Bush administration is weighing whether to impose special duties on socks imported from Honduras. According to today’s Wall Street Journal, the move would placate a particular lawmaker in Alabama with several sock factories in his district and a few other, mostly southern lawmakers whose votes may be necessary for upcoming trade deals the administration wants.

Has U.S. trade policy come to this? For the sake of a domestic sock industry that, by its own count, employs only 20,000 workers, the U.S. government would impose a temporary 13.5 percent tariff on the 8.3 percent of imported socks that come from the small neighboring democracy of Honduras—a country that entered into a free trade agreement with the United States only two years ago.

By design, the tariff would mean higher sock prices for the 300 million or so Americans who buy and wear socks. And the sock tax would fall disproportionately on lower-income families, who spend a higher share of their income on such staples as food and clothing.

The Bush administration should forget nose counting for future trade agreements if gathering votes means raising trade taxes on low-income Americans. If the administration wants to support free trade, it should resist any calls for higher tariffs.