Topic: International Economics and Development

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.

European Politicians Seeking to Export Big Government

The ideal trade policy is unilateral openness, which hopefully would be copied by other nations. But some argue that trade negotiations are a wise strategy, since one nation’s liberalization can be a carrot to obtain liberalization in other nations. Unfortunately, European politicians want to turn this strategy upside down by using liberalization as a stick to encourage other nations to adopt onerous European-style regulatory burdens. The EU Observer reports on this statist French-led gambit:

According to the European Commission, the EU should…”shape” globalisation. …Speaking at the EU summit Friday (19 October), French president Nicolas Sarkozy proved to be the strongest advocate of such a principle. “Let’s not be naive, we must demand a reciprocity”, he said, complaining about the severe environmental and social requirements placed upon EU businesses, but not followed by their non-European competitors.

Why Can’t Republicans Embrace Corporate Tax Cuts Like Canadian Liberals?

When they were in power, Canada’s left-wing party reduced the corporate tax rate from 28 percent to 19 percent. Now they are proposing to reduce the rate even more (and by more than the trivial 0.5 percentage point reduction proposed by the incumbent Conservative Party). As reported by Tax-news.com, the leader of the Liberal Party makes a very strong supply-side/tax competition argument for the lower rate:

Liberal Leader Stephane Dion has pledged to further reduce the Canadian federal corporate tax rate to better compete with other countries and strengthen Canada’s economic sovereignty. …Dion told the Economic Club of Toronto…“A lower corporate tax rate is a powerful weapon in the federal government’s arsenal to generate more investment, higher living standards and better jobs.” …The previous Liberal government reduced the federal corporate tax rate to 19% from 28%. Dion said he would go deeper than the Conservatives have done with their reduction to 18.5% in 2011. …“If you lower the corporate tax rate, you lower the cost of capital for Canadian companies. Therefore, these companies are induced to spend more on capital equipment. As for foreign investment, we need a big hook to snare investment, including Canadian investment, that might otherwise go south of the border. Finally, it would strengthen Canadian companies against foreign takeover,” Dion concluded.

Securing Land Rights for Chinese Farmers

A critical determinant of China’s long-term economic growth and social stability will be whether the wealth of its economic boom can reach the majority of its 700 million farmers, who make up approximately 56 percent of the total population. In the new Cato study, “Securing Land Rights for Chinese Farmers: A Leap Forward for Stability and Growth,” authors Zhu Keliang and Roy Prosterman confirm one fundamental cause of the widening rural-urban income gap: most Chinese farmers still lack secure and marketable land rights that would allow them to make long-term investments in land, decisively improve productivity, and accumulate wealth.

Cut Taxes to Keep Those Assets Here

The Wall Street Journal had a tiny “In Brief” story on October 10 with the headline “To Help Reduce Tax Load, 3M to Move Plants Abroad.”

Here’s the story:

Manufacturing conglomerate 3M Co. plans to move more of its operations to low-tax locations overseas in coming years as it attempts to reduce its overall tax rate. Chief Financial Officer Pat Campbell said the move is designed to help the St. Paul, Minn., maker of products ranging from transparent tape to stethoscopes achieve a tax rate of 30.5% by 2012, a reduction of about 2.5 percentage points. That would mean a $150 million to $200 million increase in 3M earnings.

If 3M had said that it was moving plants abroad in search of lower wages, the story would have been on the front page, rather than buried in the back as a small notice. The lack of news coverage on international tax competition is odd, given the general concern about the health of the U.S. manufacturing industry.  

Here is a presentation regarding 3M’s strategy by the firm’s CFO. Check out:

Page 35: “Moving Assets to Low Tax Growth Markets.” Observation: Corporate investment flows to countries that have both strong growth potential and low taxes.

Page 38: The chart shows that 3M has a higher effective tax rate at 33% than the average of its peers at 27%. Observation: U.S. corporations pay high tax rates.

Page 39: “Locate capacity in low-tax locations with common shipping locations to growth markets.” Observation: Taxes are not the only locational factor, but are part of a strategy that also requires optimizing logistics and market locations.

Message to U.S. policymakers: cut the corporate tax rate to allow 3M to keep more of its $1.5 billion in annual capital investments here.

Globalization and Food Safety

The Washington Post has an interesting story today about E. coli on lettuce. A batch of lettuce produced in California last month passed through numerous screenings and was sent to U.S. grocery stores. Some of it was also sent to Canada, and the government there found E. coli, which led to a major recall across both countries.

Here are some speculations:

  • Globalization increases the safety of American-produced goods because those goods must often pass muster in foreign markets where consumers and governments have different standards and safety procedures.
     
  • I don’t know whether American or Canadian food safety procedures are better, but a diversity of systems generates greater information, which allows producers and governments everywhere to improve quality.
     
  • Globalization doesn’t lead to a “race to the bottom” on environmental standards as critics often claim. Some countries, such as Japan, apparently have very high standards on food, and that tends to push up standards elsewhere. When Japanese importers demand strict standards from Chinese food producers, Americans consuming Chinese products also benefit.