Topic: International Economics and Development

Flat Tax Progress in Hungary and Poland

While most other East European nations have adopted pro-growth flat tax systems, Hungary and Poland are still burdened by class-warfare systems that penalize people for contributing more to economic performance. The Budapest Times, however, reports that Hungary’s small parties may combine to push through an 18 percent flat tax:

MDF leader Ibolya Dávid called for opposition parties to attend talks on 15 April 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% personal income tax to reduce a tax burden it called “unfairly high”. The Free Democrats (SZDSZ) and main opposition party Fidesz - along with its ally the Christian Democrats (KDNP) - have said in the past that they would favour a flat tax. …The MSZP 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 Organisation 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 - damages Hungary’s regional competitiveness.

Meanwhile, the Polish government already has promised to implement a flat tax, but a key official has suggested that the new system may be implemented in 2009 rather than in 2010 or 2011 as originally planned. Because of its size and geography, Poland’s shift to a flat tax would be a momentous development and could sharply increase the pressure for pro-growth reforms in Old Europe:

According to Zbigniew Chlebowski, head of ruling Civic Platform’s (PO) parliamentary club, there is a possibility of introducing a flat tax rate as early as 2009. Chelbowski said that Prime Minister Tusk supports this option and is ready to fight President Kaczynski should he veto it. Chelbowski, however, did not give a concrete rate of the possible flat tax, but stressed that it shall surely be lower than 18 percent, because such a rate would be higher than the present tax rates. The final decision is to be made in July or August. The ruling Civic Platform had originally planned to introduce the new tax in 2010 or 2011.

Monetary Mercantilism

Chile’s Central Bank has finally decided to intervene in the local currency market in order to avoid a further appreciation of the peso against the U.S. dollar. In doing this, Chile joins a monetary policy trend that includes most Latin American countries, particularly Argentina, Bolivia, Peru, Colombia, Costa Rica and Guatemala.

Until recently, Chilean monetary policy was regarded as an example for all Latin America. Chile was mentioned frequently — especially by defenders of “monetary sovereignty” — as a model of how a Latin American country can have both a national currency and monetary stability.

However, alarm bells started ringing last year when inflation tripled to almost 8 percent, mainly because of an excessive increase in public spending by the government of Michelle Bachelet. Now, by deciding to abandon the historic policy of free floatation of the peso, Chile’s Central Bank further compromises this year inflation’s target.

Aiming for a cheaper peso will prove very expensive for Chileans.

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.