Topic: International Economics and Development

American Politicians Lagging in Global Race to Squander Tax Dollars

While U.S. lawmakers do their best to waste money, Europeans politicians inevitably seem to have more expertise when it comes to squandering other people’s money. A good example comes from Finland, where the city of Tampere is using European Union funds (it is easier to finance absurd ideas when other people are paying the bills) so that clowns can entertain city bureaucrats. Indeed, the title of the story on the English-language Finnish website is “Clowns enlisted to raise spirits of Tampere municipal workers.” Sure, American politicians have concocted some crazy ideas, such as building an indoor rainforest in Iowa, but even that bit of pork cannot beat the absurdity of paying clowns to boost the morale of bureaucrats:

The idea for the city clowns came from comedian Mona Ratalahti, occupational well-being trainer Riita Harilo, and its godmother was Kirsi Koski, head of the Mayor’s office. Koski has worked as the city’s head of personnel for three years. ”I have thought about what would be the core of well-being. Yes, it is laughter”, Koski says. “It is all right to laugh at craziness - at what is not said out loud in business discussions.” Ratalahti feels that a clown nose “changes us and the viewer in such a way that forces people to look at things differently”. …Tampere’s city clowns are the 41st idea that the “Creative Tampere” programme has decided to support. The programme has a budget of EUR 12 million to back corporate ideas worthy of development. The EUR 25,000 earmarked for the clowns makes it possible for four artists, who have mostly worked alone, can concentrate on joint projects.

Tax Competition Creating Pressure for Lower Corporate Rate in Canada

Neil Reynolds continues his good work by explaining how tax competition is leading to better policy and that Canada better jump on the tax-cutting bandwagon:

As tax reform sweeps the world, Canada stands resolutely on guard for high rates. …the two essential principles of good government remain unchanged: (1) If you want more of something, subsidize it; (2) if you want less of something, tax it. …Britain’s Margaret Thatcher, a conservative, was the first leader in Europe to cut corporate rates. In the 1980s, she reduced them from 52 per cent to 35 per cent. This was the catalyst. As KPMG observed last year in a global review of corporate taxes, once Britain acted, “other [European] countries seemed compelled to do the same.” …In 1987, Denmark went from 50 per cent to 30 per cent. In 1991, Sweden went from 60 per cent to 28 per cent. In 1992, Norway went from 51 per cent to 28 per cent. In 1993, Finland went from 43 per cent to 25 per cent. Germany and France, bastion countries of Europe, fiercely resisted, trying to turn tax competition into a criminal conspiracy. Yet, in 2000, Social Democrat chancellor Gerhard Schroeder cut Germany’s corporate federal rate from 40 per cent to 25 per cent. (Combined with local and regional corporate taxes, the country’s rate remained one of the highest in the world at 40 per cent.) Now, finally, Germany has capitulated, surrendering unconditionally, cutting its combined rate from 40 per cent to 30 per cent. …France, in turn, will cut its corporate rate, now 33 per cent, by “a minimum of five percentage points” - assuming French President Nicolas Sarkozy, a conservative, keeps this promise. Spain’s socialist Prime Minister, Jose Luis Rodriguez Zapatero, has announced that he will cut rates by as much as France. In the past 14 years (1992-2006), KPMG calculated that the average corporate tax rate in the world has fallen by almost one-third - from 38 per cent to 27 per cent. The economic evidence, the company said, indicates that the countries that adopted lower rates had tended to “do better” than the countries that had not.

Swiss Court Rules Against Obwalden Tax Regime

The Canton of Obwalder created a stir by voting for a tax system that rewards more productive residents with a lower income tax rate. The Swiss Federal Court has ruled against this regime, though the nation’s Finance Ministry quickly noted that the decision does not undermine Switzerland’s support for federalism and tax competition. Swissinfo.org reports:

Canton Obwalden’s degressive tax system, aimed at attracting wealthy residents, has been ruled unconstitutional by the Swiss Federal Court. The country’s highest court said on Friday that degressive income taxes ran counter to constitutional measures designed to ensure taxation according to economic performance. …Obwalden had adopted a degressive income tax system which meant that the richer you are, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent. It was introduced in 2006 following a cantonal vote as a way of boosting the fortunes of Obwalden, one of the poorest cantons located in Switzerland’s mountainous centre. …Friday’s court ruling comes in response to a case brought by Communist parliamentarian Josef Zisyadis – who moved to Obwalden to oppose the tax charges… The Finance Ministry said that the court’s decision would neither change the system of tax competition between the cantons nor encourage tax harmonisation. It emphasised that federalism and tax competition were essential parts of Swiss identity that also made the country more attractive for foreign companies.

More Irish Resistance to Corporate Tax Harmonization

Tax-news.com reports that the Irish Taxation Institute is urging united opposition to the European Commission scheme to create a harmonized corporate tax base.  

Some in the business community mistakenly think a harmonized corporate base would mean lower compliance costs because they could file one tax return for all EU nations, but this naive view fails to recognize that curtailing tax competition will make it easier for politicians to increase the overall tax burden:

The Irish Taxation Institute (ITI) has called for political, business and representative groups to unite against moves to harmonise European taxes. ITI made the call on a day when the German Presidency of the EU hosted a meeting in Berlin on the subject of the Common Consolidated Corporate Tax Base or CCCTB.

Commenting on the issue, Mark Redmond, CEO of the ITI said moves towards a common means of paying corporate taxes in the EU is bad for Ireland and bad for Europe. “The more you harmonise taxes, the more tax rates will rise, the more compliance costs will rise and the more unemployment will rise. The proposals put forward to date remain vague. They fail to come clean on the burden they will bring on both domestic and international businesses and they fail to address the widely held belief that it will mean higher corporate tax rates by the backdoor,” he warned.

High Tax Rates Contributing to German ‘Brain Drain’

The UK-based Independent reports that German emigration levels have reached record levels, in large part because the highly skilled are escaping the country’s onerous tax burden. Switzerland is the top destination, especially since a move across the border can yield a 40 percent reduction in the tax burden:

For a nation that invented the term “guest worker” for its immigrant labourers, Germany is facing the sobering fact that record numbers of its own often highly-qualified citizens are fleeing the country to work abroad in the biggest mass exodus for 60 years. Figures released by Germany’s Federal Statistics Office showed that the number of Germans emigrating rose to 155,290 last year — the highest number since the country’s reunification in 1990 — which equalled levels last experienced in the 1940s during the chaotic aftermath of the Second World War.

…Leading economists and employers say the trend is alarming. They note that many among Germany’s new breed of home-grown “guest workers” are highly-educated management consultants, doctors, dentists, scientists and lawyers. …Fed up with comparatively poor job prospects at home — where unemployment is as high as 17 per cent in some regions — as well as high taxes and bureaucracy, thousands of Germans have upped sticks for Austria and Switzerland, or emigrated to the United States. …More than 18,000 Germans moved to Switzerland last year. The US was the second most popular destination with 13,245, followed by Austria with 9,309. Switzerland already has a resident German population of 170,000.

…Claus Boche, a 32-year-old executive, left the west German city of Paderborn two-and-a-half years ago to take up a job with a Swiss management consulting firm. He now lives in Zurich. “Nearly everything is less bureaucratic and more go ahead than in Germany,” he said. “I also pay about 40 per cent less tax. I have no plans to go back.”

…Thomas Bauer, a labour economist from Essen, was scathing about Germany’s employment conditions. “Germany is certainly not attractive when compared to other countries in Europe,” he said. “The taxes are too high, the wages are too low and feelings of jealousy towards high-income earners is widespread. This is a special deterrent to the highly qualified.”

Is Europe Dying?

A Wall Street Journal review of “The Last Days of Europe” warns that the continent’s economic rebound (2.5 percent growth, tepid by American standards) is hardly proof that Europe’s troubles are going away.

The author is worried about Muslim immigration and integration, but the book also focuses on the punitive fiscal system that discourages productive behavior and encourages sloth:

Is it possible, then, that the writers who have spent the past few years predicting Europe’s collapse could be wrong? The short answer is: no. Even a corpse has been known to twitch once or twice before the rigor mortis sets in. The longer answer is provided by Walter Laqueur in “The Last Days of Europe,” one of the more persuasive in a long line of volumes by authors on both sides of the Atlantic chronicling Europe’s decline and foretelling its collapse.

…In the economic field, Europe is celebrating a growth rate of 2.5% annually; in the U.S. a similar pace is regarded as a crisis. Meanwhile unemployment remains brutally high and productivity stagnant. Mr. Laqueur notes that Europeans sometimes embrace their economic sluggishness as part of their “soft power” appeal: all those 35-hour weeks, long vacations and generous social benefits. But the long-term cost of their welfare states — and their confiscatory tax rates — may eventually make such luxuries unaffordable.

…[A]s Mr. Laqueur observes, museums are filled with the remnants of vanished civilizations. Abroad, the U.S. has long surpassed Europe in power, influence and economic dynamism; Asia may do so before long. At home, a profound demoralization has set in, induced in part by the continent’s ruinous past century.

A Poison Pill for China?

Last week top Chinese and American economic officials met in Washington for the second “Strategic Economic Dialogue.” While trade and exchange rates grabbed all the headlines, one less publicized subject was advice from the American side on how the Chinese can promote consumption in their domestic economy.

More consumption would presumably mean the Chinese would buy more American products and send less of their excess savings to the United States, leading eventually to a smaller Chinese trade surplus with the United States and the world.

How did U.S. government officials propose to promote more consumption in China? The Chinese were advised by their American friends to “create a social safety net for its population, similar to the Social Security and Medicare programs in the United States, so Chinese residents do not need to continue to save as much as 50 percent of their income for their retirement and future medical needs,” according to one trade newsletter.

Whoa. Would China’s economic managers really want to saddle its population with the same unsustainable government promises that characterize our two biggest entitlement programs? As my Cato colleagues have long noted, and as USA Today reported on its front page this week, the unfunded liabilities wracked up by those two programs has now reached more than $45 trillion (yes, that’s trillion).

I suppose saddling the Chinese economy with a huge, unfunded government obligation would be one way to “level the playing field.”