Topic: International Economics and Development

Europe’s Best and Brightest Flee the Welfare State

A Washington Post column on relations between Europe and the United States explains that ambitious and entrepreneurial Europeans are “voting with their feet” and moving to America:

Young Europeans are more eager than ever to work and study in the United States. A brain drain from France and Germany has sent some of their best and brightest to the United States. A top destination is Silicon Valley; an estimated 80,000 young French people, known for their math skills, have migrated there in pursuit of jobs with high-tech firms. When I spoke last year with about 50 Germans studying at MIT and Harvard, not one of them expressed a desire to return home. They all wanted to live and work in the United States, where, they said, opportunities are far more abundant. Many complained that the sclerotic welfare states in Europe punish those who work and reward those who don’t. So they’re fleeing the crushing tax burden at home for more lucrative challenges in the United States. Europe’s leaders are slowly waking up to the fact that, with shrinking birth rates and a diminished work force, the continent may no longer be able to afford lavish social benefits, such as universal health care, retirement on full pensions as early as age 50 and up to nine weeks of paid vacation per year. They are exploring best practices in the United States to see how to rekindle entrepreneurial spirit and push people off welfare rolls.

Germany Attacks Ireland

This is a bad news/good news story. The bad news is that Germany is attacking Ireland. The good news is that the Germans now attack with words and bureaucratic schemes rather than Panzers and Stukas. But the attack - based on German complaints that Ireland’s low tax rates are “unfair” - is nonetheless despicable. Instead of attacking Ireland, the Germans should learn from the Irish Miracle and cut tax rates and reduce the burden of government. Fortunately, as noted by an article in the Irish Examiner, the Irish are resisting Germany’s fiscal aggression:

The German finance minister has threatened to go after Ireland’s low corporation tax system that he says leads to unfair competition with Germany and other EU countries. …Ireland has the second-lowest corporation tax rate in the EU at 12.5%, which is credited for creating the celtic tiger, attracting massive foreign investment and jobs. Germany has the highest at 38.6%. In 2004 over €33 billion flooded into the country, almost the same as went to Germany. German minister Peer Steinbruck warned that Ireland and other low tax countries in Eastern Europe were involved in what he called cutthroat competition that was not sustainable in the long run. …The German government is adopting a two pronged attack — first in pushing the European Commission to develop an EU-wide harmonised tax base and secondly by reopening the EU’s Code of Conduct on unfair tax competition. …Politicians from all parties, Internal Markets Commissioner Charlie McCreevy and business interests have all warned that the plan to harmonise the corporate tax base must be killed. Taoiseach Bertie Ahern has said that harmonizing the tax base across the EU could seriously affect the country’s ability to compete for investment and jobs in the global economy. …Mr McCreevy has said that those pushing for the Common Consolidated Corporation Tax Base (CCCTB) see this as the first step in having a single uniform corporate tax rate across the union.

Switzerland Officially Rejects Request from Brussels to Negotiate Surrender of Tax Sovereignty

Politicians from high-tax nations in the European Union are upset that companies - and tax revenues - are escaping to Switzerland to benefit from better tax law. But rather than fix their bad policies, they want the Swiss to raise the tax burden on economic activity in Switzerland. Not Surprisingly, as the Neue Zuricher Zeitung reports, Swiss leaders have said no:

The Swiss government has rejected formal negotiations with the European Union in a bid to resolve a controversy over the country’s corporate tax system. …Finance Minister Hans:Rudolf Merz and Foreign Minister Micheline Calmy:Rey said on Wednesday that Switzerland would not surrender its sovereignty on tax matters. The statement came in the wake of a decision earlier this week by EU ministers to open official negotiations with Switzerland. …Over the past few weeks several ministers have come out against holding formal negotiations with Brussels in the tax row. Merz said the cabinet and the cantons, which have wide:ranging autonomy in fiscal matters, wanted to ensure that Switzerland remains competitive.

That Mobile Line in the Sand

In a recent post and in this Washington Times commentary today, I note that there is less than meets the eye with respect to last week’s “grand deal” to include labor and environmental provisions in trade agreements reached between congressional Democrats and the White House.  (That’s not to say its unimportant — it is significant, and also regrettable).

One of my points (implicit as it may be) is that caving on labor and the environment would not be enough to warm Congress to the benefits of trade liberalization.  What was pitched to the press as the final price to win Congressional support for the administration’s trade agenda was merely the admission fee.  More demands would be forthcoming.

Alas, today members of Congress (22 Ds, including the trade leadership and 20 Rs) petitioned the U.S. Trade Representative to launch a Section 301 investigation into Chinese currency manipulation.  The petition is touted as “one last chance” for the Bush administration to act on the currency manipulation issue before legislation effectively mandating that conclusion, along with sanctions, is moved in Congress.

I can already see the words of Ways and Means trade subcommittee chairman Sander Levin (D-MI) when the USTR turns down today’s 301 petition.  “How can any member of Congress in his right mind vote to support any more trade agreements when this administration is unwilling to stand up for the working men and women of America?”

Of the four pending bilateral trade agreements (Korea, Colombia, Peru, and Panama), I’m betting exactly none will become reality during this presidency and beyond.

New Zealand Tax Reform

In yet another sign of the liberalizing impact of tax competition, New Zealand lawmakers are lowering the nation’s corporate tax rate and moving toward a territorial tax regime (the common-sense approach of only taxing income earned inside national borders).

Kiwi officials openly admit that these reforms are driven by a need to compete with other nations, further confirming the need to protect and promote fiscal rivalry from the anti-competition schemes of international bureaucracies such as the Organization for Economic Cooperation and Development.

Tax-news.com reports on the New Zealand reforms: 

New Zealand Finance Minister Michael Cullen has announced a 3% cut in the country’s rate of corporate income tax along with a series of other measures designed to improve the nation’s international business competitiveness.

The most significant component of Cullen’s 2007 Budget, announced in parliament on Thursday, was the decision to reduce the rate of corporate tax to 30% from April 1, 2008. ”Business has long argued that such a reduction will assist in boosting productivity and competitiveness and attracting more foreign direct investment increasing labour productivity and wage rates,” Cullen stated, adding that the move would also “reduce the attractiveness of structuring businesses so as to report minimal profits within New Zealand.”

…[A]ccording to Cullen, the review of the international business tax regime could be of greater significance than the corporate rate cut or the research and development tax credit in contributing to future economic growth and could cost far less. “Our current tax rules in relation to New Zealand companies investing in offshore activity impose additional costs that are not faced by businesses resident in other countries. This has created an incentive for New Zealand firms to migrate,” Cullen observed. Currently, New Zealand taxes New Zealand residents on their worldwide income. This includes any income that is earned by a foreign company that is controlled by New Zealand residents.

What’s Legal at the New York Times?

The New York Times reports that Venezuelan president Hugo Chavez “is carrying out what may become the largest forced land redistribution in Venezuela’s history…in a process that is both brutal and legal.” In what way is this process legal? The article never says. Presumably the Venezuelan congress has passed legislation authorizing the seizure and redistribution of land. But Chavez controls all 167 members of the National Assembly, and the Assembly has granted him the power to rule by decree. It’s hard to call anything in Venezuela “legal” at this point. One might as well say that Stalin’s executions or Pinochet’s disappearances were “legal.” (And by the way, have you noticed that the Times always refers to Pinochet as a dictator, but to Chavez and Fidel Castro as President or leader?)

If the term “legal” has any meaning other than “the ruler has the power to do it,” then it means that something is done in accordance with the law. The Oxford English Dictionary defines law as “the body of rules, whether proceeding from formal enactment or from custom, which a particular state or community recognizes as binding on its members or subjects.” One of the key elements of law is that it provides stability and certainty. I doubt that all the people of Venezuela recognize land seizures as proceeding in accordance with a body of rules. And certainly the arbitrary rule of a president or a rubber-stamp congress does not provide any certainty in the law.

At least the Times paused to tell us that the process was legal, even if it failed to specify just how. The Wall Street Journal article on the same topic doesn’t bother to consider the question of legality; perhaps that’s just a clearer recognition that in Venezuela there is no law, there is only Chavez.

And the rest of the Times article makes the process pretty clear:

The squatters arrive before dawn with machetes and rifles, surround the well-ordered rows of sugar cane and threaten to kill anyone who interferes. Then they light a match to the crops and declare the land their own….

Mr. Chávez’s supporters have formed thousands of state-financed cooperatives to wrest farms and cattle ranches from private owners. Landowners say compensation is hard to obtain. Local officials describe the land seizures as paving stones on “the road to socialism.”

“This is agrarian terrorism encouraged by the state,” said Fhandor Quiroga, a landowner and head of Yaracuy’s chamber of commerce, pointing to dozens of kidnappings of landowners by armed gangs in the last two years….

But while some of the newly settled farming communities are euphoric, landowners are jittery. Economists say the land reform may have the opposite effect of what Mr. Chavez intends, and make the country more dependent on imported food than before.

The uncertainties and disruptions of the land seizures have led to lower investment by some farmers. Production of some foods has been relatively flat, adding to shortages of items like sugar, economists say.

John R. Hines Freyre, who owns Yaracuy’s largest sugar-cane farm, is now trying desperately to sell the property and others in neighboring states. “No one wants this property, of course, because they know we’re about to be invaded,” said Mr. Hines, 69….

“The double talk from the highest levels is absurd,” Mr. Machado said. “By enhancing the state’s power, the reforms we’re witnessing now are a mechanism to perpetuate poverty in the countryside.”

To be sure, the Times does stress the concentration of land ownership in Venezuela and the delight of many of the squatters at getting the seized land. But it’s a balanced article, other than that pesky word “legal.”

As I’ve written before, too many journalists are treating Chavez’s growing dictatorship in a guarded way. They report what’s happening – nationalizations, land seizures, the unanimous assembly, the rule by decree, the demand to repeal presidential term limits, the installation of military officers throughout the government, the packing of the courts – but they still treat it as normal politics and even report with a straight face that “Chavez stresses that Venezuela will remain a democracy.” Some law, some democracy.

Anti-trade Demagoguery from the Eagle Forum

I’m occasionally asked, “If the case for free trade is so solid, why don’t more people agree with it?”  One reason is that it is so much easier to demagogue international trade than it is to explain it.

For example, consider a column posted this morning by Phyllis Schlafly, president of the Eagle Forum. Mrs. Schlafly is a social conservative known mostly for her opposition to abortion and the Equal Rights Amendment, but she also speaks out frequently against immigration and free trade.

In today’s column, titled “The Price Of Imported Food Is Too High,” she takes aim at trade with China, and in particular trade in agricultural goods.

The Clinton Administration conned American farmers into being the principal lobbyists in 2000 for passage of PNTR (Permanent Normal Trade Relations) for Communist China, which gave Chinese goods unconditional access to U.S. markets.

Bill Clinton promised in his State of the Union address that PNTR for China would be a win-win for American agriculture because “this agreement will open China’s market to us.” His Department of Agriculture predicted that the average annual value of U.S. agricultural exports to China would increase by $1.5 billion.

Globalization turned out to be a cheat. Department of Commerce figures show that U.S. wheat exports to China are less today than before PNTR was passed.

Consider the facts on U.S. farm exports to China. Since 2001, when we made normal trade relations with China permanent, U.S. agricultural exports to China have grown from $2.1 billion to $7.2 billion–an increase of more than $5 billion. Our export of soybeans alone has increased by $1.5 billion, raw cotton by almost $2 billion. Wheat exports, in contrast, make up a small and declining share of our total agricultural sales to China. 

Mrs. Schlafly goes on to rail against tainted pet food recently imported form China. “Maybe China’s poisoning of our pets will be one offense too many to tolerate,” she concludes. 

Food safety is not primarily a problem of imports. Americans have been poisoned recently by meat from Nebraska and spinach from California. The answer is better safety inspections for domestic and imported food alike, not higher tariffs on imports. If we tax imported food, we would merely drive up food costs for American families, especially those on tight budgets who spend a higher share of their income on food. 

It’s regrettable that an organization dedicated to upholding moral and family values would put out such misleading material in effect arguing for higher food costs for millions of American families.