Topic: International Economics and Development

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.”

National Service Is Garbage

In Albania, anyway. NPR reports that garbage is piling up in the streets of Tirana, and “It’s something you could blame on the fall of communism.” As reporter Vicky O’Hara explained,

When communism collapsed here in the early 1900s so did the city’s system of garbage removal. Shpresa Rira, a teacher at the foreign language institute in Tirana, remembers that under communism families were ordered to spend part of their weekend picking up trash.

Ms. SHPRESA RIRA: It was called the communist Saturday because people were meant to come to come together and give their services to the community.

O’HARA: Rira says that people were not paid but they turned out anyway, because if they didn’t, the consequences could be dire.

So it was universal compulsory service, like Melvin Laird and John Edwards want for the United States. But it turns out it didn’t work so well in Albania.

The communist tactic, she says, destroyed community spirit in Albania.

Ms. RIRA: We thought that we were closely connected, but as soon as communism was over, you know, we understood that that community spirit didn’t exist at all. It was just a fake.

And like most collectivist systems, it did not  “foster a culture of responsibility for our democracy.” Instead, it left people expecting that government would handle everything. So now, the government no longer threatens people with dire consequences for not picking up trash, and no one does. The city has been slow to create a normal garbage collection system. Maybe this forced community spirit stuff isn’t such a good idea after all.

Canadian Tax Exiles

Thanks to high tax rates, two successful Canadian artists have escaped to Switzerland. Both Shania Twain and Luc Plamondon have decided that the Canadian residence is not worth the price if government seizes too much of their income. One politician calls tax migration a form of “economic treason,” but the real problem is greedy politicians who think that successful people should be milk cows for wasteful government. The Montreal Gazette reports:

He’s one of Quebec’s highest-profile tax avoiders - moving to Ireland, and then to Switzerland to avoid paying Canadian and Quebec income taxes. For the last few weeks, successful songwriter Luc Plamondon is also the owner of an Order of Canada pin, presented to those who, through their achievements, set an example for other Canadians. Ironically, the presentation of Plamondon’s Order of Canada pin by Governor-General Michaelle Jean in a private ceremony last month comes as the Conservative government is moving to crack down on tax avoidance by Canadian companies. …some MPs, such as Liberal finance critic John McCallum, say they see nothing wrong with electing a residence outside Canada to avoid Canadian taxes, others, like New Democrat MP Pat Martin, strongly condemn the practice. “I call it economic treason to be a tax fugitive,” said Martin, suggesting that Plamondon return his Order of Canada pin. …In 1999, three years before he was named to the Order of Canada, Plamondon moved to Ireland, saying he was doing it to avoid high federal and provincial taxes in Canada and to take advantage of its special tax breaks for artists. “There is an enormous number of writers and musicians from around the world who have moved to Ireland because of the tax savings,” Plamondon said when he sold his Montreal home. …Among the other residents of the Montreux area is Canadian singer Shania Twain, also an Order of Canada recipient. …David Perry, senior research associate with the Canadian Tax Foundation, said countries like Canada, which has higher tax rates than some other countries, risk having some of their most successful citizens elect to live outside the country of their birth. “Any country that has had a very high level of taxation on the rich … soon finds itself exporting that type of talent.” A minority of wealthy Canadians elect to reside outside the country to escape its taxes, and the practice is less common than it once was, he said. However, it nevertheless increases the frustration for other Canadians left to bear the tax burden, he said.

Gov. Kaine Warns against Protectionism

Virginia’s Gov. Tim Kaine has a message for his fellow Democrats on the subject of trade: protectionism is for losers.

In an interview with Bloomberg News that was published this morning, Kaine said he disagreed with members of his party who criticize globalization and trade agreements such as NAFTA. Their attitude displays a “loser’s mentality,” Kaine countered, adding that, “The only way you’ll succeed [in the global economy] is by being an aggressive competitor rather than trying to hoard your dwindling assets.”

As I’ve argued elsewhere, the Democratic Party’s embrace of Lou Dobbs-style populism against trade betrays the party’s historical commitment to competition and internationalism. For its own and the nation’s good, party leaders would be wise to listen to Gov. Kaine’s advice on trade.

The Wrong and Right Approach on U.S.-China Trade

The economic illiteracy that drives the “revalue-your-currency-immediately-and-dramatically-or-else-we’ll-impose-a-27.5 percent tariff” mantra has become a huge political problem.  The more that policymakers (and columnists) imply parity between the economic effects of a stronger Chinese Yuan and those of a huge import tax on Chinese goods at the U.S. border, the more likely we are to cross the precipice into astoundingly stupid economic policy.

On that score, Washington Post business columnist Steven Pearlstein deserves scorn.  In his column on Sunday, Pearlstein touted his preference for populist bromides over any desire to comprehend and convey truth to his readers about trade.  Pearlstein has joined the ranks of those agitating for an across-the-board tariff on Chinese imports since China “cannot take the one step that would restore some [trade] balance—revalu[ing] its currency.”  Though Pearlstein has grown increasingly hostile to trade recently, Sunday’s column, in which he describes the upside of a massive levy against all Chinese imports, is probably the most irresponsible one I’ve read from him. 

The “currency issue” is the most prominent source of contention afflicting the U.S.-China economic relationship.  But it is merely a proxy for broader concern over the U.S. trade deficit with China.  From the large and growing deficit, many policymakers conclude that we are losing at trade, and we’re losing because China is cheating.  Intervention in the currency market by China’s central bank to keep the Yuan artificially low is the chief form of cheating, which acts as a subsidy on exports and a tax on imports.  Fix the currency manipulation, and you fix the trade account.

That is an extremely simplistic take on the cause and effect of Chinese intervention in the currency market. 

And even if trade balance or a trade surplus were a legitimate and worthwhile objective of policy, measures to encourage consumption in the surplus country or to encourage savings in the deficit country or some combination of both would be the proper course of action.  (Note: To those who believe a trade surplus should be the objective of policy, take a look at Japan and Germany.  Both have had large and persistent trade surpluses for decades.  But for the better part of the past two decades, Japan has experienced anemic economic growth. Germany, during the same period, has had mostly double-digit unemployment.  Meanwhile, the United States, with its large and growing deficit, has experienced steady, consistent economic growth and job creation over the same period.)

But the trade account has very little to do with trade policy.  Attempts to achieve greater trade balance by tinkering with trade policy levers, particularly the levers that discourage trade and investment altogether, should be avoided.  The trade account is a function of habits of savings and consumption, which are to some degree a function of fiscal and monetary policy, as well as relative confidence in local institutions and general outlook.

In that regard, last week’s Strategic Economic Dialogue between U.S. and Chinese officials in Washington was quite successful.  Of course the meetings were characterized by those who fail to look beneath the surface as the last chance for China to bow to U.S. demands and avoid sanctions.  That the Chinese didn’t say “how high” in response to U.S. demands to “jump” is evidence of the failure of the SED.  But the SED is part of a process, and that process has yielded very important progress (if progress is defined as movement toward greater trade balance, which has become a political, rather than an economic, necessity).

In the weeks leading up to last week’s SED congregation in Washington, through its conclusion on Thursday, all sorts of incremental steps have been taken in the name of achieving greater trade balance.  The Chinese announced a broader band within which the Yuan can fluctuate on a daily basis.  The Yuan can now appreciate more quickly than in the past.  Since July 2005, the Yuan has appreciated by over 8 percent against the dollar.  It is now on a steeper appreciation trajectory.  (But has it even occurred to anyone that the deficit has only grown larger during this period of Yuan appreciation?  That fact certainly hasn’t deterred the currency-or-sanctions hawks.)

In response to a U.S. WTO complaint filed in March, the Chinese agreed to cut export tax rebates, which allegedly subsidize Chinese exporters, and to reduce certain import taxes, which allegedly hamper import competition in China.  Also, the Chinese agreed to improved market access for U.S. commercial airliners and other industries, and they agreed to go on a shopping spree to boost U.S. exports (even though U.S. exports to China have been growing by leaps and bounds – by 32% in 2006 versus about 15% overall). 

But in my view, the most important breakthrough last week was China’s decision to open its financial services sector even further than it has bound itself to do under its WTO commitments.  This is more important than anything the Congress is raging about in Washington because it addresses a huge structural impediment to Chinese consumption: the dearth of consumer credit, life insurance, and disability insurance markets.  The scarcity of these services encourages thrift, as medical emergencies, education expenses, big ticket purchases, and expenses related to catastrophic events must be financed, in most cases, from personal savings.

Treasury Secretary Henry Paulson has long held that the key to improving the trade balance is encouraging Chinese consumption.  The Chinese government is trying to encourage that as well.  Paulson’s suggestion that U.S. financial services providers can help in that task (given how skilled we are at consuming), and China’s acceptance of that proposal is testament to the validity and value of the SED.

While Schumer and Graham and Pearlstein advocate dropping the bomb, Paulson and Schwab and Wu Yi contemplate the keys to a successful bilateral relationship with economic growth for all.