Topic: International Economics and Development

Tax Competition Forcing Lower Corporate Rates in Europe

The news pages of the Wall Street Journal have an excellent article showing how nations in Europe are cutting corporate tax rates in an effort to compete for jobs and capital. The politicians and bureaucrats do not like this process, of course, but European Commission-led efforts to harmonize taxes fortunately have failed. In closing, the WSJ article cites a post on the Cato blog about the shame of America having a higher corporate tax rate than France:

Europe’s major economies are competing with one another to cut corporate taxes as they fight to attract and keep investment, fueling a trend that has taken Europe’s corporate-tax rates below those of other regions. Nominal tax rates on corporate income in the European Union average 26%, compared with 30% in the Asian-Pacific region and nearly 40% in the U.S. The latest moves by European governments suggest business taxes in the EU will fall further in coming years. … In recent years, many smaller European nations – including Ireland and the former Soviet-bloc nations of Eastern Europe – have slashed corporate-tax rates to as low as zero, as part of their economic-growth strategies, and have succeeded in attracting investment from multinational corporations. That success has put pressure on Europe’s larger economies to cut their taxes. Until recently, Germany condemned the low-tax competition from Poland and others as “tax dumping.” But after failing to win support within the EU, Germany has joined in: Chancellor Angela Merkel’s ruling coalition has agreed to cut the corporate-tax rate to just under 30% next year from 39%. Others in Western Europe have reacted to the tax cut in Germany, Europe’s largest economy. In March, Britain’s finance chief, Gordon Brown, announced a reduction to 28% from 30%, following complaints from British companies that Britain was losing its status as one of Europe’s low-tax countries. Nicolas Sarkozy, a leading contender to become France’s next president, wants to cut the French corporate-tax rate to less than 28% from around 34%, albeit with some vaguely defined strings attached. … Elsewhere in Europe, Spain is reducing its tax rate on corporate profits to 30% from 35% in stages. … The Cato Institute in Washington, a free-market think tank, calls it “rather embarrassing” that France has a lower corporate-tax rate than the U.S.

The Border … Is You

Tomorrow, the House Homeland Security Committee is hosting a “Border Security Tech Fair.”

Vendors scheduled to participate include: Sightlogix, Scantech, Wattre, Hirsch, Bioscrypt, Cogent Systems, Cross Match, L1 Identity, Sagem Morpho, Motorola, L3 Communication, Authentec, Privaris, Mobilisa, and Lumidigm.

I don’t know all of these companies, so I made some educated guesses about the links (and I may have gotten the wrong division of Motorola), but it appears that fully 11 of the 15 participants are in the biometrics industry.

If you think for a minute that this is about the boundary line dividing the United States from its neighbors, I have a bridge to sell you. No wait - I have a “biometric solution” to sell you.  Mobilisa, for example, is being used to run background checks on the citizens of Clermont County, Ohio.

Participants in the Homeland Security Committee’s lunch briefing are all in the biometrics industry.  One of them, James Ziglar, wrote an op-ed in favor of a national ID in Monday’s New York Times. He claims it’s not a national ID, but then, he’s got a biometric solution to sell you.

Europe’s Dismal Fiscal Future

Nations such as France and Germany already are over-burdened by excessive taxes and spending, but things are going to get worse. A column in the Wall Street Journal notes that the number of potential workers per retiree is going to shrink dramatically. This helps explain, of course, why so many European politicians are opposed to tax competition. Mobility of labor and capital undermines their ability to keep Ponzi schemes afloat:

A shrinking population in itself is not necessarily a problem. But the rise in the “old age dependency” most definitely is. Fewer and fewer younger workers will have to finance the retirement of more and more elderly people in need of a range of support services from pensions to health care. European Commission forecasts suggest that the number of people aged 65 and older as a percentage of the working population (aged 15-64) will more than double between now and 2050 to 53% from 25%. …A continuation of the current pay-as-you-go pension systems, where employee contributions are used to pay for the pensions of those already retired, seems unsustainable. It would require an almost superhuman willingness among the shrinking pool of workers to pay ever rising payroll taxes for the increasing ranks of the older generation. It would overstretch the solidarity between generations and would only accelerate an already observable brain drain. Many of the most talented Europeans are already looking for higher salaries and lower taxes abroad.

But Americans should not gloat. Entitlement programs are pushing the United States in the same direction.

Upside-Down Budgeting in Europe

Politicians in Washington are quite adept at wasting money and coming up with clever excuses for new programs, but they are rank amateurs compared to their counterparts across the ocean. In Europe, politicians and bureaucrats have become so adept at twisting words that the European Commission actually announced that it “protected taxpayers’ interests” by spending almost every penny it received. The EU Observer reports on this Kafka-esque abuse of language:

The European Union has become better at spending money resulting in EU capitals getting back less of their annual membership fee, the European Commission has announced. …Out of the €107.4 billion EU spending finally agreed on for 2006 only €950 million was left unused - down from €1 billion in 2005. “Improved budget management and better planning help protect taxpayers’ interests,” said EU budget commissioner Dalia Grybauskaite in a statement. …the European Union is not allowed to make any profit and any surplus is therefore channelled back to EU member states’ coffers by way of a rebate on the year’s EU fee.

Freeing the Farm

Today Cato’s Center for Trade Policy Studies released a new study, “Freeing the Farm: A Farm Bill For All Americans”, as part of our efforts to promote serious and permanent reform of farm policy in the United States. We will be holding a forum to discuss the study on April 26 (register here).

For too long, American consumers and taxpayers have been supporting farmers, many of whom run successful agribusinesses (for more information on subsidies and who receives them, see the excellent work of the Environmental Working Group here). Removing price supports, import barriers and subsidies will save taxpayers and consumers billions of dollars and will expose farmers to the 21st century economy. To the extent that reforms help to achieve a successful conclusion to the Doha round of multilateral trade negotiations, American businesses (including farmers) and consumers will gain further.

How would we propose to achieve all this, given the notorious power of the farm lobby? A one-time, limited buyout of commodity support coupled with legislative changes and contracts.

With any luck, the 2007 Farm Bill will be the last.

Growing Pains in the U.S.-China Trade Relationship

What do I think about Red China?  Looks fabulous on a white, satin tablecloth!  

For more serious thoughts about China (in particular, its trade relationship with the
United States), please check out my interview with People’s Daily, a large Chinese newspaper.  Morgan Stanley Chief Economist Stephen Roach was asked the same questions.  His responses can be found here.

Montenegro Joins the Flat Tax Club

The International Monetary Fund published a discredited attack on the flat tax last year, which concluded that, “the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.” The IMF’s powers of prediction are perhaps even worse than its economic analysis. Since that paper was published, four new nations have a flat tax and several others are about to implement a flat tax. The latest to join the club is Montenegro. Alvin Rabushka, intellectual Godfather of the flat tax movement, explains:

In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. Effective July 1, 2007, it replaces the previous system of three rates… The new law sets the flat rate at 15% in 2007 and 2008, reduces it to 12% in 2009 and 9% in 2010. Montenegro has set the corporate profits tax rate at 9%, reduced from the previous two-rate system of 15% on taxable profit up to 100,000 and 20% on the gain exceeding 100,000. In 2010, Montenegro will have a unified flat tax of 9% on personal and corporate income. This will be one percentage point less than the 10% unified rate in Macedonia.

Rabhushka’s article also comments on the likely adoption of the flat tax in Albania and East Timor (where the IMF, not surpisingly, is advocating a higher-than-necessary tax rate):

Prime Minister Sali Berisha of Albania secured approval of the Strategic Planning Committee that he chairs for a unified 10% flat tax on personal and corporate income. The proposal has been sent to Albania’s parliament for its consideration. If enacted in a timely manner, the 10% tax on personal income would take effect on July 1, 2007. The proposed 10% flat tax on would slash Albania’s corporate 20% tax in half effective January 1, 2008. …Ramos-Horta plans to transform East Timor into a free-trade nation, with no tariffs, sales tax, or excise taxes save on dangerous substances. He proposes to set personal and corporate income tax rates at the same flat rate between 5 and 10%. His proposal is being drafted into law based on consultations with the World Bank, the United Nations Development Program, academics, and the International Monetary Fund. Although the IMF had pushed for a flat rate between 15 and 20% to prevent East Timor from becoming a tax haven.