Topic: International Economics and Development

India Reveals Its Preference

My favorite concept in economics (it should tell you something about my dorkiness that I even have a favorite economics concept) is the theory of revealed preference. Basically, this theory (one of Samuelson’s) says that if you want to know the preferences of a rational economic actor, you just need to observe their behavior. It is basically the economists’ way of saying (and showing, using the ubiquitous diagrams) that actions speak louder than words.

India has treated us to a beautiful display of the theory by announcing yesterday that it will unilaterally reduce its tariffs on some goods and reduce its maximum tariff on non-agricultural goods to 10 percent (from a previous cap of 12.5 percent) in an effort to control inflation (more here).

This is the same India that is one of the main hold-outs in the Doha Round of multilateral trade talks. The same India that, in the poisoned atmosphere of the failed talks in Cancun, formed the G-20 in an attempt to assert developing countries “rights,” and to generally disrupt talks. Particularly in the agriculture negotiations, India has been frustratingly adamant that developed countries do more to open markets than developing countries and has been a strong proponent of mechanisms by which developing countries can shield a certain (20 percent, insists India) share of their “sensitive” agricultural products from tariff reductions.

Why, one is then tempted to ask, are India’s trade negotiators still clinging to the same tired mercantilist position in the Doha round, while the treasury goes ahead with (albeit limited) trade liberalization? Bureaucratic inconsistency, perhaps. Or maybe India enjoys, in the theater of the WTO, stickin’ it to the man. It’s a pity that the man they’re stickin’ it to is the man on the Indian street.

China and France May Copy America’s Punitive Tax Penalty on Non-Resident Citizens

America is the world’s only developed nation to impose tax on its citizens that live and work abroad – even though they already are subject to taxation by the foreign country where they reside. As the Wall Street Journal notes, China has decided to adopt this foolish policy:

The U.S. is the only developed nation to tax its citizens abroad. Now China has picked up on Mr. Grassley’s grand idea. From March 31, all mainland citizens working abroad will be taxed on their world-wide income. That might give some comfort to U.S. protectionists worried about China’s labor competitiveness, even though mainland employees aren’t so far a huge force abroad. But as America is now discovering, punitive taxation is an export that comes with a high price.

Not surprisingly, French socialists are intrigued by this self-destructive form of double-taxation. A column in The American comments on Segolene Royal’s interest in extending bad French tax laws to those who have escaped to friendlier jurisdictions:

…a report recently prepared for Royal’s camp floated a creative proposal—a “citizen contribution” (read: tax) for all French citizens residing abroad. The “contribution” would be designed to collect revenues from all French people residing abroad, irrespective of their reasons for leaving France: businessmen, families, retired workers, successful artists, etc. would all be affected. Former finance Minister Dominique Strauss-Kahn laid out the rationale: “It is no longer acceptable that French citizens be able to escape taxes by installing themselves outside of France. We propose to define a citizen contribution that will be paid in accordance with contributive capacities by each Frenchman residing abroad who does not pay taxes in France.” … If she implements her Socialist rhetoric, like Mitterrand in the early 1980s, financial forces beyond her control will quickly force her to change. For France’s sake, it is a situation she would do well to avoid.

“Cleaning Those Foreigners’ Clocks”

While a lame argument is disappointing for the opportunity cost of having read it, a lame argument put forth as rebuttal to one’s own assertions can be affirming.  But, to paraphrase a colleague, there’s nothing better than being challenged with lame arguments by adversaries who have wide media circulation.  For that, I thank you, Pat Buchanan.

Buchanan takes exception to the arguments I make in this piece, which appeared in the Washington Times last week.  The theme of my op-ed was that Congress should curtail its instinct to blame trade for everything that’s wrong with America.  I even go as far as to suggest that, with strong economic growth, strong job creation, and a low rate of unemployment, things might not be all that bad in America.  And at the very least, Congress should take the time to honestly assess the meaning of the trade deficit.  What Congress would find is that the deficit is highly pro-cyclical (meaning that is shrinks when the economy contracts, it grows when the economy expands, and grows faster when the economy grows faster – see some of Dan Griswold’s work on this topic).  I also suggested that the trade account has very little to do with trade policy, and much more to do with demand in the United States and abroad, as well as differences in habits of savings and consumption.

For those empirically sound (and verifiable) assertions, Buchanan lampoons libertarians for possessing some religious-like devotion to their beliefs regardless of the facts before taking two of my points out of context to serve as springboards into his xenophobic, isolationist, nationalistic rage.

When we win at trade, it doesn’t mean they lose (“cleaning those foreigners’ clocks”).  We are all winning at trade as the economic pie grows larger and larger—so much so that the large U.S. economy can grow at a moderate-to-strong pace every year with the exception of two for the past quarter century, while the small-to-medium-sized Chinese economy simultaneously can grow by double digits every year during the same period.  

But rather than reinvent the wheel under which arguments like Buchanan’s have been reliably squashed throughout the years, I invite you to peruse this collection of timeless commentaries from Cato scholars and others about Buchanan-like views on trade and globalization.

Europeans Want More Tax Harmonization — Which Means Higher Taxes

There already is a minimum fuel levy in the European Union, but governments are allowed to impose higher taxes (but never lower taxes, of course). This tax difference is causing some truckers to drive longer distances to buy fuel where diesel taxes are lower. The proposed response to this alleged problem is to reduce the difference in the tax among jurisdictions. Needless to say, the Euro-crats have decided that the solution is higher tax rates for all nations.

The EU Observer reports on the latest evidence that tax harmonization is always a scheme to increase government power:

EU tax commissioner László Kovács is set to table a proposal to harmonize the minimum level of excise duties at €359 per 1000 litres of diesel in 2012 and subsequently at €380 in 2014, a move which would see most EU states increasing their current rates.

According to Mr Kovács’ paper — seen by EUobserver — such a rise would stamp out so-called fuel tourism, as big trucks now make detours from their routes to tank in a state where it is the cheapest, generating more greenhouse gas emissions as well as losses to some EU states’ coffers. Germans, for example, are willing to drive two to four additional kilometres for each euro cent price differential compared to a neighbouring country in the case of gas oil. Fuel tourism cost Germany €1.9 billion in 2004.

…[O]ne Lithuanian diplomat [is now] saying the Brussels proposal should be scrapped as it would translate into an overall increase in prices and inflation. “It could freeze Lithuania’s euro hopes”, a diplomat told EUobserver, adding “taxes remain one’s competitive edge and countries with high rates have taken a voluntary risk”.

Religious Think Tank Defends Tax Competition

A scholar from the Acton Institute looks at the tax battle between Swtizerland and EU leaders in Brussels, and exposes the misguided morality of the politicians who denounce tax competition:

The war of words was ignited by the French rock star Johnny Hallyday’s decision in late 2006 to move to Gstaad, Switzerland, because he was tired of France’s exorbitant tax-rates. Mr. Hallyday joins an exodus of individuals and companies from France, Germany, Italy, and Austria taking advantage of Switzerland’s 21 percent overall tax-rate and considerably lower corporate tax-rates. Liechtenstein, Switzerland’s tiny neighbor, maintains even lower tax-rates and has benefited from a similar flight.

For corporate tax-exiles in Switzerland, the situation is especially advantageous. Each canton sets its own corporate tax-rates. This has triggered intense competition between cantons anxious to attract new businesses. In January 2006, for example, the central Swiss canton of Obwalden reduced its corporate tax-rate to 6.6 percent. Over 11 months, it attracted 376 new companies. No wonder large corporations such as Google and IBM have located their European headquarters in Zurich.

Outside Switzerland, the response has been extraordinary. Some French socialists have accused Switzerland of “looting” its neighbors. This is somewhat strange, given that no-one is forcing these individuals and companies to move to Switzerland. Some would suggest that the real “looters” are French governments of left and right who have raised taxes over the past 40 years to such levels that even many relatively modestly well-off French citizens have left or invested their capital in off-shore tax-havens.

…“Tax-harmonization” in the EU, incidentally, never means lowering tax-rates. It invariably involves raising taxes to the same high level. It was on this basis that, when faced with companies leaving Germany to base their headquarters in 19 percent flat-tax Slovakia, Germany’s ex-chancellor Gerhard Schroeder once accused Slovakia of “un-European” behavior. To be truly European — apparently — means giving about half your income to the government.

The European Commission Is Free Market?!?

There is nothing terribly newsworthy in a story from the EU Observer about a move to the left by the European Commission, but it is revealing that the report indicates that the Brussels-based bureaucracy has a free market reputation.

This is, after all, the bureaucracy that pushes for tax harmonization between countries and operates a Soviet-style agricultural subsidy system. But, then again, maybe the bureaucrats are free market when compared to French and German politicians:

The European Commission on Wednesday appeared to be trying to shrug off its reputation as a free-market bulwark, releasing a vision on the future of the EU’s single market which is notably sensitive to social concerns. 

…The current team of commissioners led by Jose Manuel Barroso generally has a pro-market reputation, not least in Germany and France.

…The paper also states that “many European citizens have raised concerns about the perceived disruptive impacts of globalisation,” adding that it is a “matter of social justice” to “anticipate and accompany change for the people and sectors directly affected by the market opening.” Brussels already runs the so-called Globalisation Adjustment Fund which was introduced by Mr. Barroso in 2005 after French president Jacques Chirac criticised the EU for failing to respond to massive lay-offs in France by U.S. computer maker Hewlett-Packard.