Topic: International Economics and Development

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.

If It’s Not a National ID, Then What is It?

Former IRS Commissioners Doris Meissner and James Zigler editorialize in today’s New York Times about their support for “secure, biometric Social Security cards” as an essential part of immigration law reform.

The give-away line?: “To insist on secure documents with biometric identifiers is not a call for a national ID.” They provide no logical support for this naked assertion. Because it’s false.

Strengthened “internal enforcement” of immigration law means federal surveillance and tracking of all workers. All of them. Including you.

Russian Parliament Rejects Proposal for So-Called Progressive Taxation

Russia’s flat tax has been remarkably successful. Growth is reasonably strong and tax compliance has improved. Indeed, inflation-adjusted personal income tax revenues have been growing at double-digit rates. Despite this record of success, some politicians wanted to re-impose discriminatory tax rates on more productive taxpayers. Fortunately, as Tax-news.com reports, this misguided scheme was rejected:

The Russian State Duma, the lower house of parliament, has voted to reject two amendments to the Russian tax code that would replace Russia’s flat rate of tax on personal income with a progressive system whereby those who earn more pay more tax. The amendments concerned article 224 of the tax code, which stipulates that Russian tax residents pay income tax at a rate of 13% regardless of their income, and were introduced by the nationalist Rodina party, who argue that the current tax system disproportionately hits the poorest taxpayers. One of the amendments proposed no tax on individual incomes up to 60,000 rubles per year, a 10% tax on incomes from 60,000 to 120,000 rubles, a 13% tax on incomes from 120,000 to 1.2 million rubles, a 20% tax on income from 1.2 million to 3.6 million rubles and a 30% tax on income over 3.6 million rubles. The bill was opposed by both Deputy Prime Minister Alexander Zhukov and the speaker of the State Duma, Boris Gryzlov.

More Negative Consequences of Government Intervention

Many writers, including Cato experts, have noted the negative economic consequences of ethanol subsidies. While the direct effects are bad, government intervention also has negative indirect effects. As the UK-based Times notes, the subsidies are driving up the price of corn, hurting not only poor Mexicans but also American meat buyers:

Typically, meat production in the United States rises by about 2 per cent a year, but the pressure from American ethanol producers manufacturing road fuel from corn has sent the price of maize soaring to $4 a bushel. The USDA is predicting that the 2006 corn crop will sell for an average of $3.10 a bushel at the farm gate, the highest for a decade. Faced with extortionate feed costs, cattle and poultry farmers are rearing fewer animals and slaughtering them early. That means a sudden reversal in the annual meat production gain, representing a fall of 1.7lb per person. “There is a new demand component,” Shayle Shagam, a livestock analyst at USDA, said. “Livestock producers have to bid against the ethanol industry to get supplies of corn.” The biofuel revolution’s unpleasant negative consequence was first felt south of Rio Grande, when the escalating price of corn affected a food staple. Mexico’s tortilla inflation crisis is spreading north to the heartland of rib-eye steak and chicken wings. The USDA predicts that food prices will rise by up to 3.5 per cent this year as farmers rein in output in response to feedstock costs.