Topic: International Economics and Development

(Ways and) Means to an End

The House Ways and Means Committee released their trade policy vision on Tuesday, and it should give cause for concern to free-traders who thought a compromise could be reached between the Democratic majority and the administration on how to advance the trade agenda. There are few details on how exactly trade agreements could be made acceptable to Democrats in the immediate future, and plenty of demands that could give potential trade partners cause for alarm.

The administration must give 90 days’ advance notice to Congress when seeking its approval for trade agreements, under the terms of the trade promotion authority delegated by Congress to the President. Because that authority expires on July 1, there are only two working days left to iron out differences on completed trade agreements (those with Peru, Colombia, and Panama, and possibly the still-under-frantic-negotiation agreement with South Korea). The Democrats’ one-pager was lamentably short on details about how to make these agreements acceptable to them.

In the longer-term, if the new majority’s trade strategy is indicative of its overall approach to trade policy (and we have every reason to believe that it is) then negotiated trade liberalization looks to be over for the next two years at least. Unless, of course, the secret 15-page proposal (mentioned in this NY Times piece) presented to the administration contains more of substance, and less of the deal-breaking demands, than what was released to the public.

The details we do have from the one-pager, however, do not paint a pretty picture. The Democrats’ plan proposes new emphasis on labour and environmental standards (including some standards to which, some critics point out, the United States is not a party), non-tariff barriers, calls for immediate action (italics in original) on currency manipulation in China and Japan, and more help for workers displaced by trade. Organized labor has welcomed it, of course, although–bizarrely–so have some Republican members of the committee, including the ranking Republican, Jim McCrery (R-LA). Steven Pearlstein in an article in yesterdays Washington Post, called some of the demands “political poison pills.”

Previous Cato research on some of these topics can be viewed here, and my colleague Dan Ikenson gave an interview on BBC on Tuesday night on the Dems’ proposal: view here.

Europe Takes Another Step Toward Tax Harmonization

Even though several nations are opposed, the European Commission plans to harmonize the definition of taxable income for corporations. It is true that the current system is a hassle for multinational companies, requiring 27 different tax returns for firms operating in all EU nations. But there are good ways and bad ways to address this problem. Allowing firms the option of choosing the “common” tax base would ensure that the bureaucrats in Brussels had less of an incentive to use the new system as a way of extorting more money from businesses. Another option would allow firms to use their home country’s definition of taxable income – an approach that would promote rather than retard tax competiiton since governments would have an incentive to attract companies by using a pro-growth definition of taxable income. Needless to say, the European Commission is not using either of these approaches. The EU Observer reports:

The European Commission is set to press ahead with introducing a single EU company tax base by 2010 in only a limited number of member states, circumventing national veto power in the sensitive tax area. … EU member states are deeply divided over possible harmonization, with 12 capitals in favour, five to seven against and the rest remaining undecided. Britain, Ireland and the Baltic states fear that the next step for Brussels would be interference in the levels of their corporate taxes, an area where EU states compete with each other as well.

Happy Birthday for EU Bureaucrats

The European Union is celebrating its 50th anniversary, but citizens in most nation are understandably underwhelmed. As an article at Foreignpolicy.com explains, the European Union is a remarkably anti-democratic institution.

Today’s EU resembles a sort of undemocratic Habsburg Empire. Its legislation is proposed by a Commission of unelected bureaucrats who have now apparently lost control of their own staffs and who themselves are usually political outcasts from their national political systems. Decisions on whether to adopt their often bizarre initiatives are then taken in total secrecy by the Council of Ministers or the European Council, before being rubber-stamped by the federalist parliament and imposed on the citizens of member states, whose national legislatures can do absolutely nothing to alter their directives or regulations. Indeed, 84 percent of all legislation before national parliaments, according to the German Ministry of Justice, now simply involves implementing Brussels diktats. All this makes European politics undemocratic at all levels, and opinion polls reflect the public’s growing disillusionment.

Daniel Schwammentahl of the Wall Street Journal, meanwhile, notes that politicians who favor more European centralization treat voters as obstacles to be overcome in their drive for a more powerful bureaucracy in Brussels:

…as Valéry Giscard d’Estaing, the former French President and main drafter of the constitution, said last year, rejecting his chef d’oeuvre “was a mistake which will have to be corrected.” In other words, Europeans are given a free vote as long as they vote for what the Brussels mandarins think is best for them. In a newspaper interview last week, Ms. Merkel diagnosed a certain alienation between the EU and its citizens, the root cause of which she located in the people’s alleged impatience with the slow pace of decision making in Brussels. “To change that we need an EU constitutional treaty,” she said. Come again? The chancellor wants to fight the citizens’ alienation by ignoring democratic votes that expressed that very alienation?

Tax Havens Protect Against Greedy Government

The New York Times has a story reviewing developments in the private banking industry. The article notes a couple of important points. First, high-tax nations - and the international bureaucracies that represent those nations - resent Swtizerland for serving as a refuge:

For generations, Europe’s wealthy journeyed through mountains and valleys to quietly stash their money with Switzerland’s bankers, famed for taking their secrets to the grave. …many of the country’s detractors complain that Switzerland remains the world’s prime tax haven. The European Union and the Organization for Economic Cooperation and Development have pressured Switzerland to loosen its bank secrecy.

Second, the article notes that high-tax countries can get at least some money to return home if they remove and/or reduce the tax penalites:

Several countries, including Italy and Belgium, have lured back untaxed assets held abroad by decreeing an amnesty for tax evasion. But that is not the biggest challenge.

Third, tax competition is creating other havens for people seeking to avoid not only punitive taxes, but also other forms of oppression:

As Swiss bankers penetrate markets abroad they are facing like-minded competitors from elsewhere in the world. Dubai and Singapore have cultivated sophisticated private banking hubs, offering discreet financial services and a tax haven aimed at luring away wealthy clients. And just as the Swiss have moved overseas, foreign banks like Citibank have flocked to Switzerland. Geneva, once a sleepy lakeshore town, now has branches of 100 foreign banks.

Lastly, the article notes that Switzerland has a completely different approach from America. Unlike the US - which has a so-called Bank Secrecy Act that strips away financial privacy, Swtizerland still respects the fundamental right to privacy. Citizens are treated like adults - a relationship that is facilitated by a better tax regime:

Unlike regulations in the United States, Swiss law forbids bankers from divulging information about clients or their assets, under threat of penalty. Tax evasion is not considered a crime.

Corporate Tax Rate Dropping to 28 Percent in England

Bowing to the pressure of tax competition, Gordon Brown announced that the corporate tax rate will be reduced by two percentage points. This is a very small cut, and it will be at least partially offset by other tax hikes (especially on manufacturers), so the United Kingdom is not exactly poised to become the next Estonia, Ireland, or Slovakia. Nonetheless, it is always amusing to see politicians who want higher tax rates being compelled to lower tax rates instead. Tax-news.com reports:

Chancellor of the Exchequer Gordon Brown surprised many yesterday by announcing a 2% reduction in the rate of corporation tax and a 2% cut in the basic rate of income tax, representing the first major cut in these taxes in many years. Brown has been on the receiving end of growing criticism of his handling of the public finances and his propensity to add complexity to an already unwieldy tax system, but many of the more cynical observers believe that the Chancellor’s generosity has more to do with securing his place as the next Prime Minster than it does with giving the UK’s tax competitiveness a much-needed fillip. Taking centre-stage in what is likely to be Brown’s last budget speech was the announcement that corporation tax would be cut by 2% to 28%. According to the Chancellor, this would bring the UK’s corporate tax rate below both the OECD and EU15 average. However, tax experts observe that while the Chancellor has given with one hand, he will claw back much of this lost revenue with the other through changes in capital allowances. …Paul Davies, UK Head of Tax at Ernst & Young noted that while the Chancellor appears to have finally woken up to the pleas of the business community for a tax cut, the overall result of the budget is a “mixed bag of changes that may affect different taxpayers in different ways.” “The cut in the main rate of Corporation Tax is welcome, showing that the UK is once again on a competitive path. This will reassure those companies thinking of moving offshore. However, the gain from the rate reduction will be more than clawed back by the change in plant and machinery capital allowances. As a result it is clear that the main beneficiaries of the rate cut will be in the service sector rather than the manufacturing sector,” he stated.

America Ranks Only 14th in Property Rights Index

In an interesting new report, the Property Rights Alliance has published the first index measuring property rights. Not surprisingly, the report finds that nations with stronger protections of property rights also have more prosperous economies. It was discouraging to read, though, that America is tied for 14th place, behind welfare states such as Denmark, Sweden, and Germany (though the U.S. beat France):

…countries in the higher rankings of the IPRI are primarily advanced industrialized economies, particularly Western Europe (Scandinavia) and North America. Countries that show a weak performance with respect to property rights protection are African and Latin American nations, in addition to the Central European nations. … better performing countries (1st Quartile in ranking) enjoy, on average, a GDP per capita income of more than eight times their counterparts at the lower quartile of the Index. … citizens of countries in the top quartile in the IPRI ranking enjoy a per capita income that is more than seven times that of their counterparts in the bottom quartile. … the correlation between the IPRI rating and GDP per capita amounts to a value of eighty-nine percent.

Europe’s Insane Agriculture Subsidies

American politicians have created a wretched system of agricultural subsidies, but it seems that Europe’s lawmakers win the prize for concocting the most perverse ways to squander tax money. The Times reports that there is now a secondary market in buying and selling agricultural subsidy entitlements:

City dwellers are making huge profits out of an EU loophole that allows people who have never set foot on a farm to claim European farm subsidies. …Auctioneers and brokers who used to sell cattle and farm-land are now focusing their attention on selling the rights to receive European taxpayers’ money — known as entitlement trading — in what one described as a “ferocious” market with the rights to subsidies “flying off the shelf”. …Open auctions are being held — with one in Aberdeen due next Friday — while investors are also buying the rights to subsidies over the telephone, through brokers, through internet auction sites and inter-active trading. …Under EU regulations, only someone classified as a farmer can buy the right to receive subsidies, but to be classified officially as a farmer, people need only hold a lease on a minimum of 1.7 acres for ten months of the year, and never need to visit it. Scottish landowners are now leasing out vast tracts of rocky highland for as little as £5 an acre a year, so that investors can claim to be farmers. For each acre you lease, you can buy annual subsidies averaging £100 an acre, but which can rise to over £1,000 an acre.

A newspaper in Scotland, meanwhile, reports that one dairy farmer has figured out how to scam the system for about $2 million per year - most of which is received as a subsidy for milk that does not exist:

A Scottish dairy farmer has exploited a glaring loophole in European law to annually earn the right to claim more than £1million in subsidies. William Hamilton and Sons, of Meldrum Farm, Blairdrummond, Stirling, has taken advantage of a flaw that allows it to get handouts on almost nine times the amount of milk it produces. Under EU law, the business will continue to qualify for the lottery-size payment annually until 2012 - even if it stops producing milk.