Topic: International Economics and Development

British Trade Association Warns against Growing Burden of Government

The Institute of Directors is urging the UK government to slow the growth of government in order to protect England from becoming an uncompetitive continental-style welfare state. The group notes that Spain successfully has reduced the burden of government by nearly 11 percentage points of GDP. A smaller burden of spending, the group explains, would facilitate much-needed tax reforms, including a lower corporate rate and the abolition of the death tax. Tax-news.com reports:

As part of its Budget submission, the Institute of Directors (IoD) has warned the UK government that economic policy now stands at a “fork in the road,” and that the level of taxation now stands at a “tipping point” as international companies begin to seek out more tax competitive jurisdictions in increasing numbers. The IoD argues that the UK government now faces a choice of continuing along its present path towards an economy that will mirror that of other EU economies with large governments, or of pursuing polices that aim to reduce the size of the state towards the levels seen in the US, Australia, Ireland and Switzerland, where public spending is between 34% and 37% of GDP. …Miles Templeman, Director General of the IoD commented: “There is nothing inevitable about a rising burden of public spending and taxation. Other countries have achieved huge reductions in the spending to GDP ratio. The UK should take Spanish lessons. Since 1993 public spending in Spain has fallen by 10.8% of GDP – from 48.6% to 37.8% of GDP in 2007. The optimal size of Government in the UK is well below its current size. …Unfortunately, the current size of the state in the UK is not globally competitive.” …The Institute also called on the government to consider its previously announced proposals to simplify the capital gains tax system and abolish inheritance tax, while calling for the proposed planning gain supplement to be abandoned.

Private Education in China — You Read It Here First

Bloomberg’s Singapore-based columnist Andy Mukherjee writes about the private-education boom in China:

At the end of 2005, some 15 million students were enrolled in 77,000 non-state schools. That’s 8 percent of the 197 million Chinese children aged 5 to 14 years. Privately funded schools in India have twice as large a share of the total market.

Expect the gap to close quickly.

Nine years ago, Ma Lei of Fudan University wrote about the growth of private schools in China for Cato Policy Report:

In Wenzhou, more than half of the 600 million RMB spent on education comes from the private sector. That’s a claim that few, if any, communities in the United States can make. …There are more than 2,300 privately run kindergarten classes in Wenzhou, in which more than 90 percent of all children of kindergarten age are enrolled. In addition, there are 21 private high schools, which educate about a quarter of the total high school student population.

James Tooley has also written at length about private education for the poor in Africa and India. His work, and its exciting new directions, are discussed in this Atlantic article.

European Commission Pushes Hypocritical Regulatory Message

The bureaucrats in Brussels are infamous for promulgating directives that add to the regulatory burden in European Union nations. Yet the same bureaucrats are pressuring national governments to adopt deregulation targets. This do-as-I-say-not-as-I-do message certainly rings hollow, though European consumers would benefit if politicians reduced red tape. The EU Observer reports:

EU leaders have agreed to a somewhat stronger goal on cutting red tape in their national legislation, despite previous reluctance to commit to a reduction of 25 percent of administrative burdens. …The move comes after last-minute pressure from the European Commission, urging governments to make a clear commitment to cut national bureaucracy which accounts for half of the bloc’s administrative costs. …Brussels believes red tape reduction would boost the EU economy by the equivalent of 3.5 percent of GDP and free up an estimated €150 billion for investment but only if national targets are included.

Will Halliburton Escape America’s Bad Tax System?

Some politicians are denouncing Halliburton for moving its headquarters to Dubai, but this is not a full-fledged corporate “expatriation.” Halliburton is only moving its headquarters, not its place of incorporation. Under US tax law, Halliburton will continue to be taxed on its worldwide income so long as the company is still chartered in Delaware. The move does not save the company one penny, at least from a tax perspective. To advance the interests of shareholders, however, the company should seek to change its place of incorporation. America’s worldwide tax system, combined with a high corporate tax rate, make it very difficult for multinational companies to compete in global markets. Unfortunately, it is now increasingly difficult to escape the Berlin Wall of American taxation, though Halliburton executives presumably are looking at the options. The politicians, meanwhile, should stop demagoguing the company and instead lower the coporate rate and shift to a territorial tax regime so that American companies can compete on a level playing field. ABC News reports:

The much-maligned defense contractor Halliburton is moving its corporate headquarters from Houston to Dubai in the United Arab Emirates. …Sen. Patrick Leahy, D-N.H., called the company’s move “corporate greed at its worst.”  …Fellow Democratic Rep. Henry Waxman, D-Calif., who chairs the House Oversight and Government Reform Committee, which has investigated contractor fraud, is planning to hold a hearing. “This is a surprising development,” he said. “I want to understand the ramifications for U.S. taxpayers and national security.”

Let America Benefit from Brain Drain

In a globalized economy, it is very easy for capital to cross national borders. This provides an excellent way for the market to punish governments that over-tax, over-spend, and over-regulate since capital will flow to jurisdictions with less statism. It also is increasingly easy for skilled labor to shift from less competitive nations to those with more opportunity. The United States often is at the top of the list of desired destinations for the world’s best-and-brightest. Unfortunately, even though these skilled workers and entrepreneurs would generate more wealth for America, they often are unable to overcome restrictive immigration laws. Investors’ Business Daily explains how this policy hurts the United States:

America has it all backward. Our country’s doors are open to the low-skilled while we keep out the talent that’s crucial to our competitiveness. …The global economy is a brain game, and the nations with the best-educated work forces are the ones that win. …there’s a talent gap that can be filled only by relaxing restrictions on foreign computer scientists, software engineers and other highly trained workers who want jobs in the U.S. …Much of the work in fields such as software development might still get done offshore. But that would not produce jobs here. More critically in the long run, it would deny America a stream of capable, creative people. For many visa holders, the temporary permit is a step toward permanent residency. Allowed to stay, they may do more than just work here. They may start their own businesses and create work for others. …The issue here isn’t America’s failure to control its borders. It’s that America does too good a job of excluding some of the people it most needs.

Iceland’s Laffer Curve

The Wall Street Journal notes that corporate tax revenue has jumped dramatically in Iceland, even though the corporate tax rate has been slashed to 18 percent. That sentence actually should say that revenues jumped because of the lower tax rate. Iceland is a clear example of the Laffer Curve. As the rate fell, companies had less reason to avoid taxes. The low rate also encouraged additional economic activity. Iceland’s workers are the biggest winners, of course, since they now enjoy higher incomes and more prosperity:

The benefits of low taxes are on full display in Iceland, which provides an almost perfect demonstration of the Laffer Curve. From 1991 to 2001, as the corporate-tax rate fell gradually to 18% from 45%, tax revenues tripled to 9.1 billion kronas ($134 million in today’s exchange rate) from just above 3 billion kronas. Since 2001, revenues more than tripled again to an estimated 33 billion kronas last year. Personal income-tax rates were cut gradually as well, to a flat rate of 22.75% this year from 33% in 1995. Meanwhile, the economy averaged annual growth rates of about 4% over the past decade.

The editorial also notes that tax competition is encouraging good policy in other European jurisdictions. It is not surprising that Swiss cantons are lowering tax rates, but it is noteworthy that even the tax-loving German politicians are being forced to reduce the tax burden:

In addition to Eastern Europe’s flat-tax movement, there is healthy rivalry from Switzerland, where the individual cantons can set their rates independently. Obwalden just lowered its corporate-tax rate to 6.6%, drawing criticism from the European Union, which called it an illegal subsidy. One of the biggest critics, Germany, recently announced that it will cut its corporate-tax rate to just below 30% next year from the current rate of about 38%.

U.S. Economic Misery — or Delusion?

Opponents of trade liberalization are painting themselves into a corner. They repeat endlessly that rising imports and trade deficits are bad for the U.S. economy and American workers. Imports and the trade deficits they fuel supposedly reduce U.S. employment and wages and impoverish American households as we borrow more and more and sell off the family jewels to support consumption. And since imports and trade deficits keep expanding, our economy must be getting worse, right?

Wrong. This morning the Labor Department reported that the U.S. unemployment rate fell again last month, to 4.5 percent, which must be full employment by anybody’s definition. Almost 100,000 net jobs were added in February, despite cold weather that crimped construction. Those job gains come on top of a revised net gain of 372,000 jobs in December and January, bringing net employment growth in the past four years to 6.5 million. Today’s report also confirms that real wages continue to rise for American workers.

Adding to the favorable picture, the Federal Reserve Board reported yesterday that the net household wealth of American families in the last quarter of 2006 reached a record $55.6 trillion. And that is net wealth: what we own after subtracting mortgage, consumer and other debts. Our net wealth is up 43 percent in the past four years, driven by increases not only in home values but also stock prices.

Granted, our infinitely complex, $13.5 trillion economy will have its ups and downs, but the current reality simply does not square with the politically tainted picture of economic misery and hopelessness being portrayed by certain critics of trade.