Topic: International Economics and Development

The French Tax Debate

Shocking as it may seem, one of France’s presidential candidates actually is talking about tax cuts. And the current president endorsed a big reduction in the corporate tax rate. No tax cuts have actually been implemented, but perhaps some people in France have finally realized that it is better to reward rather than punish productive behavior.

The Wall Street Journal opines

Ms. Royal’s foray into these waters came, as much else in recent weeks, awkwardly. Socialist Party chief François Hollande, who is also Ms. Royal’s personal partner and the father of their four children, floated a plan to raise taxes on people earning above €4,000 a month. This was quickly panned as a tax hike that soaks the middle classes. Taken by surprise, Ms. Royal tried to distance herself from his proposal, but her campaign was soon put on another back foot when details of their own personal wealth were leaked to the press.

…Mr. Sarkozy has taken advantage. Building on the momentum from his formal nomination by the ruling center-right party last week, and with an emerging lead in the polls, he used a front-page interview in Tuesday’s Le Monde to push for cuts in income taxes and — the real whammy in France — social charges. His proposals are modest, but break a taboo in France — something that this son of Hungarian and Jewish immigrants specializes in.

…Mr. Sarkozy isn’t a Thatcherite by a long stretch, nor would being one help him in the eyes of French voters. He doesn’t dare support revoking the 35-hour workweek; he wants only to relax the law, even though it is widely seen as a failure. When he was briefly finance minister in 2004, he showed an interventionist streak that appeared to betray a lack of true understanding about how a market economy really works.

U.S. Posturing for a Fight at the WTO

Regarding the antidumping dispute concerning “zeroing,” which I’ve argued could shake the very foundations of the multilateral trading system, we have this development (see last item).  It is becoming evident that the United States will attempt to discredit the WTO Appellate Body’s logic in its latest rebuke of U.S. zeroing practices. 

It may take a year or more before we get there, but we appear to be headed for a confrontation with the dispute settlement system that could leave that institution weakened and U.S. credibility further damaged.  And that could invite consequences far worse than a stalled or derailed Doha Round.

More to come.

Switzerland Provides Refuge for Victims of Fiscal Oppression

Tax-news.com reports on the influx of wealthy foreigners seeking to benefit from Switzerland’s attractive tax laws for non-citizens. Driven in large part by competition among cantons, this system enables highly productive people to escape excessive taxation in other nations. High-tax European welfare states despise this policy, not surprisingly, but Swiss lawmakers understandably ignore these complaints. Indeed, as reported by the International Herald Tribune, one Swiss official even explained that there is no such thing as a “just” tax:

“It’s not a question of justice or injustice; there’s no just tax,” said Jean- Daniel Gerber, head of the Swiss State Secretariat for Economic Affairs.

Legendary French music and film superstar Johnny Hallyday and English pop star James Blunt are not unique in their desire to escape the high-tax regimes of their home countries. Switzerland has become a popular haunt for a variety of sports starts, rock stars and tycoons, notably Michael Schumacher, the former Formula One world champion, and Boris Becker, the Grand Slam tennis champion, rock star Phil Collins and Ingvar Kamprad, founder of the furniture chain Ikea.

Well over 3,500 wealthy foreigners have taken advantage of fiscal deals offered by Swiss cantons, paying an average of CHF75,000 each in tax on earnings of CHF300 million annually, according to Swissinfo. While individual deals vary, a typical agreement will see the individual pay tax on a multiple of the the value of their property or living expenses.

Swiss cantons are permitted an unusual amount of freedom from central government to set their own tax rates under the 2001 Tax Harmonisation Act, which has established a direct link between voters and tax policy and has helped to encourage tax competition within Switzerland for wealthy individuals and holding companies.

At least eighteen out of Switzerland’s 24 cantons planned to cut rates of taxation in 2006, led by Obwalden, which cut the corporate tax to 6.6% in January 2006, the lowest rate in Switzerland. Obwalden also cut tax for individuals earning over CHF300,000 by 1% to 2.35% and reduced property tax.

The system has also attracted criticism from the European Union. While Switzerland is not a member of the EU, it is party to a free trade agreement with Brussels dating back to 1972 and the European Commission has told Berne that it thinks certain aspects of Switzerland’s tax system are “incompatible” with this agreement and distort trade within the EU. To date, EC pressure on Switzerland to change its tax system has been firmly resisted by the Swiss government, with President Micheline Calmy-Rey telling the press whilst still Foreign Minister in December that there is “absolutely no room for negotiation,” regarding Swiss tax laws.

Hear That? It’s the Sound of a Nation Constricting

Beginning today, citizens of the United States, Canada, Mexico, and Bermuda are required to present a passport to enter the United States when arriving by air from any part of the Western Hemisphere.

This new restriction on local international travel is part of the “Western Hemisphere Travel Initiative.” Tightening up on travel documentation was a recommendation of the 9/11 Commission that Congress passed into law in the Intelligence Reform and Terrorism Prevention Act of 2004.

To downplay the consequences of this new travel restriction, a Department of Homeland Security press release points out that over 90 percent of U.S. citizens, 97 percent of Canadians, and just about all Mexicans and Bermudans flying to the United States over the past week arrived with passports. But this means that fully 10 percent of Americans who currently travel overseas this way are going to be at least inconvenienced, and at most dissuaded, from doing so.

It’s hard to quantify what a marginal restriction on travel like this means, but let’s try:

As early as January 1, 2008, the new restriction may apply to citizens entering the U.S. from the Western Hemisphere by land or sea. Air travelers are probably more likely than land or border crossers to have passports so let’s assume that 10 percent of all American border crossers lack passports.

To get a rough idea of what this means, in 1999, there were approximately 300 million roundtrips between the United States and Mexico and the United States and Canada, the vast majority of them same-day trips. Let’s assume 250 million of them were U.S. citizens. If 1% of these trips don’t happen (10% of current non-passport holders) because of the new Western Hemisphere travel restrictions, that’s 2.5 million cross-border trips forgone each year, along with the commerce, goodwill, and freedom those trips would have entalied.

What price freedom? Well, let’s make it 10 bucks. At that price, using these strictly back-of-envelope estimates, WHTI costs $25 million per year (not counting the cost of administration). The net present value of a $25 million annual expenditure is $500 million (at a 5% interest rate). In other words, more than half-a-billion dollars (a low estimate) worth of freedom and commerce goes down the drain starting today.

It would be worth every penny if it improved our national security by a similar margin. Alas, it does not.

The reason why requiring passports at borders provides so very little security boils down to the fact that identity does not reveal intention.

In our daily lives, we use identity to assure ourselves of the bona fides of others - neighbors, coworkers, stores, and restaurants, for example. But terrorists and hardened criminals are not similarly constrained by the social and legal pressures we can bring to bear on our law-abiding neighbors.

You could have perfect knowledge of who everyone is - lock down everyone’s identity with a mandatory cradle-to-grave biometric tracking system - and you would still not prevent crime and terrorism. I have carefully analyzed the utility of identity for security in my book, Identity Crisis.

Terrorists can defeat an identity-based security system either physically or logically. They can enter the country someplace other than a border crossing for example - and the half-billion expendture on WHTI is 100% wasted. A logical evasion of identity-based border security is to enter the country legally, not having participated in terrorism planning or acts before. This was the technique used by al Qaeda with most of the 9/11 terrorists.

Checking passports at the border of the country is what security expert Bruce Schneier correctly calls “security theater.” It may make you feel safer, but it doesn’t make you safer. It does corral law-abiding citizens into the habit of showing ID as they go about their business, and it puts information about law-abiding travelers into government data stores for who-knows-what future use.

With the travel restrictions going into effect today, America does not get safer, just smaller.

Trade Showdown Looks Inevitable

Yesterday I argued that Congress’s unflinching devotion to the antidumping law poses a real threat to the world trading system.  As the WTO dispute settlement mechanism renders more decisions against U.S. antidumping actions and procedures, Congress will grow more inclined to question the efficacy and legitimacy of the WTO in public.  And that is a slippery slope.

I wrote:

To Congress, trade remedy laws are not the problem.  Dumping and subsidization are.  And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.

Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.

Well, judging from this news release and letter, written by the two highest ranking legislators on trade issues, “later this year” is here.  Stay tuned.

Trade is Much Bigger Than the Doha Round

There have been whispers of late regarding prospects for a last minute resurrection of the WTO’s Doha Round of multilateral trade talks.  My colleague Sallie James does a great job discussing those prospects with polite skepticism in a recent Cato podcast.  Let me be a little more direct: Doha’s dead, yadda yadda yadda, now let’s move on!

Ok, that sounds a bit cavalier.  So please allow me to clarify.  To be more precise, Doha is not dead permanently; it is in a cryogenic state, available for resuscitation under different circumstances. 

Atop the many reasons to conclude that Doha’s time has passed for now is this: the Bush administration has neither the will nor the resources to engage in the type of horse trading necessary to produce an agreement that would be simultaneously acceptable to our trade partners and our Congress (and worthy of the negotiating efforts expended thus far).  As with every other policy initiative “championed” by the Bush administration (and trade was never really a priority), trade’s oxygen has been consumed by the Iraq inferno.

Judging from the commentaries I’ve read and conversations I’ve had, I am less inclined than most to view Doha’s deep freeze as some colossal economic setback.  Certainly it is a(nother) foreign policy setback for the United States, which will undoubtedly be accused of perpetuating poverty and misery the world over.  To the extent there is some small truth in that (some U.S. trade policies have acute, adverse impacts on people in developing countries), Doha’s failure carries real costs.  But by and large, there is no reason to assume that international trade and foreign investment will suddenly slow or reverse course.  In fact, trade and investment are likely to continue to grow handsomely and the world economy will continue to expand, as more and more people from more and more countries partake of the global economy.  And furthermore, I suspect that some, if not many, of the reforms and liberalizations proposed in the Doha Round will be adopted, ultimately, without need of agreement, by countries (including the U.S.) that recognize it is in their interest to reform regardless of what other countries do. 

What concerns me more than the failure to reach a new accord is the potential for marginalization of the old agreements and institutions.  The agreements that culminated in the creation of the World Trade Organization in 1995 and the quiet success of its dispute settlement system (which has “handled” 357 disputes) have a lot to do with trade’s contribution to world economic growth.  Long-standing rules and familiar processes have helped reduce and eliminate some of the uncertainties (and therefore, risks and costs) traditionally associated with trading and investing with foreigners.  If member countries were to begin questioning the efficacy of the system or the wisdom or propriety of its adjudication process when it becomes politically convenient to do so, calls to skirt the rules and ignore the verdicts might not be too far behind.  And that behavior could prove contagious, leading to new uncertainties, greater risks and costs, and ultimately, degradation and a potential collapse of the rules-based trading system.

That scenario, should it unfold, is a long way off.  But the seeds of discontent are sowing.  U.S. policymakers have from time-to-time expressed skepticism about WTO rulings.  That skepticism is memorialized in Section 2101(b)(3) of the legislation that gave President Bush trade promotion authority in 2002:

Support for continued trade expansion requires that dispute settlement procedures under international trade agreements not add to or diminish the rights and obligations provided in such agreements. Therefore-

(A) the recent pattern of decisions by dispute settlement panels of the WTO and the Appellate Body to impose obligations and restrictions on the use of antidumping, countervailing, and safeguard measures by WTO members under the Antidumping Agreement, the Agreement on Subsidies and Countervailing Measures, and the Agreement on Safeguards has raised concerns; and

(B) the Congress is concerned that dispute settlement panels of the WTO and the Appellate Body appropriately apply the standard of review contained in Article 17.6 of the Antidumping Agreement, to provide deference to a permissible interpretation by a WTO member of provisions of that Agreement, and to the evaluation by a WTO member of the facts where that evaluation is unbiased and objective and the establishment of the facts is proper.

Reactions in Congress to WTO dispute settlement decisions have been most acerbic when the subject has concerned U.S. application of its trade remedy laws.  As I reported last month, the WTO Appellate Body’s indictment of the U.S. antidumping calculation practice known as zeroing led to a rare change in practice at the Commerce Department.  However, some in Congress were not very pleased, suggesting the administrative actions circumvented congressional authority.Just last week, the Appellate Body ruled again on the issue of zeroing in the United States, but this time the ruling was even more encompassing, forbidding the practice under almost every conceivable comparison methodology.  Compliance with the ruling would be a landmark achievement in the realm of antidumping reform because the practice of zeroing is the single greatest systemic inflator of dumping margins.  And therein lies the problem.  In terms of the practical effect on the bottom line, banning zeroing entirely is akin to fairly ambitious antidumping reform, which Congresses past (and presumably present) have opposed.

When Congress granted President Bush trade promotion authority in 2002, it did so with strings attached. 

(14) TRADE REMEDY LAWS.-The principal negotiating objectives of the United States with respect to trade remedy laws are-

(A) to preserve the ability of the United States to enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws, and avoid agreements that lessen the effectiveness of domestic and international disciplines on unfair trade, especially dumping and subsidies, or that lessen the effectiveness of domestic and international safeguard provisions, in order to ensure that United States workers, agricultural producers, and firms can compete fully on fair terms and enjoy the benefits of reciprocal trade concessions; and

(B) to address and remedy market distortions that lead to dumping and subsidization, including overcapacity, cartelization, and market-access barriers.

To Congress, trade remedy laws are not the problem.  Dumping and subsidization are.  And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.

Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.

Antidumping is not the only area where the United States is on the defensive in the WTO.  Without an ongoing negotiating round, new cases concerning agricultural subsidies are likely to be brought (Brazil and Canada have already done so). 

If the United States refuses to comply (or is seen dragging its feet for a long time), other WTO members might follow the example, and eventually the dispute settlement mechanism could become a dead letter. These are the risks to the multilateral trading system. 

The failure of Doha to bear fruit in the form of a new ambitious agreement is disappointing, but hardly catastrophic.  However, to the extent that the absence of an ongoing negotiating round (indeed, in the wake of the first failed multilateral negotiating round ever) might liberate politicians to call for unilateral actions that contravene trade agreements, it will be more important to be vigilant in the face of threats to global commerce.

The Czechs (Finally) Have a New Government

The 7-months-long political stalemate in the Czech Republic ended this morning. The Czech Parliament approved a coalition government consisting of the liberal Civic Democrats, conservative Christian Democrats and centrist Greens. The new government is committed to a flat individual and corporate tax rate of between 17 percent and 19 percent (to be determined during pre-budget negotiations), and slashing regulation and state expenditure.

A last-minute desertion of two MPs from the socialist opposition enabled the government to squeak through, but the government remains in a precarious position. With only a 100 seats in a 200 seat Parliament, the government’s reform program will be difficult to push through.