Topic: Tax and Budget Policy

More on Chinese Military Spending

Michael Goldfarb of the Weekly Standard blog takes aim at this Glenn Greenwald post lamenting the fact that the U.S. spends more on defense than the rest of the world combined. In his post, Goldfarb protests that Greenwald is using a figure for Chinese defense spending that is too low and criticizes those “who act like they understand military spending but find themselves flummoxed over terms like ‘purchasing power parity.’”

Thankfully for all of us, Goldfarb called’s John Pike, who was able to inform him that attempting to ascertain the exact level of Chinese military spending is a “fiendishly complex problem…[that] approaches not even being a meaningful question.”

I say thankfully, because Goldfarb must have come to his senses since he last took a crack at Chinese military spending. That time he consulted with the Heritage Foundation’s John Tkacik, who has been touting his argument that China’s military spending is roughly equivalent to U.S. defense spending. For reasons I’ve laid out in detail before here, this is not a serious argument. It’s not clear why Goldfarb has chosen to jettison Tkacik’s figure in favor of Mr. Pike’s caution, but it’s a welcome development. Still, it would be good to know whether Mr. Goldfarb now thinks he was mistaken to tout the absurd figure last March.

Then Goldfarb takes it on himself to declare that those who advocate a lower defense budget “just don’t understand the issues. And they shouldn’t pretend to.” One might say the same thing about basically everybody who wrote for the Weekly Standard about Iraq before the war, but that would be uncharitable. But the larger point is that Goldfarb’s statement isn’t even true, unless he thinks he can write, say, Richard Betts out of the debate.

Even if one accepts Goldfarb’s criticism of Greenwald’s figure for China’s defense expenditures, it doesn’t affect the finding that the U.S. spends more on defense than the rest of the world combined. Unless Goldfarb then wants to repair to Tkacik’s argument about the Chinese defense budget, which I don’t imagine he wants to. Either way, it’s odd to see someone waving his hands and advising that we be cautious with figures of Chinese defense spending when he chose to tout the most outlandish figure out there just several months back…

Britain, Canada, Germany, Italy, Spain, and Now Kuwait

To close out a year of remarkable corporate tax cutting around the world, Kuwait has passed a bill to sharply cut its uniquely high rate. Here is the one-sentence story in the Washington Post today (page D8):

Kuwait’s parliament passed a bill to cut taxes on profit of foreign companies to 15 percent, abolishing a progressive scale established in 1955 with a maximum rate of 55 percent, in a bid to attract investments and diversify the economy.

Progressive is the past; flat is the future. 

What’s So Funny about P. J. O’Rourke?

I decided to give a young colleague a post-graduate course in political science and economics – P. J. O’Rourke’s books Parliament of Whores and Eat the Rich. So I went to my local Barnes & Noble to search for them. Not in Current Affairs. Not in Economics. No separate section called Politics. I decided to try Borders. But first – to avoid yet more driving around – I went online to see if my local Borders stores had them in stock. (An excellent innovation that Barnes & Noble should copy, for customers who like to look at the actual book before buying it, or who don’t do their Christmas shopping far enough in advance to shop online.) Sure enough, they did, in a couple of stores just blocks from the Cato Institute. Checking to see where in the store I would find them, I discovered that they would both be shelved under “Humor–Humorous Writing.” Oh, right, I thought, they’re not books on economics or current affairs, they’re humor.

Yes, P.J. is one of the funniest writers around. But what people often miss when they talk about his humor is what a good reporter and what an insightful analyst he is. Parliament of Whores is a very funny book, but it’s also a very perceptive analysis of politics in a late 20th century democracy. And if you read Eat the Rich, you’ll learn more about how countries get rich—and why they don’t – than in a whole year of econ at most colleges. In fact, I’ve decided that the best answer to the question “What’s the best book to start learning economics?” is Eat the Rich.

On page 1, P. J. starts with the right question: “Why do some places prosper and thrive while others just suck?” Supply-and-demand curves are all well and good, but what we really want to know is how not to be mired in poverty. He writes that he tried returning to his college economics texts but quickly remembered why he hated them at the time–though he does attempt, for instance, to explain comparative advantage in terms of John Grisham and Courtney Love. Instead he decided to visit economically successful and unsuccessful societies and try to figure out what make them work or not work. So he headed off to Sweden, Hong Kong, Albania, Cuba, Tanzania, Russia, China, and Wall Street.

In Tanzania he gapes at the magnificent natural beauty and the appalling human poverty. Why is Tanzania so poor? he asks people, and he gets a variety of answers. One answer, he notes, is that Tanzania is actually not poor by the standards of human history; it has a life expectancy about that of the United States in 1920, which is a lot better than humans in 1720, or 1220, or 20. But, he finally concludes, the real answer is the collective “ujamaa” policies pursued by the sainted post-colonial leader Julius Nyerere. The answer is “ujaama—they planned it. They planned it, and we paid for it. Rich countries underwrote Tanzanian economic idiocy.”

From Tanzania P. J. moves on to Hong Kong, where he finds “the best contemporary example of laissez-faire….The British colonial government turned Hong Kong into an economic miracle by doing nothing.”

You could do worse than to take a semester-long course on political economy where the texts are Eat the Rich and Parliament of Whores. So, bookstore owners, leave them in the Humorous Writing section for sure, but also put copies in the Economics, Politics, and Current Affairs sections.

Will the IRS Drive More Business Offshore?

In a baffling move, the Internal Revenue Service is poised to unilaterally change the rules for “captive” insurance companies, a policy that will drive business out of the
United States.

It is unclear whether the tax agency actually has the regulatory authority to make this change, and the IRS in the past has tried to use regulations to overturn existing law, so anything is possible. In any event, a report from the Cayman Islands shows that low-tax jurisdictions are looking forward to taking advantage of the IRS’s initiative:

A recent Internal Revenue Service proposal to remove tax deductions for certain U.S. captives may drive more companies to go offshore, with Cayman and Bermuda the prime beneficiaries of the change. If approved, this proposal would eliminate the ability of U.S. captives to claim tax deductions for money set aside in reserves to pay for future claims and losses. Instead, these deductions would only be allowed at the time the actual claims are paid out, potentially leading to millions of dollars in taxes being collected up front.

…Vermont has been the only real onshore competitor for Bermuda and Cayman as large numbers of U.S. companies have turned to captives, transforming this once exotic product into a mainstream choice on the global market place.  …To date, Bermuda leads the captive market with about 870 companies, followed by Cayman (756) and Vermont (562).

Hillary Claus

Hillary Clinton’s Christmas-weekend TV ad shows her sitting at her famous couch wrapping presents. They’ve all got tags — reading “Alternative Energy,” “Middle Class Tax Breaks,” “Universal Health Care,” and “Universal Pre-K.” (Also “Bring Troops Home,” but she’s already made clear that that box is empty.) I’d embed the video here, but you’d think it was a Club for Growth parody, so instead I’ll link directly to her campaign website.

Hillary actually sees herself as Santa Claus, handing out presents to the voters. Except, as my colleague Justin Logan notes, instead of putting together the toys at the North Pole with her elves, she’ll just take our toys, wrap them up, and then give them back to us after taking her cut and then pretend that it’s a great act of beneficence.

I complained once about teenagers interviewed by Parade magazine who “seemed to regard the new president as a combination of Superman, Santa Claus, and Mother Teresa.” But they were teenagers, not 60-year-old presidential candidates. Only one of the teens interviewed had an adult understanding of where government benefits come from. “I worked every day last summer,” he told Parade, “repairing and setting up cattle fences, from 8 a.m. to 5 p.m. in very hot weather. I got a good tan, but other than that it wasn’t worth it — just to have the government take a third of my money and have it go to someone I don’t even know who didn’t earn it in the first place. Do something about taxes.” He’s old enough to vote now. If only he were old enough to run for president.

Korean Tax-Cutter Wins

The corporate tax-cutting revolution may take another step forward with the election of Lee Myung-bak to the South Korean presidency.

Lee has promised to cut the country’s federal corporate tax rate from 25 to 20 percent.

Lee seems to have a very pro-market perspective on fiscal economics: “The ratio of taxation against national income was 17.9 percent under former President Kim Young-sam’s administration, but it increased to 20 percent under the incumbent administration, which almost stops the economy from growing.”

America’s tax ratio is closing in on 19 percent of GDP and our federal corporate tax rate at 35 percent will be 75 percent higher than Korea’s.

The Man with the Plan

The Russian government’s monthly propaganda insert in the Washington Post includes this headline today:

The Man with the Plan/President Putin Has Got the Nation’s Future Mapped Out

It reminded me of an article I wrote a few years ago with the same title, “The Man with the Plan.” (In Liberty, July 1996, or you can read it in my forthcoming book The Politics of Freedom.) I was writing about Clinton adviser Ira Magaziner, whose various planning schemes, while scary, are certainly not as bad as the ones that have been tried in Russia over the past century. Though this idea, expressed by presidential candidate Bill Clinton on the campaign trail in 1992, might come close:

We ought to begin by doing something simple. We ought to say right now, we ought to have a national inventory of the capacity of … every manufacturing plant in the United States: every airplane plant, every small business subcontractor, everybody working in defense.

We ought to know what the inventory is, what the skills of the work force are and match it against the kind of things we have to produce in the next twenty years and then we have to decide how to get from there to there. From what we have to what we need to do.

Five-year plans not having planned out so well, Clinton and Magaziner decided the problem was their short-term focus. Whether Bill or Hillary, Putin or Magaziner, when I hear the phrase “the man (or woman) with the plan,” I think of Adam Smith:

The man of system, on the contrary, is apt to be very wise in his own conceit, and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder.