Topic: Tax and Budget Policy

Real Growth or Fake Stimulus

Don Boudreaux’s column in the Christian Science Monitor is an excellent analysis of the stimulus debate in Washington. He starts by explaining why the bipartisan support for rebate checks is grossly misguided. And his point about consumer spending being a consequence of growth rather than a cause of growth is superb:

Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is newly created. If it comes from taxes, the value of Jones’s stimulus check is offset by the greater taxes paid by Smith, who will then have fewer dollars to spend or invest. If Uncle Sam borrows to pay for the stimulus checks, this borrowing takes money out of the private sector. Any dollars borrowed – whether from foreigners or fellow Americans – for purposes of stimulus would have been spent or invested in other ways were they not loaned to the government. The only other means of paying for such stimulus is for the Federal Reserve to create new money. Unfortunately, this option leads inevitably to inflation. …Spending power is not so much the fuel for economic growth as it is its reward. And the key to economic growth is investment that raises worker productivity.

Professor Boudreaux then explains the types of policies that will boost growth, both in the short run and long run. Smaller government on both the tax side and spending side of the fiscal equation would be very helpful, he explains, and he also makes the critically important point that an easy-money policy from the Fed is the wrong approach:

Mr. Bush should call for a substantial and permanent cut in both capital-gains and personal-income tax rates. …Cutting taxes is, of course, a good thing, but it’s important to know why. The goal would not be to increase consumer spending. Instead, it would be to raise the returns on investment and work. By letting investors and workers keep more of the fruits of their risk-taking, creativity, and efforts, the economy will enjoy more risk-taking, creativity, and effort. Businesses that would otherwise not be started would be created. …Cutting government spending would result in more of the economy’s resources being used by wealth-creating businesses rather than being siphoned away to special-interest groups and boondoggles such as bridges-to-nowhere and Woodstock museums. …Finally, Bush should assure the Board of Governors of the Federal Reserve that he neither expects nor wants them to use monetary policy politically. Reminding them of the wisdom of Milton Friedman, he should strongly urge them to keep a tight rein on the money supply.

Mon Dieu! Smaller Government in France

In a step that could have a damaging effect on the jokes I tell when giving speeches, the Prime Minster of France has announced a plan to freeze government spending for five years. Some of the details are a bit unclear. As the Financial Times notes, Minister Fillon did not state whether spending would be frozen at current levels, or frozen after adjusting for inflation. A hard freeze would be the best option, but either choice would shrink the aggregate burden of government in France. To their credit, policy makers in Paris seem to understand the problem:

France is planning to freeze public spending for five years under its biggest programme of social and economic reform since the late 1960s, according to François Fillon, the prime minister. …The government has said it wants to eliminate its deficit and reduce spending as a share of national output – the highest in the EU at 53.5 per cent – during Mr Sarkozy’s first five-year term… Mr Fillon did not say whether he was planning a real-terms or nominal freeze, nor whether it would encompass France’s indebted social insurance system. He admitted that France would only eliminate its deficit “if we do the underlying structural reforms, which would allow us to reduce in a much more significant way public-sector employment and public spending”. …Mr Fillon has been credited with keeping Mr Sarkozy’s government focused on repairing France’s precarious public finances and cutting welfare and pension costs.

Assuming Sarkozy’s government fulfills this pledge, France will take a big step in the right direction. With any luck, maybe American politicians then would do something similar. The same policy, if adopted in America, would reduce the burden of federal government spending from more than 20 percent of GDP today to 15.9 percent of GDP (with a hard freeze) or 17.8 percent of GDP (with an inflation-adjusted freeze) after five years.

Europeans Want Asian Financial Centers to Join Savings Tax Cartel

Politicians from Europe’s high-tax governments recognize that saving and investment are escaping to jurisdictions with less-punitive tax regimes. But rather than lower their oppressive tax rates, they are trying to gain the ability to track – and tax – flight capital.

A couple of years ago, they implemented the so-called savings tax directive, but this system is ineffective (from the perspective of politicians) since many financial centers are not part of the cartel and many types of investment vehicles are not covered. Not surprisingly, politicians from nations such as France and Germany want to expand the tax cartel to cover more nations and to capture more forms of saving and investment.

Fortunately, as Tax-news.com reports, the Asian financial centers are not favorably disposed to serving as tax collectors for Europe’s inefficient welfare states. As such, high-tax nations may feel compelled to reduce tax rates to keep capital from fleeing:

Senior EU tax officials, including European Tax Commissioner Laszlo Kovacs, are preparing to make a fresh approach to Asian financial centres, in a bid to have them included within the ambit of the European Savings Tax Directive. According to a report from Reuters, Kovacs is scheduled to visit Hong Kong later this month, while other senior officials will launch a new charm offensive in the territory of Macau and the city-state of Singapore. The directive, which extends to a number of ‘third countries’ such as Switzerland, the Channel Islands and Caribbean offshore territories, facilitates the exchange of information between EU tax authorities on certain types of savings and investments held by EU residents in their territory, so that interest earned can be taxed in the resident investor’s home state. …

[W]hile the EU was effectively able to bully smaller territories such as those in the Caribbean with colonial links to member states like the UK and the Netherlands, the Asian territories have no such ties binding them to Europe. Unsurprisingly, EU officials have already received frosty responses from Hong Kong and Singapore regarding the issue, and little is expected to have changed. In the case of Hong Kong, signing up to the savings tax directive could mean altering the Basic Law which safeguards the future of its financial centre under Chinese rule.

Singapore on the other hand, is known to be staunchly opposed to the idea of sharing bank account information with the EU, and has rejected European overtures to include information exchange provisions within a broader economic agreement. The European Commission is currently reviewing the operation of the savings tax directive and is likely to make several recommendations for tightening up the legislation that would make it harder for EU-based investors to legitimately side-step the law - for example by moving assets from bank accounts to vehicles such as companies and trusts - which weren’t included in the legislation - or by shifting money to accounts based in territories out of the reach of the directive’s information sharing provisions.

It Hurts to Be Called Ugly by a Frog - Especially When the Frog is Right

European politicians are complaining that government spending in the United States is too high according to the EU Observer. Since government consumes a bigger share of economic output in almost every European nation than it does in America (see Table 25), they are throwing rocks in a glass house. But that doesn’t change the fact that they are right. Government is too big in the United States, and it wastes too much money. The EU’s Economy Commissioner, Joaquin Almunia, also is right to brag about the performance of the European Central Bank. Compared to the Fed’s easy-money policy, the ECB is Friedman-esque rock of price stability:

The European Commission has pointed to unhealthy public spending in the US as the main cause of the current global market turbulences and urged Washington to cut expenditure and boost savings, while praising Europe’s own “solid and sound” economy and the positive effect of the common currency. …Mr Almunia suggested that US policy-makers should tackle the current crisis with measures that would secure “reducing the external deficit and the fiscal deficit, and increasing domestic saving in the US both in the public and the private sectors.” He maintained that Europe’s own previous reforms and pressure for cuts in public finances have paid off, leaving the fundamentals of the bloc’s economy - in contrast to the situation across the Atlantic - as “solid and sound”.

Leave Them Teams Alone

Nick Gillespie and Matt Welch have a great article in Sunday’s Washington Post on the absurdity of Congress demanding that Major League Baseball do something about steroids right now, or else. They point out that, in the first place, “Major League Baseball, along with other sports leagues and private-sector ventures, simply should not be required to submit their business plans – much less blood and urine samples – to Congress or any other government body.” And in the second place, steroids just aren’t that big a deal, much as Congress wants them to be.

Alas, Reason’s editors do trip up on one point. They write that baseball’s exemption from federal antitrust legislation should be repealed. Why? Because it “has caused more harm than good by allowing owners to collude against players and prospective competitor leagues and by allowing cartel arrangements and restraints on trade unimaginable in other industries.”

Aside from the general problems with antitrust law, the notion that baseball owners “collude” in “cartel arrangements and restraints on trade” reflects a misunderstanding of the organization of a sports league. The different teams in Major League Baseball are not competitors like Coke and Pepsi. They’re not even quite like McDonald’s franchisees, who clearly don’t compete in the way different companies do. Rather, the economic unit is MLB, which is in the business of providing baseball games for entertainment. The competition on the field is real, but the teams are not actually economic competitors. As the Supreme Court ruled in a case involving the NFL:

The NFL owners are joint venturers who produce a product, professional football, which competes with other sports and other forms of entertainment in the entertainment marketplace. Although individual NFL teams compete on the playing field, they rarely compete in the marketplace… . The league competes as a unit against other forms of entertainment.

Gillespie and Welch are more right than they know. Congress should stay entirely out of baseball’s business, including by not siccing antitrust regulators on a single economic unit often misunderstood as 30 competing businesses.

Escaping Ireland’s High Personal Tax Rates

While Ireland has a very attractive 12.5 percent corporate tax, the tax treatment of individuals is much less benign. The top tax rate on personal income is 42 percent, and capital gains are hit with a 20 percent levy. As a result, more than 3,000 of Ireland’s most productive people have become non-residents for tax purposes, including at least half of the nation’s wealthiest citizens. The Sunday Business Post reports:

Although Ireland’s tax rates are relatively low by international standards, an increasing number of high-net-worth individuals are deciding to leave the country of their birth and move to places with more welcoming and forgiving tax regimes. …New figures prepared by the Revenue Commissioners finally reveal just how many tax exiles have decamped Ireland for other jurisdictions. According to new figures obtained by The Sunday Business Post, there are 19 high-net-worth individuals who are Irish domiciled but who are legally non-resident for tax purposes. The figures, from the Department of Finance, only includes individuals whose net worth (their assets less their liabilities) is valued at more than €50 million. …Of the top 20 individuals on the Irish Rich List, at least half are tax resident outside Ireland. John Magnier and JP McManus, the Irish horseracing tycoons, are both based in Geneva, as is Hugh Mackeown, the chairman of the Musgrave Group, the €4.6 billion Cork retail giant. Michael Smurfit, the packaging magnate, is the honorary Irish consul to Monaco, while dancer Michael Flatley also pays his tax in the principality. Billionaire financier Dermot Desmond officially resides in Gibraltar. …The 19 names on the list are just the top of the tax exile iceberg, however. According to the Department of Finance, it only includes individuals who filed an annual return in Ireland for the 2005 financial year. …It is not just the high rollers who are relocating to tax-efficient economies. According to the Revenue Commissioners, Ireland now has more than 3,000 tax exiles who claim non-residency. Many of these individuals are not in the top 250, but have serious wealth nonetheless.

European Politicians Want China to Adopt a Welfare State

Guided by the mercantilist superstition that imports somehow are bad, politicians in Europe are trying to figure out how to reduce the amount of Chinese goods available to European consumers. To their credit (to offer a back-handed compliment), the policies they are advocating - for China to adopt European-style levels of income redistribution - would be very effective. High tax rates and excessive levels of government spending would hamstring China’s economy. The EU Observer reports on European efforts to export bad policy:

EU top officials along with employment and social affairs commissioner Vladimir Spidla on Friday went to Beijing to advocate improvement of social welfare and worker protection. … “If we talk to them about health and safety at work, about social security and they see themselves that there is a necessity to change things in order to have a sustainable economy in the long-term that will also decrease possibilities for social dumping,” said Mr Spidla, according to AFP. ”If they decide to copy the European pension model, it means they consider it to be the best,” he continued. Social dumping – when countries with weak labour and safety standards export cheap goods to a state with more rigorous legislation and protection – is a strong point of contention between Brussels and Beijing. …Mr Spidla said he hoped the EU’s dialogue would “help China develop modern systems of social security.”