Fleecing Europe’s Taxpayers

Congress certainly has its share of crooks, but Members of the European Parliament make American lawmakers look like amateurs when it comes to pilfering tax monies for private gain. The U.K.-based Sun reports on the latest scandal:

Crooked MEPs are trousering cash meant for workers’ wages, it was revealed yesterday. Some hire “ghost” staff — then claim thousands of pounds from the £100million annual allowance. Others recycle the handout by employing unqualified relatives, a bombshell report on MEPs’ expenses found. In many cases the whole £125,000 allowance is paid to just one person on the staff. One assistant received a “Christmas bonus” worth 19 times their monthly salary. Taxpayers’ money is also being diverted to party funds, with the internal probe describing the corruption as “massive and widespread”.

Brussels had wanted to cover up the abuse — but EU fraudbusters have demanded a copy of the report. Last night Lib Dem MEP Chris Davies — one of a handful of people who have seen the audit — called it “dynamite”. He said: “The allegations should lead to the imprisonment of a number of MEPs. It’s embezzlement and fraud on a massive, massive scale.”

Poland to Join Flat Tax Club?

It’s a bit too soon to crank up the unofficial theme song of the flat-tax revolution, but it appears Poland will be the next nation to hop on the flat-tax bandwagon. Because of Poland’s large population and proximity to Germany, this will create additional pressure for better tax policy in Western Europe’s welfare states.

The UK-based Guardian reports:

Poland’s centre-right government plans to introduce a low, single-rate income tax by 2011 at the latest, Prime Minister Donald Tusk said on Friday. …”On Sunday we will announce a specific timetable for launching a flat tax,” Tusk told radio RMF FM. “2010 seems to be the most likely date of introducing the flat tax, 2011 is the worst case scenario.”

Poland now has a progressive personal income tax with three rates of 19, 30 and 40 percent. A source familiar with the matter told Reuters the flat tax would likely be set at 17 percent….

Finance Minister Jacek Rostowski said on Friday that taxes had to be lowered to ensure growth stays high in central Europe’s biggest economy. Tusk led his Civic Platform to an election victory last October by attracting young, educated and urban voters on promises of lower taxes [and] less state intervention in the economy.

Clarifying the Standards vs. Market Reform Debate

NRO’s Ramesh Ponnuru has written a series of interesting posts on the debate between those who believe education reformers should focus on improving the curriculum in the government schools and those who advocate focusing on free market reforms. He agrees with Jay Greene that the two approaches are compatible and should be pursued in tandem, and questions Sol Stern for wishing to emphasize curriculum reform over market reform.

But there is some equivocation going on here. Most “instructionists” are not simply advocating improving the curricula in place in our existing state school systems. Most are in fact campaigning for national standards and testing, as former Republican education secretaries Bill Bennett and Rod Paige did here, or for a full-blown national curriculum, as their erstwhile colleague Diane Ravitch has done for more than a decade.

More central planning is not better than less central planning. The fact that the former Soviet Union was able to smother vast multitudes beneath the pall of its five-year plans did not produce winning results. The instructionists who seek to homogenize American education are detached from reality, imagining that new national standards, testing, or curricula would invariably be better — and remain better — than their counterparts adopted at the state level today. There is no reason to believe this. The same dysfunctional incentive structure that has produced the faddism and quackery in state curricula (e.g., California, reading instruction, late 80’s through mid 90s…) would apply at the national level. Our political leaders must offer only the appearance of educational success or improvement to garner votes, not the reality — and they could and would do this by dumbing down standards and/or tests just as we have seen at the state level. At least now, with 50 separate state school monopolies, the hi-jinx perpetrated in one state can be contrasted with the actions of others. With a single set of standards, no domestic points of comparison would remain, making it that much easier for standards to be manipulated.

Furthermore, national standards/curricula would raise the stakes for the school wars that have been dividing communities in this country since the inception of state schooling. What history should we teach? Should math be fuzzy or traditional? Should reading instruction be phonetic or wholistic? Add to all this the fact that the U.S. Constitution grants the federal government no mandate to meddle in matters instructional, and there is every reason to oppose calls for national standards/curriculum/testing.

But what if the instructionists were to abandon their affection for a single set of standards uber alles, confining themselves to improving the content and methods of existing state school systems? How much of the education reform movement’s time should such efforts be allocated? Should there be a 50-50 split, as Greene and Ponnuru seem to be suggesting? Or should we favor curriculum reforms, as Stern advises?

For me, the answer to this question must be based on the expected return on our time and resources. Trying to “fix” the education being provided by a monopoly school system is like trying to “fix” a command economy. While occasional improvements will certainly be possible, ultimately, the effort is doomed. Even when excellent, proven methods or curricula are adopted in state schools, the incentive structure of the system provides no support for retaining  them. A couple of famous examples of this are the billion-dollar “Follow Through” curriculum experiment of the 1960s and ’70s, and the fabulously successful calculus instruction program developed by Jaime Escalante at California’s Garfield High in the 1980s. Follow Through demonstrated that one instructional system was far superior to more than 20 others across a host of criteria, and yet as soon as the experiment was completed most of the schools that had been using it ceased to do so. Escalante, after building a mathematics department that taught advanced skills to hundreds of low-income Hispanic students, was run out of the system by his peers. He simply set the bar too high, and the system had no incentive to try to maintain it. 

Consider, too, that even the best set of uniform curriculum standards, when coupled with an age-based grading system, does a terrible disservice to children. Gidget is not a widget. Kids are different — not just from one another but in their own performance across subjects. Marching students through a “high quality” uniform educational experience based on their age is not good pedagogy. It is, at best, good bureaucracy, making it easier on the paper-pushers running the system.

It is a free market education system — and only a free market education system — that can automatically identify, nurture, expand, and replicate best practices, providing incentives for relentless improvement in content and methods, while also enjoying the flexibility to allow each child to progress at his or her own optimal speed through each subject. The for-profit tutoring industry, pioneered in Japan and spreading throughout the Western world, does not group or teach children based on their age, but rather by their performance in individual subjects.

This is why I cannot spend much of my time trying to improve the curricula in the monopoly schools. Even the best result is suboptimal and almost surely transitory as well. The worst result — a national curriculum that would eventually be dumbed down — would be a catastrophe.

So while the desire to do something now is strong, the futility of trying to fix a monopoly compels me to focus my attention where I think it can actually do real, lasting good. And that is on real market reform.

Cato’s Center for Educational Freedom has in the works a live debate on this topic. Stay tuned to this space for details.

The Four Percent Folly

James Jay Carafano’s op-ed in Thursday’s Washington Times, “In Defense of Defense Spending,” exemplifies the illogic of those who want to devote a fixed portion of our national wealth to defense.

Carafano is part of group of think-tankers and Bush administration officials trying to lock in a military budget fattened by two wars. By arguing that we should spend at least four percent of GDP on defense no matter what, they effectively say that whenever we draw down from Iraq, we should take all the war funds and put them into the non-war defense budget — creating a huge increase in base defense spending.

The op-ed is wrong-headed in three ways. It ignores the meaning of the statistic — percentage of GDP — that it hangs its hat on; it implies that changes in threat levels should not affect defense budgets, and it pretends that most U.S. defense spending is related to terrorism.

Carafano’s conclusion:

Defense spending as a percentage of GDP is the appropriate way to measure our national commitment to keeping America safe, free and prosperous. That’s the number policymakers should keep in mind as they look at the president’s budget.

Maybe I have undue faith in government, but I think policymakers can keep in mind more than one number. As my professor at MIT, Cindy Williams, points out, what number you should consider in thinking about the defense budget depends on what you want to know.

Percentage of GDP is useful for historical comparisons of defense’s economic burden. Carafano substitutes the question of what we can afford for what we ought to spend. The United States can afford to spend four percent of its GDP on defense; indeed we can afford to spend far more. That doesn’t mean we should. Whatever your politics, money spent on defense means money not spent on something else: private investment, deficit reduction, infrastructure, a car, etc. The problem is opportunity cost, not economic malaise.

Percentage of GDP is not useful in demonstrating how much we spend on defense compared to the past, however, because GDP grows. Ours is more than six times bigger than it was in 1950, as I wrote here two weeks ago. True, defense’s share of the economic pie has fallen over the last several decades. But that’s because the size of the pie has grown, hiding the absolute increase in spending. The best way to compare defense budgets over time is to look at absolute spending levels adjusted for inflation. That’s what people mean when they say defense spending is the highest that it has been since World War II.

Like most of those who make this argument, Carafano ignores the fact that wealth creation means that he is supporting ever-increasing defense budgets. Why should our grandchildren spend five times more than us on defense just because they are five times richer? Carafano doesn’t say. Nor does he explain why we should spend less on defense next year if there is a recession.

Defense spending should be guided by threats and our plans to deal with them. That this banal idea needs recitation speaks to the poverty of the arguments made by advocates of the drunken-sailor approach to security budgeting. Four percent of GDP forever, capabilities-based planning — these are the desperate justifications of hawks short of threats to inflate. Carafano does not bother to relate the expensive capabilities he promotes with the enemies that they theoretically protect against. Presumably that is because the Cold War is over; China isn’t much of an enemy, plus its growth is likely to taper off far before it can devote close to what we can to its military, and North Korea, Iran and Syria, according to The Military Balance, together spend just above $10 billion on defense, which doesn’t even get you a year’s worth of spending on a faulty missile defense system around here.

What about the “long war”? That’s where Carafano says all this money goes. But the defense budget is buying and operating mostly carrier battle groups, army divisions and fighter aircraft — tools rarely useful in fighting terrorists, and even then, far more abundant than we need. As for the wars in Iraq and Afghanistan, suffice it to say that there is reason to doubt that perennial wars of occupation in Muslim countries serve counter-terrorism. But even counting the wars as counter-terrorism spending, the vast majority of the defense budget is still going toward conventional conflicts, not Al Qaeda.

For a sensible take on these matters and the source of this post’s title, see Bernard Finel’s recent op-ed in Defense News.

Iceland and Taiwan to Slash Corporate Tax Rates

Iceland is known as the Nordic Tiger because of rapid economic growth. Much of the nation’s prosperity is the result of free-market policies, including a 36 percent flat tax on labor income, a 10 percent flat tax on capital income, and a corporate tax rate of just 18 percent (down from 50 percent at the end of the 1980s). But Iceland is not resting on its laurels. The government has just announced a reduction in the corporate tax rate:

The corporate income tax will be cut from 18 per cent to 15 per cent, effective for the 2008 income year and come into force in the 2009 assessment year.

Meanwhile, even though the 25 percent corporate tax rate in Taiwan is already substantially lower than the 39 percent-plus rate in the United States, Taiwanese politicians apparently recognize that globalization and tax competition are powerful arguments for even lower rates. Tax-news.com is reporting that the government therefore plans to slash the corporate rate to 17.5 percent - and also make unspecified reductions to personal income tax rates: 

It emerged this week that the Taiwanese cabinet has approved plans to reduce corporate and personal income tax rates, although the proposed changes must still secure parliamentary approval. The cuts would see the business tax rate reduced to 17.5% (from 25%), and the personal income tax rate slashed, according to reports. No timetable has yet been announced for the introduction of the new lower rates, but according to the International Herald Tribune, ministries likely to be affected by the changes have been asked to revise legislation to accommodate the new rates as soon as possible.

When will American politicians hop on the tax-cutting bandwagon?

Why Politicians Are Wrong about Imports and Jobs

Politicians commonly blame imports for throwing millions of Americans out of work. If you don’t believe me, check out what Hillary Clinton and Barack Obama both said about trade in their post-Wisconsin-primary speeches Tuesday night.

It’s true that a certain number of Americans lose their jobs each year because of import competition, but the number is small compared to the overall size and underlying churn of the U.S. labor market. And jobs lost from import competition are more than offset by jobs created elsewhere in the economy. And if you don’t believe that, check out my recent Cato study, “Trading Up.”

Adding to the evidence, the recently published Economic Report of the President 2008 contains a nifty graph on page 94. It shows that during the past 25 years, as imports have been trending inexorably up as a share of our economy, the unemployment rate has been trending DOWN.

As the graph’s own caption concludes, “Over the long run, there is little connection between increased imports of goods and services and the strength of the labor market.”