Irish Business Leader Explains Why Optional Tax Base Harmonization Leads to Mandatory Tax Rate Harmonization

Big businesses have rarely been principled defenders of individual liberty. A good example is the fight over a harmonized corporate tax base in Europe. Some multinational companies like this approach because it means one tax return instead of 27 tax returns. But this short-sighted approach overlooks the inevitable misuse of power by politicians who will want to manipulate the system for their own benefit. An Irish business leader explains in the Financial Times:

Businesses should wake up to the fact that, if work to harmonise European Union tax systems succeeds, they will face huge uncertainty regarding their tax liabilities, pay higher tax bills and face a more rigid corporate tax regime. Lázsló Kovács, the tax commissioner, is firmly set on introducing a legislative proposal by the end of 2008 to harmonise the corporate tax base across the Union. …Separate accounting for cross-border transactions within a group would be eliminated, and group profit would be shared by means of a set formula between member states and taxed at the rate applicable in each state. …To date, business has expressed surprisingly little scepticism about this untested assertion. Such a sanguine attitude is misplaced.

 …companies doing business in Europe would pay higher tax bills. …CCCTB would drive some investment to more flexible and competitive tax jurisdictions outside the EU. Business lobbies have only backed the scheme if CCCTB is optional for companies. But, for how long could it remain optional? If simplicity and a reduction in administration costs are part of the raison d’être , then running an additional system side by side with national tax regimes makes no sense. The Commission said in 2006 that: “CCCTB should initially [my italics] be proposed as optional for companies”, and on May 2 it said: “CCCTB should be optional … where these [existing rules] are maintained alongside the CCCTB by member states.” …Despite assurances that it does not intend to extend this work to cover the tax rate, the Commission has a long history of pushing for harmonised tax rates – and a common tax base is a prerequisite of tax rate harmonisation. When the Commission embarked on this initiative, France and Germany made no secret that their end-game was tax rate harmonisation.

Lobbying Reform Reformed

The Politico offers an article about House Democrats and their effort to legislate about lobbying. The Senate passed a lobbying bill in January.

The road to the Senate bill included a struggle over the disclosure of funding for grassroots lobbying. Groups like the National Rifle Association or the National Right to Life Committee sometimes pay firms to communicate with citizens and urge them to contact their members of Congress on issues of concern to the group. The usual “reform groups” wanted the Senate to force disclosure of the sums spent mobilizing public opinion in this way. The Senate left disclosure out of their bill.

The effort to mandate disclosure resumed when the House took up lobbying reform. We held a forum on the topic that can be seen here. It now appears that the mandated disclosure will not appear in House version of the bill though it may be offered as an amendment.

The grassroots lobbying disclosure effort looked a lot like normal politics. The new majorities in Congress were (on the whole) Democratic and liberal, the groups that would be forced to disclosure their political activities were (on the whole) Republican and conservative. The new powers-that-be were apparently looking at ways to harass and perhaps discourage speech they did not like. As I said, normal politics.

Why has mandated disclosure apparently failed? A leader of one of the targeted groups told me that she hoped Speaker Pelosi would include the mandate in the lobbying reform bill. This leader believed the Speaker and her party would end up with a political black eye from the fight. Perhaps Speaker Pelosi agreed in the end.

For now, at least.

U.S. Trade Policy, R.I.P.

The NY Times, Washington Post, and other major media outlets have been gushing praise upon congressional Democrats and the Bush administration for hammering out a deal that keeps the trade agenda alive.  Lending some credibility to those media perspectives, which are too often misinformed and misleading, are assessments from knowledgeable, respected trade policy scholars that the compromise deal struck last week does in fact constitute a major breakthrough.

In my view, only analytical laziness or low expectations about the capacity of the administration and Congress to agree on anything related to trade, or sheer desperation for a sign of progress could produce a thumbs-up assessment of last week’s deal.  The proper interpretation is this:

U.S. trade policy, RIP.  Here’s why.

There are four concluded bilateral trade agreements (with Korea, Colombia, Peru, and Panama) awaiting congressional approval.  There is the seriously stalled Doha Round of multilateral trade negotiations, which has been the elusive grand prize of trade policy during the Bush years.  And there is the June 30 expiration of Trade Promotion Authority, which enables the executive branch to negotiate agreements (that must also reflect the wishes of Congress as of 2002, when TPA was passed into law) and bring them back to the Congress for an up-or-down vote.  Without TPA, agreements would be undone, reconfigured, and made unrecognizable and ultimately unacceptable, as 535 congressional tinkerers got their hands on them.

The TPA 2002 language was silent about environmental provisions and specified that trade partners should be required to enforce the labor laws on their books.  The new Democratic Congress finds the TPA 2002 language unacceptable.   Trade deals must contain strict, enforceable labor and environmental provisions, if they are to win the support of the Democratic caucus – so they say. 

The agreement struck last week is akin to a supplemental to the TPA 2002 bill.  It doesn’t extend TPA beyond June 30, but it imposes additional conditions with which trade agreements must comport.  The administration agreed to the terms because, well, it had no choice!  The labor unions, which now dictate congressional trade policy, are unwilling to support trade liberalization.  The administration has nothing, absolutely nothing, with which to compromise.  Thus, by agreeing to last week’s terms, the U.S. Trade Representative is throwing a Hail Mary.  Trade policy will not advance without those terms, and there’s a remote change it could advance with them.  The problem is that it won’t.

Arguably, the left-of-center press is giddy about the fact that Congress compelled the Bush administration to agree to include strict, enforceable labor and environmental provisions in prospective trade agreements (There was more to the deal, but labor and environmental standards were the big issues).  It matters not to the ubersanctimonious of the media that if you’re really concerned about environmental quality and working standards in poor countries you should seek to remove (not create) conditions on investment inflows.  Oh well, at least they’ve acknowledged the plight of poverty. 

But they should also remember that just because two branches of the U.S. government agree to these provisions doesn’t mean our trade partners will.  With a few relatively minor exceptions, they won’t.

In 1996, WTO trade ministers at the conclusion of their first biannual meeting in
Singapore issued a strong statement of consensus on the issue of labor standards.  The statement declared support for core labor standards, but opposed the idea of enforceable labor provisions in trade agreements.  Standards are promoted by “economic growth and development fostered by international trade and further trade liberalization,” the statement read.  Imposing conditions on trade and investment with poor countries only slows economic growth, which prevents labor standards from rising, was the gist of the statement.

Today, the WTO comprises even more developing countries than in 1996.  Their position against enforceable labor standards is even more entrenched.  They don’t oppose better local labor and environmental conditions, but fear that rich countries will use those provisions as a fig leaf to achieve protectionist outcomes.  The legitimate concern is that the potential to allege labor or environmental violations, regardless of merit, will deter foreign investment in local factories and in other areas of the local economy, which is the real key to raising standards.

Thus, despite suggestions that the last week’s deal opens up the door to continued progress on Doha, reality is quite different.  The United States has only introduced another obstacle that will calcify the current North-South divide in the Doha negotiations.

There is a remote possibility that the agreements with Peru and Panama will come to fruition.  Both of those governments are vested heavily in a successful trade deal with the United States, so they may be inclined to bite the bullet.  It remains to be seen, however, if the Peruvian and Panamanian legislatures will approve the new terms.  And quite frankly, there is absolutely no guarantee that Democrats in the U.S. Congress will support these deals despite last week’s ballyhooed “breakthrough.”

Indeed, the Colombian deal has been identified as still problematic by the congressional leadership.  In a letter to the USTR last week, House Ways and Means Chairman Charles Rangel (D-NY) wrote that the Colombia agreement can not be supported by Democrats unless the Bogota government does a better job finding and punishing violent criminals.  And House Ways and Means Trade Subcommittee Chairman Sander Levin (D-MI) is actively opposing the Korea agreement since it doesn’t include his proposal to condition Korean access to the U.S. auto market on the success of U.S. auto sales in Korea.

Although the Democratic leadership has been asserting that its caucus would support trade liberalization if its positions on labor and the environment were accommodated, it appears their bluff has been called.  Opposition to Colombia and Korea has nothing to do with labor and environmental standards.  It has everything to do with union opposition to trade, period.

And without labor’s nod, Democrats will not support trade in sufficient numbers to keep U.S. trade policy on track. 

Thus, trade policy, RIP.

Spain: Immigration Up, Unemployment Down

The recent economic success of Spain has not received the attention it deserves. One element in Spain’s resurgence, which I didn’t previously know about, is a relatively liberal immigration policy. According to BusinessWeek:

Over the past decade, the traditionally homogeneous country has become a sort of open-door laboratory on immigration. Spain has absorbed more than 3 million foreigners from places as diverse as Romania, Morocco, and South America. More than 11% of the country’s 44 million residents are now foreign-born, one of the highest proportions in Europe. With hundreds of thousands more arriving each year, Spain could soon reach the U.S. rate of 12.9%.

And it doesn’t seem to have hurt much. Spain is Europe’s best-performing major economy, with growth averaging 3.1% over the past five years. Since 2002, the country has created half the new jobs in the euro zone. Unemployment has plummeted from more than 20% in the 1990s to 8.6%, within shooting distance of the 7.2% euro zone average. The government attributes more than half this stellar performance to immigration. “We are very thankful for all these people who have come here to work with us,” says Javier Vallés, economic policy chief for Prime Minister José Luis Zapatero.

Apparently all those immigrants haven’t “taken all the jobs.” Ask your favorite Lou Dobbs-loving friend to explain to you how this is possible.

The White House Privacy Board Hasn’t Gotten Everything Right

In a recent post, I lauded the White House Privacy Board for its use of an analytical framework similar to the one I helped produce for the DHS Privacy Committee. It wasn’t a total endorsement, and I covered my … tracks by saying, “This doesn’t mean the White House Privacy Board has gotten everything right, of course. I have no doubt that they could have done better.”

Someone else shares that view, someone who should know. Lanny Davis, the lone Democrat on the Board, has resigned. Newsweek reports that he complains of “substantial” edits of the board’s report in his resignation letter.

Davis charged that the White House sought to remove an extensive discussion of recent findings by the Justice Department’s inspector general of FBI abuses in the uses of so-called “national security letters” to obtain personal data on U.S. citizens without a court order. He also charged that the White House counsel’s office wanted to strike language stating that the panel planned to investigate complaints from civil liberties groups that the Justice Department had improperly used a “material witness statute” to lock up terror suspects for lengthy periods of time without charging them with any crimes.

I am not a bit surprised. Serving as I do on a similar board, I am keenly aware of the pressures to conform the group’s findings to the prevailing view at the sponsoring agency. So far, the DHS Privacy Committee has been pretty good at resisting that, but it is not fully independent by any stretch.

This all is a reminder: Privacy will never be protected by government-constituted boards or officials. It is a product of individuals having the power to control information about themselves and exercising that control consistent with their interests and values. Don’t ever think you’ve got privacy because there is a White House Privacy Board or a DHS Privacy Committee.

Uncle Sam: Electrician

My new Cato policy analysis goes into great detail about how the federal government uses your tax money to subsidize businesses.  In fiscal 2006, the “corporate welfare state” cost $92 billion, all of which funded programs that provide unique benefits to particular companies or industries.

One of these programs is the Rural Utilities Service (RUS).  A relic of the New Deal, the goal of the program was to electrify the countryside.  Now that reading by candlelight in the boonies is a thing of the long forgotten past, the RUS has morphed into a fountain of cash for rural electricity co-ops. 

As a story on the front page of this morning’s Washington Post highlights, it’s always easier to create a program than to kill it:

The key to the longevity of the Agriculture Department’s programs for rural utilities has been the [electricity co-ops’] powerful political voice. More than 30,000 members gave an average of $41 last year to the co-op association for political contributions. Given their geographic scope, the co-ops can mobilize letter-writing campaigns across a vast number of states and congressional districts.

To learn more about the corporate welfare budget generally, tune in to my live interview on Bloomberg Radio’s “On the Economy” today at 6:30 pm Eastern.  A podcast about the corporate welfare state will be featured on the Cato website on Tuesday.   

Another Crack in Democracy’s “Bedrock”

It’s often argued that by letting parents select private schools for their children that teach curricula and values not vetted by government, school choice would destroy American democracy. In contrast, government-controlled schooling takes children from diverse backgrounds and forges them into unified, informed, tolerant Americans, making public schools the “bedrock” of American democracy.

Phooey.

In Why We Fight: How Public Schools Cause Social Conflict, I attempted to debunk those notions, pointing out how government schooling regularly forces divisive social battles and does little to foster meaningful unity. In a new Education Next article, University of Arkansas professor Patrick Wolf digs deeply into a critical component of the debate, zeroing in on what civic values and knowledge schools actually teach, and what children actually learn.  His analysis offers powerful evidence that the “bedrock of democracy,” compared to private education, is more like loose sand:

Findings from existing studies suggest that the effect of private schooling or school choice on civic values is most often neutral or positive. Among the group of more-rigorous studies, 12 findings indicate statistically significant positive effects of school choice or private schooling on civic values and 10 suggest neutral results. Only one finding from the rigorous evaluations indicates that traditional public schooling arrangements enhance a civic value.

Recommended reading.