November 3, 2008 4:03PM

Today at Cato

By Cato Editors

Op‐​Ed: “Obama’s ‘$4 Billion for Exxon’ Myth,” by Alan Reynolds in The Wall Street Journal.

In the final days of the campaign, Barack Obama continues to land the same sucker punch on taxes he used in the debates — and John McCain continues to take it on the chin.

Op‐​Ed: “Renewables Aren’t the Answer,” by Robert J. Michaels in USA Today.

America needs lots of clean, low‐​cost, secure electricity. Unfortunately, renewable sources don’t fill the bill, and a national requirement wouldn’t change things.

Article: “Talking Down the Banking System and the FDIC,” by Vern McKinley on Cato​.org.

The lesson learned during the banking crisis of the 1980s and 1990s when thousands of institutions failed and were taken over by the RTC and FDIC was not to talk down the condition of the banking system — a lesson that seems forgotten.

Podcast: “Nightly Morphin’ Bailout Dangers,” featuring William A. Niskanen.

November 3, 2008 12:45PM

Keep Virginia Red?

At John McCain’s rally Saturday in Springfield, Virginia, the audience chanted “Keep Virginia Red!” as McCain denounced Barack Obama for being a socialist. Say what?

It was very clever of the TV networks back in 2000 to insist on red for Republicans and blue for Democrats; it had often been the reverse in earlier elections. David Brinkley spoke of Ronald Reagan’s “sea of blue” in 1980, and Time wrote in 1984, “On NBC’s national map, a spreading sea of blue represented Reagan’s triumph, and little islands of red symbolized Mondale’s meager winnings; on ABC and CBS maps, the color symbolism was reversed.” NBC that year — like other networks in previous years — was in keeping with the worldwide use of political colors, where typically red represents communism, socialism, and social democracy and blue is associated with conservative parties. But when the dominant U.S. media all decided to paint the Democrats blue and Republicans red, they got rid of that pesky, lingering association of red with socialism.

And it’s worked so well that Virginia Republicans chant “Keep Virginia Red!”

November 2, 2008 10:24AM

Tax Competition Pushing Down Personal Tax Rates

Politicians love to figure out ways to rape and pillage minorities in order to win votes from majorities, and this is why class‐​warfare tax policy is a common tactic. Fortunately, globalization is making it more difficult for politicians to implement punitive tax laws. When rates become too high, it is now increasingly easy for productive resources — including labor — to escape across national borders. This is leading politicians, even in places such as France and Germany, to lower top tax rates. In our new book, Global Tax Revolution, Chris Edwards and I explain how this process of tax competition is an amazing liberalizing force in the world economy. But for those of you who inexplicably don’t want to buy our book, this excerpt from a report in Tax​-news​.com provides ample evidence:

Top personal income tax rates around the world have fallen by an average of 2.5% in the past six years, as governments strive to balance their need for revenue with the impact of increasing global labor mobility, a new study from KPMG International has found. Worldwide, top personal tax rates have fallen from an average of 31.3% in 2003 to 28.8% in 2008. But European Union (EU) taxpayers still pay the highest rates, at an average of 36.4%, followed by taxpayers in the Asia Pacific countries with an average of 34.6% and those of Latin America at 26.9%, KPMG said. At a country level, the highest tax rates in the world are paid by the people of Denmark, with a top rate of 59% for the whole six years, followed by those of Sweden, whose rate came down last year from 57% to 55%, and those of the Netherlands, who have paid 52% for the whole period. Excluding those countries which levy no tax at all, the lowest EU rate is in Bulgaria, with a newly introduced flat rate of 10%, down from 24%. In Asia Pacific the lowest is in Hong Kong, with 16% and in Latin America it is in Paraguay with 10%. Of the 87 countries surveyed, 33 have cut their rates in the past six years and only seven have a higher top rate in 2008 than they did in 2003. Among the large western European economies, France has made the most significant cut in its rates, from 48.1% in 2003 to 40% in 2007. Germany has gone from 48.5% to 45%, having briefly stood at 42% in 2005 and 2006. But across the EU it has been the introduction of flat rate taxes in the Eastern European states that has had the most impact, KPMG said. As well as Bulgaria’s new flat rate of 10%: Estonia has cut its rates from 26% in 2003 to a flat 21% in 2008; Slovakia has gone from 38% to a flat 19%; Lithuania last year fell 6 points to 27% and this year a further 3 points to a flat 24%; Romania has cut rates from 40% to a flat 16%; and the Czech Republic, this year, introduced a flat rate tax set at 15%. In the Asia Pacific region, tax competition between Hong Kong and Singapore has led Singapore to cut its rate from 22% for 2003 to 21% in 2006 and 20% in 2007. …“Australia also cut its personal tax rate by two points to 45% last year,” said Rosheen Garnon, head of KPMG’s International Executive Services practice and a partner in the Australian firm, “but if the intention was to attract back high value Australian workers who have temporarily moved to Hong Kong or Singapore, it may not be enough.” …Mexico and Panama stand out for their steady, year‐​on‐​year reductions. In the past six years, Panama has gone in stages from 33% to 22%, while Mexico has gone from 34% to 28%. …“We do not foresee a time when personal income taxes will fall so far that they become irrelevant to people moving from country to country. But it is entirely possible that the relative level of indirect taxes will begin to play a much greater part in people’s decisions on where in the world to go for work,” Garnon concluded.

November 1, 2008 7:24PM

State‐​Building vs. Counterinsurgency

In the National Interest (online), Amitai Etzioni argues that, in Afghanistan, the United States should avoid building out the central state, and instead co‐​opt militia leaders, including the Taliban.

Amen. Americans, even those writing counterinsurgency manuals, conflate counterinsurgency and state‐​building.

Both presidential candidates’ plans for Afghanistan share this failing. They both support a surge of troops and effort in Afghanistan based explicitly on the idea that our objective should be to build the Afghan state to win the loyalty of the people in the insurgent, meaning Pashtun, areas.

A better plan is a rough replication of what we did in Iraq’s Anbar province. There, we paid off the main body of insurgents and allowed them to rule in their area, provided that they turned against Al Qaeda in Iraq. Don’t believe the myth of the surge. This tactic, which pre‐​dated General David Petraeus’ assumption of command and had nothing to do with higher troop levels, was the main cause of the pacification of Iraq’s Sunni regions.

You could call this counterinsurgency strategy “appeasement” or “state‐​breaking,” as opposed to state‐​building. Having bought peace by dividing authority, there is no obvious way to put Humpty Dumpty back together — the dilemma we now face in Iraq. But if (a big if in Iraq) the division of power is remotely stable, that is not necessarily a problem, at least from a US perspective. You prioritize; sacrificing cohesive central authority for counterterrorism and rough stability.

This strategy stems from the idea that the trouble is the central state itself. You limit its sphere and leave the insurgency, essentially an alternative state, to its. Doing so is only possible where the insurgency has limited geographic orbit and ambitions — a common condition in divided societies with weak governments. Saddam Hussein himself employed this tactic late in his rule, as Austin Long explains in Survival.

In Afghanistan, where power has always been decentralized, the state‐​breaking strategy has more obvious merit than Iraq. Extending central governance is to undertake a struggle of indeterminate length, which is likely to fail at tremendous expense, while feeding the insurgency by antagonizing the Pashtun population. As Nir Rosen’s informative Rolling Stone article points out, the Afghan state reaches many Afghans not through the provision of services but via predatory national police. Our effort in Afghanistan, with its limited ambitions and reliance on local powers, has always had an element of this strategy, rhetoric to the contrary notwithstanding. But Washington’s embrace of the idea that we have neglected state‐​building in Afghanistan in favor of Iraq threatens to change this.

Our enemy in Afghanistan is really three insurgencies, and even the main body of the Taliban is really a loose‐​knit group of militias. Summit‐​style meetings with purported Taliban leaders will not do the trick. Deals with Taliban commanders will be incremental.

Sooner or later, the United States needs to leave Afghanistan. The idea that we can only do so once it is a centralized, peaceful country that collects taxes and provides services throughout its territory is a recipe for staying forever. We invaded Afghanistan to deny anti‐​American terrorists haven and deter anyone from offering it. We can maintain those conditions without a strong central goverment, and therefore without a perpetual occupation, if we do something like what Etzioni suggests.