Archives: 11/2012

In World Bank’s New Tax Report Card, ‘High Effort’ Is a Very Bad Thing

Remember when you were a kid and your parents would either be happy or angry depending on whether your report card said you were trying hard or being a slacker? No matter whether your grades were good or bad, it helped to get an “A for Effort.”

But sometimes a high level of effort isn’t a good thing.

The World Bank has a new study that measures national tax burdens. But instead of using conventional measures, such as top tax rates or tax collections as a share of GDP, the international bureaucracy has developed an index that measures “tax effort” and “tax capacity” after adjusting for variables such as per-capita GDP, corruption, and demographics.

One goal of the study is to develop an apples-to-apples way of comparing tax burdens for nations at various levels of development. Poor nations, for instance, tend to have low levels of tax revenue even though they often have high tax rates. This is partly because of Laffer Curve reasons, but perhaps even more so because of corruption and incompetence. Rich nations, by contrast, usually have much greater ability to enforce their tax codes. So if you want to compare the tax system of Paraguay with the tax system of Sweden, you need to take these factors into account.

Here’s a description of how the authors addressed this issue.

Measuring taxation performance of countries is both theoretically and practically challenging. …tax economists have attempted to deal with this problem by applying an empirical approach to estimate the determinants of tax collection and identify the impact of such variables on each country’s taxable capacity. The development of a tax effort index, relating the actual tax revenues of a country to its estimated taxable capacity, provides us with a tempting measure which considers country specific fiscal, demographic, and institutional characteristics. …Tax effort is defined as an index of the ratio between the share of the actual tax collection in GDP and the taxable capacity.

This is a worthwhile project. There sometimes are big differences between nations and those should be part of the equation when comparing tax policies. Indeed, this is why my recent post on the rising burden of the value-added tax looked at data for nations at different levels of development.

But I’m irked by the World Bank study because it’s really measuring “tax onerousness.” I’m not even sure onerousness is a word, but I sure don’t like the term “tax effort” because it implies that a higher tax burden is a good thing. After all, we learned from our report cards that it’s good to demonstrate high effort and not be a slacker.

And just so you know I’m not just imagining things, the authors explicitly embrace the notion that bigger tax burdens are desirable. They assert (without any evidence, of course) that higher levels of tax promote “development” and that more money for politicians is “desirable.”

The international development community is increasingly recognizing the centrality of effective taxation to development. …higher tax revenues are important to lower the aid dependency in low-income countries. They also encourage good governance, strengthen state building and promote government accountability. …many developing countries experience a chronic gap between the actual and desirable levels of tax revenues. Taxation reforms are needed to close this gap.

If the authors of the study looked at economic history, they would understand that they have things backwards. “Effective taxation” doesn’t lead to “development.” It’s the other way around. The western world became rich when the burden of government was very small and most nations didn’t even have income tax regimes. It was only after nations because prosperous that politicians figured out how to extract significant shares of economic output.

But let’s set that aside and see which nations have the most and least onerous tax systems. Here’s a table from the report and it seems that Papua New Guinea has the world’s worst tax system and Bahrain has the best tax system. Among developed nations, New Zealand is the worst and Japan is the best. The United States (circled in red) gets a decent score. We’re not nearly as good as Switzerland and we’re slightly worse than Canada, but our politicians expend less “effort” than their counterparts in nations such as France, Italy, and Belgium.

By the way, I’m not endorsing either the methodology or the results. I like what the authors are trying to do (at least in terms of creating an apples-to-apples measure), but some of the results seem at odds with reality. New Zealand’s tax system isn’t great, but it certainly doesn’t seem as bad as the French tax code. And I have a hard time believing that Japan’s tax code is less onerous than the Swiss system.

The World Bank study also breaks down the data so that countries can be put into a matrix based on how much money they collect and how much “effort” they expend.

Here’s where the authors let their bias show. In their descriptions of the various boxes, they reflexively assume that higher tax collections are a good thing. Here is some of what they wrote in that section of the study.

The collection of taxes in this group of countries is currently low and lies below their respective taxable capacity. These countries have potential to succeed in deepening comprehensive tax policy and administration reforms focusing on revenue enhancement. …Botswana and Chile were originally in the low-effort, low-collection group, but they made it to the high-effort, high-collection group after recent improvements in revenue performance. …Although countries in this [high collection, low effort] group have already achieved a high tax collection, fiscally they still have the potential to implement reforms to reduce distortions and reach a higher level of efficiency of tax collection, since their tax effort index is low.

Very Orwellian, wouldn’t you say? We’re supposed to conclude that it’s bad if nations are “below their respective taxable capacity” because they can “succeed in deepening comprehensive tax policy” for purposes of “revenue enhancement.” Other nations, though, got gold stars because of “improvements in revenue performance.” And others were encouraged to try harder, even if they already collected a lot of revenue, in order to “reach of a higher level of efficiency of tax collection.”

But, to be fair, the study does include some semi-sensible comments acknowledging that there are limits to the greed of the political class. For all intents and purposes, the authors warn that there will be Laffer Curve effects if “high effort” nations seek to make their tax systems even more onerous.

Given that the level of tax intake in this group of countries is already high and stays above their respective taxable capacity, a further increase in tax revenue collection may lead to unintended economic distortions. …low-income countries with a low level of tax collection but high tax effort have less opportunity to increase tax revenues without possibly creating distortions or high compliance costs.

Just in case you’re not familiar with the lingo, “distortion” refers to the economic damage caused by high tax rates. This can be because high tax rates lead to a reduction in work, saving, investment, entrepreneurship, and other productive behaviors. Or it can be because high tax rates encourage people to make economically inefficient choices solely for tax planning purposes.

So the fact that the World Bank recognizes that taxes can hurt economic performance in at least some circumstances puts them ahead of the Congressional Budget Office and Joint Committee on Taxation. That’s damning with faint praise, to be sure, but I wanted to close on an upbeat note.

P.S. If you peruse the matrix, you’ll notice that New Zealand is considered a developing country. I’m sure that will be the source of amusement to my friends in Australia.

Nostalgianomics, again

The apparent demise of iconic edible kitsch producer Hostess Brands sends Paul Krugman into a wistful reverie in his most recent column. Ah, the good old days of the 1950s – when Krugman was young and Wonder Bread was building his body eight different ways, unions were strong, and the top marginal income tax rate was 91 percent.

Krugman recognizes, in a dig at conservative ’50s nostalgia, that the days of his boyhood were also “the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, ‘Are you now or have you ever been?’” But then he serves up some ’50s nostalgia of his own. “America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right-wing propaganda then and now, it prospered. And we can do that again.”

This is nothing new from Krugman. Indeed, a few years back I wrote a paper entitled “Paul Krugman’s Nostalgianomics.”  It’s true that the quarter-century after World War II was a kind of Golden Age for the American economy, with rapid productivity growth matched by strong income gains across the socioeconomic spectrum. But it doesn’t follow that the economic policies of that era are a good model for us now – any more than China’s spectacular growth in recent decades means that we would grow faster if we just instituted rampant corruption and oppressive autocracy.

As I noted in that earlier paper:

Krugman’s analysis here rests on a crude conflation of correlation and causation. It is true that, all thing being equal, we should expect better economic policies to generate better economic performance. But in the real world, all things are seldom equal; thus strong performance is not always reliable evidence of good policies.

Economic performance is a function of both economic policies and the underlying conditions for growth. When conditions are highly favorable (as, in China’s case, when relative backwardness creates the possibility for rapid catch-up growth), even fairly bad policies (like China’s) can produce good results. And it turns out that the conditions in the United States during the early post-WWII decades were highly favorable indeed.

Here again, from my earlier paper:

But several factors were especially conducive to strong performance at that time. There was a pent-up demand for goods and services after the privations of the Great Depression and the mobilization of World War II. There was also a pent-up supply of new products that couldn’t be brought to market during the depression and war years. That pent-up supply was augmented by technological and organizational breakthroughs accelerated by the imperatives of total war. Big advances in transportation, communications, and air conditioning stimulated catch-up growth in the underdeveloped South and underpopulated West. And rapid upgrades in human capital (first explosive growth in high school graduates, then explosive growth in college graduates) doubtless helped to spur productivity gains.

When conditions for growth become less favorable, performance deteriorates and pressure builds for new policies. Which is exactly what we saw in the 1970s: stagflation, followed by the dismantling of price and entry controls in the transportation, energy, financial, and communications sectors and a steep drop in marginal tax rates. Together with disinflationary monetary policy, those reforms helped to unleash the Long Boom of the ’80s and ’90s.

In the sluggish aftermath of the Great Recession, we may well be at another inflection point. There are good reasons to believe that growth is getting harder, in which case only another big round of pro-market reforms will suffice to revitalize America’s economic dynamism.

Sorry Paul, you can’t go home again.

Taking Education Policy from Quackery to Science

I recently bewailed the peddling of education policy snake-oil – advocacy based on non-sequiturs and false/misleading/incomplete data. At the end of it, I teased a forthcoming piece suggesting how the field could be kicked up a notch in seriousness and value. It ran today on the Washington Post’s Answer Sheet blog.

Feel free to ping me on Twitter or Facebook if you have comments.

 

Where Should Libertarians and Conservatives Be on Copyright? (Event 12/6)

Last week, an influential House Republican group made a feint toward supporting revamp of copyright law. On Friday, the Republican Study Committee issued a paper harshly criticizing copyright law as it stands today and calling for a variety of reforms. Then it quickly retracted the paper. On Saturday, the paper came down from the RSC site, and RSC Executive Director Paul Teller issued a statement saying that the paper had been issued “without adequate review.”

Today, it’s hard to find a source on the tech policy beat that isn’t writing about it: Politico, Hillicon Valley, C|Net, TechDirt, Ars Technica, and TechCrunch, for example. The American Conservative was on the story early, coming out with a highly laudatory comments on the RSC policy brief.

That was the beginning of the conversation. It continues on Thursday, December 6th when we’ll be hosting a book forum on the topic of copyright here at Cato.

The Mercatus Center’s Jerry Brito has edited a volume the thesis of which is evident in the title: Copyright Unbalanced: From Incentive to Excess. In addition to Brito, contributor (and Cato alum) Tom W. Bell will speak. And we’ll have able response and counterpoint given by Mitch Glazier, Senior Executive Vice President at the Recording Industry Association of America.

Jerry Brito has written more about the book in a Tech Liberation Front blog post this morning. Our book forum is on December 6th here at Cato. Register now.

Statutes of Limitations Apply Especially to Government Agencies

Statutes of limitations exist for good reason: Over time, evidence can be corrupted or disappear, memories fade, and companies dispose of records. Moreover, people want to get on with their lives and not have legal battles from their past come up unexpectedly. Plaintiffs thus have a responsibility to bring charges within a reasonable time of injury so that the justice system can operate efficiently and effectively – and that’s doubly so when the would-be plaintiff is the government, with all its tools for investigation and enforcement.

There’s a general federal statute of limitations, therefore, 28 U.S.C. § 2462, which protects liberty by prohibiting government actions “for the enforcement of any civil fine, penalty, or forfeiture … unless commenced within five years from the date when the claim first accrued.” In April 2008, however, the Securities & Exchange Commission sued the managers of Gabelli Funds LLC, a mutual fund, for civil penalties relating to conduct that ceased in August 2002, more than five years earlier. The SEC alleged that Gabelli Funds defrauded investors by failing to disclose that the fund was allowing a favored investor to engage in “market timing” – buying and selling mutual fund shares in a manner designed to exploit short-term price swings.

The U.S. Court of Appeals for the Second Circuit ruled that the SEC’s claim was nevertheless valid because courts should read into § 2462 an implicit “discovery rule” – a common exception to statutes of limitations that prevents fraud-based claims from accruing (“stops the clock” on the limitations period) until the plaintiff discovers, or with reasonable diligence should have discovered, the basis for the claim. Because of the allegedly fraudulent nature of the defendants’ actions, the court found that the government’s claim accrued not when their conduct ceased but a year later, when the violation was actually discovered.

The Supreme Court decided to review the case, and Cato filed an amicus brief supporting the defendants. We make three points:

First, Congress could not have intended a discovery rule to be implicit here because at the time the operative language in § 2462 was enacted, case law explicitly rejected a discovery rule – and since then Congress enacted numerous statutes with explicit discovery rules that would be superfluous if a discovery rule had already existed implicitly.

Second, reading a discovery rule into § 2462 violates the principle of separation of powers by judicially changing the statute’s meaning: When judges rewrite laws, those laws fail to meet the constitutional requirement of bicameralism and presentment (“how a bill becomes a law”).

Third, even if courts could alter rather than merely interpret the meaning of statutes, there’s no basis for creating a discovery rule for government enforcement actions. Government agencies with broad investigatory powers – indeed, whose purpose is to monitor regulatory compliance – don’t face the same difficulty as private plaintiffs in identifying causes of action which give rise to the discovery rule. Adding a discovery rule to § 2462 would create an indefinite threat of government lawsuits and invite agencies to review decades of past conduct of selectively disfavored companies and individuals – inevitably chilling innocent and valuable economic activity.

To preserve individual liberty in the face of an ever-burgeoning regulatory state and ensure constitutional separation of powers, we urge the Court to reverse the Second Circuit’s decision and hold that no discovery rule applies in Gabelli v. SEC.  The case will be argued at the Supreme Court on January 8.

Could Che Guevara Inspire Peaceful Revolutionaries in Burma?

In a profile of Myat Thu, a Burmese dissident forced to flee the country after “the 1988 nationwide protests that were brutally crushed by the Burmese military,” who now runs a cafe across the border in Thailand, NPR blandly notes that he has portraits on his walls of Aung San Suu Kyi – and Che Guevara.

Does Myat Thu know that Che was a brutal murderer who helped establish a Stalinist, military-backed dictatorship in Cuba that has lasted longer than the junta in Burma? Maybe he doesn’t. But surely Jason Beaubien of NPR does.

What’s So Great about a Heavy Footprint?

I generally like David Sanger’s reporting. His recent books (The Inheritance and Confront and Conceal) provide an excellent overview of U.S. foreign policy, and his analysis of Barack Obama and Mitt Romney’s approach to world affairs, filed just before the two men faced off in their third and final debate, was one of the best that I had seen.

But I’m confused by this passage from his story in yesterday’s New York Times:

Mr. Obama’s reluctance to put American forces on the ground during the fight, and his decision to keep America’s diplomatic and C.I.A. presence minimal in post-Qaddafi Libya, may have helped lead the United States to miss signals and get caught unaware in the attack on the American mission in Benghazi.

We have had many tens of thousands of U.S. troops, and a sizable CIA presence, on the ground in Afghanistan for years, and that hasn’t stopped attacks on Americans. Ditto for the massive troop presence in Iraq, when we had one there. We have been caught unaware in other places where we have had a massive and long-standing presence on the ground; meanwhile, some places that boast no U.S. presence at all have been quiescent for decades.

In short, what happened in Benghazi is certainly a tragedy, and possibly an avoidable one, but that one instance hardly proves that a heavy footprint (i.e. sending U.S. ground troops into the middle of distant civil wars) should be the preferred option going forward.

The American people’s opposition to the wars in Iraq and Afghanistan, and a broad, bipartisan desire to avoid future such wars, constrains the president’s options. And that is a good thing. If policymakers understand that they can’t accomplish ambitious goals with small numbers of troops on the ground—or with none at all—that should compel them to focus on more limited objectives, missions that advance U.S. security, and avoid those that do not.