Tag: economics

Supporters of BATs and VATs are wrong about trade and taxes

My crusade against the border-adjustable tax (BAT) continues.

In a column co-authored with Veronique de Rugy of Mercatus, I explain in today’s Wall Street Journal why Republicans should drop this prospective source of new tax revenue.

…this should be an opportune time for major tax cuts to boost American growth and competitiveness. But much of the reform energy is being dissipated in a counterproductive fight over the “border adjustment” tax proposed by House Republicans. …Republican tax plans normally receive overwhelming support from the business community. But the border-adjustment tax has created deep divisions. Proponents claim border adjustability is not protectionist because it would automatically push up the value of the dollar, neutralizing the effect on trade. Importers don’t have much faith in this theory and oppose the GOP plan.

Much of the column is designed to debunk the absurd notion that a BAT is needed to offset some mythical advantage that other nations supposedly enjoy because of their value-added taxes.

Here’s what supporters claim.

Proponents of the border-adjustment tax also are using a dodgy sales pitch, saying that their plan will get rid of a “Made in America Tax.” The claim is that VATs give foreign companies an advantage. Say a German company exports a product to the U.S. It doesn’t pay the American corporate income tax, and it receives a rebate on its German VAT payments. But an American company exporting to Germany has to pay both—it’s subject to the U.S. corporate income tax and then pays the German VAT on the product when it is sold.

Sounds persuasive, at least until you look at both sides of the equation.

When the German company sells to customers in the U.S., it is subject to the German corporate income tax. The competing American firm selling domestically pays the U.S. corporate income tax. Neither is hit with a VAT. In other words, a level playing field.

Here’s a visual depiction of how the current system works. I include the possibility that that German products sold in America may also get hit by the US corporate income tax (if the German company have a US subsidiary, for instance). What’s most important, though, is that neither American-produced goods and services nor German-produced goods and services are hit by a VAT.

New Video Shows the Simple Recipe for Poor Nations to Become Rich Nations—in Spite of Bad Advice from International Bureaucracies

The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s the main message in this new video from the Center for Freedom and Prosperity.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.

Further Thoughts on Mariel Boatlift

Jason Richwine just blogged about my recent Mariel Boatlift post that confirmed George Borjas’ finding of wage increases for those with only a high school degree in post-Mariel Miami.  George Borjas understood my quick extension of his research.  Below are some of Richwine’s points and my quick responses. 

“The point is not especially interesting, since the standard immigration narrative has always been that efficiency gains come at the expense of the natives with whom immigrants most directly compete – high school dropouts, in the case of Mariel.”

It’s important to identify which skill-group of Miamians could have benefited from the Boatlift.  George Borjas pointed out in his report for the Center for Immigration Studies:  “Economic theory predicts that immigration will redistribute income by lowering the wages of competing American workers and increasing the wages of complementary American workers as well as profits for business owners and other “users” of immigrant labor.”  Borjas focused on the benefits for business owners and other “users” of immigrant labor in that paper. 

Does “Wagner’s Law” Mean Libertarians Should Acquiesce to Big Government?

There’s a lot of speculation in Washington about what a Trump Administration will do on government spending. Based on his rhetoric it’s hard to know whether he’ll be a big-spending populist or a budget-cutting businessman.

But what if that fight is pointless?

Back in October, Will Wilkinson of the Niskanen Center wrote a very interesting—albeit depressing—article about the potential futility of trying to reduce the size of government. He starts with the observation that government tends to get bigger as nations get richer.

“Wagner’s Law” says that as an economy’s per capita output grows larger over time, government spending consumes a larger share of that output. …Wagner’s Law names a real, observed, robust empirical pattern. …It’s mainly the positive relationship between rising demand for welfare services/transfers and rising GDP per capita that drives Wagner’s Law.

I’ve also written about Wagner’s Law, mostly to debunk the silly leftist interpretation that bigger government causes more wealth (in other words, they get the causality backwards), but also to point out that other policies matter and that some big-government nations have wisely mitigated the harmful economic impact of excessive spending and taxation by having very pro-market policies in areas such as trade and regulation.

In any event, Will includes a chart showing that there certainly has been a lot more redistribution spending in the United States over the past 70 years, so it certainly is true that the political process has produced results consistent with Wagner’s Law. As America has become richer, voters and politicians have figured out how to redistribute ever-larger amounts of money.

By the way, this data is completely consistent with my recent column that pointed out how defense spending plays only a minor role in America’s fiscal challenge.

Understanding When China Can (and Can’t) Wield Economic Influence

China Flag SmokestacksAs China grows more economically powerful there is growing concern about how it will convert its economic power into strategic influence. In its 2016 annual report, the U.S.-China Economic and Security Review Commission recommends closer scrutiny of Chinese economic practices and advocates creating a panel to prevent China’s state-owned enterprises from gaining “effective control” over U.S. companies. Fear of China’s commercial influence has recently spread to Hollywood as well, with recent purchases of film studios and theater chains by China’s Dalian Wanda leading to a torrent of commentary warning against Beijing’s nefarious long-term intentions.

The idea that China can easily convert its economic clout into influence is attractive and intuitive given the government’s important role in the economy. In Chinese Economic Statecraft: Commercial Actors, Grand Strategy, and State Control, William J. Norris, a professor at Texas A&M University’s Bush School of Government and Public Service, casts a skeptical eye on this assumption. Norris came to the Cato Institute recently to discuss his theory of economic statecraft and shed light on the complex domestic factors that help or hinder China from using commercial actors to achieve strategic goals. (Full disclosure, as a student at Texas A&M I spent several months as Norris’s research assistant while he worked on the book.) Using a theoretical model rooted in principal-agent theory applied to several case studies, Norris is able to show that China’s political leadership and commercial actors are not always on the same page.  

Economic statecraft is the intentional manipulation of economic interaction to produce or affect some sort of strategic end. Norris finds that effective economic statecraft requires state control over commercial actors and state unity across different sectors of government. While the Chinese government may have nominal control over its state-owned enterprises, it can be very difficult to get local officials in sync with provincial or national-level officials, which impedes the effective execution of economic statecraft. In some of Norris’s case studies Chinese commercial actors made decisions with little direction or oversight from state officials that had unintended strategic effects down the road.

The most important take-away from Norris’s book is, “economic statecraft is not an easy lever of national power for [China] to wield. To be effective, many factors need to align.” China’s economy makes it easier for the government to use its companies in strategic ways, but even in the Chinese system there are numerous factors that make it difficult to use commercial actors to achieve strategic goals. While Beijing has used commercial actors to achieve strategic goals, not every move by a Chinese state-owned enterprise is a strategic master stroke designed to maximize China’s power or undermine the United States. In order to better identify the real cases of Chinese economic statecraft, it would be prudent for analysts to apply the model in Norris’s book. 

The “Progressive” Threat to Baltic Exceptionalism

I’m a big fan of the Baltic nations of Estonia, Latvia, and Lithuania.

These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economies.

One key to their relative success is tax policy. All three nations have flat taxes. Estonia’s system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD.

And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).

But good policy in the past is no guarantee of good policy in the future, so it is with great dismay that I share some very worrisome news from two of the three Baltic countries.

First, we have a grim update from Estonia, which may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman. But now Estonia may cause sadness for me. The coalition government in Estonia has broken down and two of the political parties that want to lead a new government are hostile to the flat tax.

Estonia’s government collapsed Wednesday after Prime Minister Taavi Roivas lost a confidence vote in Parliament, following months of Cabinet squabbling mainly over economic policies. …Conflicting views over taxation and improving the state of Estonia’s economy, which the two junior coalition partners claim is stagnant, is the main cause for the breakup. …The core of those policies is a flat 20 percent tax on income. The Social Democrats say the wide income gaps separating Estonia’s different social groups would best be narrowed by introducing Nordic-style progressive taxation. The two parties said Wednesday that they will immediately start talks on forming a coalition with the Center Party, Estonia’s second-largest party, which is favored by the country’s sizable ethnic-Russian majority and supports a progressive income tax.

And Lithuanians just held an election and the outcome does not bode well for that nation’s flat tax.

After the weekend run-off vote, which followed a first round on October 9, the centrist Lithuanian Peasants and Green Union party LGPU) ended up with 54 seats in the 141-member parliament. …The conservative Homeland Union, which had been tipped to win, scored a distant second with 31 seats, while the governing Social Democrats were, as expected, relegated to the opposition, with just 17 seats. …The LPGU wants to change a controversial new labour code that makes it easier to hire and fire employees, impose a state monopoly on alcohol sales, cut bureaucracy, and above all boost economic growth to halt mass emigration. …Promises by Social Democratic Prime Minister Butkevicius of a further hike in the minimum wage and public sector salaries fell flat with voters.

The Social Democrats sound like they had some bad idea, but the new LGPU government has a more extreme agenda. It already has proposed to create a special 4-percentage point surtax on taxpayers earning more than €12,000 annually (the government also wants to expand double taxation, which also is contrary to the tax-income-only-once principle of a pure flat tax).

Reality Will Curb Trump’s Protectionist Fantasies

I said there was no way Trump would last through the early primaries.  I belittled the prospect of Trump even attending the convention, much less accepting the Republican nomination.  And I was cavalier in my certainty that Trump would be making a concession speech early Tuesday night.  In other words, by Washington’s standards, I have established credibility on the subject. 

So you should feel reassured that I am less bearish about the direction of President Trump’s trade policy than I probably should be given candidate Trump’s bellicose campaign rhetoric.

The trade policies Trump outlined in broad strokes on the campaign trail would – to put it mildly – devastate the economy.  For example, Trump has said he would:

  • impose duties on 35 percent on imports from Mexico and 45 percent on imports from China;
  • impose special taxes on U.S. companies that incorporate foreign components or labor into their production or assembly operations;
  • tear up the North American Free Trade Agreement – or at least renegotiate what he calls “the worst trade deal ever negotiated,” and abandon the Trans-Pacific Partnership, which he calls a “rape of our country”; 
  • declare China a currency manipulator and impose countervailing duties to mitigate the export price advantages that practice allegedly bestows;
  • use tax policy, protectionism, and the threat of more protectionism to compel China, Mexico, and all of the other countries with whom the United States runs bilateral trade deficits to buy more from U.S. producers and sell less to U.S. consumers in order to achieve a state of balanced trade;
  • tax manufacturing companies that lay off workers.

The list of angry, knee-jerk, foolish ideas goes on and on. If you take candidate Trump at his word, U.S. trade policy is going to be an unmitigated disaster.

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