Steve Clemons posts a heartening little video of Bush père’s National Security Adviser Brent Scowcroft responding to Steve’s question “What do you think about Cuba?” It’s a rare occasion for foreign policy folks to take heart and ponder whether the forces of reality may not be making progress on some issues, at least:
More common sense on Cuba here.
It seems that we will have some company on Thursday for the 2008 Friedman Prize Dinner in New York City. I’ve met these Bolivarian groups before in similar circumstances. Don’t expect much dialogue from them.
Cato Unbound’s May edition discusses the resource curse. Numerous studies confirm that countries rich in natural resources tend to be poor in property rights, individual liberty, and the rule of law. Is this just a deep, and deeply depressing, feature of the world we live in? Or can wealthier countries (which make up the market for most of these resources) and international institutions somehow intervene to alleviate or even lift the resource curse?
Philosopher Leif Wenar opens up the discussion by charging that you — yes you — are almost certainly the recipient of stolen goods, resources that clearly shouldn’t have belonged to the dictators who first sold them. Wenar then offers a simple but provocative solution to the resource curse, one that will hold kleptocracies responsible for their thefts.
The discussion will feature Cato senior fellow Andrei Illarionov, the former chief economic advisor to Vladimir Putin; journalist and historian John Ghazvinian, author of Untapped: The Scramble for Africa’s Oil; and Washington University political philosopher Christopher Wellman, an expert in matters of international justice. Could Wenar’s proposal succeed? What are the obstacles along the way? What else, if anything, can developed countries do to end the resource curse? Be sure to check out Cato Unbound throughout the week, as discussion develops over one of the most pressing humanitarian issues of our time.
President Bush addressed the Council of the Americas yesterday, a business organization whose stated goal is to promote democracy and free markets in the Americas. Among the different subjects he touched in his speech, Bush highlighted the work of the Millennium Challenge Account (MCA) in Latin America.
The MCA’s goal is to provide bilateral aid to countries whose policies promote good governance and economic freedom. In Latin America, some of the standard bearers of good governance and economic freedom according to the MCA are Honduras, Nicaragua and Paraguay.
Bush proudly said in his speech that “In Paraguay, we’re working… with local leaders to reduce the cost of starting new businesses.” It sounds quite good, but when you look at the MCA’s Threshold Quarterly Report for Paraguay, you find among the accomplishments of the program this:
The Finance Ministry conducted simulated purchases to detect firms not following local tax regulations, resulting in the suspensions of more than 70 businesses. The business suspensions received significant positive media coverage and have generated greater tax compliance overall.
It sounds like U.S. aid money is being spent to shut down businesses in Paraguay. That hardly fits my idea of encouraging economic freedom in Latin America.
Not content with a protected near monopoly of the domestic market, American sugar producers are demanding that Congress make their pot of subsidies and protection even sweeter.
Chairman of the House Agriculture Committee, Rep. Colin Peterson (D-Minn.), is pushing language in the latest proposed farm bill that would raise domestic price supports for sugar and mandate that sugar imports be used for ethanol production.
His proposals would virtually lock in an 85 percent share of the U.S. market for domestic sugar beet and cane growers, even though a number of foreign countries can grow sugar more cheaply than most American growers. And by the way, did I mention that Rep. Peterson’s district is among the nation’s top producers of sugar beets?
The Bush administration, to its credit, opposes Peterson’s changes in the farm bill. The sugar industry, of course, loves the idea. A spokesman for the pro-protection American Sugar Alliance told this morning’s Wall Street Journal, “We have an administration that seems more interested in supporting foreign producers, than producers right here in America.”
Notice the sugar industry doesn’t mention American consumers. U.S. agricultural policies should not be about favoring “our” producers over “theirs,” but about advancing such national interests as freedom, prosperity, and a more peaceful world. As we’ve explained in detail at the Center for Trade Policy Studies, the U.S. sugar program favors American sugar producers primarily at the expense of the rest of America. American families pay higher prices at the store, while U.S. producers that use sugar as an input — bakeries, food processors, restaurants, candy makers, etc. — incur higher costs because of our sugar program.
As we read daily in the newspaper about soaring food prices, this Congress is the verge of passing a farm bill designed explicitly to raise domestic food prices.
A letter writer in the Washington Post complains about this Post editorial, which criticized the repression in Cuba, particularly the lack of freedom of expression and the right to emigrate. The writer declares,
Cuba is managing its economy and is making incremental changes and reforms within its socialist and human-needs-oriented system. The U.S. government and The Post shouldn’t lecture Cuba when we have our own problems with the economy, the budget, health care, infrastructure and our moral standing in the world.
I’ve just published a book, most of whose 300 pages are devoted to criticisms of the U.S. government on a far wider range of issues than that, so I’m no knee-jerk defender of any government, much less of the Bush administration. But let’s take a closer look at the writer’s claims:
Cuba is managing its economy…
Well, every country manages its economy in some sense. The Cuban government has managed to turn a beautiful country of tropical beaches 90 miles from North America into one of the poorest countries in the world.
…and is making incremental changes and reforms…
Yes, as the Post editorial noted:
In the past few weeks, Cuban President Raúl Castro has introduced a handful of micro-reforms to the oppressive and bankrupt regime left behind by his brother. Cubans are now officially allowed to buy cellphones, computers and microwave ovens; state workers may get deeds to apartments they have been renting for decades; and farmers may be able to sell part of what they grow at market prices. The measures won’t have much impact (though they have evidently annoyed the officially retired Fidel Castro): The vast majority of Cubans can’t afford to buy electronic goods, and the agricultural reforms fall short of steps taken years ago by North Korea.
So reforms are good. Wake me when they reform more than North Korea.
In numerous unsigned editorials, The Wall Street Journal has argued that cutting the federal funds rate to 2% from 5 1/4% last September has been the main reason prices of crude oil and food commodities have soared in recent months. Such commodities are priced in dollars and the dollar was generally falling through February, though not in the past two months (even though the funds rate was reduced by one percentage point).
An April 28 editorial, “The Fed’s Bender,” notes that “since 2003 the dollar price of oil has climbed far more rapidly than the euro price — 273% in dollars, compared to 146% in euros.” It is not likely that the whole 2003-2008 picture reflects “the European Central Bank’s sounder monetary management,” as the editorial implies. The euro had dropped to below parity with dollar until late 2002. And the fed funds rate was repeatedly increased from 1% in 2003 to 5 ¼% in mid-2006 (well above the ECB’s equivalent 4% rate). The euro rose partly because it had first fallen, but also for reasons other than central bank interest rates (economists have no reliable model for forecasting floating exchange rates).
The editorial boldly concludes that “had the dollar merely retained the same purchasing power as the euro, today’s price of oil would be below $70 a barrel.” That is a counterfactual exercise that makes little sense.
Even if we accept the half-true premise that the dollar-euro exchange rate is sensitive to relative short-term interest rates, the dollar might have “retained the same purchasing power as the euro” by having the ECB lower interest rates to 3% and the Fed to keep ours at 3%. Or the Fed might have kept the funds rate at 5% and the ECB at 4%. Although either option might have stabilized that particular exchange rate, they would not have had the same effect on global economic growth and therefore on the world demand for oil.
If oil had been priced in dollars and the euro had not appreciated against the dollar, then the euro area would not have been as insulated as it was against the rising cost of oil. Because demand is responsive to price (particularly business demand), Europe would have bought less oil than it did. Or, to use the editorial version, if the U.S. still faced $70 oil then we would try to buy more. Either way, the price in dollars would not have remained the same.
In The Wall Street Journal on April 15, Martin Feldstein of Harvard took a position between Makin and Chapman, saying the Fed should have left the federal funds rate at 2 1/4%, because a lower rate would cause “rising food and energy prices.” Feldstein told The Guardian the dollar had to fall further on April 11, so the link he envisions between Fed policy and commodity markets is not through exchange rates (I’ll discuss that in a later post), but just upside speculation alone:
Lower interest rates induce investors to add commodities to their portfolios. When rates are low, portfolio investors will bid up the prices of oil and other commodities to levels at which the expected future returns are in line with the lower rates.
But investors go short as well as long–betting the price will fall– and they can use credit for that too.
The only reason to make a leveraged bet that the price of oil, gold or corn will go higher is if you expect the prices to rise by enough (during the holding period) to exceed the interest expense.
Ignoring trading costs, if you can borrow at 5% to invest in something whose price is expected to rise by 8% that may look like easy money. Yet oil futures are cheaper than near-term spot prices, and gold has recently fallen by about 13%, so momentum trading is dangerous. It is properly called “greater fool investing” – just like paying too much for a Las Vegas condo on the assumption that some greater fool will later pay even more.
It seems unlikely that today’s quarter-point cut in the fed funds rate will result in lower margin rates for commodity traders. But even if it did that is not nearly enough to make a significant difference for more than a day or two.
U.S. politicians seem equally angry with upside “speculators” and downside “shorts,” but it is the contest between the two that constantly gropes for the right price.
I am shorting oil through an exchange-traded fund (DUG), and shorting precious metals through a mutual fund (SPPIX). I’m also slightly long the dollar (UUP). Don’t try this at home without a net. But if I win those bets, the world economy wins too.
In The Wall Street Journal on April 29, another AEI economist, John L. Chapman, took the exact opposite position from John Makin. Chapman suggested the Fed “should soon begin a series of rate increases.” The title was “The Fed Must Strengthen the Dollar,” but that is not what he wrote. Chapman just advocated “a stable dollar.”
The dollar was stable in March and April. The Fed’s index of the dollar’s value against a broad basket of currencies (Jan. 1997=100) was 95.84 on March 6 and 95.81 on April 29. The index against major currencies (1973=100) remained close to 70. That was just two months, of course. But those were the months when we were deluged by editorials blaming rising prices of food and oil on “the falling dollar.” In any case, if the goal is being achieved with current Fed policy, then changing that policy would mean deviating from that goal.
Chapman, like some other economists, sees “inflation warnings” in rapid growth of a measure of money supply (or demand) known as MZM (money with zero maturity), which is largely driven by institutional money market funds. These short-term investments tend to expand when corporations and financial fiduciaries are nervous about investing longer-term, and therefore park more cash in money market funds for security.
The trouble with using MZM as an omen of inflation is that it has never worked.
MZM grew rapidly in 2001, during a recession, but MZM was nearly flat in 1973 when inflation began to explode. MZM fell from $854.3 billion in September 1978 to $827.3 billion in April 1980, yet this was a period of rapidly escalating inflation. Core inflation, excluding food and energy, reached 8.5% in the year ending December 1978, then 11.3% and 12.2% in the following years.
There may be an argument for raising the fed funds rate whenever oil and food prices rise, but MZM is not it.
Yon Goicoechea, leader of the pro-democracy student movement in Venezuela, has been awarded the 2008 Milton Friedman Prize for Advancing Liberty. Under Goicoechea’s leadership, the student movement organized mass opposition to the erosion of human and civil rights in Venezuela and played the key role in defeating Hugo Chávez’s bid for a constitutional reform that would have turned the country into a dictatorship. Goicoechea’s vision of optimism, tolerance, and modernity has breathed new life into efforts to defend basic freedoms in Venezuela and elsewhere in Latin America where freedom is threatened.
Much as I hate to rain on my colleague Juan Carlos Hidalgo’s understandable happiness at the decriminalization of personal consumption/possession of small amounts of drugs, this doesn’t exactly represent a ray of hope in Argentina’s otherwise gloomy policy mix. Not because I believe in the War on Drugs – I can’t imagine anybody at Cato does – but because it was a court that reached this decision instead of a policymaking body.
Imagine the outcry if the U.S. Supreme Court simply decreed a policy it didn’t like to be unconstitutional – I know, with Justices Stevens and Kennedy at the apogee of their powers, it’s not a far stretch. Better yet, recall the poison the Court injected into our legal and political systems when it short-circuited the political process by inventing a right to abortion in Roe v. Wade (again, I’m not saying anything about the underlying policy arguments).
So it is here: Instead of having the Argentine Congress change the law, the nation’s Supreme Court (by a vote of 4-3) simply decreed that criminalizing drug use is unconstitutional. Reports are still sketchy, but this sounds like precisely the kind of judicial fiat developing (or any) countries need to avoid if they want to strengthen the rule of law.
Venezuela’s food programs
Five Central American presidents have asked Hugo Chávez for advice in supplying food to their populations. According to Honduras’ president Manuel Zelaya, “Venezuela has many [food] programs that are worth taking a look at.”
Tell that to the thousands of Venezuelans who every day wait in line at supermarkets and stores for hours in order to get simple items such as milk or meat. Hugo Chávez’s policies (such as price controls) have caused serious shortages in a country that is awash with oil money.
I’m sure Central Americans are better off without Chávez’s advice.
According to HealthLeaders Media:
South Carolina-based Companion Global Healthcare added three Singapore hospitals to its network. The deal now allows Americans access to medical and surgical services at ParkwayHealth operated hospitals at pre-negotiated, in-network rates lower than those of U.S. hospitals…
David Williams, consultant and cofounder of MedPharma Partners LLC[, notes,] “It may be a bit of a wake-up call to the local hospitals in South Carolina, putting them on notice that they are facing a broader set of competitors.”
More than one million members of Blue Cross Blue Shield and BlueChoice HealthPlan of South Carolina now have access to the three Singapore hospitals—Mount Elizabeth, Gleneagles, and East Shore—at preferred network rates. The hospitals are accredited by the Joint Commission International, the affiliate of The Joint Commission.
Competition is healthy. (You know what? That’s catchy.)
This week marks the 10-year anniversary of El Salvador’s adoption of a private social security system. Following the example of Chile 17 years earlier, El Salvador moved from a government-run (and bankrupt) pay-as-you-go system to one of individual accounts for workers administered by private operators. Salvadorians are free to choose who runs their pension accounts as well as the conditions of their own retirement.
Today, the combined value of the pension operators’ assets — that is, the savings of the Salvadorian workers — represents 21.5 percent of the country’s GDP.
An editorial yesterday in the local newspaper El Diario de Hoy lauds the success of the reform and credits Cato’s José Piñera as the father of the “pension revolution.”
The worse, the worser and the worst. Those are the choices confronting Paraguayans this Sunday when they head to the polls to elect a new president.
The leading candidate is Fernando Lugo, a former Catholic bishop who entered politics last year and endorses Hugo Chávez’s “socialism of the 21st century.” Running behind him in the polls is Lino Oviedo, an authoritarian retired general who spent 10 years in prison after leading a failed military coup in 1996. In third place is Blanca Olevar, of the ruling Colorado party, which has governed Paraguay without interruption for 61 years—longer than any other party in the world. The Colorado party is one of the most corrupt political organizations in Latin America (and that’s saying something). Fifteen out of its 20 leading Senatorial candidates—including the current president Nicanor Duarte—have been investigated for corruption.
Paraguay is one of the poorest countries in Latin America. Its GDP per capita (PPP adjusted) in 2006 was only $4,040. During 1995-2005, Paraguay was the world’s 10th slowest growing economy at 1.2 percent a year. Lack of an independent judiciary, crippling regulations on labor and businesses, and widespread corruption are the primary reasons why Paraguay is stuck in poverty.
Unfortunately things might get worse. This has been the bitterest political campaign since the country went back to democracy in 1989. President Duarte denounces that Venezuelan and Ecuadorean elements are within Paraguay ready to start violence once the Colorado party claims victory on Sunday. Candidate Lugo warns that the only way for him to loose is through fraud, and calls his sympathizers to be ready to go into the streets. In Paraguay there’s no runoff election, so Sunday’s winner will automatically become the next president.
This election has been mostly neglected by the international media. That could change on Sunday night.
A major pharmaceutical company is moving its tax domicile to Ireland because the U.K.’s corporate tax systems is too burdensome. This story from the Guardian is a great example of tax competition, of course, but it also highlights the fact that governments are only subject to competitive pressure if taxpayers have the freedom to shift economic activity to jurisdictions with better tax law - and they have the ability to benefit from those better laws. Sadly, American companies no longer have this freedom thanks to “anti-expatriation” or “anti-inversion” laws enacted by greedy politicians:
Shire, the country’s third biggest drugmaker, has intensified the debate over Britain’s corporate tax regime with plans to move its tax base to Ireland from the UK. The FTSE-100 company said it was applying to a court to create a new holding company incorporated in tax-haven Jersey and would become tax resident in Ireland, where corporate tax rates are less than half those in the UK. …its board of directors will hold meetings in its Dublin office once the tax residence move gets court approval. Most importantly, the move means it will be subject to an official corporate tax rate of 12.5%, compared with 28% in the UK. …Business lobby group the CBI said Shire’s decision deepened its concerns about the UK corporate tax system. “We are particularly worried that an uncompetitive corporate tax system is spoiling the UK’s attractiveness as a place to do business, and that other internationally-mobile firms will follow Shire’s path,” said CBI director-general Richard Lambert. Last month, technology giant Yahoo announced it was moving its European headquarters from London to Switzerland to increase competitiveness and deliver “efficiencies”. A recent survey by accountancy firm KPMG blamed complex rules and a mass of legislation for putting the UK in the bottom half of a league table of the most attractive places to do business in Europe. The study ranked Cyprus, Ireland and Switzerland top for their combination of easy-to-understand rules, low tax rates and stable fiscal laws. The UK came 12th out of 22 countries for the attractiveness of their domestic tax regimes.
The good news, according to Tax-news.com, is that newly-elected Prime Minister Silvio Berlusconi wants to reduce Italy’s top income tax rate from 43 percent to 33 percent. The bad news is that he made similar promises the last time he held office, but never delivered. One can only hope that this time he is more serious about improving Italy’s economy:
Italy’s evergreen centre-right leader Silvio Berlusconi, is set to return for his third stint as the country’s Prime Minister following his recent election victory, and has promised to reduce Italy’s tax burden… Berlusconi has also pledged to axe other taxes, including an overtime levy, a tax on annual bonuses, and a tax on car ownership, and, before his five year term is out, he wants the top rate of income tax reduced from 43% to 33%. Ultimately, Berlusconi is targeting a reduction in the country’s overall tax burden to less than 40% of gross domestic product from its current level of more than 43%.
Yesterday in the Washington Post, AFL-CIO’s president John Sweeney rhetorically asked “How many murders are ‘acceptable’?” regarding the union killings that have been used as argument by Congressional Democrats to delay indefinitely a vote on the FTA with Colombia. “I can’t answer… with a number other than zero,” stated Sweeney.
That’s good posturing. Sweeney presents these killings—which have dropped by nearly 90 percent since President Alvaro Uribe took office—as a clear sign of violence against union activity in Colombia. However, the evidence shows otherwise.
In an op-ed last Friday in the Boston Globe, Edward Schumacher-Matos, a visiting professor for Latin American studies at Harvard University, writes that:
The number of convictions now being won in the union’s own cases reveals that perhaps one-fifth, and almost certainly less than half, of the killings had to do with unionism.
Of convictions won in 87 cases since the first one in 2001, almost all for murder, the ruling judges found that union activity was the motive in only 17, according to the attorney general’s office. The judges found 15 of the cases had to do with common crime, 10 with passion, and 13 with being guerrilla members [emphasis added. No motive was established in 16 of the cases.
The unions don’t dispute the judicial findings, and deep in their reports say that they, in fact, have no idea of suspect or motive in 79 percent of their cases going back to 1986. The killings, in other words, are isolated and not part of a campaign against unionizing.
As we can see, far from being a targeted campaign against union activity, the killings of union members in Colombia are mostly part of that country’s sad history of regular violence, which also affects teachers, politicians, journalists, etc.
It’s time to get the facts straight in this debate.
According to James Hansen, the Paul Revere of global warming, the safe level for CO2 may be 350 ppm. Hansen is concerned that “ice sheet disintegration, vegetation migration, and GHG release from soils, tundra or ocean sediments, may begin to come into play on time scales as short as centuries or less.” But currently the atmospheric concentration is 385 ppm. The 350 ppm level was reached twenty years ago in 1988, the same year that James Hansen sounded the alarm over global warming at a Congressional hearing.
Is the world better off today compared to 1988?
Let’s check:
Much of these improvements are due to economic growth and agricultural activity that fueled the rise of CO2 concentrations beyond 350 ppm. Because of technological change, it is likely that a portion of these improvements would have occurred absent any economic growth (as pointed out in the book, The Improving State of the World ). But had CO2 concentrations been capped at 350 ppm, we would have to forgo many of the above improvements in the quality of life, and not only in the developing world.
But would we want to go back to the world of 1988 — or even 1998 for that matter?
If we can go back to 350 ppm without giving up the real and tangible advances in human well-being that have accrued since that “benchmark” was passed, I’d have nothing against that, but based on the precautionary principle, one needs a stronger reason than the speculative catastrophes that Hansen is concerned “may begin to come into play on time scales as short as centuries or less,” whatever that means.
While most other East European nations have adopted pro-growth flat tax systems, Hungary and Poland are still burdened by class-warfare systems that penalize people for contributing more to economic performance. The Budapest Times, however, reports that Hungary’s small parties may combine to push through an 18 percent flat tax:
MDF leader Ibolya Dávid called for opposition parties to attend talks on 15 April to work out details of a bill to submit to parliament by May. The party wants to emulate regional peers such as Slovakia and Romania by introducing a flat 18% personal income tax to reduce a tax burden it called “unfairly high”. The Free Democrats (SZDSZ) and main opposition party Fidesz - along with its ally the Christian Democrats (KDNP) - have said in the past that they would favour a flat tax. …The MSZP has only 190 seats in the 386-seat parliament, meaning that the opposition parties could force through a flat tax bill by banding together. Hungary is ranked as having the second-highest tax burden for single people, behind Belgium, amongst the members of the Organisation for Economic Cooperation and Development (OECD). Many feel the high burden - made worse in 2006 when the government hiked taxes as part of its economic reforms - damages Hungary’s regional competitiveness.
Meanwhile, the Polish government already has promised to implement a flat tax, but a key official has suggested that the new system may be implemented in 2009 rather than in 2010 or 2011 as originally planned. Because of its size and geography, Poland’s shift to a flat tax would be a momentous development and could sharply increase the pressure for pro-growth reforms in Old Europe:
According to Zbigniew Chlebowski, head of ruling Civic Platform’s (PO) parliamentary club, there is a possibility of introducing a flat tax rate as early as 2009. Chelbowski said that Prime Minister Tusk supports this option and is ready to fight President Kaczynski should he veto it. Chelbowski, however, did not give a concrete rate of the possible flat tax, but stressed that it shall surely be lower than 18 percent, because such a rate would be higher than the present tax rates. The final decision is to be made in July or August. The ruling Civic Platform had originally planned to introduce the new tax in 2010 or 2011.
Chile’s Central Bank has finally decided to intervene in the local currency market in order to avoid a further appreciation of the peso against the U.S. dollar. In doing this, Chile joins a monetary policy trend that includes most Latin American countries, particularly Argentina, Bolivia, Peru, Colombia, Costa Rica and Guatemala.
Until recently, Chilean monetary policy was regarded as an example for all Latin America. Chile was mentioned frequently — especially by defenders of “monetary sovereignty” — as a model of how a Latin American country can have both a national currency and monetary stability.
However, alarm bells started ringing last year when inflation tripled to almost 8 percent, mainly because of an excessive increase in public spending by the government of Michelle Bachelet. Now, by deciding to abandon the historic policy of free floatation of the peso, Chile’s Central Bank further compromises this year inflation’s target.
Aiming for a cheaper peso will prove very expensive for Chileans.
The Organization for Economic Cooperation and Development is infamous for its anti-tax competition campaign. Acting on behalf of uncompetitive nations such as France and Germany, the Paris-based bureaucracy even has a blacklist of low-tax jurisdictions and wants those “tax havens” to be subjected to financial protectionism. Yet a top OECD tax official just confessed that tax competition is driving tax policy in the right direction by pressuring governments to lower tax rates, as noted in this Thomson Financial News report on the Forbes website:
Chistopher Heady, head of the OECD’s centre for tax policy and administration said…whilst corporate tax rates have fallen in Europe, revenues have not. ‘It is likely that corporate tax revenue will eventually start falling,’ he said at the Brussels Tax Forum. He said that combined with decreasing tax income from high earners…this could lead to a combination of taxes which would be more beneficial for GDP growth. ‘The pressures of tax competition may lead to a tax mix that is better for growth,’ he said.
The OECD logic is remarkable. The bureaucrats admit that tax competition is producing positive results. Heck, an earlier OECD report admitted that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.” Yet rather than celebrate tax competition as a liberalizing force, the bureaucracy wants to sanction and penalize jurisdictions with pro-growth tax systems.
Unlike most of its neighbors, Hungary is still saddled with a discriminatory tax regime, leading to high tax rates on productive behavior and a big underground economy. Fortunately, the collapse of the current Hungarian government may pave the way for a flat tax:
Small Hungarian opposition party the Hungarian Democratic Forum Thursday said it would attempt to force the introduction of a flat tax after a coalition split this week raised the prospect of a minority government. “The withdrawal of the (junior coalition) Alliance of Free Democrats has opened up the possibility of introducing a flat tax from 2009, since this gives the parliamentary majority for the decision,” the party said in a statement. Free Democrat leader Ibolya David called for opposition parties to attend talks on April 15 to work out details of a bill to submit to parliament by May. The party wants to emulate regional peers such as Slovakia and Romania by introducing a flat 18-per-cent personal income tax to reduce a tax burden it called “unfairly high.” The Free Democrats and main opposition party Fidesz - along with its allies the Christian Democrats - have said in the past that they would favour a flat tax. …The Socialist Party has only 190 seats in the 386-seat parliament, meaning that the opposition parties could force through a flat tax bill by banding together. Hungary is ranked as having the second-highest tax burden for single people, behind Belgium, amongst the members of the Organization for Economic Cooperation and Development (OECD). Many feel the high burden - made worse in 2006 when the government hiked taxes as part of its economic reforms - hits Hungary’s regional competitiveness. …The tax burden also credited with maintaining the huge black economy. Estimates of the size of the black economy vary from the official figure of 18 per cent of gross domestic product to as high as 50 per cent among some analysts.
The decision of Argentina’s president Cristina Fernández to raise the export taxes on grain producers has sparked protests all over the country, putting the country once again in international headlines. But punishing exporters is not the main story, it’s the economic mess that the last two administrations have created in that beautiful country.
The previous government of Nestor Kirchner–Fernandez’s husband–thought that he could devalue his way out of the crisis of 2001. Since that year, the Central Bank of Argentina has consistently applied a weak peso policy, which along with a massive increase in public spending, has resulted in runaway inflation. Last year, the Argentine peso was the only Latin American currency that didn’t appreciate against the U.S. dollar; in fact it depreciated slightly. The weak peso thus served as a subsidy to exporters, including the farmers now protesting the tax hike.
So we actually have the Argentine government subsidizing and confiscating agricultural exporters at the same time, while creating inflation (which has led to price controls, bans on exports, and other economic beauties). And now, in response to the protests, the Fernández administration has announced new subsidies to farmers.
Only in Argentina.
An article in the Financial Times notes that the income tax imposed by the national government in Switzerland takes no more than 11.5 percent of a taxpayer’s income, and that most taxation (and spending) takes place at the canton and municipal level. This is genuine federalism, unlike the United States, where the national government is the dominant force in fiscal policy.
A big advantage of real federalism is greater tax competition, which — as the article notes — leads to lower tax rates and less government waste:
The federal constitution gives significant powers both to Switzerland’s 26 regional cantons, and to the individual towns and villages in them. …A handful of cantons have used ultra-low taxation to attract wealthy individuals to stimulate economic growth. Among the best known are Zug and Schwyz, both not far from Zurich. Most recently, Obwalden, a small, mountainous canton near Lucerne, slashed tax rates to match its low-tax rivals.
The cantonal levy is complemented by a local tax, calculated as a percentage of the cantonal level. Again, rates vary dramatically, even between communities in the same canton. For example, in the canton of Zurich, Switzerland’s most populous, local tax ranges from roughly 70 per cent of the cantonal rate in the wealthy and relatively low-tax towns and villages along Lake Zurich’s so-called Gold Coast, to more than 120 per cent in poorer and much more financially stretched communities in the hinterland. The local and communal taxes are capped by a federal tax, payable separately and at a different time of the year, that rises gently to peak at 11.5 per cent for the highest incomes.
Although three levels of taxation might sound expensive, personal taxes in Switzerland are relatively modest compared with much of Europe. Rates in the ultra-low-tax cantons can be as low as 16 per cent. Even “average” cantons tend to charge less than elsewhere in Europe, thanks to the cantonal tax competition that the Swiss say encourages cantons and local administrations to maximise efficiency.
Two stories from the British press highlight regulatory excess from the Brussels bureaucracy. The Times reports that a winemaker is being harrassed because he is selling his wares in 37.5cl bottles instead of the 50cl or 35cl sizes allowed by European regulation:
An award-winning winemaker whose wares are sold at the royal palaces is facing a £30,000 bill after European bureaucrats ruled that he was using the wrong-shaped bottles. Jerry Schooler, who sells 400,000 bottles of fruit wines and mead a year, has been threatened with prosecution over his determination to use traditional measurements. The proprietor of the Lurgashall Winery in West Sussex, has been told to halt the sale of beverages such as mead, silver birch wine and bramble liqueur in 75cl and 37.5cl bottles. If he continues to sell them, he could be taken to court under a new EU directive that permits the sale of such products in 70cl, 50cl or 35cl measures only. …Mr Schooler now faces costs of about £30,000 to change his production line. “We are going to have to change all our bottling, the labels, machinery, boxes and maybe the corks as well and it is going to cost me thousands to do it,” he said. …West Sussex County Council’s trading standards department said that the winery was bound by EU Directive 2007/45/EC, which was drawn up in September to “lay down rules on nominal quantities for prepacked products”. It said the directive meant that the use of 37.5cl bottles for liqueurs was illegal.
The absurdity of this story makes one wonder how such a regulation came into existence. Did a bureaucrat wake up on the wrong side of the bed one day and decide that wine should only be sold in bottles of certain sizes? Is there some sort of crazy health or safety rationale for the regulation? Speaking of which, that’s the alleged reason for a regulation that is forcing English bus companies to make customers disembark in the middle of routes. This foolish regulation apparently is designed to prevent driver fatigue, but, as reported by the Sun, the practical effect is to make people waste their time:
Thousands of passengers are being forced to hop off buses midway through journeys to comply with barmy EU laws. A Brussels ruling has banned local services longer than 30 miles to ensure drivers don’t spend too long at the wheel. As a result, drivers have to pull in as they hit that limit and order everyone off their bus. They then change the route number on the front and invite passengers to jump back on before resuming the trip. …Western Greyhound has split its Newquay to Plymouth route in three — even though it uses a single driver throughout. Passengers must buy three tickets and break their journey twice. Managing director Mark Howarth said: “It’s a farce. We have to kick customers off as soon as the driver hits the 30-mile limit. “Often it’s in the middle of nowhere. Passengers think we’re crazy.”
