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Archive for June 16th, 2010

I don’t often agree with the statist president of the European Commission, but Mr. Barroso may be right when he warns that some nations are at risk of descending back into dictatorship. But while he may be correct in his diagnosis, his proposed solution is more of the policies – redistribution, handounts, bailouts, and subsidies – that have caused nations to get in trouble in the first place. At best, this approach postpones the day of reckoning – but it also causes a much bigger collapse.

During my recent visits to Europe, I was surprised by the level of pessimism from all segments of the population. The general assessment is that Europe is heading downhill and that there is little hope of changing direction because too many people have been convinced by politicians that they are entitled to mooch. But, as Margaret Thatcher famously warned, the problem with socialism is that you eventually run out of other people’s money. That is what is happening in Europe. But rather than sober up, the Greeks and others are rioting in hopes of finding new victims to consume. Many people I talked to expressed concern that this attitude eventually would cause economic collapse and lead to some sort of anti-democratic rule. The optimists (if you can call them that) think the result may be some sort of soft despotism dictated by Brussels and enforced by bribes from (mostly) German taxpayers. Others are more dour and fear the rise of more malignant forms of dictatorship.

Here’s a blurb from the U.K.-based Daily Mail:

Democracy could ‘collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned. In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso set out an ‘apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money. The stark warning came as it emerged that EU chiefs have begun work on an emergency bailout package for Spain which is likely to run into hundreds of billions of pounds. …Leaders are expected to thrash out a rescue package for Spain’s teetering economy. Spain is expected to ask for an initial guarantee of at least £100 billion, although this figure could rise sharply if the crisis deepens. News of the behind-the-scenes scramble in Brussels spells bad news for the British economy as many of our major banks have loaned Spain vast sums of money in recent years. Germany’s authoritative Frankfurter Allgemeine Newspaper reported that Spain is poised to ask for multi-billion pound credits. Mr Barroso and Jean-Claude Trichet of the European Central Bank are united on the need for a rescue plan. The looming bankruptcy of Spain, one of the foremost economies in Europe, poses far more of a threat to European unity and the euro project than Greece. Greece contributes 2.5 percent of GDP to Europe, Spain nearly 12 percent.

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The Center for Immigration Studies recently put out a study arguing that immigration has had negative effects on California. One of their measures was a comparison of how many people in the state were receiving some form of welfare compared to other states. I found that data (see Table 3 of the report) very interesting, but not because of the immigration debate (I’ll leave others to debate that topic). Instead, I wanted to get a better understanding of the variations in government dependency. Is there a greater willingness to sign up for income redistribution programs, all other things being equal, from one state to another? The “all other things being equal” caveat is very important, of course, since the comparison produced by CIS may simply be an indirect measure of the factors that determine welfare eligibility. One obvious (albeit crude) way of addressing this problem is to subtract each state’s poverty rate to get a measure of how many non-poor people are signed up for income-redistribution programs. Let’s call this the Moocher Index.

 

A few quick observations. Why is Vermont (by far) the state with the largest proportion of non-poor people signed up for welfare programs? I have no idea, but maybe this explains why they elect people like Bernie Sanders. But it’s not just Vermont. Four of the top five states on the Moocher Index are from the Northeast, as are six of the top nine. Mississippi also scores poorly, coming in second, but many other southern states do well. Indeed, if we reversed the ranking and did a Self-Reliance Index, Virginia, Florida, and Georgia would score in the top 10. Nevada, arguably the nation’s most libertarian state, is the state with the lowest number of non-poor people signed up for welfare.

Let’s now emphasize several caveats. I’m not an expert on the mechanics of social welfare programs, but even I know that eligibility is not governed solely by the poverty rate. Indeed, some welfare programs are open to people with much higher levels of income. This means that a more thorough analysis at the very least would have to include some measure of income distribution by state. Moreover, states use different formulas for Medicaid eligibility, so this index ideally also would be adjusted for state-specific policies that make it easier or harder for people to become dependent. There also are some states (and even colleges) that actually try to lure people into signing up for welfare, which also might affect the results. And I’m sure there are many other factors that are important, including perhaps immigration. If anybody knows of most substantive research in this area, please don’t hesitate to share material.

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Regular readers know that I am a big supporter of international tax competition as a mechanism to limit the greed of the political elite. Unfortunately, the statists are having some success in their efforts to undermine the fiscal sovereignty of low-tax jurisdictions. Even the Swiss have been forced to weaken their human rights policy of protecting financial privacy. So does this mean the politicians from high-tax nations will get more money to spend? Probably not. One reason is that “better” enforcement of high tax rates on saving and investment will have the same economic impact as an increase in tax rates. This, of course, will mean less saving and investment, which translates into slower growth and a smaller tax base. Another reason is that restrictions on the ability to shift economic activity across border to escape oppressive taxation will lead many people to find domestic strategies as a substitute means of protecting their income and assets. An article by a Romanian academic explains further and notes that low-tax jurisdictions will continue to enjoy better economic performance.

It is of course illegal not to declare assets and income held abroad, but the fact that some people are driven to this extreme suggests that in some countries taxes have reached unacceptably high levels. In exactly the same fashion, people are also driven to hide some of their economic activity from the tax man, giving rise to the well known phenomenon of the underground economy. In fact, tax evasion is as old as taxes themselves, and the best way to minimize it is to levy reasonable taxes. International tax evasion and the local underground economy provide the two main escape routes. In modern democratic times, they also set implicit limits to the growth of government. They are both illegal, but the local shadow economy is now so widespread that governments know that they cannot enforce compliance without becoming hugely unpopular (suggesting that high taxes are, in fact, not as widely accepted by the population as some would like to think). Limiting international tax competition looks a much easier bet. However, if high-tax countries are successful in stopping the shift of savings to tax havens by enforcing transparency and information exchange, they will displace, but not halt, tax evasion and fiscal competition. The underground economy, both local and international, will grow. In the meantime, wealthy people and their assets will continue to move from high to low tax environments. Over time, the economically more attractive places will still enjoy much higher rates of economic growth.

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