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Archive for September 24th, 2012

Back in 2010, I wrote about the Free State Project, which is based on the idea that libertarians should all move to New Hampshire and turn the state into a free market experiment.

I was impressed when I spoke at one of their conferences and gave them a plug, but more recently I’m running into people who are so discouraged about America’s fiscal outlook that they’re thinking of moving to some other nation.

Wealthy people seem to prefer Switzerland and the Cayman Islands, while middle-class people mostly talk about Australia and Latin America (mainly Costa Rica or Panama).

But maybe Canada is the place to go. It’s now the 5th-freest economy in the world, while the United States has dropped to 18th place.

I’m a big fan of Canada’s fiscal reforms. On several occasions, I’ve explained how Canadian lawmakers boosted economic and fiscal performance by restraining the growth of government spending.

Indeed, Canada is my main example when I explain why the United States should follow my Golden Rule of fiscal policy.

By allowing the private sector to grow faster than the government, Canada has also been able to implement big tax cuts. Heck, they even privatized their air traffic control system.

Canada’s reforms got some positive attention in today’s Wall Street Journal from Mary Anastasia O’Grady.

Former Canadian Prime Minister Paul Martin has a stern warning for the U.S. political class: Get real about the gap between federal revenues and spending, or get ready for disaster. Mr. Martin knows of what he speaks. In 1993, when he was Canada’s finance minister, his country faced a daunting fiscal crisis. …When the Liberal Party government of Prime Minister Jean Chrétien took power in October 1993, Mr. Martin was charged with pulling his nation out of the fiscal death spiral. He did it with deep cuts in federal spending over two years that amounted to 10% of the budget, excluding interest costs. Nothing was spared. Even federal transfers to the provinces to fund Canada’s sacred national health-care system got hit. The federal government also cut and block-granted money for welfare programs to the provinces, giving them almost full control over how the money would be spent. In the 1997 election, the Liberals increased their majority in parliament. The Chrétien government followed with tax cuts starting in 1998 and one of the largest tax cuts—both corporate and personal—in the history of the country in 2000. The Liberals won again in 2000.

In the U.S., by contrast, we’ve degenerated to the point where the central bank is now financing a disturbingly large share of the deficit.

 Market discipline doesn’t exist in Washington, which has the “privilege” of an accommodating central bank issuing the world’s reserve currency. The big spenders don’t need to pay attention to pesky numbers. …the Fed bought 77% of all new federal debt last year. It is doing so at rock-bottom interest rates. By holding the short-term fed-funds rate low while it buys up long-term securities, Mr. Bernanke is helping our political class ignore the real cost of rising federal indebtedness.

This doesn’t mean we’re at near-term risk of becoming another Argentina or Zimbabwe, but I definitely don’t like the trend. No wonder the Canadian dollar is now stronger than the dollar.

But that’s a separate issue. This post is mostly about fiscal policy and Canada’s outlook.

In the short run, Canada’s a good bet. Reforms have been implemented, and they happened under a left-of-center government and have been continued more recently by a right-of-center government.

We’ve had bipartisanship in the United States as well, but the wrong kind. For the past 12 years, we’ve endured big spenders from both parties. No wonder Canada now ranks higher.

In the long run, though, I’m not sure Canada’s the right choice. I joke about the cold weather, but I’m more concerned about the fact that the burden of government spending remains too high, consuming about 42 percent of economic output. And even though Canada has implemented some pension reforms, it has a government-run healthcare system that will become a greater burden on taxpayers as the population ages.

This doesn’t mean I’m optimistic about the long-run outlook in the United States. Yes, we can fix our fiscal problems if we cap the growth of spending and implement entitlement reform to address the long-run problem, but I’m not holding my breath expecting those policies.

So I’m back to my original plan of finding somebody to give me millions of dollars so I can escape to the Cayman Islands.

P.S. If you’re thinking of sending me a big check, give me some advance notice. To avoid nasty headaches with the IRS, I should go to the Cayman Islands first and then have somebody give me millions of dollars.

P.P.S. On a more serious note, here’s my video highlighting nations – including Canada – that successfully restrained government spending.

P.P.P.S. The Canadian government also deserves praise for resisting global schemes to raise taxes on the banking sector.

P.P.P.P.S. But there are bad people in Canada, such as the politician who escaped to the U.S. for surgery while leaving ordinary Canadians stuck in long waiting lines.

P.P.P.P.P.S. To close on a light note, here’s a satirical article about American leftists trying to escape to Canada after the 2010 elections.

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I’ve written many times about the dangers of a value-added tax. I obviously think it’s a bad idea as an add-on tax, but I also think it’s dangerous as a replacement tax.

Not because it’s a horrible tax from a theoretical perspective (like the flat tax and national sales tax, it’s a single-rate system with no double taxation of income that is saved and invested), but instead because I don’t trust politicians.

The VAT in Europe, for instance, almost surely played a role in enabling the huge expansion in the burden of government spending – thus helping to set the stage for the current fiscal crisis.

All these arguments also are equally relevant to the debate about imposing a carbon tax.

As with the VAT, there are features of a carbon tax that make it a less-destructive alternative when compared to other forms of taxation. The problem is that politicians wouldn’t permanently lower or eliminate any other tax, and the new revenues would be used to further expand the size and scope of the federal government.

Andy Quinlan of the Center for Freedom and Prosperity discusses the issue in a column for Forbes. Here are some key excerpts.

With the economy sputtering toward what can at best be described as a meager recovery, it seems like an obviously poor time to consider raising taxes on any form of energy. …Yet that is also precisely what an unholy coalition of big spending liberals and misguided conservative economists is proposing – to raise taxes on carbon and send the economy spiraling toward another recession. Last month, Rep. Jim McDermott (D-WA) introduced the “Managed Carbon Price Act of 2012,” a bill that would require greenhouse gas emissions to be reduced by 80% from 2005 levels over the next 42 years – ultimately leaving the United States with per capita emissions levels lower than that of Haiti today. …At the fifth annual National Clean Energy Summit held in Las Vegas last month, Senate Majority Leader Harry Reid expressed his hope of enacting a carbon tax by next year. Senate Environment and Public Works Chairman Barbara Boxer went as far as to say that she would like to see it included in a year-end budget deal. …The motives of the left in pushing for a tax are easy to understand, they want more “revenue” to spend. A recent paper from the MIT Global Change Institute estimated one carbon tax proposal would generate $1.5 trillion over ten years, and politicians and the media immediately began to salivate at the idea of using such a tax as an excuse to further expand the burden of government spending. …If the political climate was such that cap-and-trade or other big government carbon regulations were on the horizon, proffering a more economically efficient carbon tax as an alternative might not be a bad strategy from a do-the-wrong-thing-in-the-least-destructive-fashion perspective. But that is not the case. …More generally, the very idea of offering a new tax in exchange for lower rates elsewhere is flawed. Even if leftists agree to lower taxes on income to keep a new carbon tax revenue neutral, there’s nothing to stop them from raising rates in the future. On the other hand, given the love politicians have for taxes, eliminating an entire tax would be much harder. A similar logic can be seen in the experience of Europe, where less economically destructive value-added taxes did not replace income taxes, but instead helped usher in the bloated, unsustainable European welfare states which are today circling the drain.

Wow, Reid, Boxer, and McDermott. That’s like the Three Stooges of Statism.

But this isn’t a laughing matter. Politicians would love to get their greedy hands on $1.5 trillion of new tax revenue. And Quinlan points out in the article that some Republicans are sympathetic to the idea.

Keep in mind, by the way, that $1.5 trillion would be the floor, not the ceiling. As we’re seeing in Japan, politicians can’t resist boosting the rate whenever they want to spend more money.

P.S. Read this if you want to see what happens when politicians get a new source of revenue.

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