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Posts Tagged ‘World Bank’

I don’t like international bureaucracies because they generally push for policies that expand the burden of government and undermine economic growth.

But I recognize that there are some good people who work at these institutions and I’m always willing to acknowledge when they publish good research.

The IMF said that Greece had reached the tipping point where taxes were too high.

The World Bank put together a report showing how anti-money laundering regulations hurt the poor.

The United Nations acknowledged the Laffer-Curve insight that taxes can be too high.

The OECD admitted that income taxes undermine growth and that tax competition restrains the greed of the political class.

The European Central Bank found excessive government spending undermines economic performance.

We can now add some new research to that list. The World Bank has just published a new study highlighting the link between tax complexity and tax corruption.

You can peruse the entire report if you’re so inclined, but here are the key details from the abstract.

This paper seeks to find empirical evidence of a link between tax simplification and corruption in tax administration. …The study includes 104 countries from different income groups and regions of the world. The time period is 2002–12. The empirical findings support the existence of a significant link between the measure of tax corruption and tax simplicity, so a less complex tax system is shown to be associated with lower corruption in tax administration. It is predicted that the combined effect of a 10 percent reduction in both the number of payments and the time to comply with tax requirements can lower tax corruption by 9.64 percent….The positive link between tax simplicity and lower tax corruption has useful policy implications.

There are a few caveats. While people have a greater incentive to rig the system when tax rates are high, the report only addresses this issue tangentially. This is a very unfortunate oversight.

Also, the data show that corruption is higher in developing nations, which is not terribly surprising. Though I think this might be unfair because corruption is narrowly defined so that it’s simply a measure of lawbreaking.

I suspect there are similar amounts of corruption in developed nations, but it takes the form of influence peddling and legislative favors. That’s definitely the mother’s milk of Washington’s sleazy insiders.

And if you look at this chart, this chart, or this chart, there’s no doubt that the internal revenue code is riddled with loopholes.

This video elaborates on the connection between bloated government and legal corruption.

And this video shows how our corrupt tax code could be fixed.

P.S. Just so you don’t think I’m getting soft-hearted about the World Bank, just remember that this is the bureaucracy that put together a tax “report card” that gave nations higher grades for having more punitive fiscal policy.

P.P.S. In the interests of fairness, I am a fan of the World Bank’s Doing Business Index.

P.P.P.S. I’ve written several times about overpaid bureaucrats and fat-cat lobbyists.

Well, here’s a look at per capita personal income in Washington, DC, compared to the rest of America.

You’ll notice that Washington got substantially richer during both Bush Administrations.

But it’s not just the District of Columbia. If you click on this map, you’ll see that a majority of America’s richest communities are the suburbs of Washington.

A lot of fat and happy people living directly or indirectly off your tax dollars.

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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.

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I have a love-hate attitude toward international bureaucracies.

I’m mostly negative about organizations such as the IMF, World Bank, UN, and OECD. In part this is because they are a very expensive burden on taxpayers, but also because they generally push for bad policy.

It’s reprehensible, for instance, that the OECD has allied itself with the Obama Administration to push for class-warfare tax policy. And it’s disgusting that these pampered bureaucrats at the IMF get tax-free salaries while pushing for bailouts and higher taxes.

But I confess that the international bureaucracies sometimes generate good data and produce interesting studies. The World Bank, for instance, showed how the welfare state and excessive government spending are reducing prosperity in Europe. And the European Central Bank also has produced solid research showing that large public sectors undermine economic growth.

One very good source of data from an international bureaucracy is the Doing Business Index, published each year by the World Bank. As you can see from the image (click to enlarge), the United States does relatively well in this ranking.

Since the United States has dropped in the Economic Freedom of the World Index and the World Economic Forum’s Global Competitiveness Report, it’s nice to see that the news isn’t all bad in the international rankings.

The one area where the U.S. gets a very poor score, though, is in the “paying taxes” category. This is yet another reason why we should junk the corrupt internal revenue code and replace it with a simple and fair flat tax.

Hong Kong and Singapore are at the top of the rankings, unsurprisingly. The Nordic nations also do well, which fits with the analysis showing they are very free market in areas other than fiscal policy. And it’s always good to see Estonia with a relatively high score.

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Even though there is a wealth of evidence for the Laffer Curve, statists and other big-government advocates routinely claim that incentives don’t matter.

So I wonder how they’ll react to this new research showing that incentives have an impact on sexual choices. Here are some blurbs from The Economist.

…if you are a poor African teenager, having a sugar daddy is not such a bad deal. Eventually, Mr Right may come along and in the meantime life is, as the term suggests, a lot sweeter than it might otherwise be. Except for one thing. In many parts of Africa, relationships between older men and younger women are one of the main transmitters of HIV. With that in mind, it has often been hypothesised that if teenage girls were given an alternative income—one that might, for instance, allow them to stay on at school—they would be less likely to get infected. It is a plausible hypothesis but one that has not, until now, actually been tested. That lack has just been remedied by Berk Özler, of the World Bank, and his colleagues. In a paper just published by the Lancet, they describe how they conducted a randomised clinical trial of the idea that money, and money alone, can stop the spread of HIV. …In some they and their parents were given small amounts of money each month (between $1 and $5 for the women, and between $4 and $10 for the parents), again decided at random by the computer. In a third set of areas money was doled out in a similar way, but only in exchange for a promise by the woman to attend school. If she failed to do so, no money was forthcoming. …the team found that the unpaid women had suffered more than twice the HIV infection rate experienced by the paid women over the course of the 18 months of the experiment, and four times the infection rate of genital herpes. Intriguingly, there was no difference between the infection rate suffered by those required to go to school and those who received the money unconditionally. …What is abundantly clear, however, was that the money did make women behave differently. They had younger boyfriends than those in the control group, and had sex less frequently. Liberated from the need to find a sugar daddy, they could behave in a safer way. Those attempting to stop the spread of AIDS have, in the past, tried many ways of getting people to change their behaviour in order to reduce the risk of infection. They have extolled, exhorted and even threatened, all to little avail. They have not, though, previously, resorted to bribery. But it seems to work.

Upon reading this, I had several reactions.

  • I first thought being a sugar daddy would be a nice gig, but then I realized that I don’t have nearly enough sugar in my bank account. Life obviously isn’t fair.
  • I then thought that I’m not a fan of the World Bank, but I must admit that this seems to be a reasonably good way for them to spend money.
  • I also wondered why nobody is arresting, harassing, or otherwise going after these SOBs that are infecting the young girls. If I was the father of one of these girls, it definitely would be time for some vigilante justice.
  • Finally, being a policy geek, I wondered whether this powerful example of incentives might get some leftists to draw some obvious conclusions about the need for better tax policy.

But then I came to my senses. It seems that many of the statists I debate and deal with support punitive taxation for reasons of spite and envy. As such, they don’t really care about the impact on either the economy or tax revenues.

And if you’re wondering why they would come to such a crazy conclusion, watch this video – especially beginning about the 4:30 mark.

It’s enough to make you wonder whether they realize that this strategy is self defeating. Heck, even a former socialist President of Brazil noted that there’s nothing to redistribute if some people don’t first produce.

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When Ronald Reagan said that big government undermined the economy, some people dismissed his comments because of his philosophical belief in liberty.

And when I discuss my work on the economic impact of government spending, I often get the same reaction.

This is why it’s important that a growing number of establishment outfits are slowly but surely coming around to the same point of view.

This is remarkable. It’s beginning to look like the entire world has figured out that there’s an inverse relationship between big government and economic performance.

That’s an exaggeration, of course. There are still holdouts pushing for more statism in Pyongyang, Paris, Havana, and parts of Washington, DC.

But maybe they’ll be convinced by new research from the World Bank, which just produced a major report on the outlook for Europe. In chapter 7, the authors explain some of the ways that big government can undermine prosperity.

There are good reasons to suspect that big government is bad for growth. Taxation is perhaps the most obvious (Bergh and Henrekson 2010). Governments have to tax the private sector in order to spend, but taxes distort the allocation of resources in the economy. Producers and consumers change their behavior to reduce their tax payments. Hence certain activities that would have taken place without taxes, do not. Workers may work fewer hours, moderate their career plans, or show less interest in acquiring new skills. Enterprises may scale down production, reduce investments, or turn down opportunities to innovate. …Over time, big governments can also create sclerotic bureaucracies that crowd out private sector employment and lead to a dependency on public transfers and public wages. The larger the group of people reliant on public wages or benefits, the stronger the political demand for public programs and the higher the excess burden of taxes. Slowing the economy, such a trend could increase the share of the population relying on government transfers, leading to a vicious cycle (Alesina and Wacziarg 1998). Large public administrations can also give rise to organized interest groups keener on exploiting their powers for their own benefit rather than facilitating a prosperous private sector (Olson 1982).

In other words, government spending undermines growth, and the damage is magnified by poorly designed tax policies.

The authors then put forth a theoretical hypothesis.

…economic models argue that the excess burden of tax increases disproportionately with the tax rate—in fact, roughly proportional to its tax rate squared (Auerbach 1985). Likewise, the scope for self-interested bureaucracies becomes larger as the government channels more resources. At the same time, the core functions of government, such as enforcing property rights, rule of law and economic openness, can be accomplished by small governments. All this suggests that as government gets bigger, it becomes more likely that the negative impact of government might dominate its positive impact. Ultimately, this issue has to be settled empirically. So what do the data say?

These are important insights, showing that class-warfare tax increases are especially destructive and that government spending undermines growth unless the public sector is limited to core functions.

Then the authors report their results.

Figure 7.9 groups annual observations in four categories according to the share of government spending in GDP during that year. Both samples show a negative relationship between government size and growth, though the reduction in growth as government becomes bigger is far more pronounced in Europe, particularly when government size exceeds 40 percent of GDP. …we provide new econometric evidence on the impact of government size on growth using a panel of advanced and emerging economies since 1995. As estimates can be biased due to problems of omitted variables, endogeneity, or measurement errors, it is necessary to rely on a broad range of estimators. …They suggest that a 10 percentage point increase in initial government spending as a share of GDP in Europe is associated with a reduction in annual real per capita GDP growth of around 0.6–0.9 percentage points a year (table A7.2). The estimates are roughly in line with those from panel regressions on advanced economies in the EU15 and OECD countries for periods from 1960 or 1970 to 1995 or 2005 (Bergh and Henrekson 2010 and 2011).

These results aren’t good news for Europe, but they also are a warning sign for the United States. The burden of government spending has jumped by about 8-percentage points of GDP since Bill Clinton left office, so this could be the explanation for why growth in America is so sluggish.

Last but not least, they report that social welfare spending does the most damage.

Governments are big in Europe mainly due to high social transfers, and big governments are a drag on growth. The question is whether this is because of high social transfers? The answer seems to be that it is. The regression results for Europe, using the same approach as outlined earlier, show a consistently negative effect of social transfers on growth, even though the coefficients vary in size and significance (table A7.4). The result is confirmed through BACE regressions. High social transfers might well be the negative link from government size to growth in Europe.

The last point in this passage needs to be emphasized. It is redistribution spending that does the greatest damage. In other words, it’s almost as if Obama (and his counterparts in places such as France and Greece) are trying to do the greatest possible damage to the economy.

In reality, of course, these politicians are simply trying to buy votes. But they need to understand that this shallow behavior imposes very high costs in terms of foregone growth.

To elaborate, this video discusses the Rahn Curve, which augments the data in the World Bank study.

As I argue in the video, even though most of the research shows that economic growth is maximized when government spending is about 20 percent of GDP, I think the real answer is that prosperity is maximized when the public sector consumes less than 10 percent of GDP.

But since government in the United States is now consuming more than 40 percent of GDP (about as much as Spain!), the first priority is to figure out some way of moving back in the right direction by restraining government so it grows slower than the private sector.

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Welcome Instapundit readers. Thanks Glenn! And speaking of international bureaucracies, readers may want to read this post about the Greek bailout.

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Regular readers know that I’m not a big fan of the international bureaucracies. I don’t like the International Monetary Fund because it encourages bad policy by bailing out nations such as Greece. I don’t like the Organization for Economic Cooperation and Development because it promotes bigger government with its anti-tax competition campaign. And I don’t like the United Nations because it is a wasteful and corrupt bureaucracy, though at least it is ineffective so we don’t have to worry too much about the bad ideas it generates (such as global taxes – see here, here, and here).

If I had to pick my “least despised” international bureaucracy, it would be the World Bank. Yes, it engages in lots of counterproductive income transfers, and yes, it has a long track record of wasting money with foreign aid boondoggles. But unlike other international bureaucracies, at least the World Bank doesn’t try to act like some sort of global economic policymaker.

Moreover, it occasionally is a force for good. The World Bank for years has been actively involved in helping nations develop and implement private Social Security systems. And the bureaucracy’s “Doing Business Index” and “Governance Indicators” help promote market-friendly reforms by publicizing which nations have bloated and inefficient public sectors.

And since I’m feeling temporarily warm and fuzzy about the World Bank, I should acknowledge that their researchers sometimes produce good research. I’m particularly impressed by a new study showing that economic freedom is the key to prosperity. The abstract of the paper summarizes the results.

Reviewing the economic performance—good and bad—of more than 100 countries over the past 30 years, this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes. For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates. In the case of civil and political liberties, the long-term effect is also positive and significant with a differential of 0.3 percentage point. In addition to the initial conditions, the expansion of freedom conditions over time (economic, civil, and political) also positively influences long-run economic growth. In contrast, no evidence was found that the initial level of entitlement rights or their change over time had any significant effects on long-term per capita income, except for a negative effect in some specifications of the model. These results tend to support earlier findings that beyond core functions of government responsibility—including the protection of liberty itself—the expansion of the state to provide for various entitlements, including so-called economic, social, and cultural rights, may not make people richer in the long run and may even make them poorer.

Let’s apply these finding to the United States. Under Bush and Obama, the United States has suffered an expansion in the burden of government and a loss of economic freedom. This means our economy will grow at a slower rate, our incomes will not climb as fast, and our future will be less prosperous. There are real consequences to bad policy.

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I’ve remarked before about how I get especially upset when well-to-do people figure out ways of ripping off taxpayers. Redistribution from rich to poor is not a good idea, but it is far more offensive when the coercive power of government is used to transfer money from ordinary people to the elite.

A good (perhaps “reprehensible” would be a better word to use) example if the scam created by international bureaucracies. The folks who work for entities such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation get wildly excessive compensation packages. To add insult to injury, their income is tax free!

Here are some excerpts from a Richard Pollack column at Pajamas Media.

At the World Bank, Inter-American Development Bank, the African Development Bank, and at the IMF, you find extravagantly paid men and women who masquerade as anti-poverty fighters for the Third World. As one World Bank vice president said upon his resignation: “Poverty reduction is the last thing on most World Bank bureaucrats’ minds.” These global institutions are supposed to act as non-profits, but big salaries and big perks rule as the norm. And you’re paying for them: as the largest single contributor, American taxpayers pick up the tab. By now everyone knows about DSK’s extravagant $420,000 employment agreement that included an additional $73,000 for living expenses — a provision explained thusly by the IMF: “To enable you to maintain … a scale of living appropriate to your position.” …A PJM survey found that a common annual compensation package for senior management at the anti-poverty banks exceeds $500,000 — tax-free. World Bank President Robert Zoellick currently receives $441,980 in base salary and $284,500 in other benefits. Strauss-Kahn’s deputy, John Lipsky, receives $384,000 in base salary plus “living allowances.” …Ten of Zoellick’s deputies receive tax-free base pay of $321,00 to $347,000, plus enjoy an additional $210,000 in benefits. Even mid-level World Bank employees earn well into six digits: the average salary for a professional manager is $181,000, plus $97,000 in benefits. A senior adviser receives on average $238,000 plus $127,000 in benefits. A vice president receives $286,000 plus $153,000 in benefits. The biggest hidden benefits are the off-the-book perks called “living allowances.” These perks can nearly double a stated salary. Of the 2,600 IMF and 10,000 World Bank full-time employees, all receive some form of supplemental living allowances in addition to their base pay. These include home leave grants, dependent allowances, travel perks, and education “grants” for their children to attend private schools. In addition, they offer generous pensions and health insurance policies. According to a U.S. General Accounting Office study, the average cost for these additional perks added $197,300 per employee cost beyond their base pay in 1994 dollars.

The column doesn’t mention my “favorite” international bureaucracy, which is the Paris-based Organization for Economic Cooperation and Development. The OECD’s budget is small compared to some of the other parasitic bodies mentioned in the column, but this video explains how big-government policies are being financed with the $100 million-plus of American tax dollars sent to France to subsidize the OECD.

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