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Archive for the ‘Competitiveness’ Category

Can you identify the nation with the world’s 7th-friendliest tax system according to the Index of Economic Freedom?

Don’t know the answer? Well, here’s a hint. If you don’t count Middle Eastern nations that finance their governments with oil money, this is the nation that is in second place, behind only the Bahamas.

Still don’t know?

Well, don’t be embarrassed because most people have never heard of the place. This tax paradise is an obscure nation in the South Pacific called Vanuatu. Comprised of dozens of islands, Vanuatu is one of the few places in the world that doesn’t have an income tax. No personal income tax (I’m jealous). No corporate income tax (I’m jealous). No capital gains tax (I’m jealous). No death tax (I’m jealous).

Nada. Zero. Zilch.

But the absence of an income tax bothers some outsiders. Nations such as Australia and international bureaucracies such as the World Bank are pressuring politicians in Vanuatu to adopt an income tax. And they’re playing dirty, trying to bribe and extort lawmakers with promises to provide more aid or threats to withdraw existing aid.

Faced with this threat, members of the Vanuatu business community asked me if I would make a big sacrifice and come to their nation so I could explain to politicians and the public why an income tax would be a terrible mistake. Being a noble person and nice guy, I said yes, even though it means I’m having to miss some of the wonderful December weather in Washington, DC.

This is only my second day in Vanuatu, but I’ve already given one speech, done some local media, and met with a bunch of people. Combined with the research I did before arriving, there are two lessons that we can learn from what’s happening.

First, the absence of an income tax does not necessarily mean a country a role model for free markets. If you look at the latest edition of the Index of Economic Freedom, Vanuatu is ranked #89 out of 178 nations, barely qualifying for the “Moderately Free” club of countries. To give you an idea what this means, Vanuatu ranks below Italy and France.

The moral of the story is that it’s good to have a low tax burden and no income tax, but that’s just one piece of the puzzle. Vanuatu gets very low scores in other areas, particularly regulatory efficiency and rule of law.

This is one of the reasons why Vanuatu is still a poor country.

The Bahamas has no income tax, but it also gets decent scores in other areas, so it ranks #31 out of 178 nations. Unsurprisingly, the people of the Bahamas are much more prosperous than their counterparts in Vanuatu.

And if you look at jurisdictions such as Bermuda, Monaco, and the Cayman Islands, they don’t get ranked by the Index of Economic Freedom, but they presumably would be in the top 10 because of their systemic commitment to free markets. And all of those jurisdictions are among the wealthiest places on the planet.

So the bottom line is that Vanuatu has only one good policy, and that’s the absence of an income tax. I’m telling them they need to engage in further economic liberalization. Other outside forces, however, are telling policy makers to get rid of their only attractive economic policy. Go figure.

Second, the reason why the income tax is a threat is that Vanuatu politicians have increased the burden of government spending. There are several source of data, including the IMF’s massive database, and they all show that government spending since 2000 has grown by an average of about 6 percent annually.

In other words, they’ve been violating my Golden Rule. And when that happens, it just a matter of time before there’s pressure for big tax increases.

So in my big public speech last night, I obviously explained why an income tax would be a horrid mistake for Vanuatu, but I also explained that bad tax policy will be inevitable unless there is an effective policy to control the growth of government. And that’s why the last half of my speech was about the merits of a spending cap.

I cited the positive results in nations that have enjoyed multi-year periods of spending restraint, and I specifically highlighted the very effective spending caps in Hong Kong and Switzerland. I even pointed out that international bureaucracies such as the OECD and IMF have admitted that spending caps are the only effective fiscal rule.

The challenge, of course, is that politicians very rarely are willing to tie their own hands. From their perspective, a spending cap is a threat to their ability to play Santa Claus. They’d much prefer, based on “public choice” incentives, to impose a new form of taxation.

But this doesn’t mean the fight against the income tax is hopeless. As I’ve explained when writing about American politicians, lawmakers are often tempted to do the wrong thing. They may frequently surrender to temptation and choose to do the wrong thing. But they’re also capable of doing the right thing.

My job is to be the angel on one shoulder, offering good advice to counter the malignant pressure being imposed by the devil (especially the Australian Tax Office) on the other shoulder.

The United States made a very big mistake back in 1913. Vanuatu should learn from our error.

P.S. This isn’t the first time I’ve waded into a battle over whether a zero-income-tax jurisdiction should impose an income tax. A few years ago, I helped thwart a scheme to impose an income tax in the Cayman Islands. I hope to be similarly successful in helping the people of Vanuatu.

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There are several features of President-Elect Trump’s tax plan that are worthy of praise, including death tax repeal, expensing, and lower marginal tax rates on households.

But the policy that probably deserves the most attention is Trump’s embrace of a 15 percent tax rate for business.

What makes this policy so attractive – and vitally important – is that the rest of the world has been in a race to reduce corporate tax burdens.

Ironically, the U.S. helped start the race by cutting the corporate tax rate as part of the 1986 Tax Reform Act. But ever since then, policy in America has stagnated while other developed nations are engaged in a virtuous contest to become more competitive.

And that race continues every day.

Most impressively, as reported by the Financial Times, Hungary will cut its corporate tax rate from 19 percent to 9 percent.

Hungary’s government is to cut its corporate tax rate to the lowest level in the EU in a sign of increasingly competitive tax practices among countries seeking to lure foreign direct investment. Prime Minister Viktor Orban said a new 9 per cent corporate tax rate would be introduced in 2017, significantly lower than Ireland’s 12.5 per cent. …The government said the new single band would apply to all businesses. “Corporation tax will be lowered to single digits next year: a rate of 9 per cent will apply equally to small and medium-sized enterprises and large corporations,” a statement said. …Gabor Bekes, senior research fellow at Hungary’s Institute of Economics…said the measure would likely provoke complaints of unfair tax competition from western capitals.

Needless to say, complaints from Paris, Rome, and Berlin would be a sign that Hungary is doing the right thing.

Croatia also is moving policy in the right direction, albeit in a less aggressive fashion.

Corporate income tax will…be cut from 20 to 18 per cent for large companies and from 20 to 12 per cent for small and mid-level companies whose income is no higher than 400,000 euros annually.

Though the Croatian government also plans to lower tax rates on households.

Before the reform, people with salaries between 300 and 1,750 euros a month were taxed at 25 per cent, while now everyone earning up to 2,325 euros a month will be taxed at a 24 per cent rate. People earning more than 2,325 euros a month will have a 36 per cent tax rate, replacing a 40 per cent tax rate for anyone earning over 1,750 euros a month.

But let’s keep the focus on business taxation.

Our friends on the left don’t like Trump’s plan for a corporate tax cut, but here are there things they should know.

  1. A lower corporate tax rate won’t necessarily reduce corporate tax revenue, particularly over time as there’s more investment and job creation.
  2. A lower corporate tax rate will dramatically – if not completely – eliminate any incentive for American companies to engage in inversions.
  3. A lower corporate tax rate will boost workers wages by increasing the nation’s capital stock and thus improving productivity.

If you want more information, here’s my primer on corporate taxation. You can also watch this video.

Or, to make matters simple, we can just copy Estonia, which has the world’s best system according to the Tax Foundation.

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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).

So the bad news is that the flat tax could soon disappear in Estonia and Lithuania.

But the good news, based on my discussions with people in these two nations, is that the battle isn’t lost. At least not yet.

In both cases, policy can’t be changed unless all parties in the coalition government agree. Fortunately, they haven’t reached that point.

And hopefully that point will never be reached if Estonia and Lithuania want long-run success.

All of the Baltic nations get reasonably good scores from Economic Freedom of the World. Ditching the flat tax will cause their scores to decline.

Given that fiscal policy is only 20 percent of a nation’s grade, adopting some bad tax policy may not seem like the end of the world.

But the flat tax isn’t just good policy. It also has symbolic value, telling both domestic entrepreneurs and global investors that a country has a commitment to a system that won’t impose extra punishment just because a person contributes more to national economic output.

By the way, the LPGU Party is very correct to worry about emigration. The Baltic nations (like most countries in Eastern Europe) face a very large demographic problem. And every time a young person leaves for better opportunities elsewhere (even if that better opportunity is a big welfare check), that makes the long-run outlook even more challenging.

But imposing a more punitive tax system is exactly the opposite of what should happen if the goal is faster growth so that people don’t leave the nation.

Let’s close with a famous quote from John Ramsay McCulloch, a Scottish economist from the 1800s.

To be sure, progressive taxation didn’t lead to total catastrophe, so McCulloch’s warning may seem overwrought by today’s standards.

But the so-called progressive income tax did lead to the modern welfare state. And the modern welfare state, when combined with demographic change, is threatening immense economic and societal damage in many nations.

So what he wrote in 1863 may turn out to be very prescient for historians in 2063 who wonder why the western world collapsed.

P.S. If Estonia and Lithuania move in the wrong direction, Latvia could be a big winner. That nation already has received some positive attention for being fiscally responsible, and it also has withstood pressure from the IMF to impose bad tax policy. So Latvia is well positioned to reap the benefits if Estonia and Lithuania shoot themselves in the foot.

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Back in 2010, I shared a cartoon video making a very important point that there’s a big downside when class-warfare politicians abuse and mistreat highly productive taxpayers.

Simply stated, the geese with the golden eggs may fly away. And this isn’t just theory. As revealed by IRS data, taxpayer will move across borders to escape punitive taxation.

It’s harder to move across national borders, of course, but it happens. Record numbers of Americans have given up their passports, including some very high-profile rich people.

Some folks on the left like to argue that taxes don’t actually lead to behavioral changes. Whenever there’s evidence of migration from high-tax jurisdictions to low-tax jurisdictions, they argue other factors are responsible. The rich won’t move just because tax rates are high, they contend.

Oh, really?

Here are some excerpts from a new Research Brief from the Cato Institute. Authored by economists from Harvard, the University of Chicago, and Italy’s Einaudi Institute, the article summarizes some scholarly research on how top-level inventors respond to differences in tax rates. Here’s what they did.

According to World Intellectual Property Organization data, inventors are highly mobile geographically with a migration rate of around 8 percent. But what determines their patterns of migration, and, in particular, how does tax policy affect migration? …Our research studies the effects of top income tax rates on the international migration of inventors, who are key drivers of technological progress. …We use a unique international data set on all inventors from the U.S. and European patent offices to track the international location of inventors since the 1970s. …We combine these inventor data with international top effective marginal tax rates data. Particularly interesting are “superstar” inventors, those with the most abundant and most valuable innovations. …We define superstar inventors as those in the top 1 percent of the quality distribution, and similarly construct the top 1–5 percent, the top 5–10 percent, and subsequent quality brackets. The evidence presented suggests that the top 1 percent superstar inventors are well into the top tax bracket.

And here’s what they ascertained about the behavioral response of the superstar inventors.

We start by documenting a negative correlation between the top tax rate and the share of top quality foreign inventors who locate in a country, as well as the share of top quality domestic inventors who remain in their home country. …We find that the superstar top 1 percent inventors are significantly affected by top tax rates when choosing where to locate. …the elasticity of the number of foreign top 1 percent superstar inventors to the net-of-tax rate is much larger, with corresponding values of 0.63, 0.85, and 1.04. The far greater elasticity for foreign relative to domestic inventors makes sense since, when a given country adjusts its top tax rate, it potentially affects inventor migration from all other countries.

And they point out a very obvious lesson.

…if the economic contribution of these key agents is important, their migratory responses to tax policy might represent a cost to tax progressivity. … An additional relevant consideration is that inventors may have strong spillover effects on their geographically close peers, making it even more important to attract and retain them domestically

And don’t forget the research I shared last year showing that superstar entrepreneurs are more likely to be found in lower-tax jurisdictions.

P.S. Seems to me, given that upper-income taxpayers shoulder most of the nation’s fiscal burden, that our leftist friends should be applauding the rich rather than demonizing them.

P.P.S. Let’s close with some more election-related humor.

Saw this very clever item on Twitter today.

And connoisseurs of media bias will have to double check to confirm this is satire rather than reality.

Regular readers know I’m skeptical about whether Trump will seek to control big government, but one thing I can safely say is that we’ll have an opportunity to enjoy some amusing political humor for the next four years.

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For data-loving policy wonks, the World Bank’s Doing Business report is a fascinating look at the degree to which nations have a policy and governance environment that is conducive to economic activity.

Unlike Economic Freedom of the World, it’s not designed to measure whether a jurisdiction has small government. Doing Business is probably best described as measuring quality of governance and whether a nation has sensible business policy.

That being said, there’s a lot of overlap between the rankings of the two publications. Indeed, you’ll notice many free-market countries in the top 20 of Doing Business, led by the “unsung success story” of New Zealand, followed by the capitalist haven of Singapore.

The United States is ranked #8, and you’ll notice most of the Nordic nations with very good scores, along with two of the Baltic nations.

Here’s some of the report’s analysis, including the unsurprising observation that countries with market-friendly policies tend to have high incomes (a lesson one wishes Hillary Clinton was capable of absorbing).

OECD high-income economies have on average the most business-friendly regulatory systems, followed by Europe and Central Asia. There is, however, a large variation within those two regions. New Zealand has a ranking of 1 while Greece has a ranking of 61; FYR Macedonia stands at 10 while Tajikistan is at 128. The Sub-Saharan Africa region continues to be home to the economies with the least business-friendly regulations on average.

If you’re wondering where the rest of world’s nations rank, click on the table in the excerpt. One thing that stands out is that Venezuela – finally! – isn’t in last place. Though being 187 out of 190 is not exactly something to brag about.

While it’s good to give favorable attention to the nations with the highest scores, it’s also worthwhile to see which countries are moving in the right direction at the fastest pace.

Ten economies are highlighted this year for making the biggest improvements in their business regulations—Brunei Darussalam, Kazakhstan, Kenya, Belarus, Indonesia, Serbia, Georgia, Pakistan, the United Arab Emirates and Bahrain.

Kudos to Georgia (the one wedged between Turkey and Russia on the Black Sea, not the one that is home to my beloved – but underperforming – Bulldogs). It’s the only country that is both in the overall top 20 and among the 10 nations that delivered the most positive reforms.

Here’s the table from the report showing why these 10 nations enjoyed a lot of improvement.

The report observes that a more sensible regulatory approach is associated with higher levels of prosperity.

A considerable body of evidence confirms that cross-country differences in the quality of business regulation are strongly correlated with differences in income per capita across economies.

But here’s the part that should open a few eyes among our leftist friends.

A more market-friendly regulatory environment also is linked to lower levels of inequality.

There is a negative association between the Gini index, which measures income inequality within an economy, and the distance to frontier score, which measures the quality and efficiency of business regulation when the data are compared over time (figure 1.8). Data across multiple years and economies show that as economies improve business regulation, income inequality tends to decrease in parallel.

As I’ve said many times tomorrow, I don’t care about differences in income. I simply want economic liberty so everybody has a chance to earn more income.

Nonetheless, it’s good have some evidence for statists who fixate on how the pie is sliced. Here’s the relevant chart from the report.

And here’s another chart showing that lots of regulation and red tape in labor markets (inevitably imposed for the ostensible goal of “protecting” workers) is correlated with a bigger underground economy.

Reminds me of the research showing how “labor protection” laws actually hurt workers.

Let’s now turn to the tax component, which predictably the part that grabbed my interest.

The score for this component is based on both the tax burden and the cost of tax compliance.

While the size of the tax cost imposed on businesses has implications for their ability to invest and grow, the efficiency of the tax administration system is also critical for businesses. A low cost of tax compliance and efficient tax-related procedures are advantageous for firms. Overly complicated tax systems are associated with high levels of tax evasion, large informal sectors, more corruption and less investment.

Here’s a table from the report showing some of the good reforms that have happened in various nations.

Sadly, America did not make any improvements in tax policy, so we don’t show up on any of the lists.

But since we’re on that topic, let’s now take a closer look at the United States. As already noted, America is ranked #8, which obviously is a reasonably good score.

But if you look at the various components, you sort of get the same story that we saw with the World Economic Forum’s Global Competitiveness Report, namely that there are some sub-par government policies that are hampering an otherwise very efficient private economy.

I’m particularly displeased that the U.S. scores so poorly (#51) in “starting a business.” And just imagine how much the score will drop if statists succeed in forcing states like Delaware, Wyoming, and Nevada to alter their business-friendly incorporation laws.

And I’m also unhappy that we rank #8 when the United States started at #3 in the World Bank’s inaugural 2006 edition of Doing Business. Thanks Bush! Thanks Obama!

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While the overall issue of immigration is highly controversial and emotional, I’ve explained before that everyone should be able to agree that it’s a very good idea to bring in people who can be expected to increase per-capita economic output.

The good news is that we have some policies designed to make this happen, including the H-1B visa for skilled workers and the EB-5 visa for job-creating investors. And if the data on median income for certain immigrant groups is any indication, we’re getting some good results.

Today, motivated in part by the fact that I’ll be participating next month in a conference in London on the topic of “economic citizenship” and therefore having to prepare for that discussion,  let’s take a closer look at the EB-5 policy and why it’s a smart approach (by the way, I’m allowed to share a few discounted registrations since I’m a speaker, so contact me if you’re interested in the London event).

To put things in context, we’ll begin by reviewing a four-author study published by the National Bureau of Economic Research that looks at the growing effort by many nations to attract highly productive and capable immigrants.

Highly skilled workers play a central and starring role in today’s knowledge economy. Talented individuals make exceptional direct contributions—including breakthrough innovations and scientific discoveries—and coordinate and guide the actions of many others, propelling the knowledge frontier and spurring economic growth. In this process, the mobility of skilled workers becomes critical to enhancing productivity. …In the 2013 World Population Policies report, 40 percent of countries reported policies to raise immigration of high-skilled workers, a large increase from 22 percent in 2005. …For recipient countries, high-skilled immigration is often linked to clusters of technology and knowledge production that are certainly important for local economies and are plausibly important at the national level. …When it comes to talented foreigners, a number of countries…implement recruiting programs. …Canada has been very active in targeting skilled migrants who are denied or frustrated by the H-1B visa system in the United States, even taking out ads on billboards in the United States to attract such migrants.

By the way, I can’t resist observing that the authors recognize that highly talented (and therefore highly compensated) people are very important for economic growth. Based on the tax policies they advocate, that’s something politicians such as Hillary Clinton have a hard time understanding. Heck, upper-income taxpayers are the ones who finance the lion’s share of big government, so you’d think leftist politicians would be slapping them on their backs rather than across their faces.

But I digress. Let’s look at what the study says about migration by those most capable of producing growth.

Observed migration flows are the result of a complex tangle of multinational firms and other employers pursuing scarce talent, governments and other gatekeepers trying to manage these flows with policies, and individuals seeking their best options given the constraints imposed upon them. …The number of migrants with a tertiary degree rose nearly 130 percent from 1990 to 2010, while low skilled (primary educated) migrants increased by only 40 percent during that time. A pattern is emerging in which these high-skilled migrants are departing from a broader range of countries and heading to a narrower range of countries—in particular, the United States, the United Kingdom, Canada, and Australia. …More than half of the high-skilled technology workers and entrepreneurs in Silicon Valley are foreign-born. …host countries may end up with high concentrations of high-skilled immigrants in particular occupations. For example, immigrants account for some 57 percent of scientists residing in Switzerland, 45 percent in Australia, and 38 percent in the United States (Franzoni et al. 2012). In the United States, 27 percent of all physicians and surgeons and over 35 percent of current medical residents were foreign born in 2010. Immigrants also accounted for over 35 percent of recent enrollments in STEM fields, with very high proportions in specific areas like Electrical Engineering (70 percent), Computer Science (63 percent) and Economics (55 percent)… The global migration of inventors and the resulting concentration in a handful of countries have been particularly well documented. …the global migration rate of inventors in 2000 stood at 8.6 percent, at least 50 percent greater in share terms than the average for high-skilled workers as a whole. Figure 4 builds on WIPO global patent filings from 2001-2010. The United States has received an enormous net surplus of inventors from abroad.

The authors then consider the policies that different nations adopt in their search for GDP-enhancing immigrants.

…we then review the “gatekeepers” for global talent flows. At the government level, we compare the points-based skilled migration regimes as historically implemented by Canada and Australia with the employment-based policies used in the United States through mechanisms like the H-1B visa program. …The exceptional rise in the number of high-skilled migrants to OECD countries is the result of several forces, including increased efforts to attract them by policymakers as they recognize the central role of human capital in economic growth, positive spillovers generated by skill agglomeration, declines in transportation and communication costs, and rising pursuit of foreign education by young people. Among the resulting effects are the doubling of the share of the tertiary-educated in the labor force and fierce competition among countries hoping to attract talent. …One can explain certain aspects of current high-skilled migration patterns using this model. For example, the United States has a very wide earnings distribution and low tax levels and progressivity, especially compared to most source countries, including many high-income European countries. As a result, we can see why the United States would attract more high-skilled migrants…relative to other high-income countries.

By the way, I can’t resist making one minor correction. While we generally have lower taxes than other developed nations, we actually have a very “progressive” tax system. But US-style progressivity is the result of very low taxes on lower- and middle-income workers (no value-added tax, for instance), not unusually steep taxes on higher-income workers.

Returning to our main topic , the authors explain that developed nations either use a points-based system or an employment-based system when seeking to facilitate more high-skilled immigration.

Here’s how the the points-based system works.

Canada and Australia are prominent examples of countries that implement points-based systems for skilled migration. These programs select individuals based upon their observable education, language skills, work experience, and existing employment arrangements. …In the Canadian example, migrants need to collect 67 points across six categories. In terms of education, for example, 15 points are awarded for one-year post-secondary diploma, trade certificate or apprenticeship, compared to 25 for a doctorate degree. With regards work experience, six or more years of applicable experience receive 15 points, compared to 9 points for just one year of experience.

And here’s information on the employment-based approach, with the US being an obvious example.

The United States is the most cited example of a country that uses an employer-driven program for highskilled immigration, with the H-1B and L1 visas as primary categories (Kerr et al. 2015a). The H-1B visa allows US companies to temporarily employ skilled foreigners in “specialty occupations,” defined to be those demanding application of specialized knowledge like engineering or accounting. …Virtually all H-1B holders have a bachelor’s degree or higher and about 70% of the visas in recent years went to STEM-related occupations. India is by far the largest source country, accounting for about two-thirds of H-1B recipients in recent years. …most real-world regimes combine different features of points-based and employment-driven systems.

But the study notes that America also has a special system for bringing in ostensible superstars. Sort of a points system for the super talented.

Superstar talent rarely competes for H-1B visas, for example, but instead gains direct access to the United States through O1 temporary visas for extraordinary ability and direct green card applications of the EB-1 level for those with even more exceptional talent. …In effect, the US operates a points system for individuals with truly exceptional talents such as Nobel Prize winners, superstar athletes and musicians.

Now let’s turn the EB-5 program, which is another way that the United States seeks to attract those capable of making big economic contributions.

In part because the natural inefficiency of government creates opportunities for corruption in implementation, the EB-5 program has become very controversial. Some lawmakers even want the entire program to lapse when its authorization expires in December.

At the risk of understatement, I hope they don’t throw the baby out with the bathwater.

The Brookings Institution notes that Senators Chuck Grassley (R-IA) and Patrick Leahy (D-VT) want to impose stricter rules and micro-manage how the investment occurs.

It also raises the minimum investment amount to $800,000 within a [targeted employment area] and $1.2 million otherwise. Most important for reaching the program’s economic development goals, however, are the bill’s new rules on defining TEAs. …The bill would revise the TEA definition to include rural areas, closed military bases, or single census tracts within metro areas with an unemployment rate at 150 percent of the national average. To further increase the effect of EB-5 financing, at least 50 percent of the job creation would have to be within the metro area, or within the county in which a rural TEA is located.

The business community doesn’t object to some stricter standards, as reported by The Hill, but wants the program to remain and wants it made permanent.

A coalition of business groups is pushing Congress to permanently renew a controversial investor visa program before it expires in September. …In a letter shared with The Hill on Thursday, those groups called on lawmakers to renew the EB-5 investor visa program with bolstered security and anti-fraud checks, adjustments to highly criticized investment incentives and streamlined visa processing. “Congress must not let this important job-creating program lapse, in large measure because of the immediate negative consequences to U.S. businesses and projects counting on EB-5 investment to create jobs for Americans,” wrote the groups to the Senate and House Judiciary committees. …The EB-5 program is responsible for more than $15 billion in investment and 100,000 jobs between 2005 and 2010, the coalition says.

Ike Brannon, writing for the Weekly Standard, worries that politicians will undermine the positive impact of the program with some back-door central planning.

That EB-5 program has succeeded at its intended purpose is not in dispute: A Brookings Institution study estimated that the program has created nearly 100,000 jobs along with over $5 billion of new investment since its inception. The current EB-5 program technically consists of two different pieces: The first is the original EB-5 visa program, which Congress enacted in 1990. Its intent was to help American business compete for foreign investment with countries like Canada and Australia, which had similar investor programs in place. …The overriding intent of the program has always been about job creation, anywhere and everywhere. Senator Paul Simon, a sponsor of the original EB-5 program, took care to emphasize that its purpose was first and foremost to attract entrepreneurs and spur job creation, noting that “neither the Senate nor the House bill established any sort of criteria about the type of business investment…As long as the employment goal is met, it is unnecessary to needlessly regulate the type of business or the character of the investment.”

But politicians love the “needlessly regulate,” so the EB-5 system has lots of red tape and Ike fears it may get even more.

Congress nonetheless attempted to spur some sort of geographic balance-cum-urban development with the creation of Target Employment Areas [TEAs], which consist of areas with high unemployment rates or rural areas outside the boundary of any city or town with a population over 20,000. In a TEA, the necessary investment need only be $500,000, so long as it creates the requisite number of jobs. …The problem with a federal top-down approach of this sort is that such a constraint could limit the efficacy of the program. …imposing a new rule that restricts how states designate Targeted Employment Areas will only make EB-5 more of a political football than it already is. Creating a welter of restrictions about where such investment can and cannot go would likely dampen the economic impact of the program.

A columnist for Forbes explains why the program should continue.

The EB-5 immigration visa may be the best immigration program the U.S. has to offer. Foreign investors…are putting up a minimum of $500,000 to renew and rebuild rundown urban areas and create jobs. It’s a legal way in for the kind of immigrant, a fortunate one, that tends to contribute to the neighborhood by bringing in money and jobs. …“EB-5 has economic benefits that doesn’t stop at the five hundred thousand dollars they need to invest to participate,” says Julian Montero, a partner in the Miami law office of Arnstein & Lehr. “It’s just the beginning of a more significant investment that will be made by these families when the come here. They’re going to private schools. They’re making good income. They’re paying taxes. And most of them start other businesses once here.” …The EB-5 has become a way for developers to attract foreign capital at low, project finance-style structured interest rates because the people giving the money are getting a prize: the right to live, work and study in the United States.

Perhaps most notably, even the International Monetary Fund recognizes the advantages of this type of program.

…economic residency programs were recently launched across a wide range of (generally much larger) European countries, including Bulgaria, France, Hungary, Ireland, the Netherlands, Portugal, and Spain. Almost half of EU member states now have a dedicated immigrant investor route. Also known as golden visa programs, these arrangements give investors residency rights…some advanced economies, such as Canada, the United Kingdom, and the United States, have had immigrant investor programs since the late 1980s or early 1990s, offering a route to citizenship in exchange for specific investment conditions… The inflows of funds to countries from these programs can be substantial, with far-reaching macroeconomic implications for nearly every sector.

The IMF article includes a helpful summary of nations that have programs to attract investors.

The bottom line is that there are many high-income and high-wealth people in the world (including the “super-entrepreneurs“) who would like to move to places that offer more stability, security, and opportunity. This creates a potential win-win situation for both the people migrating and the recipient nations.

The United States is already a big beneficiary of economic-based migration, but we could reap even greater benefits with a more sensible, streamlined, and expanded EB-5 system.

P.S. Zooming out to the broader issue of immigration and whether people want to come to the United States for the wrong reason, Professor Tyler Cowen of George Mason University has a very intriguing proposal to have open immigration with nations such as Denmark that have bigger welfare states than America.

P.P.S. Today’s column is about economic-based immigration. There’s also the issue of economic-based emigration. Sadly, the United States policy on allowing people to leave is even worse than France’s system.

P.P.P.S. If you want to enjoy some migration-related humor, we have a video about Americans emigrating to Peru and a story about American leftists escaping to Canada.

P.P.P.P.S. Remember to contact me if you’re interested in the London conference.

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A couple of days ago, I wrote about the new rankings from the World Economic Forum’s Global Competitiveness Report and noted that America’s private sector is considered world class but that our public sector ranks poorly compared to many other developed nations.

To elaborate on the depressing part of that observation, let’s now look at the Tax Foundation’s recently released International Tax Competitiveness Index.

Lots of data and lots of countries. Estonia gets the top score, and deservedly so. It has a flat tax and many other good policies. It’s also no surprise to see New Zealand and Switzerland near the top.

If you’re curious about America’s score, you’ll have to scroll way down because the United States ranks #31, below even Belgium, Spain, and Mexico.

If you look at how the U.S. ranks in the various categories, we have uniformly poor numbers for everything other than “Consumption Taxes.” So let’s be very thankful that the United States doesn’t have a value-added tax (VAT). If we did, even France would probably beat us in the rankings (I hope Rand Paul and Ted Cruz are paying attention to this point).

And if you wonder why some nations with higher top tax rates rank above the U.S. in the “Individual Taxes” category, keep in mind that there are lots of variables for each category. And the U.S. does poorly in many of them, such as the extent to which there is double taxation of dividends and capital gains.

By the way, there is some “good” news. Compared to the 2014 ranking, the United States is doing “better.” Back then, there were only two nations with lower scores, Portugal and France. In the new rankings, the U.S. still beats those two nations, and also gets a better score than Greece and Italy.

But we’re only “winning” this contest of weaklings because the scores for those nations are falling faster than America’s score.

Here’s the 2014-2016 data for the United States. As you can see, we’ve dropped from 54.6 to 53.7.

P.S. The Tax Foundation’s International Tax Competitiveness Index is superb, but I hope they make it even better in the future by adding more jurisdictions. As of now, it only includes nations that are members of the OECD. That’s probably because there’s very good and comparable data for those countries (the OECD pushes very bad policy, but also happens to collect very detailed numbers for its member nations). Nonetheless, it would be great to somehow include places such as Hong Kong, Singapore, Bermuda, and the Cayman Islands (all of which punch way above their weight in the international economy). It also would be desirable if the Tax Foundation added an explicit size-of-government variable. Call me crazy, but Sweden probably shouldn’t be ranked #5 when the nation’s tax system consumes 50.4 percent of the economy’s output (this size-of-government issue is also why I asserted South Dakota should rank above Wyoming in the Tax Foundation’s State Business Tax Climate Index).

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