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Archive for the ‘Competitiveness’ Category

The Organization for Economic Cooperation and Development has published a 136-page “Economic Survey” of China.

My first reaction is to wonder why the Paris-based bureaucracy needs any publication, much less such a long document, when Economic Freedom of the World already publishes an annual ranking that precisely and concisely identifies the economic strengths and weaknesses of various nations.

A review of the EFW data would quickly show that China doesn’t do a good job in any area, but that the nation’s biggest problems are a bloated public sector and a suffocating regulatory burden.

Though it’s worth noting that China’s mediocre scores today are actually a big improvement. Back in 1980, before China began to liberalize, it received a dismal score of 3.64 (on a 1-10 scale). Today’s 6.45 score isn’t great, but there’s been a big step in the right direction.

One of the most impressive changes is that the score for the trade category has jumped from 2.72 to 6.78 (i.e., moving from protectionism toward open trade is good for growth).

I cite this EFW data because part of me wonders why the OECD couldn’t be more efficient and simply put out a 5-page document that urges reforms – such as a spending cap and deregulation – that would address China’s biggest weaknesses?

To be fair, though, the number of pages isn’t what matters. It’s the quality of the analysis and advice. So let’s dig into the OECD’s China Survey and see whether it provides a road map for greater Chinese prosperity.

But before looking at recommendations, let’s start with some good news. This chart shows a dramatic reduction in poverty and it is one of the most encouraging displays of data I’ve ever seen.

Keep in mind, by the way, that China’s economic statistics may not be fully trustworthy. And it’s also worth noting that China’s rural poverty measure of CNY2300 is less than $350 per year.

Notwithstanding these caveats, it certainly appears that there’s been a radical reduction in genuine material deprivation in China. That’s a huge triumph for the partial economic liberalization we see in the EFW numbers.

Now let’s see whether the OECD is suggesting policies that will generate more positive charts in future years.

The good news is that the bureaucrats are mostly sensible on regulatory matters and state-owned enterprises (SOEs). Here are a few excerpts from the document’s executive summary.

Business creation has been made easier through the removal and unification of licenses. …Gradually remove guarantees to SOEs and other public entities to reduce contingent liabilities. …Reduce state ownership in commercially oriented…sectors. Let unviable SOEs go bankrupt, notably in sectors suffering from over-capacity.

The bad news is that the OECD wants the government to increase China’s fiscal burden. I’m not joking.

Policy reforms can greatly enhance the redistributive impact of the tax-and-transfer system. …Increase central and provincial government social assistance transfers…increase tax progressivity. Implement a broad-based nationwide recurrent tax on immovable property and consider an inheritance tax.

This is bad advice for any nation at any point, but it’s especially misguided for China because of looming demographic change.

Here’s another chart from the report. It shows a staggering four-fold increase in the share of old people relative to working-age people in the country.

This chart should be setting off alarm bells. The Chinese government should be taking steps to lower the burden of government spending and implement personal retirement accounts so there will be real savings to finance this demographic shift.

But the OECD report actually encourages less savings and more redistribution.

…rebalancing of the economy towards consumption is key. …Social infrastructure needs to be further developed…and the tax and transfer system made more progressive. …tax exemptions on interest from government bonds and savings accounts at Chinese banks could be abolished…introduction of inheritance tax.

What’s especially noteworthy is that the personal income tax in China (as is the case in almost all developing nations) only collects a trivial amount of revenue.

In 2016, PIT revenue amounted to 1.4 percent of GDP.

So why not do something bold and pro-growth, such as abolish that repugnant levy and make China a beacon for entrepreneurship and investment?

Needless to say, that’s not a recommendation you’ll find in a report from the pro-tax OECD.

And given the bureaucracy’s dismal track record, you won’t be surprised that there’s lots of rhetoric about the supposed problem of inequality, all of which is used to justify higher taxes and more redistribution.

The OECD instead should focus on growth and poverty mitigation, goals that naturally lend themselves to pro-market reforms.

Which brings me to the thing that’s always been baffling. Why doesn’t China simply copy the ultra-successful policies of Hong Kong, which has been a “special administrative region” of China for two decades?

Hong Kong has the policies – a spending cap, very little redistribution, open trade, private Social Security, etc – that China needs to become a rich nation.

If the leadership in Beijing has been wise enough to leave Hong Kong’s policies in place, why haven’t they been astute enough to apply them to the entire country?

Every so often, I think China is moving in that direction, only to then come across reasons to be pessimistic.

P.S. The OECD’s China report was predictably disappointing, but it wasn’t nearly as bad as the IMF’s report on China, which I characterized half-jokingly as a declaration of economic war.

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It’s relatively easy to demonstrate how certain regulations make our lives less pleasant (inferior light bulbs, substandard toilets, inadequate washing machines, crummy dishwashers, etc).

Furthermore, it’s also simple to highlight examples of foolish and preposterous regulations.

And it’s a straightforward exercise (at least conceptually) to argue that regulations should pass some sort of cost-benefit test.

What’s not so easy, however, is getting folks to grasp the overall impact of red tape on growth and living standards. After all, most normal people don’t want to learn about wonky concepts such as the production possibilities frontier. And I also doubt there are many people who are interested in the technical challenge of how to measure the aggregate impact of thousand of rules and restrictions.

But these issues matter. A lot. According to Economic Freedom or the World, the regulatory burden is just as important as the fiscal burden when determining a nation’s competitiveness and economic outlook. Simply stated, our living standards are determined by productivity, which is determined by how wisely labor and capital are combined to generate output.

With this in mind, a new study from the European Central Bank helpfully examines the degree to which regulation hinders the efficient allocation of those factors of production.

The focus of this paper is on the…misallocation of labour and capital in eight macro-sectors (which include manufacturing and services) for five large euro-area countries (Belgium, France, Germany, Italy and Spain) during the period 2002-2012. …The paper then investigates the potential determinants of changes in input misallocation by looking at traditional structural determinants, namely restrictive product and labour market regulations. …regulations that shelter firms from competition might result in poor allocation of resources because low productive firms will keep operating instead of downsizing or exiting. Similarly, stringent labour market regulation, in the form of high hiring and firing costs, might also thwart resource allocation.

For those who are interested in such things, the study looks at what drives improvements in productivity. Is it firms becoming more efficient because of competition, or is “reallocation” as weak companies vanish and dynamic new firms emerge?

The short answer, as illustrated by the table, is that both play a role.

Here are some of the issues considered in the ECB study.

In our full empirical specification, as well as initial conditions in misallocation, …we first examine the role of two structural factors, i.e. changes in both product and labour market regulations. In the presence of high barriers to entry, unproductive firms are able to survive and therefore retain productive resources which are not shifted to the most efficient firms in a given industry (Schiantarelli 2008; Restuccia and Rogerson 2013; Andrews and Cingano 2014). Furthermore, more stringent employment regulation might prevent firms from adjusting their workforce to optimal levels, therefore hampering the efficient reallocation of workers across firms (Haltiwanger, Scarpetta and Schweizer 2014; Bartelsman, Gautier and de Wind 2011). Moreover, in the labour misallocation regressions we also include an interaction term between the changes in product and labour market regulations.

Here are their estimates of both product market regulation and labor market regulation for selected nations.

It’s good to see that there’s a slight trend toward less regulation of product markets. A few nations have modestly reduced regulation of labor markets, but the most interesting observation is that this is an area where the United States has a major advantage. Only Germany is even close to America in allowing markets to operate with a high level of freedom.

Having examined the issues covered by the study, let’s now consider the results.

All discussed capital misallocation results are robust to the inclusion of market distortions, i.e. to regulatory and credit constraints. …The general decline in PMR over the period considered dampened capital misallocation dynamics… Stricter product market regulation is found to have led to higher labour misallocation growth. But we also find that more stringent labour market regulations positively correlate with labour misallocation growth, particularly in sectors characterized by more stringent product market regulations. Thus, these results support the idea that the positive effect of the tightness of PMR on labour misallocation growth is amplified if also EPL becomes more restrictive. Seen from an inverse perspective, the gains in the allocative efficiency of labour are larger if both kinds of regulation are jointly loosened.

Here’s the bottom line.

Our results therefore suggest that in order to foster a more efficient within-sector allocation of inputs across firms structural reforms, such as those lowering entry barriers for firms, removing size-contingent regulations that prevent firms from reaching their optimal size and enhancing bankruptcy regulations that facilitate the exit of unproductive firms, would be warranted. The loosening of PMR and EPL in recent years in some countries has proven to dampen misallocation dynamics, yet there is still room for further reductions, as shown for example when comparing the level of regulation with that in the U.S.

Unfortunately, I don’t expect that this study will have any sort of impact on the debate. The people who already understand the negative impact of regulation now have more evidence about the value of unfettered markets and creative destruction.

But the politicians and interest groups won’t care. They are interested in accumulating power and obtaining unearned benefits. To the extent that they would even bother to read the study, they would conclude that they should fight extra hard to preserve the status quo since they will realize that there are fewer favors to distribute when genuine capitalism is allowed to operate.

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The centerpiece of President Trump’s tax plan is a 15 percent corporate tax rate.

Republicans in Congress aren’t quite as aggressive. The House GOP plan envisions a 20 percent corporate tax rate, while Senate Republicans have yet to coalesce around a specific plan.

Notwithstanding the absence of a unified approach, you would think that the stage is set for a big reduction in America’s anti-competitive corporate tax rate, which is the highest in the developed world (if not the entire world) and creates big disadvantages for American workers and companies.

If only.

While I am hopeful something will happen, there are lots of potential pitfalls, including the “border-adjustable tax” in the House plan. This risky revenue-raiser has created needless opposition from major segments of the business community and could sabotage the entire process. And I also worry that momentum for tax cuts and tax reform will erode if Trump doesn’t get serious about spending restraint.

What makes this especially frustrating is that so many other nations have successfully slashed their corporate tax rates and the results are uniformly positive.

My colleague Chris Edwards recently shared the findings from an illuminating study published by the London-based Centre for Policy Studies. It examines what’s happened in the United Kingdom as the corporate tax rates has dropped from 35 percent to 20 percent over the past 30 years. Here’s some of what Chris wrote about this report.

New evidence comes from Britain… It shows the tax rate falling from 35 percent to 20 percent since the late 1980s and corporate tax revenues as a percentage of gross domestic product (GDP) trending upwards. As the rate has fallen, the tax base has grown more than enough to keep money pouring into the Treasury. …the CPS study says, “In 1982-83 when the rate was 52%, corporation tax receipts yielded revenues equivalent to 2% of GDP. Corporation tax now raises over 2.3% of GDP when the headline rate is at just 20%.”

And keep in mind that GDP today is significantly greater in part because of a better corporate tax system.

Here’s the chart from the CPS study, showing the results over the past three decades.

 

The results from the most-recent round of corporate rate cuts are especially strong.

In 2010-11, the government collected £36.2 billion from a 28 percent corporate tax. The government expected its corporate tax package—including a rate cut to 20 percent—to lose £7.9 billion a year by 2015-16 on a static basis. …But that analysis was apparently too pessimistic: actual revenues in 2015-16 had risen to £43.9 billion. So in five years, the statutory tax rate fell 29 percent (28 percent to 20 percent) but revenues increased 21 percent (£36.2 billion to £43.9 billion). That is dynamic!

None of this should be a surprise.

Big reductions in the Irish corporate tax rate also led to an uptick in corporate receipts as a share of economic output. And remember that the economy has boomed, so the Irish government is collecting a bigger slice of a much bigger pie.

And Canadian corporate tax cuts generated the same effect, with no drop in revenues even though (or perhaps because) the federal tax rate on business has plummeted to 15 percent.

Would we get similar results in the United States?

According to experts, the answer is yes. Scholars at the American Enterprise Institute estimate that the revenue-maximizing corporate tax rate for the United States is about 25 percent. And Tax Foundation experts calculate that the revenue-maximizing rate even lower, down around 15 percent.

I’d be satisfied (temporarily) if we split the difference between those two estimates and cut the rate to 20 percent.

Let’s close with some dare-to-hope speculation from Joseph Sternberg of the Wall Street Journal about what might happen in Europe if Trump significantly drops the U.S. corporate tax rate.

Donald Trump says many things that alarm Europeans, but one of the bigger fright lines may have come in last week’s address to Congress: “Right now, American companies are taxed at one of the highest rates anywhere in the world. My economic team is developing historic tax reform that will reduce the tax rate on our companies so they can compete and thrive anywhere and with anyone.” What’s scary here to European ears is…the idea that tax policy is now fair game when it comes to global competitiveness. …One of the biggest political gifts Barack Obama gave European leaders was support for their notion that low tax rates are unfair and that taxpayers who benefit from them are somehow crooked. Europeans pushed that line among themselves for years, complaining about low Irish corporate rates, for instance. The taboo on tax competition is central to the political economy of Europe’s welfare states… Mr. Obama…backed global efforts against “base erosion and profit shifting,” meaning legal and efficient corporate tax planning. The goal was to obstruct competition among governments… The question now is how much longer Europe could resist widespread tax reform if Mr. Trump brings in a 20% corporate rate alongside rapid deregulation—or what the consequences will be in terms of social-spending trade-offs to a new round of tax cutting. Dare to dream that Mr. Trump manages to trigger a new debate about competitiveness in Europe.

Amen. I’m a huge fan of tax competition because it pressures politicians to do the right thing even though they would prefer bad policy. And I also like the dig at the OECD’s anti-growth “BEPS” initiative.

P.S. I want government to collect less revenue and spend less money, so the fact that a lower corporate tax rate might boost revenue is not a selling point. Instead, it simply tells us that the rate should be further reduced. Remember, it’s a bad idea to be at the revenue-maximizing point on the Laffer Curve (though that’s better than being on the downward-sloping side of the Curve, which is insanely self-destructive).

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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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