If globalism means free trade and peaceful interaction among peoples, sign me up. I’m a big supporter.
But if globalism means international bureaucracies working to increase the power of governments (i.e., dirigiste forms of global governance), then I’m a big opponent.
Because the word means different things to different people, I’ve explored various ways to compare and contrast “good globalism” vs “bad globalism.”
For what it’s worth, I think my 2×2 matrix needs to be revised.
One reason for an update is that “globalism” now seems more closely linked with bad policies
In an article for the US-based version of the Spectator, Roger Kimball warns against the statist version of “globalism.”
Globalism…is the enemy of freedom. Why? Because globalism systematically attacks and undermines the moral and political filiations that make genuine freedom possible. …A sterling contemporary example is the Great Reset, recently proposed by the Davos-based World Economic Forum… Here at last was an opportunity to enact a worldwide tax on wealth, a far-reaching (and deeply impoverishing) “green-energy” agenda…the WEF plan involved nothing less than the absorption of liberty by the extension of bureaucratic power. …The globalist alternative dangled before us is a version of utopia. But like The Wizard of Oz, it is all show and no substance. Or rather, the substance is an erosion of traditional sources of strength.
More specifically, the folks at the World Economic Forum are pushing a “great reset” based on “stakeholder capitalism” (which is largely repackaged “cronyism”).
Samuel Gregg of the Acton Institute opined on this issue for the Australian version of the Spectator.
The WEF is a dangerous force in global politics. …In October 2020, Schwab stated that…”Free-market fundamentalism has eroded…economic security, triggered a deregulatory race to the bottom and ruinous tax competition.” Precisely how and where ‘free-market fundamentalism’ has run amuck remains a mystery. After all, we live in a world in which most governments in developed nations routinely control 40 per cent or more of their nation’s GDP. Nor does the regulatory and welfare state’s relentless growth in, say, the European Union, Britain and America suggest that free market radicals have been in charge in Brussels, London or Washington for decades. …Ignoring these inconvenient facts, Schwab believes that the world needs a ‘Great Reset.’ …For all his invocation of the predictable woke pieties, Schwab’s core commitment is to political and economic arrangements which used to be known as corporatism. …The language of corporatism, like that of Schwab’s WEF, may be one of coordinated consultation, but the agenda is one of control. …On an economic level, corporatism discourages innovation, produces inflexible labour markets dominated by unions whose priority is maintaining the status quo, and riddle the marketplace with privileges for well-connected businesses. …anyone who believes in preserving things like liberty, sovereignty, and the decentralisation of power should be concerned.
Writing back in 2020 for the Wall Street Journal, Richard Shinder opined about the dirigiste agenda of modern-day globalists compared to the good version of globalism that existed in the 19th century.
Globalism touts the supremacy of supranational bodies and accords—the United Nations, the Paris climate agreement and the like. …many aspects of today’s globalism—or at least its promotion of market economies, capital mobility, and mostly free trade—aren’t in conflict with nationalism. In one sense of the word, the greatest “globalist” age in history was the period before World War I. Trade among western European countries increased to 10% of the region’s GDP in 1900 from 1% in 1830. Supply chains extended across the globe, and capital and labor flowed freely across borders. The “long” 19th century…was also a time of industrialization, enormous poverty reduction, wealth creation and global economic integration. This unabashed age of nation-states wasn’t all roses, but it was one of free markets, free trade and unrestricted capital flows. …this period demonstrates that globalism need not be unaccountable nor collectivist. …international institutions…shouldn’t impinge on national sovereignty. Sovereign nations consenting to play by an agreed set of rules, or banding together in service of a common objective, differs radically from unaccountable transnational elites engineering outcomes, often without scrutiny. …Nationalism as a response to a collectivist and unaccountable globalism—whether in dealing with a “climate crisis,” “inequality,” or something else—need not be nativist or protectionist. …the nation-state remains the most successful vehicle for advancing liberty, economic advancement and individual achievement in the history of the world.
For a differing perspective, Dalibor Rohac of the American Enterprise Institute made the case for globalism in a column for the Washington Examiner.
Humankind has become vastly more prosperous with extensive international cooperation. Since 1950, the world’s population has roughly tripled; over the same time, real output has increased by more than a factor of 10. In Botswana and South Korea, real per capita incomes have grown 38 and 30 times, respectively. Global prosperity is a direct outcome of economic globalization. Compared to automation, trade accounts for a tiny fraction of total job losses in the U.S. Meanwhile, cheaper consumer products imported from overseas have been among the most effective anti-poverty “policies” in the Western world. …This would not be possible without…the open trading environment created by successive rounds of multilateral trade liberalization under the General Agreement on Tariffs and Trade and, later, the World Trade Organization.
Moreover, Dalibor also mentions other international agreements and entities that are unobjectionable.
Or even desirable. After all, does anyone oppose the parts of the “rules-based postwar order” that facilitate things such as cross-border air travel, international shipping, and global telecommunications?
But the helpful work of those bodies doesn’t change the fact that major international bureaucracies engage in activities that are counterproductive. A “rules-based order” is only good, after all, if it advancing good rules.
The bottom line is that governments should be competing against each other, not conspiring with each other.
Which leads me to a revised version of my 2×2 matrix (the upper-right quadrant is empty because protectionist nations, by definition, don’t want jurisdictional competition).
To summarize, yes to globalization, no to global governance.
P.S. If the choice is nation states vs. global governance, the answer is obvious.
P.P.S. While I prefer nation states over global governance, I’m not happy that the European Union is morphing from an international bureaucracy into a nation state.
Way back in 2007, I narrated this video to explain why tax competition is very desirable because politicians are likely to overtax and overspend (“Goldfish Government“) if they think taxpayers have no ability to escape.
The good news is that tax competition has been working.
As explained in the above video, there have been big reductions in personal tax rates and corporate tax rates. Just as important, governments have reduced various forms of double taxation, meaning lower tax rates on dividends and capital gains.
These pro-growth tax reforms didn’t happen because politicians read my columns (I wish!). Instead, they adopted better tax policy because they were afraid of losing jobs and investment to countries with better fiscal policy.
Now for the bad news.
There’s been an ongoing campaign by high-tax governments to replace tax competition with tax harmonization. They’ve even conscripted international bureaucracies such as the Organization for Economic Cooperation and Development (OECD) to launch attacks against low-tax jurisdictions.
And now the United States is definitely on the wrong side of this issue.
Here’s some of what the Biden Administration wants.
The United States can lead the world to end the race to the bottom on corporate tax rates. A minimum tax on U.S. corporations alone is insufficient. …President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This plan also denies deductions to foreign corporations…if they are based in a country that does not adopt a strong minimum tax. …The United States is now seeking a global agreement on a strong minimum tax through multilateral negotiations. This provision makes our commitment to a global minimum tax clear. The time has come to level the playing field and no longer allow countries to gain a competitive edge by slashing corporate tax rates.
As Charlie Brown would say, “good grief.” Those passages sound like they were written by someone in France, not America
And Heaven forbid that countries “gain a competitive edge by slashing corporate tax rates.” Quelle horreur!
There are three things to understand about this reprehensible initiative from the Biden Administration.
Tax harmonization means ever-increasing tax rates – It goes without saying that if politicians are able to create a tax cartel, it will merely be a matter of time before they ratchet up the tax rate. Simply stated, they won’t have to worry about an exodus of jobs and investment because all countries will be obliged to have the same bad approach.
Corporate tax harmonization will be followed by harmonization of other taxes – If the scheme for a harmonized corporate tax is imposed, the next step will be harmonized (and higher) tax rates on personal income, dividends, capital gains, and other forms of work, saving, investment, and entrepreneurship.
Tax harmonization denies poor countries the best path to prosperity – The western world became rich in the 1800s and early 1900s when there was very small government and no income taxes. That’s the path a few sensible jurisdictions want to copy today so they can bring prosperity to their people, but that won’t be possible in a world of tax harmonization.
Some supporters of the EEC also were motivated by a desire for some form of political unification and their efforts eventually led to the 1992 Maastricht Treaty, which created the European Union – along with increased powers for a Brussels-based bureaucracy (the European Commission).
There are significant reasons to think that this evolution – from a Europe based on free trade and mutual recognition to a Europe based on supranational governance – was an unfortunate development.
Back in 2015, I warned that this system would “morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.”
A few years earlier, when many of Europe’s welfare states were dealing with a fiscal crisis, I specifically explained why it would be a very bad idea to have “eurobonds,” which would mean – for all intents and purposes – that reasonably well governed nations such as Germany and Sweden would be co-signing loans for poorly governed countries such as Italy and Greece.
Well, this bad idea has resurfaced. Politicians from several European nations are using the coronavirus as an excuse (“never let a crisis go to waste“) to push for a so-called common debt instrument.
…we need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States, thus ensuring stable long term financing… The case for such a common instrument is strong, since we are all facing a symmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all. And we are collectively accountable for an effective and united European response. This common debt instrument should have sufficient size and long maturity to be fully efficient… The funds collected will be targeted to finance in all Member States the necessary investments in the healthcare system and temporary policies to protect our economies and social model.
Lots of aspirational language, of course, but no flowery words change the fact that “collectively accountable” means European-wide debt and “social model” means welfare state.
I wrote last year that globalization is good whereas global governance is bad. Well, this is the European version.
The Wall Street Journalopined against the concept. Here’s some background information.
Bad crises tend to produce worse policy… We speak of proposals for “corona bonds,” an idea floated as a fiscal solution to Europe’s deepening pandemic. Italian Prime Minister Giuseppe Conte launched the effort, and French President Emmanuel Macron this week joined Mr. Conte and seven other leaders in backing such a bond issue for health-care expenditures and economic recovery. Some 400 economists have joined the chorus. …The bonds would be backed collectively by member governments. The proceeds could be allocated to members such as Italy that otherwise couldn’t borrow from private markets. …Calls for euro bonds last hit a crescendo during the debt crises of 2010-12, when they were pitched to fund bailouts of Greece and others. But the idea has never gone anywhere because it would transform the eurozone into something voters didn’t approve when the currency was created in the 1990s.
And here’s the editorial’s explanation of why eurobonds would be a very bad idea.
Europeans were promised the euro would not become an excuse or vehicle for large fiscal transfers between member states. …Proponents say corona bonds are a special case due to the unfolding economic emergency. But the Italian government that now can’t finance its own recovery was also one of the worst fiscal offenders before Covid-19… Claims that the corona bond would be temporary aren’t credible because European elites have wanted such a facility for years… Voters can assume that if they get these bonds in a crisis, they’ll be stuck with this facility forever. …euro bonds would create profound governance problems. …With corona bonds, German and Dutch taxpayers for the first time are being asked to write a blank check to Italy and perhaps others.
Amen.
Once the camel’s nose is under the tent, it would simply be a matter of time before eurobonds would become a vehicle for bigger government in general and more country-to-country transfers in particular.
Hopefully this terrible idea will be blocked by nations such as Germany, Sweden, and the Netherlands (this satirical video will give you an idea of the tension between the European nations that foot the bills and the ones looking for handouts).
Some advocates for eurobonds say there’s nothing to worry about since the European Commission and related pan-European bureaucracies currently don’t spend much money, at least when measured as a share of overall economic output.
Which is why I sometimes warn my European friends that the United States is an example of why they should be vigilant.
For much of American history, the central government in Washington was very small, as envisioned by the Founders. But beginning with the so-called Progressive Era and then dramatically accelerating under the failed policies of Hoover and Roosevelt, the federal government has expanded dramatically in both size and scope.
The lesson to be learned is that more centralization is a very bad idea, particularly if that centralized form of government gains fiscal power.
That’s especially true for Europe since the burden of government spending at the national level already is excessive. Eurobonds would exacerbate the damage by creating a new European-wide method of spending money.
P.S. While eurobonds are a very bad idea, it would be even worse (akin to the U.S. approving the 16th Amendment) if the European Union somehow got the authority to directly impose taxes.
A few years ago, I put together a basic primer on corporate taxation. Everything I wrote is still relevant, but I didn’t include much discussion about international topics.
In part, that’s because those issues are even more wonky and more boring than domestic issues such as depreciation. But that doesn’t mean they’re not important – especially when they involve tax competition. Here are some comments I made in March of last year.
The reason I’m posting this video about 18 months after the presentation is that the issue is heating up.
The tax-loving bureaucrats at the International Monetary Fund have published a report whining about the fact that businesses utilize low-tax jurisdictions when making decisions on where to move money and invest money.
According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. …much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. …a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.
That’s a nice list of jurisdictions. My gut instinct, of course, is to say that high-tax nations should copy the pro-growth policies of places such as Bermuda, Singapore, the Cayman Islands, and Switzerland.
The IMF, however, thinks those are bad places and instead argues that harmonization would be a better approach.
…how does this handful of tax havens attract so much phantom FDI? In some cases, it is a deliberate policy strategy to lure as much foreign investment as possible by offering lucrative benefits—such as very low or zero effective corporate tax rates. …This…erodes the tax bases in other economies. The global average corporate tax rate was cut from 40 percent in 1990 to about 25 percent in 2017, indicating a race to the bottom and pointing to a need for international coordination. …the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies. No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalized economic environment.
Here’s a chart that accompanied the IMF report. The bureaucrats view this as proof of something bad
I view it as prudent and responsible corporate behavior.
At the risk of oversimplifying what’s happening in the world of international business taxation, here are four simple points.
It’s better for prosperity if money stays in the private sector, so corporate tax avoidance should be applauded. Simply stated, politicians are likely to waste any funds they seize from businesses. Money in the private economy, by contrast, boosts growth.
Multinational companies will naturally try to “push the envelope” and shift as much income as possible to low-tax jurisdictions. That’s sensible corporate behavior, reflecting obligation to shareholders, and should be applauded.
Nations can address “profit shifting” by using rules on “transfer pricing,” so there’s no need for harmonized rules. If governments think companies are pushing too far, they can effectively disallow tax-motivated shifts of money.
A terrible outcome would be a form of tax harmonization known as “global formula apportionment.” This wouldn’t be harmonizing rates, as the E.U. has always urged, but it would force companies to overstate income in high-tax nations.
Why does all this wonky stuff matter?
As I said in my presentation, we will suffer from “goldfish government” unless tax competition exiss to serve as a constraint on the tendency of politicians to over-tax and over-spend.
But some people complain this is akin to disarmament in a hostile world. I reject that analogy. If my neighbor shoots himself in the foot, I’ve never thought I should “level the playing field” by also shooting my foot.
That being said, we all should agree that the ideal scenario is for nations to adopt free trade agreements in order the maximize the economic benefits for all consumers and businesses.
And the good news is that nations have been building on the multilateral success of the WTO by also adopting bilateral free trade agreements.
The United States, for instance, has 14 FTAs that govern trade with 20 nations, most notably NAFTA. And while I grouse about some of the E.U.’s statist tendencies, there is genuine free trade among member nations.
But there is some bad news. Politicians and bureaucrats are slowly but surely hijacking FTAs and undermining their pro-growth impact with red tape.
It’s become so much of a problem that some free traders are questioning whether the current approach is worthwhile. For example, Iain Murray of the Competitive Enterprise Institute explains why he isn’t losing any sleep about America backing out of the Trans-Pacific Partnership.
The Trans-Pacific Partnership is an example of why free trade came to have such a bad reputation with the American public. Rather than a simple agreement to lower tariffs for mutual benefit, it morphed into a massive international regulatory regime over 5,000 pages long. It was weighed down by numerous non-trade provisions aimed at appeasing non-trade special interests. …the TPP went down the road of regulatory harmonization.
He makes sure to point out that the TPP may still have been worthwhile when using cost-benefit analysis.
This is not to say that…the TPP’s tariff reductions would not have outweighed the regulatory burden.
But he argues that a much better approach is FTAs based on regulatory competition.
…there is an alternative to 5,000 pages of regulatory harmonization. …regulatory competition may be a better solution than harmonization… Regulatory competition works best by mutual recognition. For instance, Australia and New Zealand have formed a single economic market based around the Trans-Tasman Mutual Recognition Agreement, whereby…Goods legally sold in one country can be sold in the other. This principle operates regardless of different standards, or other sale-related regulatory requirements between New Zealand and Australia. …Such an agreement would probably work very well between the U.S. and Canada – and, indeed, between the U.S. and both Australia and New Zealand in the Trans-Pacific context. …Australia, New Zealand, Canada, Chile, Singapore, and Hong Kong…A series of mutual recognition agreements with these former TPP countries would effectively form the nucleus of a Global Free Trade Association.
I would add the United Kingdom to Iain’s list (assuming it manages to extricate itself from the European Union).
Indeed, just yesterday I submitted a comment to the United States Trade Representative on a proposed FTA between the U.S. and the U.K.
Here’s some of that analysis.
A trade agreement between the United States and United Kingdom would be a chance to increase prosperity in both nations by eliminating all forms of trade barriers… It’s also an opportunity to refocus trade agreements in ways that recognize sovereignty and promote pro-market policies. More specifically, a free trade pact between the U.S. and U.K. would offer a much-needed opportunity to discard the clutter of exceptions, long phase out periods, and non-trade issues, which has characterized recent agreements, and instead go with a cleaner approach that would allow the simplicity of unfettered commerce. The ideal trade pact should seek to make trade between the U.S. and the U.K. as simple as trade between New York and Pennsylvania. That type of trade agreement doesn’t need to be cumbersome and doesn’t require a detailed thousand-page document.
…such a pact should be based on the principle of “mutual recognition,” which means that nations can have their own laws governing economic activity inside their borders, but they recognize that other nations have the same right. Most important, they also agree that there should be no restriction on the ability of consumers to buy from producers in the other nation(s). …Under such a regime, a company in the U.S. wouldn’t have to produce separate products for U.K. customers since there would be no policy restricting a consumer in, say, London, from buying a product made in, say, Cleveland. …A pact for free and open trade between the U.S. and U.K. could become a new role model for agreements between industrialized, high-income nations. If based on mutual recognition, such a free trade agreement should reverse the unfortunate trend of deals getting saddled with extraneous and/or harmful provisions.
And explain that FTAs based on mutual recognition produce an added benefit.
This approach respects national sovereignty and also would have the added benefit of encouraging policy competition between nations. If either the U.S. or the U.K. was over-regulating in a certain sector, it would mean a loss of sales to the other country, which surely would create pressure for regulatory relief. Very similar to the way tax competition puts pressure on governments today not to impose excessive tax rates.
In other words, it’s not a good idea to put all your eggs in one basket.
Let’s close with a picture that powerfully captures what’s wrong with the current approach to free trade agreements. Does anybody think the new Singapore-E.U. pact is really about unfettered commerce?
I’ve previously written about the bizarre attack that the European Commission has launched against Ireland’s tax policy. The bureaucrats in Brussels have concocted a strange theory that Ireland’s pro-growth tax system provides “state aid” to companies like Apple (in other words, if you tax at a low rate, that’s somehow akin to giving handouts to a company, at least if you start with the assumption that all income belongs to government).
This has produced two types of reactions. On the left, the knee-jerk instinct is that governments should grab more money from corporations, though they sometimes quibble over how to divvy up the spoils.
Senator Elizabeth Warren, for instance, predictably tells readers of the New York Times that Congress should squeeze more money out of the business community.
Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to…repair our broken corporate tax code. …Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10.
As part of her goal to triple the tax burden of companies, she also wants to adopt full and immediate worldwide taxation. What she apparently doesn’t understand (and there’s a lot she doesn’t understand) is that Washington may be capable of imposing bad laws on U.S.-domiciled companies, but it has rather limited power to impose bad rules on foreign-domiciled firms.
So the main long-run impact of a more onerous corporate tax system in America will be a big competitive advantage for companies from other nations.
The reaction from Jacob Lew, America’s Treasury Secretary, is similarly disappointing. He criticizes the European Commission, but for the wrong reasons. Here’s some of what he wrote for the Wall Street Journal, starting with some obvious complaints.
…the commission’s novel approach to its investigations seeks to impose unfair retroactive penalties, is contrary to well established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.
But his solutions would make the system even worse. He starts by embracing the OECD’s BEPS initiative, which is largely designed to seize more money from US multinational firms.
…we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development.
He then regurgitates the President’s plan to replace deferral with worldwide taxation.
…the president’s plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income.
In other words, his “solution” to the European Commission’s money grab against Apple is to have the IRS grab the money instead. Needless to say, if you’re a gazelle, you probably don’t care whether you’re in danger because of hyenas or jackals, and that’s how multinational companies presumably perceive this squabble between US tax collectors and European tax collectors.
On the other side of the issue, critics of the European Commission’s tax raid don’t seem overflowing with sympathy for Apple. Instead, they are primarily worried about the long-run implications.
Veronique de Rugy of the Mercatus Center offers some wise insight on this topic, both with regards to the actions of the European Commission and also with regards to Treasury Secretary Lew’s backward thinking. Here’s what she wrote about the never-ending war against tax competition in Brussels.
At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.
And she also points out that Treasury Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and BEPS.
…as Lew’s op-ed demonstrates, …they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system. …In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. …And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel… The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.
John O’Sullivan, writing for National Review, echoes Veronique’s point about tax competition and notes that elimination of competition between governments is the real goal of the European Commission.
…there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. …Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe. Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.
Holman Jenkins of the Wall Street Journal offers some sound analysis, starting with his look at the real motives of various leftists.
…attacking Apple is a politically handy way of disguising a challenge to the tax policies of an EU member state, namely Ireland. …Sen. Chuck Schumer calls the EU tax ruling a “cheap money grab,” and he’s an expert in such matters. The sight of Treasury Secretary Jack Lew leaping to the defense of an American company when in the grips of a bureaucratic shakedown, you will have no trouble guessing, is explained by the fact that it’s another government doing the shaking down.
Tax harmonization is a final refuge of those committed to defending Europe’s stagnant social model. Even Ms. Vestager’s antitrust agency is jumping in, though the goal here oddly is to eliminate competition among jurisdictions in tax policy, so governments everywhere can impose inefficient, costly tax regimes without the check and balance that comes from businesses being able to pick up and move to another jurisdiction. In a harmonized world, of course, a check would remain in the form of jobs not created, incomes not generated, investment not made. But Europe has been wiling to live with the harmony of permanent recession.
Even the Economist, which usually reflects establishment thinking, argues that the European Commission has gone overboard.
…in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant… Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago.
Seeking a silver lining to this dark cloud, the Economist speculates whether the EC tax raid might force American politicians to fix the huge warts in the corporate tax system.
Some see a bright side. …the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely.
America desperately needs a sensible system for taxing corporate income, so I fully agree with this passage, other than the strange call for “ending deferral.” I’m not sure whether this is an editing mistake or a lack of understanding by the reporter, but deferral is no longer an issue if the tax code is reformed to that the IRS is “taxing only profits made in America.”
But the main takeaway, as noted by de Rugy, O’Sullivan, and Jenkins, is that politicians want to upend the rules of global commerce to undermine and restrict tax competition. They realize that the long-run fiscal outlook of their countries is grim, but rather than fix the bad policies they’ve imposed, they want a system that will enable higher ever-higher tax burdens.
In the long run, that leads to disaster, but politicians rarely think past the next election.
P.S. To close on an upbeat point, Senator Rand Paul defends Apple from predatory politicians in the United States.
But there is something even worse, a Multilateral Convention on Mutual Administrative Assistance in Tax Matters that has existed for decades but recently has been dangerously modified. MCMAATM is a clunky acronym, however, so let’s go with GATCA. That’s because this agreement, along with companion arrangements, would lead to a Global Tax Compliance Act.
And the United States would be the biggest loser. That’s because FATCA was bad legislation that primarily imposed heavy costs on – and caused much angst in – the rest of the world.
Let’s learn more about this bad idea, which will become binding on America if approved by the Senate.
James Jatras explains this dangerous proposal in a column for Accounting Today.
Treasury’s real agenda is…a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration. …the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.
The Foreign Relations Committee unfortunately has approved the GATCA Protocol.
…the senator is right to insist that the OECD Protocol is dead on arrival.
Taxpayers all over the world owe him their gratitude.
In a column for Investor’s Business Daily, Veronique de Rugy of the Mercatus Center warns that this pernicious and risky global pact would give the IRS power to collect and automatically share massive amounts of our sensitive financial information with some of the world’s most corrupt, venal, and incompetent governments.
During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition. For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. …they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development’s latest attempt to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.
But she closes with the good news.
Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it’s currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah.
Actually, all that’s being blocked is the ability to ram the Multilateral Convention through the Senate without any debate or discussion.
John Gray explains the procedural issues in a piece for Conservative Review.
Senators Rand Paul (R-KY) and Mike Lee (R-UT)…aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for. …Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments. They simply want them to be expedited through the Senate without transparency. …As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. …These treaties are dangerous to our personal liberties. Senator Paul and Senator Lee deserve the transparency and debate they’ve requested.
Amen.
For those of us who want good tax policy, rejecting this pact is vital.
An ideal fiscal system not only has a low rate, but also taxes income only one time and only taxes income earned inside national borders.
For fans of the flat tax, national sales tax, or other proposals for tax reform, this would be a death knell.
But this isn’t just a narrow issue of tax policy. On the broader issue of privacy and government power, Professor Niall Ferguson of Harvard makes some very strong points in a column for the South China Morning Post.
I should be a paid-up supporter of the campaign to close down tax havens. I should be glad to see the back of 500-euro bills. …Nevertheless, I am deeply suspicious of the concerted effort to address all these problems in ways that markedly increase the power of states – and not just any states but specifically the world’s big states – at the expense of both small states and the individual.
He cites two examples, starting with the intrusive plan in the U.K. to let anybody and everybody know the owners of property.
The British government announced it will set up a publicly accessible register of beneficial owners (the individuals behind shell companies). In addition, offshore shell companies and other foreign entities that buy or own British property will henceforth be obliged to declare their owners in the new register. No doubt these measures will flush out or deter some villains. But there are perfectly legitimate reasons for a foreign national to want to own a property in Britain without having his or her name made public. Suppose you were an apostate from Islam threatened with death by jihadists, for example.
…getting rid of bin Ladens is the thin end of a monetary wedge. …a number of economists…argue cash is an anachronism, heavily used in the black and grey economy, and easily replaced in an age of credit cards and electronic payments. But their motive is not just to shut down the mafia. It is also to increase the power of government. Without cash, no payment can be made without being recorded and potentially coming under official scrutiny. Without cash, central banks can much more easily impose negative interest rates, without fearing that bank customers may withdraw their money.
He’s right. The slippery slope is real. Giving governments some power invariably means giving governments a lot of power.
And that’s not a good idea if you’re a paranoid libertarian like me. But even if you have a more benign view of government, ask yourself if it’s a good idea to approve a global pact that is explicitly designed to help governments impose higher tax burdens?
Senators Paul and Lee are not allowing eight treaties to go forward without open debate and discussion. Seven of those pacts are bilateral agreements that easily could be tweaked and approved.
But the Protocol to the Multilateral Convention can’t be fixed. The only good outcome is defeat.
Most normal Americans have never heard of the “Base Erosion and Profit Shifting” project being pushed by the tax-loving bureaucrats at the Paris-based Organization for Economic Cooperation and Development.
But in the world of tax policy, BEPS is suddenly attracting a lot of attention, mostly because the business community has figured out it’s a scheme that would require them to pay more money to greedy governments.
Though I will say that the Wall Street Journalquickly recognized that the BEPS scheme was a ruse for tax increases on the business community.
And the editors of the paper have continued their criticisms as BEPS has morphed from bad concept to specific policy. Here are some passages from an editorial earlier this week.
…the Organization for Economic Cooperation and Development this week released its final proposals for combatting “base erosion and profit shifting,” or BEPS. …The OECD claims governments lose anywhere between $100 billion and $240 billion in revenue each year to such legal strategies, and it has spent two years concocting complex rules and new compliance burdens to stop it. Perhaps the worst of the OECD’s ideas is…country-by-country reports to every jurisdiction in which a company operates would detail operations in that area, and where it has paid tax on any relevant profits.
The WSJ is particularly concerned about proposals to require sharing of information with irresponsible and corrupt governments.
Ostensibly this…data would be kept confidential. Fat chance about that, especially if a high-taxing government thinks it has spotted an opportunity to grab more revenue or indulge some political grandstanding. A related proposal would require companies to hand over their so-called master files to governments. Those files, which detail global operations and intra-company transfers, are essentially guides to proprietary business strategies. Passing them to the authorities, and especially governments that run state-owned enterprises competing with multinational firms, is an invitation to mischief.
The OECD’s proposals also will mean higher compliance costs.
Companies could also be forced to spend years in courts and arbitration challenging potential new instances of the double taxation the current global tax system was developed to avoid. …Underlying all of this is the belief that the fiscal problems of the world result from insufficient tax collection, when the real culprit is anemic growth.
The final point in the above passage deserves special attention. Economic growth in many industrialized nations is relatively anemic because of bad government policy. And since people are earning less income and businesses are earning fewer profits, this means less revenue for government.
But rather than fix the policies that are causing sub-par growth, the politicians want to impose higher tax rates.
Needless to say, this will simply lead to less taxable income, making it even harder to collect revenue (this is the core insight of the Laffer Curve).
It’s also worth citing what the Wall Street Journalwrote over the summer on the BEPS issue. The editors started with an important observation about companies being able to invest in high-tax nations because they can protect some of their profits.
The global war on low tax rates entered a new stage… Hang onto your wallets—and your proprietary corporate data. …Governments have noticed that companies try to protect themselves from rapacious tax policies. …This is all legal for now, and a good thing too. Shielding profits from growth-killing taxes helps make investment and job creation in high-tax jurisdictions more economical.
And the editorial also warns about the dangers of giving dodgy governments access to more information, particularly when some of them will be incapable of protecting data from hackers.
The compliance burden these rules would impose counts as a new tax in itself. Despite some attempts to allow companies to file only one global disclosure in the jurisdiction of the corporate headquarters, in practice firms are likely to have to submit multiple, overlapping documents around the world. Sensitive corporate financial information would then be shared among global tax collectors. If you believe the OECD’s claim that all this will be kept confidential, have a chat with any of the millions of federal employees whose personnel files Uncle Sam allowed China to hack.
By the way, I don’t doubt for one second that companies push the envelope as they try to protect their shareholders’ money from government.
But less money for government is a good outcome. Particularly when politicians are imposing taxes – like the corporate income tax – that hurt workers by impeding capital investment.
Dealing with those problems is the right approach, not some money grab from an international bureaucracy. I shared these ideas in this brief presentation I made to an audience on Capitol Hill.
For what it’s worth, the chart I shared is all the evidence you could ever want that governments aren’t suffering from a lack of corporate tax revenue.
Moreover, while I don’t like OECD schemes to enable higher tax burdens, the BEPS project won’t equally affect all businesses.
Let’s look at how the project specifically disadvantages American companies (above and beyond the self-imposed damage from Washington).
Aparna Mathur of the American Enterprise Institute explains how BEPS will make a bad system even worse for US-based multinationals.
The U.S. has much to lose from a shift to this system. …the U.S. today has the highest corporate tax rate in the OECD. Under BEPS, this would affect the real decisions of firms to locate jobs and capital investment in the U.S.. In a recent report Michael Mandel points out that the BEPS principles will give multinationals a strong incentive to move high-paying creative and research jobs out of the U.S. since that is the easiest way to take advantage of low tax rates. …The current U.S. system of corporate taxation has many flaws. …the changes envisaged under the OECD’s BEPS project would make matters even worse.
This doesn’t sound good.
Some people have complained about corporate inversions, but it doesn’t hurt America when a company technically redomiciles in a nation with better tax law. After all, the jobs, factories, and headquarters generally remain in the United States.
But the way BEPS is structured, companies will have to move economic activity out of America.
Last but not least, Veronique de Rugy of the Mercatus Center identifies some major systematic flaws in the BEPS project. She starts by pointing out what the OECD wants.
Europe’s largest welfare states…are leading the charge through the Organisation for Economic Co-operation and Development to raise corporate tax rates globally. …The underlying assumption behind the base erosion and profit shifting, or BEPS, project is that governments aren’t seizing enough revenue from multinational companies. …Its solution is to force those companies that wisely structured their operations to benefit from low-tax jurisdictions to declare more income in high-tax nations.
And then she explains what will be the inevitable result of higher tax burdens.
Far from filling government coffers in order to continue funding massive redistributive welfare regimes, BEPS will strangle global economic output and erode tax bases even further. …Corporations provide an easy political target for tax-hungry politicians, but the burden of corporate taxes falls on ordinary citizens. Employees, shareholders, and investors will bear the brunt of the OECD’s corporate tax grab, all because European politicians refuse to accept responsibility for building bigger governments than their economies can sustain.
So what is the Obama White House doing to protect American companies from this global tax grab?
The good news is that some folks from the Treasury Department have complained that the project is targeting U.S. multinationals.
The bad news is that the minor grousing from the United States hasn’t had an impact. Not that we should be surprised. Because of a shared belief in statism, the Obama Administration has worked to expand the OECD’s power to push bad tax policy around the world.
P.S. Since today’s topic is arcane yet important international tax issues, allow me to share an update on the horribly misguided FATCA law. As is so often the case, the op-ed page of the Wall Street Journal is the source of great wisdom.
Or, in this case, maybe it would be best to write “the source of great sadness and frustration.”
America is the only country that taxes citizens on their global earnings, and in 2010 Washington exacerbated that by passing the Foreign Account Tax Compliance Act, or Fatca. As this law comes into force, it is doing immense harm to…the 8.7 million U.S. citizens living abroad, who have essentially been declared guilty of financial crimes unless they can prove otherwise. …American leadership overseas, from volunteer organizations to the business world, has diminished. No one wants an American involved when their citizenship attracts a maze of rules, regulations, potential fines and criminal penalties. …It’s painful to witness the anguish of patriotic Americans as they contemplate giving up their U.S. citizenship, as record numbers have been doing. In 2014, 3,417 renounced their citizenship, a 266% increase over 2012, before Fatca came fully into effect.
Interestingly, the way to solve the FATCA problem is the same way to deal with the corporate inversion issue.
The best solution is for the U.S. to join the rest of the world in taxing based on residency rather than citizenship. …Doing so would advance American fairness, mobility and economic competitiveness.
If you want to pinpoint the leading source of bad economic policy proposals, I would understand if someone suggested the Obama Administration.
But looking to Europe might be even more accurate.
For instance, I’d be hard pressed to identify a policy more misguided than continent-wide eurobonds, which I suggested would be akin to “co-signing a loan for your unemployed alcoholic cousin who has a gambling addiction.”
And now there’s another really foolish idea percolating on the other side of the Atlantic Ocean.
The U.K.-based Financial Times has a story about calls for greater European centralization from Italy.
Italy’s finance minister has called for deeper eurozone integration in the aftermath of the Greek crisis, saying a move “straight towards political union” is the only way to ensure the survival of the common currency. …Italy and France have traditionally been among the most forceful backers of deeper European integration but other countries are sceptical about supporting a greater degree of political convergence. …Italy is calling for a wide set of measures — including the swift completion of banking union, the establishment of a common eurozone budget and the launch of a common unemployment insurance scheme — to reinforce the common currency. He said an elected eurozone parliament alongside the existing European Parliament and a European finance minister should also be considered. “To have a full-fledged economic and monetary union, you need a fiscal union and you need a fiscal policy,” Mr Padoan said.
This is nonsense.
The United States has a monetary union and an economic union, yet our fiscal policy was very decentralized for much of our nation’s history.
And Switzerland has a monetary and economic union, and its fiscal policy is still very decentralized.
There’s an ideological reason and a practical reason for this bias.
The ideological reason is that statists strongly prefer one-size-fits-all systems because government has more power and there’s no jurisdictional competition (which they view as a “race to the bottom“).
The practical reason is that politicians from the weaker European nations see a fiscal union as a way of getting more transfers and redistribution from nations such as Germany, Finland, and the Netherlands.
But the Italian political elite also has a statist ideological perspective. And the best evidence for that is the fact that Signore Padoan used to be a senior bureaucrat at the Paris-based OECD.
The Italian finance minister…served as former chief economist of the OECD.
You won’t be surprised to learn that French politicians also have been urging a supranational government for the eurozone. And presumably for the same reasons of ideology and self-interest.
But here’s the man-bites-dog part of the story.
The German government also seems open to the idea, as reported by the U.K.-based Independent.
France and Germany haveagreed a new plan for closer eurozone political union… The new Franco-German agreement would see closer cooperation between the 19 countries.
Wow, don’t the politicians in Berlin know that a fiscal union is just a scheme to extract more money from German taxpayers?!?
As I wrote three years ago, this approach “would involve putting German taxpayers at risk for the reckless fiscal policies in nations such as Greece, Italy, and Spain.“
But maybe the Germans aren’t completely insane. Writing for Bloomberg, Leonid Bershidsky explains that the current German position is to have a supranational authority with the power to reject national budgets.
The German perspective on a political and fiscal union is a little more cautious. Last year, German Finance Minister Wolfgang Schaeuble and a fellow high-ranking member of the CDU party, Karl Lamers, calledfor a euro zone parliament (not elected, but comprising European Parliament members from euro area countries) and a budget commissioner with the power to reject national budgets if they contravene a certain set of rules agreed by euro members.
And since the German approach is disliked by the Greeks, then it can’t be all bad.
Former Greek finance minister Yanis Varoufakis, Schaeuble’s most eloquent hater, pointed out in a recent article for Germany’s Die Zeit that, in the Schaeuble-Lamers plan, the budget commissioner is endowed only with “negative” powers, while a true federation — like Germany itself — elects a parliament and a government to formulate positive policies.
But “can’t be all bad” isn’t the same as good.
Simply stated, any sort of eurozone government almost surely will morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.
So you can see why Europe’s political elite may be even more foolish than their American counterparts.
One would think that Europeans might finally be realizing that an ever-growing welfare state and an ever-rising tax burden are a form of economic suicide.
The most obvious bit of evidence is to look at what’s happening in Greece. Simply stated, public policy for too long has punished workers and producers while rewarding looters and moochers. The result is economic collapse, bailouts, and the destruction of cultural capital.
But Greece is just the tip of the iceberg. Many other European nations are heading in the same direction and it shows up in the economic data. Living standards are already considerably lower than they are in the United States. Yet instead of the “convergence” that’s assumed in conventional economic theory, the Europeans are falling further behind instead of catching up.
There are some officials sounding the alarm.
In a column for the Brussels Times, Philippe Legrain, the former economic adviser to the President of the European Commission, has a glum assessment of the European Union.
In 2007, the EU accounted for 31 per cent of the world economy, measured at market prices. This year, it will account for only 22 per cent, according to the International Monetary Fund (IMF). Eight years ago, the EU’s economy was a fifth bigger than the US’s; this year it is set to be smaller than America’s. …Continued economic decline seems inevitable.
But it seems that the folks who recognize that there is a problem are greatly out-numbered by those who want to make the problem worse.
Yet, as reported by the EU Observer, some statists at the European Commission want to mandate the amounts of redistribution in member nations.
The European Commission is to push for minimum standards on social protection across member states… Employment commissioner Marianne Thyssen Tuesday (9 June) said she wants to see minimum unemployment benefits, a minimum income, access to child care, and access to basic health care in all 28 countries. …The commission will look into whether “enough people are covered in member states when they have an unemployment problem; how long are they protected. What is the level of the unemployment benefit in comparison with the former wage they earned,” said Thyssen. …”The aim is to have an upper convergence…”
This is a horrible idea. It’s basically designed to impose a rule that forces nations to be more like France and Greece.
Instead of competition, innovation, and diversity, Europe would move even further in the direction of one-size-fits-all centralization.
Though I give her credit for admitting that the purpose of harmonization is to force more spending, what she calls “upper convergence.” So we can add Ms. Thyssen to our list of honest statists.
And speaking of centralization, some politicians want to go beyond mandates and harmonization and also have EU-wide taxes and spending.
Here are some of the details from a report in the U.K.-based Guardian.
German and French politicians are calling for a…eurozone treasury equipped with a eurozone finance chief, single budget, tax-raising powers, pooled debt liabilities, a common monetary fund, and separate organisation and representation within the European parliament. …They call for the setting up of “an embryo euro area budget”, “a fiscal capacity over and above national budgets”, and harmonised corporate taxes across the bloc. The eurozone would be able to borrow on the markets against its budget, which would be financed from a kind of Tobin tax on financial transactions and also from part of the revenue from the new business tax regime.
By the way, this initiative to impose another layer of taxes and spending in Europe isn’t being advocated by irrelevant back-bench politicians. It’s being pushed by Germany’s Vice Chancellor and France’s Economy Minister!
Thankfully, not everyone in Europe is economically insane. Syed Kamall, a member of the European Parliament form the U.K.’s Conservative Party, is unimpressed with this vision of greater centralization, harmonization, and bureaucratization.
Here’s some of what he wrote in a column for the EU Observer.
The socialist dream that these two politicians propose would soon turn into a nightmare not just for the Eurozone, but for the entire EU. …Their socialist vision of harmonised taxation and more social policies sounds utopian on paper but it fails to accept a basic fact: that Europe is not the world, and Europe cannot close itself off from the world. …After several decades of centralisation in the EU, we have seen the results: …a failure to keep up with growing economic competitiveness in many parts of the world. …Specific proposals such as harmonised corporate taxes are nothing new from the socialists, but they would reduce European competitiveness. …With greater harmonisation Europe’s tax rate would only be as low as the highest-taxing member. …
Syed’s point about Europe not being the world is especially relevant because the damage of one-size-fits-all centralization manifests itself much faster when jobs and capital can simply migrate to other jurisdictions.
Over the years, I’ve shared some ridiculous arguments from our leftist friends.
Paul Krugman, for instance, actually wrote that “scare stories” about government-run healthcare in the United Kingdom “are false.” Which means I get to recycle that absurd quote every time I share a new horror story about the failings of the British system.
Today we have some assertions from a statist that are even more absurd
“Taxes for thee, but not for me!”
Pascal Saint-Amans is a bureaucrat at the Paris-based Organization for Economic Cooperation and Development. He has spent his entire life sucking at the public teat. After spending many years with the French tax authority, he shifted to the OECD in 2007 and now is in charge of the bureaucracy’s Centre for Tax Policy Administration.
I don’t know why he made the shift, but perhaps he likes the fact that OECD bureaucrats get tax-free salaries, which nicely insulates him from having to deal with the negative consequences of the policies he advocates for folks in the private sector.
Anyhow, Saint-Amans, acting on behalf of the uncompetitive nations that control the OECD, is trying to create one-size-fits-all rules for international taxation and he just wrote a column for the left-wing Huffington Post website. Let’s look at a few excerpts, starting with his stated goal.
To regain the confidence and trust of our citizens, there is a pressing need for action. To this end, the OECD’s work…will pave the way for rehabilitating the global tax system.
You probably won’t be too surprised to learn that the OECD’s definition of “rehabilitating” in order to regain “confidence and trust” does not include tax cuts or fundamental reform. Instead, Monsieur Saint-Amans is referring to the bureaucracy’s work on “tax base erosion and profit shifting (BEPS) and automatic exchange of information.”
I’ve already explained that “exchange of information” is wrong, both because it forces low-tax jurisdictions to weaken their privacy laws so that high-tax governments can more easily double tax income that is saved and invested, and also because such a system necessitates the collection of personal financial data that could wind up in the hands of hackers, identity thieves, and – perhaps most worrisome – under the control of governments that are corrupt and/or venal.
The OECD’s palatial headquarters – funded by U.S. tax dollars
So let’s focus on the OECD’s “BEPS” plan, which is designed to deal with the supposed crisis of “massive revenue losses” caused by corporate tax planning.
I explained back in March why the BEPS proposal was deeply flawed and warned that it will lead to “formula apportionment” for multinational firms. That’s a bit of jargon, but all you need to understand is that the OECD wants to rig the rules of international taxation so that high-tax nations such as France can tax income earned by companies in countries with better business tax systems, such as Ireland.
In his column, Monsieur Saint-Amans tries to soothe the business community. He assures readers that he doesn’t want companies to pay more tax as a punishment. Instead, he wants us to believe his BEPS scheme is designed for the benefit of the business community.
Naturally, the business community feels like it’s in the cross-hairs. …But the point of crafting new international tax rules is not to punish the business community. It is to even the playing field and ensure predictability and fairness.
And maybe he’s right…at least in the sense that high tax rates will be “even” and “predictable” at very high rates all around the world if government succeed in destroying tax competition.
You’re probably thinking that Saint-Amans has a lot of chutzpah for making such a claim, but that’s just one example of his surreal rhetoric.
He also wants readers to believe that higher business tax burdens will “foster economic growth.”
The OECD’s role is to help countries foster economic growth by creating such a predictable environment in which businesses can operate.
I guess we’re supposed to believe that nations such as France grow the fastest and low-tax economies such as Hong Kong and Singapore are stagnant.
Yeah, right. No wonder he doesn’t even try to offer any evidence to support his absurd claims.
But I’ve saved the most absurd claim for last. He actually writes that a failure to confiscate more money from the business community could lead to less government spending – and he wants us to believe that this could further undermine prosperity!
Additionally, in some countries the resulting lack of tax revenue leads to reduced public investment that could promote growth.
If so, he’s ignoring research on the negative impact of excessive government spending from international bureaucracies such as the International Monetary Fund, World Bank, and European Central Bank. And since most of those organizations lean to the left, these results should be particularly persuasive.
Perhaps he should peruse the compelling data in this video, which includes a comparison of the United States and Europe.
Not that I think it would matter. Saint-Amans is simply flunky for high-tax governments, and I imagine he’s willing to say and write ridiculous things to keep his sinecure.
…the world’s richest countries have hit upon a new idea that looks a lot like the old: International coordination to raise taxes on business. The Organization for Economic Cooperation and Development on Friday presented its action plan to combat what it calls “base erosion and profit shifting,” or BEPS. This is bureaucratese for not paying as much tax as government wishes you did. The plan bemoans the danger of “double non-taxation,” whatever that is, and even raises the specter of “global tax chaos” if this bogeyman called BEPS isn’t tamed. Don’t be fooled, because this is an attempt to limit corporate global tax competition and take more cash out of the private economy.
P.S. High-tax nations have succeeded in eroding tax competition in the past five years. The politicians generally claimed that they simply wanted to better enforce existing law. Some of them even said they would like to lower tax rates if they collected more revenue. So what did they do once taxpayers had fewer escape options? As you can probably guess, they raised personal income tax rates and increased value-added tax burdens.
P.P.S. If you want more evidence of the OECD’s ideological mission.
The OECD is pushing a “Multilateral Convention” that is designed to become something akin to a World Tax Organization, with the power to persecute nations with free-market tax policy.
It supports Obama’s class-warfare agenda, publishing documents endorsing “higher marginal tax rates” so that the so-called rich “contribute their fair share.”
The OECD advocates the value-added tax based on the absurd notion that increasing the burden of government is good for growth and employment.
P.P.P.S. I should take this opportunity to admit that Monsieur Saint-Amans probably could get a job in the private sector. His predecessor, for instance, got a lucrative job with a big accounting firm, presumably because “he had ‘value’ to the private sector only because of his insider connections with tax authorities in member nations.” See, it’s very lucrative to be a member of the parasite class.
2. I’m even more worried about global regulations that force all nations to adopt the same policy. The one-size-fits-all approach of regulatory harmonization is akin to an investment strategy of putting all your retirement money into one stock.
I talked about this issue in Slovakia, as a conference that was part of the Free Market Road Show. The first part of my presentation was a brief description of cost-benefit analysis. I think that’s an important issue, and you can click here is you want more info about that topic.
But today I want to focus on the second part of my presentation, which begins at about the 3:40 mark. Simply stated, there are big downsides to putting all your eggs in one regulatory basket.
Financial regulations like the Basel capital accords, designed to make banks act more prudentially, did the opposite – incentivising banks to load up on government-backed mortgage debt and, particularly in Europe, government bonds. Unlike mistakes made by individual firms, these were compounded across the entire global financial system.
The final sentence of that excerpt is key. Regulatory harmonization can result in mistakes that are “compounded across the entire global financial system.”
P.S. For a more learned and first-hand explanation of how regulatory harmonization can create systemic risk, check out this column by a former member of the Securities and Exchange Commission.
P.P.S. Politicians seem incapable of learning from their mistakes. The Obama Administration is trying to reinflate the housing bubble, which was a major reason for the last financial crisis. This Chuck Asay cartoon neatly shows why this is misguided.
P.P.S. Don’t forget that financial regulation is just one small piece of the overall red tape burden.
Two Belgian government ministers have complained…that..Belgian companies are facing unfair competition. The two Belgian cabinet ministers were in Hannover (Germany) on Monday. They decided on their visit after often hearing in Belgium that it was cheaper to get Belgian cattle processed in Germany than at home.
So what is the unfair competition from Germany? Are there special tariffs or trade barriers that are artificially raising costs on Belgian products?
Nope, the Belgians are complaining that Germany doesn’t have a minimum wage and that regulations are not sufficiently onerous. Oh, the horror.
The Belgian ministers say that the most striking thing is that this can happen legally because there is no general minimum wage in Germany: “The company is not violating any regulations, because there are no regulations and that must stop” Mr Vande Lanotte told the VRT. The Belgians insist Belgian companies are the subject of unfair competition. Economy Minister Vande Lanotte says that in principle everybody should be treated in the same way: “Belgian companies cannot compete with their German competitors and this has ramifications.”
Gasp, there “are no regulations.” What sort of vicious dog-eat-dog system are the Germans running?!?
The answer, of course, is that Germany has lots of red tape.
More statist than France?!?
But apparently not as much intervention as Belgium. And you’ll notice that the “principle” that “everybody should be treated the same way” is really a stalking horse for the argument that there should be regulatory harmonization.
But the harmonization always means that everyone has to impose more onerous rules. Belgium doesn’t harmonize with Germany’s comparatively market-oriented policy. Instead, Germany is supposed to harmonize with the more statist and interventionist model of the Belgians.
In an ideal world, the Germans would tell the Belgians to go jump in a lake.
But thanks to the never-ending pressure for regulation, harmonization, and centralization in Europe, it’s not that simple. The Brussels bureaucrats may decide to force Germany to adopt bad policy.
Mr Vande Lanotte intends to raise the issue of the absence of a minimum wage in many German sectors with the European Commission.
P.P.S. This story helps to explain why I want Belgium to split apart. If it became two nations, one Dutch and one French, I suspect we’d get better policy because they would then compete with each other instead of nagging Germany to become more statist.
Several months ago, I wrote a rather wonky post explaining that the western world became rich in large part because of jurisdictional competition. Citing historians, philosophers, economists, and other great thinkers, I explained that the rivalry made possible by decentralization and diversity played a big role in both economic and political liberalization.
Now I want to provide another argument in favor of the jurisdictional differences that are encouraged by national sovereignty. Simply stated, it’s the idea of diversification. Reduce risk by making sure one or two mistakes won’t cause a catastrophe.
This isn’t my insight. The author of The Black Swan understands that this simple principle of financial investment also applies to government. He recently explained his thinking in a short interview with Foreign Policy. The magazine began with a few sentences of introduction.
Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. …His newest project is helping governments get smarter about risks.
The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.
But it’s important to understand why he likes Switzerland and dislikes the European Union: Small is beautiful. More specifically, decentralized decision making means less systemic risk.
We need smaller, more decentralized government. On paper, it might appear much more efficient to be large — to have economies of scale. But in reality, it’s much more efficient to be small. …an elephant can break a leg very easily, whereas you can toss a mouse out of a window and it’ll be fine. Size makes you fragile.
Taleb elaborates on this theme, echoing many of the thinkers I cited in my wonky September post.
The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.
Because it’s a short article, he doesn’t cite many specific examples, so let me elaborate. One of the reasons for the financial crisis is that the world’s financial regulators thought it would be a good idea if everybody agreed to abide the same rules for weighing risks. This resulted in the Basel rules that tilted the playing field in favor of mortgage-backed securities, thus helping to create and pump up the housing bubble. And we know how that turned out.
Unfortunately, governments seem drawn to harmonization like moths to a flame. To make matters worse, the corporate community often has the same instinct. Their motive often is somewhat benign. They like the idea of one rulebook rather than having to comply with different policies in every nations.
But mistakes made for benign reasons can be just as bad as mistakes made for malignant reasons.
P.S. Last but not least, it’s worth noting that Taleb is not a big fan of democracy.
I have a negative approach to democracy. I think it should be primarily a mechanism by which people can remove a bad leader
I don’t know if this is because he recognizes the danger of untrammeled majoritarianism, much like Thomas Sowell, George Will, and Walter Williams. But if you want more information on why 51 percent of the people shouldn’t be allowed to oppress 49 percent of the people, here’s a very good video.
As you can probably guess, what they’re really searching for is more money for global redistribution.
But here’s the most worrisome part of their proposal. They want the U.N. to be in charge of collecting the taxes, sort of a permanent international bureaucracy entitlement.
…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.
Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to nations such as China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.
But don’t hold your breath waiting for that to happen.
Next, here’s what the U.N. says about a financial transactions tax.
A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.
But rather than reiterate some of my concerns about taxing financial consumers, I want to give a back-handed compliment the United Nations. The bureaucrats, by writing that “a higher rate…might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.
By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama Administration blows hot and cold on the topic.
Now let’s turn to the worst idea in the U.N. report. The clowns want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.
…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person.21 A 1 per cent tax on the wealth of these individuals would raise $46 billion in 2012.
I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”
But here’s a news flash for the nitwits at the United Nations. Rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is deliberate naiveté to think that this would be a successful long-run source of revenue.
For more information, I addressed wealth taxes in this post, and the argument I was making applies to a global wealth tax just as much as it applies to a national wealth tax.
Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the U.N. report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented at any point in the near future.
But the statists have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for going overboard on metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.
The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. The bureaucrats recently unveiled a proposal – to be discussed at a conference in South Korea in November – that would look at schemes to harmonize tobacco taxes and/or impose global taxes.
The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.
It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.
They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.
If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.
That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).
Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.
I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”.
His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.
Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.
In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.
The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.
Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.
I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).
It’s no coincidence that the U.S. and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the U.S., but Canada also scores very well in this measure, so the point is strong regardless).
Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).
Like Sweden and Denmark, Germany is a semi-rational welfare state. It generally relies on a market-oriented approach in areas other than fiscal policy, and it avoided the Keynesian excesses that caused additional misery and red ink in America (though it is far from fiscally conservative, notwithstanding the sophomoric analysis of the Washington Post).
Nonetheless, it’s difficult to have much optimism for Europe’s future when the entire political establishment of Germany blindly thinks there should be more centralization, bureaucratization, and harmonization in Europe.
The EU Observer has a story about the agenda of the de facto statists in the Christian Democratic party who currently run Germany.
“Harmonization über alles!”
…what Merkel and her party are piecing together is a radical vision of the EU in a few years time – a deep fiscal and political union. The fiscal side involves tax harmonisation, a tightly policed Stability and Growth Pact with automatic sanctions for countries that breach debt and deficit rules, and the possibility of an EU Commissioner responsible for directly intervention to oversee budgetary policy in a crisis-hit country. …On the institutional side, the CDU backs a directly elected President of the European Commission as well as clearly establishing the European Parliament and Council of Ministers as a bi-cameral legislature with equal rights to initiate EU legislation with the Commission.
Keep in mind that the Christian Democrats are the main right-of-center party in Germany, yet the German political spectrum is so tilted to the left that they want tax harmonization (a spectacularly bad idea) and more centralization.
Not surprisingly, the de jure statists of Germany have the same basic agenda. Here’s some of what the article says about the agenda of the Social Democrat and Green parties.
…its commitments to establish joint liability eurobonds and a “common European fiscal policy to ensure fair, efficient and lasting receipts” would also involve a shift of economic powers to Brussels. While both sides have differing ideological positions on the political response to the eurozone crisis – they are talking about more Europe, not less.
Over the years, I’ve strenuously objected to schemes that would enable international bureaucracies to levy taxes. That’s why I’ve criticized “direct funding” proposals, most of which seem to emanate from the United Nations.
Unfortunately, proponents of global taxes are like the Energizer Bunny of big government, relentlessly pushing a statist agenda. If the world economy is growing, it’s time for a global tax. If the world economy is stagnant, it’s time for a global tax. If it’s hot outside or cold outside, it’s time for a global tax (since “global warming” is one of the justifications for global taxation, I’m not joking).
Given this ongoing threat, I’m glad that Brian Garst of the Center for Freedom and Prosperity has put together a two-page Libertas explaining why international bureaucracies should not get taxing powers or direct funding.
…it would be imprudent to give international bureaucracies an independent source of revenue. Not only would this augment the already considerable risk of imprudent budgetary practices, it would exacerbate the pro-statism bias in these organizations. …The issue of taxing powers and direct funding has become an important issue because international organizations are challenging the contribution model and pushing for independent sources of revenue. The United Nations has been particularly aggressive in pushing for global taxes, seeking to expand its budget with levies on everything from carbon to financial transactions.
He then highlights one of the most dangerous proposals, a scheme by the World Health Organization to impose a “Solidarity Tobacco Contribution.”
Another subsidiary of the United Nations, the World Health Organization (WHO), is also looking to self-fund through global taxes. The WHO in 2010 publicly considered asking for global consumer taxes on internet activity, online bill paying, or the always popular financial transaction tax. Currently the WHO is pushing for increased excise taxes on cigarettes, but with an important condition that they get a slice of the added revenue. The so-called Solidarity Tobacco Contribution would provide billions of dollars to the WHO, but with no ability for taxpayers or national governments to monitor how the money is spent.
I have to give the left credit. They understand that few people are willing to defend tobacco, so proposing a global tax on cigarettes sounds noble, even though the real goal is to give the WHO a permanent stream of revenue.
Brian explains, though, why any global tax would be a mistake.
What all of these proposals have in common – in addition to their obvious intended use in promoting statist policies – is that they would erode the influence of national governments, reduce international accountability, promote waste, and undermine individual sovereignty and liberty. …Before long, international organizations will begin proposing – no doubt in the name of efficiency or reducing the burden on nation states – that affected taxpayers withhold and transfer taxes directly to the international body. This would effectively mean the end of the Westphalian system of sovereign nation states, and would result in a slew of new statist policies, and increased waste and corruption, as bureaucrats make use of their greater freedom to act without political constraint.
He concludes by noting that a global tobacco tax would be the proverbial camel’s nose under the tent. Once the statists succeed in imposing the first global tax, it will simply be a matter of time before additional levies are imposed.
National governments should not be fooled. Any sort of taxing power or direct funding for international bureaucracies would undermine national sovereignty. More importantly, it will further weaken the ability of people to influence and control the policies to which they are subjected. Moreover, once the first global tax is imposed, the floodgates will be opened for similar proposals.
The point about fiscal sovereignty is also important. Not because national governments are keen to adopt good policy, but because nations at least have to compete against each other.
Over the years, tax competition among governments has led to lower tax rates on personal and corporate income, as well as reductions in the double taxation of income that is saved and invested.
I’ve periodically put up other gun control posters that have been very popular, and you can peruse them here, here, here, here, and here. I’ve also posted amusing images of t-shirts and bumper stickers on gun control, which can be seen here, here, and here.
This is either frightening or hilarious. The people in Washington who are trying to make America more like Europe are advising the Europeans to double-down on the awful policies that have pushed the continent’s welfare states to insolvency.
Treasury Secretary Timothy Geithner will take the unprecedented step of attending a meeting of EU finance ministers in Poland on Friday. It will be his second trip to Europe in a week after he met his main EU counterparts at a G7 meeting last weekend. Obama said that while Greece is the immediate concern, an even bigger problem is what may happen should markets keep attacking the larger economies of Spain and Italy. “In the end the big countries in Europe, the leaders in Europe must meet and take a decision on how to coordinate monetary integration with more effective co-ordinated fiscal policy,” the news agency EFE quoted him as saying. Geithner is likely to urge euro zone finance ministers on Friday to speed up ratification of changes to their bailout fund and consider boosting its size, an EU source said. …Obama’s comments suggested that Washington is trying to nudge European governments toward closer fiscal union or a bigger bailout fund to recapitalize teetering banks but European politics, especially in Germany, make that difficult.
But you have to give Obama and Geithner credit. They support the same bad policies on both sides of the Atlantic Ocean.
Obama, however, is not fully consistent in his beliefs. During a visit to Africa, he said, “No business wants to invest in a place where government skims 20 percent off the top.” But I guess bigger government is okay in Europe, where the burden of government is already 50 percent of economic output.
If Jimmy Carter and Barack Obama are neck-and-neck competitors in the contest to be the public face of incompetent statism in America, then the competition in Europe is between Herman van Rompuy and Olga Stefou.
But since I’ve already crowned Ms. Stefou as the Queen of Greece, then Mr Rompuy (a.k.a., President of the Euorpean Council) is the winner by default.
And “winner by default” is a pretty good description of this statist paper pusher. I’ve previously mocked this über-bureaucrat for:
Even though he has this impressive list of accomplishments, Mr. Rompuy is not taking any chances. To cement his place in history, he is overseeing a series of disastrous bailouts and then ineffectually complaining that markets are unimpressed by his willingness to throw good money after bad. Here’s a blurb from an article in the EU Observer.
Van Rompuy, who brokered the eurozone deal on Greece, precipitated by the very same rising costs as for the Italian government, has tried to allay market fears in an op-ed published in several European newspapers. “Astonishingly,” he writes, “since our summit the cost of borrowing has increased again for a number of euro area countries. I say astonishingly, because all macro economic fundamentals point in the opposite direction.” The Greek bailout conditions are “exceptional” and mark no precedent for other countries, he added. Citing the austerity measures adopted in Italy and Spain, as well as Madrid’s low debt, Van Rompuy accused the markets of making risk assessments “totally out of line with the fundamentals.” Ratings agencies which downgraded the two countries also acted in a “ludicrous” way when putting them in the top tier of default risk countries, he claimed.
Let’s recap: The fiscal collapse of Europe is proceeding in a predictable fashion, as excessive spending and high tax rates are strangling growth and pushing red ink to unsustainable levels.
And Mr. Rompuy thinks the answer is more spending, higher taxes, and additional debt. And then this clown has the nerve to complain that markets are giving a thumbs-down. Amazing.
Even more astounding, or perhaps even more discouraging, President Obama wants America to travel down the same path.
But that’s a story for another day. Let’s close this post by looking at a couple of amusing videos, featuring the head of the UK Independence Party raking Mr. Rompuy over the coals.
Why hasn’t Europe fought World War III? Could it be because the Soviet Union eventually collapsed? Could it be that the NATO, the western military alliance, was effective? Could it be the mutually assured destruction kept the peace? Could it be that America’s commitment to defend Europe was a deterrent?
But all those reasons focus on the role of the Soviet Union. Let’s cast the net wider and ask why World War III, or even smaller wars, didn’t begin with fights among Western European nations. How did long-time rivals France and England avoid war? Why did the Germans not launch another war on the continent? Did these things not happen because civilization finally triumphed? Because the peoples of Europe finally got sick of fighting? Because Western European nations were focused on the danger from the Soviet Union? Because the large U.S. military presence as part of NATO helped keep the peace?
I’m not a foreign policy expert, so I’m sure this is not even close to being a comprehensive list of potential explanations. But it turns out that all of my guesses are wrong. Or they’re wrong if we choose to believe French Finance Minister Christine Lagarde, who says the creation of a pan-European bureaucracy in Brussels has been the key to peace. Moreover, we are supposed to believe that the only way to keep the peace is to impose more harmonization, more centralization, and more bureaucratization on the unwilling peoples of Europe.
You may think I’m being satirical, but this is not a joke. Ms. Lagarde was being interviewed on BBC. She was asked about plans to further erode national sovereignty and transfer more power to Brussels, and whether the people of Europe (rather than just the political elite) should get to choose whether this happens. Here’s a summary of her mind-blowing statement from Open Europe.
…when asked whether people had ever voted for this convergence she replied, “The European project has been around for over fifty years and it was built on the back of a situation where people were at war…The European project is something we all believe in because we want peace to be maintained.”
To be fair, I don’t actually think Ms. Lagarde is stupid. There’s no way she thinks the so-called European Project, or any of its bureaucratic creations (European Commission, European Parliament, European Court of Justice, etc), deserves credit for keeping the peace. But she obviously thinks the people of Europe are a bunch of stupid peasants and serfs. Or she thinks they are so powerless, thanks to the anti-democratic structure of the European Union and the housebroken European media, that she can say something utterly absurd and be confident that there will be no adverse consequences.
1 Mario Draghi – Governor Banca d’Italia
2 Timothy Geithner – Secretary of the Treasury US Department of the Treasury
3 Barney Frank – Congressman United States House of Representatives
4 Dominique Strauss-Kahn – Managing Director International Monetary Fund
5 Josef Ackermann – Chairman of the Management Board and the Group Executive Committee Deutsche Bank AG
6 Nout Wellink – President De Nederlandsche Bank
7 Zhou Xiaochuan- Governor People’s Bank of China
8 Michel Barnier – Commissioner for the Internal Market and Services European Commission
9 Jean-Claude Trichet – President European Central Bank
10 Stefan Walter – Secretary General Basel Committee on Banking Supervision
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244 Daniel J. Mitchell – Senior Fellow The Cato Institute
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262 George Soros – Hedge Fund Manager Quantum Mutual Funds.
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407 Paul Krugman – Columnist and Economist New York Times
The federal government is capable of enormous waste, which obviously is bad news, but the worst forms of government spending are those that actually leverage bad things. In a previous video on the economics of government spending, I call this the “negative multiplier” effect, and one of the worst examples is the $100 million that taxpayers spend each year to subsidize the Paris-based Organization for Economic Cooperation and Development.
There are many other examples of the negative multiplier effect.
The old welfare system, for instance, paid people not to work and have babies out of wedlock (this still happens, but it’s not as bad as it used to be). Paying exorbitant salaries to federal bureaucrats is bad, but it’s even worse if they take their jobs seriously and promulgate new regulations and otherwise harass people in the productive sector of the economy.
Europe’s economy is stagnant, the euro currency is in danger of collapse, and many nations are on the verge of bankruptcy. But one thing you can count on in this time of crisis is for prompt, thoughtful, and intelligent action by the super-bureaucrats of the European Commission. Right? Well, maybe not. You can be confident, however, that they will generate idiotic regulations that increase costs and trample national sovereignty. The latest example is some new red tape that will prohibit grocers from selling items based on numerical quantity. I’m not joking. Here’s a blurb from the UK-based Telegraph:
Under the draft legislation, to come into force as early as next year, the sale of groceries using the simple measurement of numbers will be replaced by an EU-wide system based on weight. It would mean an end to packaging descriptions such as eggs by the dozen, four-packs of apples, six bread rolls or boxes of 12 fish fingers. …The changes would cost the food and retail industries millions of pounds as items would have to be individually weighed to ensure the accuracy of the label. Trade magazine, The Grocer, said food industry sources had described the move as “bonkers” and “absolute madness”. Its editor, Adam Leyland, said the EU had “created a multi-headed monster”. Caroline Spelman said: “This goes against common sense. Shopkeeping is a long standing British tradition and we know what customers want. They want to buy eggs by the dozen and they should be allowed to – a point I shall be making clear to our partners in Europe.” …Andrew Opie, food director of the British Retail Consortium, which represents 90 per cent of UK shops, said: “This is a bad proposal – we need to help consumers, not confuse them.”
President Andrew Jackson is believed to have said that “One man with courage makes a majority.” Well, let’s hope this statement also applies to women. The incoming Prime Minister of Slovakia, Ms. Iveta Radicova, has the power to stop the corrupt and misguided European bailout scheme. At one point, Irish voters had the power to stop more centralization, bureaucratization, and harmonization in Brussels. Then the President of the Czech Republic had the opportunity to derail the movement to a socialist superstate in Brussels. In both cases, the forces of statism eventually prevailed. The bailout is a different issue, but the underlying issues are the same. Should nations have both the sovereign right to determine their own policies and should they also have the responsibility of dealing with the consequences of those actions? Here’s a blurb from the EU Observer about whether Slovakia will save Europe from the political elites:
The emerging new leadership in Slovakia has said the country will not contribute its share of the €110 billion rescue package for Greece. In addition, Bratislava is likely not to add its signature to the €750 billion eurozone support mechanism – something that could put the entire project on ice. …”It would be a serious blow to the EFSF and the euro area’s ability to stand behind its members [if a member does not sign],” a senior eurozone official told this website. He explained that all 16 signatures on the document – which specifies provisions on how to issue loan guarantees if necessary – are required to bring the emergency mechanism to life. …Conservative politician Iveta Radicova, the likely next prime minister, described the bloc’s €750 billion rescue fund during the pre-election debates as “bad, dangerous and [the] worst possible solution.” On Tuesday (15 June), Ms Radicova also re-iterated that she is against Slovakia providing any financial support to Greece.
David Ignatius continues his odd habit of drawing wrong conclusions from Europe’s fiscal crisis. In a previous post, we made fun of one of his columns because he said America needed a value-added tax to avoid a Greek-style crisis. Yet since Greece has a VAT, he was, for all intents and purposes, arguing that we should copy Greece’s policies to avoid Greece’s problems. Now he has a column saying that Europe needs fiscal centralization to make the euro work. This is a rather interesting assertion since Ignatius comes from a nation that shows that it is possible to have a common currency with 50 different states with 50 different fiscal policies. Perhaps this is why he wrote an entire column on the topic without ever offering any analysis or evidence for his position. Here’s an excerpt:
…there’s a radical mismatch between the ideal of economic integration and the reality that the eurozone has 16 different fiscal regimes — a disconnect that helped produce this crisis. …With this crisis, [Italian President Giorgio Napolitano] argued, Europeans must finally accept that union “implies a partial transfer of national sovereignty.” The current halfway integration simply isn’t strong enough to support a common currency, he suggested. …Investors keep pounding Europe in part because they don’t yet see the mechanisms that will enforce discipline. The European Union just established a trillion-dollar bailout fund, but what happens when it runs out? There’s a pledge to impose strict conditions on Greece, Portugal and the rest in exchange for loans, but it still isn’t clear how Brussels will make this austerity regime work. …What worries me is that the dictates of economics and politics are now in conflict in Europe. To sustain its common currency, Europe needs integrated fiscal policies that are enforceable on all members.
Given his reliance on empty assertions, let’s step into the vacuum and make two observations. First, letting Greece officially default would have been the best way to enforce fiscal discipline. A default would have radically curtailed Greece’s ability (and the ability of other European nations) to overspend by borrowing cheap money and leaving the bill for future generations. The bailout, by contrast, rewarded profligacy and sent a signal to other European nations that it is possible to over-tax and over-spend and send the bill to taxpayers in other nations.
Second, a centralized fiscal policy would exacerbate Europe’s fiscal problems by creating a tragedy of the commons. The existence of a pot of money in Brussels would encourage every nation to maximize its share of the loot, in the same way that a bloated federal government in Washington subsidizes bad fiscal behavior by state politicians. It wouldn’t matter whether the centralized fiscal policy replaced a portion of national budgets or (more likely) represented an additional source of government largesse. Europe’s problems exist because too many people have learned to try to live off the labor of too few people. Another layer of government makes that problem worse, not better – especially since it would open up the possibility of having people from other nations bear the burden.
Sleazy politicians from France, Germany, England, and the United States want a bank taxes that would finance national piggy banks to bail out politically favored companies and industries. But they are not stupid, so they realize that nations that impose bank taxes will lose deposits to nations with more sensible policy. This is why the statists want to convince all nations to adopt the same policy. Fortunately, some nations are resisting harmonized bank taxes, and Canada is taking the lead. Canadian leaders rightfully explain that their banks never got in trouble, largely because Canada does not have foolish housing subsidies. Let us hope that Canada, as well as other nations such as Brazil and Australia, block the corrupt policies being pushed by statists such as Obama and Merkel.
Canada will “resist” a bank tax, Industry Minister Tony Clement said Tuesday as ministers fanned out across the world to raise opposition to the proposal for avoiding another financial crisis. “Canada is, and will remain, opposed to a tax that would penalize financial institutions that remained strong and prosperous while many of the world’s banks failed,” Clement told a press conference with Foreign Minister Lawrence Cannon. …Attempts to reach international agreement on coordinated bank taxes at last month’s G20 and IMF meetings ran aground. Nations including Canada and Brazil, whose banking sectors emerged largely unscathed from the financial crisis, objected to the plan, favoring higher capital reserve requirements instead. But it is expected to be revived at the next meeting of G20 leaders in Toronto next month, with Germany’s Angela Merkel vowing to press for the proposal supported by many in Europe. Clement said the bank tax would “encourage risky behavior” if it is used to create a bank bailout fund and “reward bad behavior” of those institutions responsible for the recent financial crisis in the first place. …”This tax would reach into consumers’ pockets and punish our financial institutions which have taken precautions to avoid the very turmoil that is afflicting other parts of the globe,” Clement lamented.
Insanity is sometimes defined as doing the same thing over and over again while expecting a different result. On this basis the Euro-statists are clinically over the edge. They keep centralizing more power in Brussels and then they complain that European economies remain stagnant. On this basis, the new EU President must have escaped from the sanitarium, because he is asking for “economic government.” This means, not surprisingly, more power for Brussels to harmonize and regulate in hopes of creating the imaginary nirvana of a competitive social model. But I have to admire the perseverance of the “federalists,” as they are known. Every time they expand power, such as the recent Lisbon Treaty (basically a sanitized version of the statist EU constitution), they claim that they don’t intend to push for more centralization. Yet the ink is barely dry on one agreement before they start pushing for more powers. You would think European citizens would wake up to this boy-who-cried-wolf scam, but since the “European project” is fundamentally anti-democratic, most of them have ceased paying attention.
The European Union’s new president, Herman Van Rompuy, is calling for an “economic government” for the bloc, with closer policy coordination and financial incentives for good performers. …”Whether it is called coordination of policies or economic government,” only the European nations working are “capable of delivering and sustaining a common European strategy for more growth and more jobs,” he underlined. …The evocation of a European “economic government” will please France which has lobbied in this direction for years without success. …Thursday’s summit will also will also prepare the ground for a new EU economic strategy, focussing on investing in research, innovation and the green economy. This will replace the bloc’s Lisbon Strategy launched in 2000. The ambitious Lisbon Strategy was supposed to make Europe’s economy the most competitive and dynamic in the world. It failed to do so and Van Rompuy was happy to bury it. …For Van Rompuy it the matter is urgent and strikes at the very heart of the European project. …”Our structural growth rate is not high enough to create jobs and sustain our social model,” he warned.
The French government is relentlessly awful in its support for tax harmonization, regulatory harmonization, and other policies to drag other nations into the cesspool of statism. But France’s desire for a one-size-fits-all approach miraculously vanishes when it comes to language. Even though English is now the world’s language, especially for commerce, the French are resorting to coercion and protectionism to protect against – gasp! – English words. I greatly enjoyed this WSJ column about France’s fight against modernity:
A French group entitled Avenir de la Langue Française (Future of the French Language) has claimed that the invasion of English words poses a greater “threat” to France’s national identity than the imposition of German under the Nazis. Writing recently in Le Monde and l’Humanite, the group, supported by eight other patriotic organizations, has called on the Sarkozy government to turn back the English flood. “There are more English words on the walls of Paris,” they state, “than German words under the Occupation.” …English has became the dominant language of the Internet, air traffic control, computers, international business and by 2030 more Chinese people will be able to speak it than there are Americans. Already by 2001, English was being spoken by more than one in three of the 350 million citizens of the European Union, whereas fewer than one in 10 spoke French outside France itself. Even in those areas where French influence has been strong —Morocco, Algeria, Syria, Vietnam, Cambodia, Chad, and elsewhere—English has encroached very successfully. English is the official language used by the Organisation of the Petroleum Exporting Countries, and the only working language of the European Free Trade Association, the Baltic Marine Biologists Association, the Asian Amateur Athletics Association, the African Hockey Federation, while it is the second language of bodies as diverse as the Andean Commission of Jurists and the Arab Air Carriers Organization. …France’s traditional response to this linguistic “Anglobalization” has been to attempt a form of legal protectionism against the steamroller tongue of “les rosbifs” and “les Anglo-Saxons”. In 1994 the French Assemblée Nationale passed the Loi Toubon, which was signed into law by President François Mitterand. Named after Jacques Toubon, the culture minister, it stipulated that “French shall be the language of instruction, work, trade and exchanges and of the public services. “The use of French shall be mandatory for the designation, offer, presentation, instructions for use, and description of the scope and conditions of a warranty of goods, products and services as well as bills and receipts. The same provisions apply to any written, spoken, radio and television advertisement” and so on for another 21 highly prescriptive clauses. The law has been used against American and British companies, such as Disney and the Body Shop on the Champs Elysées that had labels in English. …In two centuries, French may have to be protected as a linguistic curio, like Britain does with Cornish or Manx. Until then, the French must learn to be bilingual, or risk being left behind in the global market-place, gasping outraged complaints in a tongue fewer and fewer people understand.
(i.e., dirigiste forms of global governance), then I’m a big opponent.by the Davos-based World Economic Forum… Here at last was an opportunity to enact a worldwide tax on wealth, a far-reaching (and deeply impoverishing) “green-energy” agenda…the WEF plan involved nothing less than the absorption of liberty by the extension of bureaucratic power. …The globalist alternative dangled before us is a version of utopia. But like The Wizard of Oz, it is all show and no substance. Or rather, the substance is an erosion of traditional sources of strength.
Nor does the regulatory and welfare state’s relentless growth in, say, the European Union, Britain and America suggest that free market radicals have been in charge in Brussels, London or Washington for decades. …Ignoring these inconvenient facts, Schwab believes that the world needs a ‘Great Reset.’ …For all his invocation of the predictable woke pieties, Schwab’s core commitment is to political and economic arrangements which used to be known as corporatism. …The language of corporatism, like that of Schwab’s WEF, may be one of coordinated consultation, but the agenda is one of control. …On an economic level, corporatism discourages innovation, produces inflexible labour markets dominated by unions whose priority is maintaining the status quo, and riddle the marketplace with privileges for well-connected businesses. …anyone who believes in preserving things like liberty, sovereignty, and the decentralisation of power should be concerned.
The “long” 19th century…was also a time of industrialization, enormous poverty reduction, wealth creation and global economic integration. This unabashed age of nation-states wasn’t all roses, but it was one of free markets, free trade and unrestricted capital flows. …this period demonstrates that globalism need not be unaccountable nor collectivist. …international institutions…shouldn’t impinge on national sovereignty. Sovereign nations consenting to play by an agreed set of rules, or banding together in service of a common objective, differs radically from unaccountable transnational elites engineering outcomes, often without scrutiny. …Nationalism as a response to a collectivist and unaccountable globalism—whether in dealing with a “climate crisis,” “inequality,” or something else—need not be nativist or protectionist. …the nation-state remains the most successful vehicle for advancing liberty, economic advancement and individual achievement in the history of the world.
real per capita incomes have grown 38 and 30 times, respectively. Global prosperity is a direct outcome of economic globalization. Compared to automation, trade accounts for a tiny fraction of total job losses in the U.S. Meanwhile, cheaper consumer products imported from overseas have been among the most effective anti-poverty “policies” in the Western world. …This would not be possible without…the open trading environment created by successive rounds of multilateral trade liberalization under the General Agreement on Tariffs and Trade and, later, the World Trade Organization.
Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. …His newest project is helping governments get smarter about risks.
International Liberty 