Corporate Taxation, Ireland, and Jealousy

Two months ago, I wrote about a remarkable example of the Laffer Curve, involving Ireland’s low 12.5 percent corporate tax rate.

According to the New York Times, Ireland was collecting so much corporate tax revenue that the government was having a hard time figuring out what to do with all the money (as you might expect, I suggested that politicians lower other taxes).

Today, let’s look at a different story about Ireland’s corporate tax policy.

Only we’ll be talking about jealousy and bitterness rather than how to dispose of extra tax revenue.

Sarah Collins reports that some of the world’s best-known left-wing economists are upset that Ireland is so successful.

Three leading economists – including France’s Thomas Picketty and former IMF official Ashoka Mody – have accused Ireland of “siphoning” other countries’ tax revenues and operating a “parasitic” corporation tax policy. …Princeton professor Ashoka Mody, the former International Monetary Fund economist…, said Ireland’s policy was “parasitic”. …French economist Thomas Picketty, professor at France’s school for advanced studies in social studies (EHESS)…, said Ireland is “siphoning” taxes off other countries. …Their comments follow a tweet on Wednesday by French economist Gabriel Zucman, head of the EU Tax Observatory and author of a recent EU-funded report that called Ireland a tax haven. …It comes the same week corporation tax receipts were revealed to be up more than a quarter in November compared with the same month last year, boosting overall revenues and putting the State on track to beat last year’s record tax take.

What makes this story amusing (above and beyond the whining) is that left-wing economists should be happy with Ireland.

The OECD’s annual Revenue Statistics was just released and the data show that Ireland is collecting much more tax revenue from corporations.

What makes these numbers so remarkable is that there is more than five times as much GDP in Ireland today as there was in 1990.

So the government is collecting more than twice as much revenue from a pie that is more than five times larger.

You would think lefty economists would applaud.

Here’s some more data from the OECD report. It shows corporate tax revenue as a share of overall tax revenue.

This is another chart that the left should applaud. They complain that big companies don’t pay their “fair share.”

Yet when there’s an example of a country where corporate tax revenues have soared, they are not happy.

There are three reasons for their unhappiness.

1. They don’t like Ireland’s low corporate tax rate because it shows that supply-side tax policy generates prosperity and it shows that the Laffer Curve is real.
2. They don’t like Ireland’s low corporate tax rate because they are mostly motivated by envy and they like punitive tax rates even more than they like tax revenue.
3. They don’t like Ireland’s low corporate tax rate because it puts pressure on other countries to lower their corporate rates to become more competitive.

Let’s look at a favorable article about Ireland.

Lawrence Reed wrote earlier this year that the Emerald Isle is a case study for economic freedom Here are some excerpts.

Though fewer people today live in Ireland than did almost two centuries ago, they’re busy teaching the world that economic freedom works. The Heritage Foundation’s Index of Economic Freedom ranks the Irish economy as the third freest in the world, behind Singapore and Switzerland. …In 2022, the Irish economy grew at the astonishing rate of 12.2 percent, the fastest on the European continent. (By comparison, the US economy grew by 2.1 percent in 2022.) If you think there’s no connection between Irish freedom and Irish prosperity, contact your economics teachers and demand a refund. …Ireland ranks high because property rights and contracts are well protected. The business climate is friendly because regulations aren’t nutty and intrusive, while tax rates are competitive. …It’s freedom, not the “luck of the Irish,” that explains Ireland’s remarkable economic success.

I agree that Ireland is a success story, but I also warn that it is not quite as successful as some people think.

Way back in 2011, I explained that the presence of so many companies created a distorted picture of Irish prosperity and that it’s better to use gross national income rather than gross domestic product.

Ireland is still a success story with GNI numbers, to be sure, but you won’t find 12.2 percent annual growth.

For wonky readers, I recommend this thread on Irish economic data.

In honor of St. Patrick's day, a brief thread on Ireland's economy — which has essentially decoupled from the rest of the euro area since 2015, and entered its own tax and economic zone in the middle of the North Atlantic …

1/x pic.twitter.com/LpNrRnOF9t

— Brad Setser (@Brad_Setser) March 17, 2023

And if you want to understand how Ireland wound up enacting a good corporate tax system, here’s another very illuminating thread.

How did Ireland end up with a 12.5% corporate tax rate? (a thread) pic.twitter.com/T71XwoBULW

— Ciarán Casey (@ciaranmcasey) March 28, 2023

I’ll close with a couple of negative observations about Ireland. First, Ireland does not get a good score on the Tax Foundation’s International Tax Competitiveness Index, so it definitely should be using any extra tax revenue to finance lower personal income tax rates.

Second, it appears that Ireland has a relatively low burden of government spending (see the chart in Thursday’s column), but those numbers would look much worse if we used GNI rather than GDP. And Ireland has gotten in trouble before because of excessive spending.

The bottom line is that Ireland has an admirably low corporate tax rate, but other fiscal policies often leave much to be desired.

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Ireland’s Corporate Tax and the Laffer Curve

About 15 years ago, I narrated a three-part series on the Laffer Curve. Here’s Part II, which looks at real-world evidence.

About halfway through the video (3:15-3:55), I discuss what happened when Ireland dramatically lowered its corporate tax rate.

The net result was an increase in tax revenue.

But not just by a small amount. I included a chart showing that corporate tax revenue as a share of GDP significantly increased in response to the lower rate.

And I made sure to point out that economic output also increased dramatically, meaning that the Irish government not only got a bigger slice of the pie, but also that the pie was much larger.

I’ve been asked a few times, however, whether that was a transitory phenomenon.

The answer is no. Using OECD data, I’ve updated the chart to also show what’s happened in the past 15 years. As you can see, corporate tax revenue has averaged close to 3 percent of economic output.

I realize that some folks on the left will be skeptical, even though I’m using data from the left-leaning OECD.

But perhaps they’ll believe the New York Times.

Ed O’Loughlin reports that Irish corporate tax revenues are so buoyant that the government in battling over how to allocate a budget surplus.

Ireland…is discovering that having too much money can…be a problem. Swollen by rising corporate tax revenue, mainly from American tech and pharmaceutical corporations, the government is expecting to have a record budget surplus of 10 billion euros ($10.9 billion) this year. Next year, the windfall is projected to be even larger, reaching €16 billion. For years, Ireland’s low corporate tax rate has lured multinational organizations to set up overseas subsidiaries here. Their tax payments have created a financial cushion for the government… Which leaves Irish lawmakers in a quandary. As the government prepares its annual budget statement in October, it must settle the tricky question of what to do with this pot of money. Chief among the options: save it for the future; pay off debts; invest in badly needed housing or some other infrastructure, like hospitals, schools and a subway system for Dublin; or give it away in tax cuts and support payments.

For what it’s worth, the obvious answer is lower tax rates on households (an area where Ireland scores very poorly).

Spending increases, by contrast, would be a very bad idea, especially since that approach has backfired in the past.

I’ll close with a final observation that Ireland is a success story, but GDP data create an excessively optimistic picture.

P.S. The NYT article also points out that big-ticket infrastructure projects suffer from massive cost overruns (sound familiar?).

…one obstacle to spending money on major projects, said Eoin Reeves, an economics professor at the University of Limerick, is that the Irish government has not been efficient at spending large sums of money on big investments. …Even by global standards, big infrastructure projects in Ireland tend to be completed late and far over budget. In 2015, a new 380-bed national children’s hospital in Dublin was projected to open by 2020, at a cost of €650 million. Its opening date has now been postponed until next year and at a cost of almost €2.2 billion — which reportedly could make it the most expensive hospital in the world, in terms of cost per bed. …plans for a line to its busy airport, with an estimated price tag in 2000 of €3.5 billion, have been repeatedly postponed or modified. The latest plan, if it ever gets underway, would take about 10 years to construct, at a cost of €7 billion to €12 billion.

P.P.S. The article also notes that the OECD’s global minimum tax scheme will hurt Ireland.

…the Organization for Economic Cooperation and Development is leading an effort to create a global minimum corporate tax rate of 15 percent, which could flatten Ireland’s tax-rate advantage.

It is true that Ireland will become less competitive, but there are many other losers when governments conspire against taxpayers.

P.P.P.S. Ireland was a role model of spending restraint in the late 1980s.

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A Case Study on Corporate Tax and Competitiveness

Last year’s three-part series on corporate tax rates (here, here, and here) primarily focused on the case for low rates in the United States.

Today, we’re going to look at why the United Kingdom should have a low corporate tax rate.

Though the arguments don’t change simply because we cross the Atlantic Ocean.

A low corporate tax rate is a good idea because it means more investment, higher productivity, and better wages.

That’s true in the U.S., it’s true in the U.K., and its true in every other nation.

If you want evidence, Phil Radford’s article for CapX explains why the U.K.’s pharmaceutical industry has contracted while Ireland’s has expanded.

AstraZeneca’s plan to build a $350m pharmaceuticals factory in Ireland rather than the UK was 100% predictable. …the long-term failure of UK pharma highlights how UK policy discussion is light years behind our competitors when it comes to understanding what drives prosperity. …The trend kicked off back in 2011, when US-based Pfizer shifted its Viagra-making plant from Sandwich in Kent to Ringaskiddy, near Cork. This event marked the start of a five-year plunge in UK pharma manufacturing and exports… According to ONS, output in UK pharma manufacturing declined by roughly one-third from 2010 to 2015. Gross value added actually halved. Where did the manufacturing go? Ireland… What’s caused this malady? In a word: taxation. …corporate taxation levels appear to exert a dominating effect on where pharmaceuticals companies locate their factories. …Ireland’s corporate tax rate fell from 40% in 1996 to 12.5%n 2003, and it has stayed at that level for the past 19 years. Meanwhile, the UK’s corporate taxation rate was 30% 20 years ago, and from 2008 it began a gentle drift downwards to 19% where it will remain until April this year, when it will increase to 25%. This means, from AstraZeneca’s point of view, the investment equation is a no-brainer. Even if Ireland is forced to raise its rate to 15%, the country will shortly regain its general comparative level of between one-half and two-thirds the UK rate.

The data in Radford’s article is a damning indictment of the supposedly conservative government in the United Kingdom.

A few years ago, the corporate tax rate was 19 percent and expected to drop to 17 percent. Now, thanks to an unwillingness to control spending, the rate is jumping to 25 percent.

And, as noted in the article, the U.K. lost a $350 million factory. As well as all the jobs and taxable income that it would have generated.

Politicians are winning and people are losing.

P.S. Biden wants to make the same mistake.

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The Case for Capitalism, Part VI

I have shared five videos (Part I, Part II, Part III, Part IV, and Part V) that make the case for capitalism.

Here’s a sixth example.

The video notes that poverty was the natural condition for humanity (notwithstanding the economic illiteracy of Congresswoman Pressley).

But then, starting a couple of hundred years ago, capitalism gained a foothold and – for the first time in world history – there were nations with mass prosperity.

We learn about how various places became rich, including the United States, Hong Kong, and New Zealand.

The narrator also pointed out that Ireland experienced a period of dramatic market-driven growth.

Which gives me a good excuse to make the following comparison, which shows the dramatic divergence between Ireland and Greece beginning in the mid-1980s.

Why the stunning divergence (one of many examples I’ve collected)?

Ireland controlled spending and cut tax rates and now routinely ranks among the nations with the most economic liberty.

Greece, by contrast, has imposed more and more government over time.

Let’s close with this tweet, which nicely summarizes Walter Williams’ famous observation.

P.S. This comparison of Sweden and Greece also makes the key point about the superiority of markets over statism.

P.P.S. Don Boudreaux and Deirdre McCloskey have must-watch videos on how capitalism enabled (some) nations to escape poverty.

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Can the Irish (Once Again) Save Civilization?

How the Irish Saved Civilization was a bestselling book in the mid-1990s.

Today, we’re going to consider an updated version, focusing on whether Ireland can save the world economy from Joe Biden’s plan for a global tax cartel.

This should be a slam-dunk issue. Ireland transformed itself from “The Sick Man of Europe” to the “Celtic Tiger” in part by adopting a 12.5 percent corporate tax rate.

How much of a tiger? Look at this data comparing per-capita gross domestic product in Ireland and France.

For what it’s worth, the Maddison data on gross domestic product makes Ireland look richer than it actually is (a result driven by largely by all the corporate activity).

So I also used World Bank data on gross national income to create a chart that tells a similar story, but with numbers that presumably are a closer match to actual economic conditions.

The bottom line is that Ireland’s policy on corporate taxation has been a success.

But that success has produced envy. High-tax nations such as France are big supporters of Joe Biden’s scheme to force all jurisdictions to have a corporate tax rate of at least 15 percent.

And that minimum rate inevitably will increase if politicians are able to create a cartel (indeed, some nations already are pushing for the rate to be 25 percent or above).

That’s the bad news.

The good news is that Ireland (as well as other nations such as Hungary and Estonia) presumably can block Biden’s tax cartel by using their “national veto” and preventing the European Union from being a participant.

But that means standing up to pressure.

For instance, the Associated Press recently reported on how France is trying to cajole Ireland into joining the cartel.

Emmanuel Macron was in Dublin for a one-day visit on Thursday, his first trip to Ireland since entering office. The State is facing calls from the French government to sign up to global tax reform. The country is one of only a handful of nations not to agree to a major Organisation for Economic Co-operation and Development (OECD) agreement on tax, which is backed by more than 130 countries worldwide, as well as the EU. …At a press conference in Dublin on Thursday, Mr Macron denied that he was putting pressure on the State on the issue. “This is for you to lead. This is not for France to put pressure. But I think the OECD framework works in the context,” Mr Macron said. “It makes sense in terms of co-operation. It makes sense in terms of the EU. …He said that the Irish economy had achieved “tremendous results” in recent decades and acknowledged that a low corporate tax base had been a crucial part of that success. “What you have managed to do in past decades is unique,” Mr Macron said. But he said that things had to change.

Saul Zimet and Dan Sanchez, writing for the Foundation for Economic Education, explained why Ireland should defends its fiscal sovereignty.

132 countries, including the twenty most powerful economies in the world, have all agreed to institute a minimum global corporate tax of 15 percent. …But, one hold-out is threatening to spoil the scheme. …Ireland has long had a 12.5 percent corporate tax… And this relatively low tax rate has drawn Facebook, Apple, Google, Pfizer, and many other corporate giants to set up regional headquarters or manufacturing hubs there instead of in countries with higher tax rates. …the flow of corporate wealth and opportunity into Ireland has resulted in enormous GDP growth and job growth for the nation in recent decades… Lower corporate taxes mean a bigger capital stock which means new jobs, higher wages, and more goods and services. That is why Ireland’s low corporate taxes have not just been good for multinational corporations, but for Irish workers, consumers, and entrepreneurs. …Jurisdictional competition, like market competition, is a good thing. It places a check on how tyrannical a government can be… So kudos to Ireland for bravely refusing to join what amounts to a 132-government tax cartel. By standing up for itself, it stood up for us all.

In a column for the Wall Street Journal, former Congressman Mick Mulvaney also opined in favor of Ireland.

The premise behind the minimum global corporate tax is simple: Most governments around the world are looking to raise money. But they don’t like taxing the middle class, as this tends to result in lost elections, and there aren’t enough rich people to soak to raise the necessary funds. That means that governments have started to look to corporations as piggy banks they can raid. …the Irish…rode a 12.5% corporate tax rate to an economic boom that has left many other European countries green with envy. …The Irish know what should be obvious to everyone: Their OECD partners can’t raise their corporate rates unless low-tax Ireland agrees to give up one of its largest competitive advantages in the global marketplace. …if you are losing a competition, there are two ways you can respond. One is to get better. The other is to prevent the competition from happening. …Ireland is on the front line of that battle today. Should it lose, the fight will be coming to our shores soon.

Mulvaney’s point about competition is spot on.

Joe Biden wants to raise the federal corporate tax rate from 21 percent to 28 percent, a policy that would give the United States (once again) the developed world’s most punitive system.

I don’t know if Biden is cognizant of the consequences, but his Treasury Secretary clearly understands that this means the United States will lose the battle for jobs and investment.

Which explains why the Biden Administration wants “to prevent the competition from happening.”

Let’s hope Ireland holds firm and says no to Biden’s anti-growth tax cartel.

P.S. For what it’s worth, Ireland failed to block the E.U.’s Lisbon Treaty back in 2009.

P.P.S. The current president of Ireland almost surely is on the wrong side, but fortunately he has very little power in the Irish system.

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Four Fiscal Policy Lessons from Ireland

In the world of public finance, Ireland is best known for its 12.5 percent corporate tax rate.

That’s a very admirable policy, as will be momentarily discussed, but my favorite Irish policy was the four-year spending freeze in the late 1980s.

I discussed that fiscal reform in a video about 10 years ago, and I subsequently shared data on how spending restraint reduced the overall burden of government in Ireland and also lowered red ink.

It’s a great case study showing the beneficial impact of my Golden Rule.

Spending restraint also paved the way for better tax policy, and that’s a perfect excuse to discuss Ireland’s pro-growth corporate tax system. The Wall Street Journal opined last week about that successful supply-side experiment.

Democrats want a high global minimum tax that would end national tax competition and reduce the harm from their huge tax increase on U.S. business. But tax competition has been a boon to global growth and investment, as Ireland’s famous low-tax policy makes clear. Far from a “race to the bottom,” Ireland adopted policies that were ahead of their time and helped its economy grow from a backwater into a Celtic tiger. …in the late 1990s …an EU mandate led Dublin to…pioneer…a new strategy: Apply the same low tax rate to every business. Policy makers settled on 12.5%, which was a tax increase for some companies but a cut for others. This was a classic flat-tax reform… Ireland has reaped the benefits. Between 1986 and 2006, the economy grew to nearly 140% of the EU average from a mere two-thirds. Employment nearly doubled to two million, and the brain drain of the 1970s and 1980s reversed. …Oh and by the way: After Ireland slashed its rate and broadened the corporate-tax base, tax revenue soared. Except for the post-2008 recession and its aftermath, corporate-profits taxes in some years account for about 13% of total revenue and exceed 3% of GDP. That’s up from as low as 5% of revenue and less than 2% of GDP before the current tax rate was introduced.

That’s a lot of great information, particularly the last couple of sentences about how Ireland collected more revenue when the corporate tax rate was slashed.

Indeed, I discussed that remarkable development in Part II of my video series on the Laffer Curve (and it’s not just an Irish phenomenon since both the IMF and OECD have persuasive global data on lower corporate tax rates and revenue feedback).

Though higher revenue is not necessarily a good thing.

I complained back in 2011, for example, about how Irish politicians began to spend too much money once a booming economy began to generate a lot of tax revenue.

Which is a good argument for a Swiss-style spending cap in Ireland.

Let’s wrap up by considering some fiscal lessons from Ireland. Here are four things everyone should know.

1. Spending restraint is a powerful tool to achieve smaller government..
2. Lower tax rates on productive behavior lead to jobs and prosperity.
3. Lower corporate tax rates can generate substantial revenue feedback.
4. A spending cap is needed to maintain long-run fiscal discipline.

Good rules for Ireland. Good rules for any nation.

P.S. Ireland has definitely prospered in recent decades, but GNI data gives a more accurate picture than GDP data.

July 29, 2021 Addendum: This chart shows the growth Ireland has experienced since starting to adopt pro-market policies in the mid-1980s.

Even though the nation got hit hard by the financial crisis, it is still far ahead of where it was before reforms.

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From the British Isles, Great Moments in Foreign Government

One of the great insights of “public choice” is that politicians engage in self-serving behavior just like everyone else.

But there’s a profound difference between them and us. In the private economy, we can only make ourselves better off by providing value to others. In government, by contrast, politicians oftentimes make themselves better off by providing unearned benefits to various interest groups.

This elementary insight is a good starting point for those who want to understand how Washington (mal)functions.

And these behavioral insights don’t change when you cross national borders, which is why I periodically share examples of bizarre boondoggles as part of my series on “Great Moments in Foreign Government”. Here are some examples of prior editions.

• Paid sex breaks for bureaucrats in Sweden.
• The German spy agency employing a terrorist.
• Welfare payments for illegal polygamous marriages in the United Kingdom.
• Stopping kids from selling worms in Canada.
• Buying trains that are too wide for railway stations in France.
• Taxpayer-financed friends for mass killers in Norway.

Today, we have a special version of this series from the British Isles.

We’ll start with a story, from the U.K.-based Sunday Times, about a voluntary tax scheme in a rich part of London.

Westminster city council said it would be writing to 15,000 of its wealthiest homeowners asking them to make a voluntary donation on top of their council tax. The initiative comes amid warnings that a crisis in local government funding is likely to drive five councils into insolvency within the next 12 months, with 10 running out of money within two years. …The begging letters scheme, dubbed the “Westminster community contribution”, will see letters sent to all 15,000 band H properties, worth about £1m and above. Nickie Aiken, leader of Westminster council, said she had decided to tap the wealthy for donations because “they have asked me, ‘Why can’t we pay more council tax?’ We are giving people the option. It is an opportunity to invest in their neighbourhood.” …A total of 904 people replied.

My immediate reaction is that there are 904 nitwits in Westminster.

But, to be fair, it doesn’t say they responded by sending extra money to the local council. Maybe they scrawled obscenities on the notice and returned it, which would have been my preferred response.

But I’m guessing many of them did cough up some cash, which makes them more foolish than the taxpayers of Norway. And even more foolish than hypocritical leftists in the United States.

It’s also frustrating that there’s no data in the story on why local councils are feeling a budget pinch. I’m guessing that they’re in trouble because spending has climbed much faster than inflation (similar to what happened where I live in Fairfax County, Virginia). So why reward that overspending with additional payments?

Now let’s head across the Irish Sea.

The Irish Times has a story about how a program that supposedly was designed to help homeless people actually is lining the pockets of well-to-do property owners.

The Government’s homeless family hub solution is not only a short-term fix for a long-term crisis, it’s a shocking deal for taxpayers that benefits private operators. …doesn’t “hub” have a cosy ring to it? There will be a total of 18 family accommodation hubs in Dublin, nine of which include hotels and B&Bs already in use being “adapted”. …Let’s take the former Mater Dei site as a prime example. Dublin City Council (DCC) earmarked €4.5 million to refurbish the former college complex to house 50 families… Sources say the project is likely to substantially overrun due to “many extras”… The problem is, after ploughing millions into a magnificent revamp, the council must hand the property back to the archdiocese in less than three years. …This is mirrored in every one of the family hubs, the longest lease being just five years. It starts to look like an incredible deal for the private owners. They get back a terrifically refurbished, furnished and equipped building, paid for by taxpayers, that can be rented out for profit. Everything goes back to the owner… On top of the deal of a lifetime, DCC is paying rent on the site, a figure it described as “nominal” but not nominal enough to make public.

Cronies getting rich(er) thanks to programs that supposedly were designed to help the poor? As Inspector Renault said in Casablanca, “I’m shocked, shocked”!

Probably as shocked as he was to learn that Obamacare cost estimates were wrong and that childcare subsidies led to higher costs in the U.K.

Sadly, insiders always figure out how to line their pockets as government gets bigger. It’s a feature, not a bug.

Last but not least, let’s travel to Scotland.

In the U.K.-based Times, we learn that the government is so incompetent that it has a hard time ripping off European taxpayers for farm subsidies.

Scottish ministers have appealed to Europe for help in heading off a looming crisis in farm subsidy payments for the second year running. Discussions have taken place with the European Commission to set up “contingency plans” in case Scottish farmers once again missed out on their payouts. An extension to the end-of-the-month deadline for processing payments is vital if the Scottish government is to avoid being hit with millions of pounds in fines. …The first minister is likely to be asked what her government is doing to make sure farmers get their payments on time. Scottish ministers came in for extensive criticism last year after an IT failure delayed European agriculture subsidy payments to thousands of farmers.

What makes this story extra depressing is that the supposed Conservative opposition doesn’t question the wisdom of handouts.

…the Scottish government had asked for a deadline extension earlier this week, prompting anger from opposition politicians. Ruth Davidson, the Scottish Conservative leader,…added: “It’s a disgrace that so many farmers are still waiting for payments, and it looks like, for the second year running, the SNP is going to have to go cap-in-hand to Europe and ask for special treatment.”

And it goes without saying that the welfare recipients…oops, I mean farmers…are anxious to know when their handouts will arrive.

Scott Walker, the chief executive of the National Farmers’ Union in Scotland, said: “Everyone who is due a payment simply wants to know when it will arrive and that is a reasonable demand.”

Sigh.

One of the reasons I was sympathetic to Scottish independence is that the entitlement mindset in the country may have been disrupted if they lost subsidies from the central government in London. Redistribution isn’t as fun when you’re taking money from your own pockets.

However, that wouldn’t have put an end to handouts from the statists in Brussels, assuming that Scotland would have been part of the European Union. So I’ll never be without things to write about. That’s good for me, bad for Europe.

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Great Moments in International Taxation

Back in 2013, I wrote about a gay guy adopting his long-time lover in order to escape the evil and pernicious death tax. I speculated that this would cause confusion and angst in some circles.

• Traditional leftists would want to applaud the adoption because of their support for gay rights, but they would be conflicted because of their support for the death tax.
• Traditional conservatives, by contrast, would dislike the way adoption laws were being used, but presumably like the fact that the reach of the death tax was being curtailed.

Now we have a somewhat similar example of the death tax leading people to take an unusual step.

Here are some excerpts from a report in the Belfast Telegraph.

Two best friends in the Republic of Ireland who have decided to get married to avoid paying inheritance tax… Michael O’Sullivan, a father of three, is set to marry his friend Matt Murphy in January. …Friends for almost 30 years they have made the decision so that Michael will inherit Matt’s home in Stoneybatter, Dublin when he dies. …Neither man is gay and say they are like brothers.

Not only will this save them money, it will be beneficial for other taxpayers as well.

Both men say they are currently on a small pension and say their idea is “saving the State money”. Michael said: “We found out from a friend of mine that she is paying €1,760 a week to stay in a nursing home, okay I could put Matt in a nursing home and then people would be paying their tax to look after him in the nursing home. “I don’t have much money and Matt can’t pay me to look after him but we tried to find out how much it would cost for a 24-hour care, you’re talking about a couple of thousand a week. “We are saving the State money.”

By the way, this story also may be an indirect example of excessive regulation.

It seems the guys could have received a subsidy from the government so that Michael could take care of Matt, but that would have triggered so much hassle and red tape that it wasn’t worth it.

“We didn’t go for the Carer’s Allowance because Matt would have to be examined, the house would have to be looked at.

Amen. Nobody welcomes a bunch of nosy bureaucrats poking through their life.

Now let’s zoom out and consider some broader policy implications.

I like and defend Ireland’s policy of aggressively using low corporate taxes to attract jobs and investment, but that doesn’t mean other policies in the country are favorable for taxpayers.

Indeed, there’s plenty of evidence that other taxes in that country are too high and it’s quite clear that the burden of government spending also is excessive.

The story doesn’t give details about the extent of the death tax, but it obviously must be punitive if two straight guys are marrying each other to dodge the levy.

In any event, it belongs in my collection of odd moments in international taxation.

• Bizarrely foolish tax policies, such as the German tax on online coffee sales that loses money for government.
• Heartening protests against government greed, such as Irish taxpayers refusing to pay a housing levy.
• Quirky examples of tax avoidance in Ukraine, Finland, Scotland, and Catalonia.
• Inexplicable taxation rules, such as porn being taxed at lower rates than high culture in Spain.
• Strange forms of tax enforcement, such as transgender tax collectors in Pakistan.
• Governments get very creative, such as a German plan to tax prostitutes with parking meters.
• Clever forms of tax avoidance, such as the Spanish theatre that gave free passes to patrons who bought lightly taxed carrots.
• X-rated tax protests, such as the brothel owner in Austria who provided free “services” to lower his tax bill.

It doesn’t really belong in this collection, but I think the oddest tax story I’ve ever read is that a bureaucrat from the tax-loving European Commission criticized France for excessive taxation.

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Global Evidence Shows Lower Corporate Tax Rates Are a No-Lose Recipe for Growth and Competitiveness

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

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

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

If only.

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

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

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

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

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

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

 

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

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

None of this should be a surprise.

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

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

Would we get similar results in the United States?

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

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

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

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

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

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

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The European Commission’s Attack on Apple and Ireland Is Really an Attack on Tax Competition

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.

And he adds his warning about this fight really being about tax competition versus tax harmonization.

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.

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European Commission Launches Shakedown of Apple, Asserts Low Taxes Are “State Aid”

Working the world of public policy, I’m used to surreal moments.

Such as the assertion that there are trillions of dollars of spending cuts in plans that actually increase spending. How do you have a debate with people who don’t understand math?

Or the oft-repeated myth that the Reagan tax cuts for the rich starved the government of revenue. How can you have a rational discussion with people who don’t believe IRS data?

And let’s not overlook my personal favorite, which is blaming so-called tax havens for the financial crisis, even though places such as the Cayman Islands had nothing to do with the Fed’s easy-money policy or with Fannie Mae and Freddie Mac subsidies.

These are all example of why my hair is turning gray.

But I’ll soon have white hair based on having to deal with the new claim from European bureaucrats that countries are guilty of providing subsidies if they have low taxes for companies.

I’m not joking. This is basically what’s behind the big tax fight between Apple, Ireland, and the European Commission.

Here’s what I said about this issue yesterday.

There are three things about this interview are worth highlighting.

• First, the European Commission is motivated by a desire for more tax revenue. Disappointing, but hardly surprising.
• Second, Ireland has benefited immensely from low-tax policies and that’s something that should be emulated rather than punished.
• Third, I hope Ireland will respond with a big corporate tax cut, just as they did when their low-tax policies were first attacked many years ago.

I also chatted with the folks from the BBC.

I’ll add a few comments on this interview as well.

• First, to the extent that the European Commission wants to interfere with fiscal policy in member states, it should urge spending caps for profligate welfare states.
• Second, since it’s been in bed with the Europeans on schemes to boost business taxation, the US government can’t throw stones since it lives in a glass house.
• Third, our friends on the left are terrified of a “race to the bottom” but their real motive seems to be a desire for more money to prop up big welfare states.

Here’s an interview from the morning, which was conducted by phone since I didn’t want to interrupt my much-needed beauty sleep by getting to the studio at the crack of dawn.

Once again, here are a few follow-up observations.

• First, I realize I’m being repetitive, but it’s truly bizarre that the European Commission thinks that low taxes are a subsidy. This is the left-wing ideology that the government has first claim on all income.
• Second, it’s a wonky point, but Europe’s high-tax nations can use transfer pricing rules if they think that Apple (or other companies) are trying to artificially shift income to low-tax countries like Ireland.
• Third, the U.S. obviously needs to reform its wretched corporate tax system, but that won’t solve this problem since it’s about an effort to impose more tax on Apple’s foreign-source income.

The Wall Street Journal opined wisely on this issue, starting with the European Commission’s galling decision to use anti-trust laws to justify the bizarre assertion that low taxes are akin to a business subsidy.

Even by the usual Brussels standards of economic malpractice, Tuesday’s €13 billion ($14.5 billion) tax assault on Apple is something to behold. …Apple paid all the taxes it owed under existing tax laws around the world, which is why it hasn’t been subject to enforcement proceedings by revenue authorities. …Brussels now wants to use antitrust law to tell Ireland and other low-tax countries how to apply their own tax laws. …Brussels is deploying its antitrust gnomes to claim that taxes that are “too low” are an illegal subsidy under EU state-aid rules.

This is amazing. A subsidy is when government officials use coercion to force taxpayers (or consumers) to pay more in order to line the pockets of a company or industry. The Export-Import Bank would be an example of this odious practice, as would ethanol handouts.

Choosing to tax at a lower rate is not in this category. It’s a reduction in government coercion.

That doesn’t necessarily mean we’re necessarily talking about good policy since there are plenty of preferential tax laws that should be wiped out as part of a shift to a simple and fair flat tax.

I’m simply pointing out that lower taxes are not “state aid.”

The WSJ also points out that it’s not uncommon for major companies to seek clarification rulings from tax authorities.

Brussels points to correspondence between Irish tax officials and Apple executives to claim that Apple enjoyed favors not available to other companies, which would be tantamount to a subsidy. But all Apple received from Dublin, in 1991 and 2007, were letters confirming how the tax authorities would treat various transactions under the Irish laws that applied to everyone. If anyone in Brussels knew more about tax law, they’d realize such “comfort letters” are common practice around the world.

Indeed, the IRS routinely approves “advance pricing agreements” with major American taxpayers.

This doesn’t mean, by the way, that governments (the U.S., Ireland, or others) treat all transactions appropriately. But it does mean that Ireland isn’t doing something strange or radical.

The editorial also makes the much-needed point that the Obama White House and Treasury Department are hardly in a position to grouse, particularly because of the demagoguery and rule-twisting that have been used to discourage corporate inversions.

As for the U.S., the Treasury Department pushed back against these tax cases, which it rightly views as a protectionist threat to the rule of law. But it’s hard to believe that Brussels would have pulled this stunt if Treasury enjoyed the global respect it once did. President Obama and Treasury Secretary Jack Lew have also contributed to the antibusiness political mood by assailing American companies for moving to low-tax countries.

Amen.

It’s also worth noting that the Obama Administration has been supportive of the OECD’s BEPS initiative, which also is designed to increase corporate tax burdens and clearly will disadvantage US companies.

A story from the Associated Press reveals the European Commission’s real motive.

The European Commission says…it should help protect countries from unfair tax competition. When one country’s tax policy hurts a neighbor’s revenues, that country should be able to protect its tax base.

Wow, think about what this implies.

We all recognize, as consumers, the benefits of having lots of restaurants competing for our business. Or several cell phone companies. Or lots of firms that make washing machines. Competition helps us by leading to lower prices, higher quality, and better service. And it also boosts the overall economy because of the pressure to utilize resources more efficiently and productively.

So why, then, should the European Commission be working to protect governments from competition? Why is it bad for a country with low tax rates to attract jobs and investment from nations with high tax rates?

The answer, needless to say, is that tax competition is a good thing. Ever since the Reagan and Thatcher tax cuts got the process started, there have been major global reductions in tax rates, both for households and businesses, as governments have competed with each other (sadly, the US has fallen way behind in the contest for good business taxation).

Politicians understandably don’t like this liberalizing process, but the tax competition-induced drop in tax rates is one of the reason why the stagflation of the 1960s and 1970s was replaced by comparatively strong growth in the 1980s and 1990s.

Let’s close by looking at one final story.

Bloomberg has a report on the Apple-Ireland-EC controversy. Here are some relevant passages.

Irish Finance Minister Michael Noonan on Tuesday vowed to fight a European Commission ruling… The country’s corporate tax regime is a cornerstone of its economic policy, attracting Google Inc. and Facebook Inc. to Dublin. …While the Apple ruling doesn’t directly threaten the 12.5 percent rate, the government has promised to stand by executives it says are helping the economy. “To do anything else, it would be like eating the seed potatoes,” Noonan told broadcaster RTE on Tuesday, adding a failure to fight the case would hurt future generations.

Kudos to Noonan for understanding that a short-term grab for more revenue will be bad news if the tradeoff is a more onerous tax system that reduces future growth.

I wish Hillary Clinton was capable of learning the same lesson.

Also, it’s worth noting that Apple is just the tip of the iceberg. If the EC succeeds, many other American companies will be under the gun.

The iPhone-maker is one of more than 700 U.S. companies that have units there, employing a combined 140,000 people, according to the American Chamber of Commerce in Ireland.

And when politicians – either here or overseas – raise taxes on companies, never forget that they’re actually raising taxes on worker, consumers, and shareholders.

P.S. Just in case you think the Obama Administration is sincere about defending Apple and other American companies, don’t forget that these are the folks who included a global corporate minimum tax scheme in the President’s most recent budget.

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If Poor Nations Want Economic Convergence and Capital Accumulation, They Need Good Policy

There’s a “convergence” theory in economics that suggests, over time, that “poor nations should catch up with rich nations.”

But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this question. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.

The authors analyze this data.

The figure above shows the rapid and persistent relative income growth (convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning in the late 1960s all through the early 2000s to catch up or converge to the higher level of per capita income in the U.S. …In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels… The lack of convergence is even more striking among low-income countries. Countries such as Bangladesh, El Salvador, Mozambique and Niger are stuck in a poverty trap, where their relative per capita income is constant and stagnant at or below 5 percent of the U.S. level.

The article concludes by asking why some nations converge and others don’t.

Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies?

I’ll offer my answer to this question, though it doesn’t require any special insight.

Simply stated, Solow’s Growth Theory is correct, but needs to be augmented. Yes, nations should converge, but that won’t happen unless they have similar economic policies.

And if relatively poor nations want to converge in the right direction, that means they should liberalize their economies by shrinking government and reducing intervention.

Take a second look at the above chart above and ask whether there’s a commonality for the jurisdictions that are converging with the United States?

Why have Hong Kong, Singapore, Taiwan, and Ireland converged, while nations such as Mexico and Brazil remained flat?

The obvious answer is that the former group of jurisdictions have pursued, at least to some extent, pro-market policies.

Heck, they all rank among the world’s top-18 nations for economic freedom.

Hong Kong and Singapore have been role models for economic liberty for several decades, so it’s no surprise that their living standards have enjoyed the most impressive increase.

But if you dig into the data, you’ll also see that Taiwan’s jump began when it boosted economic freedom beginning in the late 1970s. And Ireland’s golden years began when it increased economic freedom beginning in the late 1980s.

The moral of the story is – or at least should be – very clear. Free markets and small government are the route to convergence.

Here’s a video tutorial.

And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

* Botswana vs. other African nations

Gee, it’s almost enough to make you think there’s a relationship between good long-run growth and economic freedom!

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The Irish Tax Policy Debate: Bono 1 – Irish Union Bosses 0

I wrote last year about the remarkable acknowledgement by Bono that free markets were the best way to lift people out of poverty. The leader of the U2 band and long-time anti-poverty activist specifically stated that, “capitalism has been the most effective ideology we have known in taking people out of extreme poverty.”

As the old saying goes, I couldn’t have said it better myself. Too many politicians and interest groups want us to believe that foreign aid and bigger government are the answer, but nations that have jumped from poverty to prosperity invariably have followed a path of free markets and small government.

But today’s topic isn’t foreign aid.

Instead, I want to come to Bono’s aid. He recently defended his home country’s favorable corporate tax regime. Here are some excerpts from a report earlier this month in the Irish Times.

U2 singer Bono has said Ireland’s tax regime, used to attract multinational companies such as Apple, Facebook and Google to Irish shores, has brought Ireland “the only prosperity we’ve known”. Speaking in an interview in today’s Observer newspaper, Bono said Ireland’s tax policy had given the country “more hospitals and firemen and teachers”. “We are a tiny country, we don’t have scale, and our version of scale is to be innovative and to be clever, and tax competitiveness has brought our country the only prosperity we’re known,” he said. …“As a person who’s spent nearly 30 years fighting to get people out of poverty, it was somewhat humbling to realise that commerce played a bigger job than development,” said Bono. “I’d say that’s my biggest transformation in 10 years: understanding the power of commerce to make or break lives, and that it cannot be given into as the dominating force in our lives.”

So why does Bono need defending?

Because bosses from the leading Irish labor union apparently think he said something very bad. Here are some excerpts from a story published by the U.K-based Guardian.

Unite, which represents 100,000 workers on the island of Ireland, launched a blistering attack on the U2 singer for remarks…defending the 12.5% tax rate on corporations enjoyed by multinational companies such as Apple, Google, Facebook and Amazon. …Unite pointed out that one in four Irish people have to endure social deprivation, according the state’s own official Central Statistics Office. Mike Taft, Unite’s researcher and an economist, told the Guardian: “The one in four who suffer deprivation as well as the tens of thousands of others having to put up with six years of austerity will regard Bono’s remarks with total derision, it is the only word anyone could use to describe what he has said. “…for six years we have seen public services smashed apart due to austerity cuts, and here we have Bono talking about low corporation tax bringing us prosperity.”

I have three reactions.

First, I wonder whether the union is comprised mostly of private-sector workers or government bureaucrats. This may be relevant because I hope that private-sector union workers at least have a vague understanding that their jobs are tied to the overall prosperity of the economy. But if Unite is dominated by government bureaucrats, then it’s no surprise that it favors class-warfare policies that would cripple the private sector.

Second, the union bosses are right that Ireland has been suffering in the past six years, but they apparently don’t realize that the nation’s economy stumbled because government was getting bigger and intervening too much.

Third, maybe it’s true that “one in four” in Ireland currently suffer from “deprivation,” but that number has to be far smaller than it was thirty years ago. Here’s a chart, based on IMF data, showing per-capita economic output in Ireland. As you can see, per-capita GDP has jumped from $15,000 to more than $37,500. And these numbers are adjusted for inflation!

I gave some details back in 2011 when I had the opportunity to criticize another Irish leftist who was blithely ignorant of Ireland’s big improvements in living standards once it entered into its pro-market reform phase.

I don’t know how the folks at Unite define progress, but I assume it’s good news that the Irish people now have more car, more phones, more doctors, more central heating, and fewer infant deaths.

Last but not least, none of this should be interpreted as approval of Ireland’s current government or overall Irish policy. There’s too much cronyism in Ireland and the overall fiscal burden (other than the corporate income tax) is onerous.

I’m simply saying that Bono is right. Pro-growth corporate tax policy has made a big – and positive – difference for Ireland. The folks at Unite should learn a lesson from the former President of Brazil, who was a leftist but at least understood that you need people in the private sector producing if you want anything to redistribute.

P.S. Bono isn’t the only rock star who understands economics.  Gene Simmons, the lead singer for Kiss, stated that “Capitalism is the best thing that ever happened to human beings. The welfare state sounds wonderful but it doesn’t work.”

P.P.S. Irish politicians may understand the importance of keeping a low corporate tax rate, but they certainly aren’t philosophically consistent when it comes to other taxes.

P.P.P.S. Some statists have tried to blame Ireland’s recent woes on the low corporate tax rate. More sober analysis shows that imprudent spending hikes and misguided bailouts deserve the blame (Ireland’s spending is particularly unfortunate since the nation’s period of prosperity began with spending restraint in the late 1980s).

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Mirror, Mirror, on the Wall, Which Nation Has Increased Welfare Spending the Fastest of All?

There’s an old joke about two guys camping in the woods, when suddenly they see a hungry bear charging over a hill in their direction. One of the guys starts lacing up his sneakers and his friend says, “What are you doing? You can’t outrun a bear.” The other guys says, I don’t have to outrun the bear, I just need to outrun you.”

That’s reasonably amusing, but it also provides some insight into national competitiveness. In the battle for jobs and investments, nations can change policy to impact their attractiveness, but they also can gain ground or lose ground because of what happens in other nations.

The corporate tax rate in the United States hasn’t been changed in decades, for instance, but the United States has fallen further and further behind the rest of the world because other nations have lowered their rates.

Courtesy of a report in the UK-based Telegraph, here’s another example of how relative policy changes can impact growth and competitiveness.

The paper looks at changes in the burden of welfare spending over the past 14 years. The story understandably focuses on how the United Kingdom is faring compared to other European nations.

Welfare spending in Britain has increased faster than almost any other country in Europe since 2000, new figures show.  The cost of unemployment benefits, housing support and pensions as share of the economy has increased by more than a quarter over the past thirteen years – growing at a faster rate than in most of the developed world. Spending has gone up from 18.6 per cent of GDP to 23.7 per cent of GDP – an increase of 27 per cent, according to figures from the OECD, the club of most developed nations. By contrast, the average increase in welfare spending in the OECD was 16 per cent.

This map from the story shows how welfare spending has changed in various nations, with darker colors indicating a bigger expansion in the welfare state.

American readers, however, may be more interested in this excerpt.

In the developed world, only the United States and the stricken eurozone states of Ireland, Portugal and Spain – which are blighted by high unemployment – have increased spending quicker than Britain.

Yes, you read correctly. The United States expanded the welfare state faster than almost every European nation.

Here’s another map, but I’ve included North America and pulled out the figures for the countries that suffered the biggest increases in welfare spending. As you can see, only Ireland and Portugal were more profligate than the United States.

Needless to say, this is not a good sign for the United States.

But the situation is not hopeless. The aforementioned numbers simply tell us the rate of change in welfare spending. But that doesn’t tell us whether countries have big welfare states or small welfare states.

That’s why I also pulled out the numbers showing the current burden of welfare spending – measured as a share of economic output – for countries in North America and Western Europe.

This data is more favorable to the United States. As you can see, America still has one of the lowest overall levels of welfare spending among developed nations.

Ireland also is in a decent position, so the real lesson of the data is that the United States and Ireland must have been in relatively strong shape back in 2000, but the trend over the past 14 years has been very bad.

It’s also no surprise that France is the most profligate of all developed countries.

Let’s close by seeing if any nations have been good performers. The Telegraph does note that Germany has done a good job of restraining spending. The story even gives a version of Mitchell’s Golden Rule by noting that good policy happens when spending grows slower than private output.

Over the thirteen years from 2000, Germany has cut welfare spending as a share of GDP by 1.5 per cent… Such reductions are possible by increasing welfare bills at a lower rate than growth in the economy.

But the more important question is whether there are nations that get good scores in both categories. In other words, have they controlled spending since 2000 while also having a comparatively low burden of welfare outlays?

Here are the five nations with the smallest increases in welfare spending since 2000. You can see that Germany had the best relative performance, but you’ll notice from the previous table that Germany is not on the list of five nations with the smallest overall welfare burdens. Indeed, German welfare spending consumes 26.2 percent of GDP, so Germany still has a long way to go.

The nation that does show up on both lists for frugality is Switzerland. Spending has grown relatively slowly since 2000 and the Swiss also have the third-lowest overall burdens of welfare spending.

Hmmm…makes you wonder if this is another sign that Switzerland’s “debt brake” spending cap is a policy to emulate.

By the way, Canada deserves honorable mention. It has the second-lowest overall burden of welfare spending, and it had the sixth-best performance in controlling spending since 2000. Welfare outlays in our northern neighbor grew by 10 percent since 2000, barely one-fourth as fast as the American increase during the reckless Bush-Obama years.

No wonder Canada is now much higher than the United States in measures of economic freedom.

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The Laffer Curve Bites Ireland in the Butt

Cigarette butt, to be more specific.

All over the world, governments impose draconian taxes on tobacco, and then they wind up surprised that projected revenues don’t materialize. We’ve seen this in Bulgaria and Romania, and we’ve seen this Laffer Curve effect in Washington, DC, and Michigan.

Even the Government Accountability Office has found big Laffer Curve effects from tobacco taxation.

And now we’re seeing the same result in Ireland.

Here are some details from an Irish newspaper.

…new Department of Finance figures showing that tobacco excise tax receipts are falling dramatically short of targets, even though taxes have increased and the number of people smoking has remained constant…the latest upsurge in smuggling…is costing the state hundreds of millions in lost revenue. Criminal gangs are openly selling smuggled cigarettes on the streets of central Dublin and other cities, door to door and at fairs and markets. Counterfeit cigarettes can be brought to the Irish market at a cost of just 20 cents a pack and sold on the black market at €4.50. The average selling price of legitimate cigarettes is €9.20 a pack. …Ireland has the most expensive cigarettes in the European Union, meaning that smugglers can make big profits by offering them at cheaper prices.

I have to laugh at the part of the article that says, “receipts are falling dramatically short of targets, even though taxes have increased.”

This is what’s called the Fox Butterfield effect, when a leftist expresses puzzlement about something that’s actually common sense. Named after a former New York Times reporter, who was baffled that more people were in prison at the same time that crime rates were falling, it also shows up in tax policy when statists are surprised that tax revenues don’t automatically rise when tax rates become oppressive.

Ireland, by the way, should know better. About the only good policy left in the Emerald Isle is the low corporate tax rate. And as you can see in this video, that policy has yielded very good results.

My favorite example from that video, needless to say, is what happened during the Reagan years, when the rich paid much more to the IRS after their tax rates were slashed.

P.S. You won’t be surprised to learn that a branch of the United Nations is pushing for global taxation of tobacco. To paraphrase Douglas McArthur, “Bad ideas never die, they become global.”

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Miracles Do Happen: Someone in Brussels Accurately Analyzes Europe’s Fiscal Crisis!

With the exception of a few top-notch thinkers such as Pierre Bessard and Allister Heath, there are very few people in Europe who can intelligently analyze public policy, particularly with regard to fiscal issues.

I don’t know if Fredrik Erixon of the Brussels-based European Centre for International Political Economy is even close to being in the same league with Pierre and Allister, but he has a very good article that correctly explains that government spending and the welfare state are the real fiscal problems in Europe.

Here are some excerpts from his Bloomberg column.

When it comes to overspending on social welfare, …Europe has no angels. Even the “good” Scandinavians, and governments that appeared to be in sound fiscal shape in 2008, …were spending too much and will have to restructure. …Greece, Ireland, Portugal and Spain…are in many ways different, but they have three important characteristics in common. …government spending in those nations grew at remarkably high rates. In Greece and Spain, nominal spending by the state increased 50 percent to 55 percent in the five years before the crisis started, according to my calculations based on government data. In Portugal, public expenditure rose 35 percent; in Ireland, almost 75 percent. No other country in Western Europe came close to these rates.

This is remarkable. Someone in Europe who is focusing on the growth of government spending. He doesn’t mention that the solution is a spending cap (something akin to Mitchell’s Golden Rule), but that’s an implication of what he says. Moreover, I’m just glad that someone recognizes that the problem is spending, and that debt and deficits are best understood as symptoms of that underlying disease.

In any event, Mr. Erixon also has the right prognosis. The burden of the welfare state needs to shrink. And he seems reasonably certain that will happen.

Europe’s crisis economies will now have to radically reduce their welfare states. State spending in Spain will have to shrink by at least a quarter; Greece should count itself lucky if the cut is less than a half of the pre-crisis expenditure level. The worse news is that this is likely to be only the first round of welfare-state corrections. The next decade will usher Europe into the age of aging, when inevitably the cost of pensions will rise and providing health care for the elderly will be an even bigger cost driver. This demographic shift will be felt everywhere, including in the Nordic group of countries that has been saved from the worst effects of the sovereign-debt crisis. …Europe’s social systems will look very different 20 years from now. They will still be around, but benefit programs will be far less generous, and a greater part of social security will be organised privately. Welfare services, like health care, will be exposed to competition and, to a much greater degree, paid for out of pocket or by private insurance. The big divide in Europe won’t be between North and South or left and right. It will be between countries that diligently manage the transition away from the universal welfare state that has come to define the European social model, and countries that will be forced by events to change the hard way.

I’m not quite so optimistic. While I agree that current trends are unsustainable, I fear that the “optimistic” scenario is for governments to semi-stabilize their finances with both taxes and spending consuming about 50 percent of gross domestic product.

That’s obviously far beyond the growth-maximizing size of government, which means European nations  – on average – would be condemned to permanent economic stagnation. Some of the nations that have very laissez-faire policies in areas other than fiscal policy, such as the Nordic nations, might experience some modest growth, but that would be offset by permanent recession in nations that have both big government and lots of intervention.

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Revolt of the Irish Tax Slaves

I wrote last year about a backlash from long-suffering Greek taxpayers. These people – the ones pulling the wagon rather than riding in the wagon – are being raped and pillaged by a political class that is trying to protect the greedy interest groups that benefit from Greece’s bloated public sector.

We now have another group of taxpayers who are fighting back against greedy government. My ancestors in Ireland have decided that enough is enough and there is widespread civil disobedience against a new property tax.

Here are the key details from an AP report.

The Serfs Fight Back

Ireland is facing a revolt over its new property tax. The government said less than half of the country’s 1.6 million households paid the charge by Saturday’s deadline to avoid penalties. And about 5,000 marched in protest against the annual conference of Prime Minister Enda Kenny’s Fine Gael party. Emotions ran raw as police backed by officers on horseback stopped demonstrators from entering the Dublin Convention Centre. …One man mistakenly identified as the government minister responsible for collecting the tax had to be rescued by police from an angry scrum. Kenny said his government had no choice, but to impose the new charge as part of the nation’s efforts to emerge from an international bailout. …The charge this year is a flat-fee €100 ($130) per dwelling, but is expected to rise dramatically next year once Ireland starts to vary the charge based on a property’s estimated value. Anti-tax campaigners have urged the public to ignore the tax demand, arguing that the government doesn’t have the power to collect it.

What makes this new tax so outrageous is that Irish taxpayers already have been victimized with higher income tax rates and a more onerous value-added tax. Yet they weren’t the ones to cause the nation’s fiscal crisis. Ireland is in trouble for two reasons, and both deal with the spending side of the fiscal equation.

1. The burden of government spending exploded last decade, more than doubling in less than 10 years. This wiped out all the gains from fiscal restraint in the 1980s and 1990s.

2. Irish politicians decided to give a bailout not only to depositors of the nation’s failed banks, but also to bondholders. This is a grotesque transfer of wealth from ordinary people to those with higher incomes – and therefore a violation of Mitchell’s Guide to an Ethical Bleeding Heart.

It’s worth noting that academic studies find that tax evasion is driven largely by high tax rates. This makes sense since there is more incentive to hide money when the government is being very greedy. But there is also evidence that tax evasion rises when people perceive that government is wasting money and being corrupt.

Heck, no wonder the Irish people are up in arms. They’re being asked to cough up more money to finance a bailout that was both corrupt and wasteful.

Let’s close by looking at American attitudes about tax evasion. Here’s part of a column from Forbes, which expresses surprise that Americans view tax evasion more favorably than behaviors such as shoplifting and littering.

A new survey suggests Americans consider cheating on their taxes more socially acceptable than shoplifting, drunk driving or even throwing trash out the window of a moving car. …only 66% of  the participants said they “completely agree” that “everyone who cheats on their taxes should be held accountable”  and only 72% completely agreed that “it’s every American’s civic duty to pay their fair share of taxes”–suggesting, as the Shelton study does, that perhaps disapproval of tax evasion is not as strong as, say, disapproval of stealing from private businesses.

I’m not sure, though, why anybody would be shocked by these results. We have a government in Washington that is pervasively corrupt, funneling money to corrupt scams like Solyndra.

These same people want higher tax rates, which will further encourage people to protect their income.

If we really want to promote better tax compliance, whether in the U.S., Ireland, or anywhere in the world, there are two simple answers. First, enact a simple and fair flat tax to keep rates low. Second, shrink government to its proper size, which will automatically reduce waste and limit opportunities for corruption.

But none of this is in the interests of the political class, so don’t hold your breath waiting for these reforms.

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Is Ireland’s Michael Higgins an Economic Illiterate or a Cynical Hack

I’ve always been proud of my Irish heritage, but now I’m having to reconsider. As is so often the case when something goes awry, the blame belongs to a politician (this Craig Ferguson joke is right on the mark).

Michael Higgins, the President-Elect of Ireland, has lived a very comfortable life sucking on the government teat. He began his adult life as a sociologist in academia. He then moved into politics, and for decades enjoyed lucrative pay as a member of the political elite (well above $100,000 annually in recent years).

Now he’ll pull in more than $300,000 per year for a largely ceremonial job as Ireland’s President. As the old saying goes, nice work if you can get it. This guy’s definitely part of the top 1 percent.

He’s also an economic illiterate or a cynical hack who apparently thinks noble poverty is a good idea for the other 99 percent.

Here’s some of what the Daily Mail reported about one of his recent speeches.

Michael D Higgins launched a savage attack on the Celtic Tiger in his first speech as President elect. In his acceptance speech, the Labour Party candidate…rejected the years of materialism and selfishness that drove the country to ruin. …Michael D declared: ‘We leave behind a narrow individualism that valued the person for what was assumed to be their accumulated wealth but neglected the connection between the person, the social, the community and the nation. …Mr Higgins called on Irish people to return to ‘co-operative and collective values’.

Isn’t this just wonderful? This pampered and cosseted member of the political elite thinks that Ireland somehow was demeaned by being the Celtic Tiger. Does this mean he wants to go back the mid-1980s, before Ireland began to reform? Back when government was consuming more than 50 percent of the nation’s output? Back when the the corporate tax rate was 50 percent? Back when other tax rates were at extortionary levels?

If that’s true, he wants to dramatically reduce the living standards of the Irish people.

Here’s a chart based on World Bank data for gross domestic product and gross national income.

Prior to the market-based reforms of the Celtic Tiger era, Ireland was a relatively poor nation with per-capita income and output well below $10,000. Today, by contrast, output and income are four or five times higher.

But here are two important caveats. First, the World Bank GDP/GNI numbers are not adjusted for inflation, so the chart overstates the rise in living standards. This World Bank data suggests that the price level in Ireland roughly doubled between 1985 and 2010, so the people of Ireland are perhaps “only” twice as rich as they were in the era before free-market reform.

The second caveat is that some of Ireland’s prosperity in recent years was hollow, the result of a real estate bubble. But even with the big decline since 2007-2008, the Irish people are still much better off than they were a generation ago.

But Mr. Higgins apparently doesn’t approve of this big jump in living standards.

He’s against “materialism,” so let’s look at some real world examples of how the lives of ordinary people have improved.

Maybe I’m just old fashioned, but I’d rather live in a “selfish” world that gives me doctors, cars, and central heating.

But to a member of the political elite like Mr. Higgins, this kind of prosperity probably spoils people and makes them uppity. Better for people to live noble lives of poverty and deprivation.

Last but not least, this post isn’t an endorsement of the “Irish model.” Yes, there are some admirable policies in Ireland, most notably the 12.5 percent corporate tax. And Ireland’s score from the Economic Freedom of the World has jumped from 6.3 in 1985 to 7.4 in 2009.

But that’s considerably below free-market jurisdictions such as Hong Kong (9.0) and Singapore (8.7).

Simply stated, government is too big in Ireland and many policies are grossly inconsistent with sound economics.

But if I get to choose between today’s Irish economy and the pre-Celtic Tiger economy of the early 1980s, it’s not a close call.

Maybe Mr. Higgins should spend a year or two living at 1985 living standards before he makes another jackass speech.

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New CBO Numbers Confirm – Once Again – that Modest Spending Restraint Can Balance the Budget

The Congressional Budget Office has just released the update to its Economic and Budget Outlook.

There are several things from this new report that probably deserve commentary, including a new estimate that unemployment will “remain above 8 percent until 2014.”

This certainly doesn’t reflect well on the Obama White House, which claimed that flushing $800 billion down the Washington rathole would prevent the joblessness rate from ever climbing above 8 percent.

Not that I have any faith in CBO estimates. After all, those bureaucrats still embrace Keynesian economics.

But this post is not about the backwards economics at CBO. Instead, I want to look at the new budget forecast and see what degree of fiscal discipline is necessary to get rid of red ink.

The first thing I did was to look at CBO’s revenue forecast, which can be found in table 1-2. But CBO assumes the 2001 and 2003 tax cuts will expire at the end of 2012, as well as other automatic tax hikes for 2013. So I went to table 1-8 and got the projections for those tax provisions and backed them out of the baseline forecast.

That gave me a no-tax-hike forecast for the next 10 years, which shows that revenues will grow, on average, slightly faster than 6.6 percent annually. Or, for those who like actual numbers, revenues will climb from a bit over $2.3 trillion this year to almost $4.4 trillion in 2021.

Something else we know from CBO’s budget forecast is that spending this year (fiscal year 2011) is projected to be a bit below $3.6 trillion.

So if we know that tax revenues will be $4.4 trillion in 2021 (and that’s without any tax hike), and we know that spending is about $3.6 trillion today, then even those of us who hate math can probably figure out that we can balance the budget by 2021 so long as government spending does not increase by more than $800 billion during the next 10 years.

Yes, you read that correctly. We can increase spending and still balance the budget. This chart shows how quickly the budget can be balanced with varying degrees of fiscal discipline.

The numbers show that a spending freeze balances the budget by 2017. Red ink disappears by 2019 if spending is allowed to grow 1 percent each years. And the deficit disappears by 2021 if spending is limited to 2 percent annual growth.

Not that these numbers are a surprise. I got similar results after last year’s update, and also earlier this year when the Economic and Budget Outlook was published.

Some of you may be thinking this can’t possibly be right. After all, you hear politicians constantly assert that we need tax hikes because that’s the only way to balance the budget without “draconian” and “savage” budget cuts.

But as I’ve explained before, this demagoguery is based on the dishonest Washington practice of assuming that spending should increase every year, and then claiming that a budget cut takes place anytime spending does not rise as fast as previously planned.

In reality, balancing the budget is very simple. Modest spending restraint is all that’s needed. That doesn’t mean it’s easy, particularly in a corrupt town dominated by interest groups, lobbyists, bureaucrats, and politicians.

But if we takes tax hikes off the table and somehow cap the growth of spending, it can be done. This video explains.

And we know other countries have succeeded with fiscal restraint. As is explained in this video.

Or we can acquiesce to the Washington establishment and raise taxes and impose fake spending cuts. But that hasn’t worked so well for Greece and other European welfare states, so I wouldn’t suggest that approach.

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Ireland Is Considering a Lower Corporate Tax Rate, so How Come I’m not Happy?

It’s not often that I am unenthusiastic about the possibility of a nation reducing its corporate tax rate. But when the country is doing the right thing for the wrong reason, I hope that feelings of ambivalence are understandable.

In this case, some Irish politicians are talking about using a lower corporate tax rate as a weapon to extract more favorable bailout terms from other European nations. That’s an embarrassment, and it makes good tax policy seem like some sort of scam.

Indeed, I’m quite irritated with everything that’s happened in Ireland in the past couple of years. For a period of time, the nation was a positive example of the benefits of lower corporate tax rates and spending restraint. But Irish politicians did not handle prosperity well, and they went on a spending binge with all the tax revenue that was generated by a rapidly growing economy.

And the icing on this unpalatable cake was the decision to engage in the “Mother of all Bailouts” when the big banks became insolvent. That meant not just holding depositors harmless, but also bailing out all bondholders as well.

Given these unfortunate developments, I hope you will share my lack of excitement about the possibility of a lower corporate tax rate in the land of my ancestry.

Here’s the relevant part of a story in the Irish press.

The Government’s failure to secure a cut in the penal interest rate being charged on Ireland’s so-called ‘bailout’ and worsening diplomatic relations with France over corporation tax have been the catalyst for a surprising increase in Euro-scepticism within Government circles. Last week in Europe, Finance Minister Michael Noonan — who has previously been markedly restrained in his comments — sharply criticised the current ECB bailout strategy and, for the first time, openly asked if it offered a realistic road to success. Now, the Sunday Independent has learned that senior political figures are not ruling out the possibility that the under-fire Irish corporation tax rate of 12.5 per cent might be cut to 10 per cent or an even lower rate — rather than being increased — if the Irish Government does not soon receive a similar cut to that secured by Greece to the interest rate being on its bailout.

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Spending Restraint Works: Examples from Around the World

America faces a fiscal crisis. The burden of federal spending has doubled during the Bush-Obama years, a $2 trillion increase in just 10 years. But that’s just the tip of the proverbial iceberg. Because of demographic changes and poorly designed entitlement programs, the federal budget is going to consume larger and larger shares of America’s economic output in coming decades.

For all intents and purposes, the United States appears doomed to become a bankrupt welfare state like Greece.

But we can save ourselves. A previous video showed how both Ronald Reagan and Bill Clinton achieved positive fiscal changes by limiting the growth of federal spending, with particular emphasis on reductions in the burden of domestic spending. This new video from the Center for Freedom and Prosperity provides examples from other nations to show that good fiscal policy is possible if politicians simply limit the growth of government.

These success stories from Canada, Ireland, Slovakia, and New Zealand share one common characteristic. By freezing or sharply constraining the growth of government outlays, nations were able to rapidly shrinking the economic burden of government, as measured by comparing the size of the budget to overall economic output.

Ireland and New Zealand actually froze spending for multi-year periods, while Canada and Slovakia limited annual spending increases to about 1 percent. By comparison, government spending during the Bush-Obama years has increased by an average of more than 7-1/2 percent. And the burden of domestic spending has exploded during the Bush-Obama years, especially compared to the fiscal discipline of the Reagan years. No wonder the United States is in fiscal trouble.

Heck, even Bill Clinton looks pretty good compared to the miserable fiscal policy of the past 10 years.

The moral of the story is that limiting the growth of spending works. There’s no need for miracles. If politicians act responsibly and restrain spending, that allows the private sector to grow faster than the burden of government. That’s the definition of good fiscal policy. The new video above shows that other nations have been very successful with that approach. And here’s the video showing how Reagan and Clinton limited spending in America.

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Which Nation Will Be the Next European Debt Domino…or Will It Be the United States?

Thanks to decades of reckless spending by European welfare states, the newspapers are filled with headlines about debt, default, contagion, and bankruptcy.

We know that Greece and Ireland already have received direct bailouts, and other European welfare states are getting indirect bailouts from the European Central Bank, which is vying with the Federal Reserve in a contest to see which central bank can win the “Most Likely to Appease the Political Class” Award.

But which nation will be the next domino to fall? Who will get the next direct bailout?

Some people think total government debt is the key variable, and there’s been a lot of talk that debt levels of 90 percent of GDP represent some sort of fiscal Maginot Line. Once nations get above that level, there’s a risk of some sort of crisis.

But that’s not necessarily a good rule of thumb. This chart, based on 2010 data from the Economist Intelligence Unit (which can be viewed with a very user-friendly map), shows that Japan’s debt is nearly 200 percent of GDP, yet Japanese debt is considered very safe, based on the market for credit default swaps, which measures the cost of insuring debt. Indeed, only U.S. debt is seen as a better bet.

Interest payments on debt may be a better gauge of a nation’s fiscal health. The next chart (2011 data) shows the same countries, and the two nations with the highest interest costs, Greece and Ireland, already have been bailed out. Interestingly, Japan is in the best shape, even though it has the biggest debt. This shows why interest rates are very important. If investors think a nation is safe, they don’t require high interest rates to compensate them for the risk of default (fears of future inflation also can play a role, since investors don’t like getting repaid with devalued currency).

Based on this second chart, it appears that Italy, Portugal, and Belgium are the next dominos to topple. Portugal may be the best bet (no pun intended) based on credit default swap rates, and that certainly is consistent with the current speculation about an official bailout.

Spain is the wild card in this analysis. It has the second-lowest level of both debt and interest payments as shares of GDP, but the CDS market shows that Spanish government debt is a greater risk than bonds from either Italy or Belgium.

By the way, the CDS market shows that lending money to Illinois and California is also riskier than lending to either Italy or Belgium.

The moral of the story is that there is no magic point where deficit spending leads to a fiscal crisis, but we do know that it is a bad idea for governments to engage in reckless spending over a long period of time. That’s a recipe for stifling taxes and large deficits. And when investors see the resulting combination of sluggish growth and rising debt, eventually they will run out of patience.

The Bush-Obama policy of big government has moved America in the wrong direction. But if the data above is any indication, America probably has some breathing room. What happens on the budget this year may be an indication of whether we use that time wisely.

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Five Lessons from Ireland

The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counterproductive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

2. Excessive Government Spending Is a Path to Fiscal Ruin – The bailout of the banks obviously played a big role in causing Ireland’s fiscal collapse, but the government probably could have weathered that storm if politicians in Dublin hadn’t engaged in a 20-year spending spree.

The red line in the chart shows the explosive growth of government spending. Irish politicians got away with this behavior for a long time. Indeed, government spending as a share of GDP (the blue line) actually fell during the 1990s because the private sector was growing even faster than the public sector. This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

Eventually, however, the house of cards collapsed. Revenues dried up and the banks failed, but because the politicians had spent so much during the good times, there was no reserve during the bad times.

American politicians are repeating these mistakes. Spending has skyrocketed during the Bush-Obama year. We also had our version of a financial system bailout, though fortunately not as large as Ireland’s when measured as a share of economic output, so our crisis is likely to occur when the baby boom generation has retired and the time comes to make good on the empty promises to fund Social Security, Medicare, and Medicaid.

3. Low Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other Policies Are Bad – Ireland used to be a success story. They went from being the “Sick Man of Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in large part because policy makers dramatically reformed fiscal policy. Government spending was capped in the late 1980 and tax rates were reduced during the 1990s. The reform of the corporate income tax was especially dramatic. Irish lawmakers reduced the tax rate from 50 percent all the way down to 12.5 percent.

This policy was enormously successful in attracting new investment, and Ireland’s government actually wound up collecting more corporate tax revenue at the lower rate. This was remarkable since it is only in very rare cases that the Laffer Curve means a tax cut generates more revenue for government (in the vast majority of cases, the Laffer Curve simply means that changes in taxable income will have revenue effects that offset only a portion of the revenue effects caused by the change in tax rates).

Unfortunately, good corporate tax policy does not guarantee good economic performance if the government is making a lot of mistakes in other areas. This is an apt description of what happened to Ireland. The silver lining to this sad story is that Irish politicians have resisted pressure from France and Germany and are keeping the corporate tax rate at 12.5 percent. The lesson for American policy makers, of course, is that low corporate tax rates are a very good idea, but don’t assume they protect the economy from other policy mistakes.

4. Artificially Low Interest Rates Encourage Bubbles – No discussion of Ireland’s economic problems would be complete without looking at the decision to join the common European currency. Adopting the euro had some advantages, such as not having to worry about changing money when traveling to many other European nations. But being part of Europe’s monetary union also meant that Ireland did not have flexible interest rates.

Normally, an economic boom drives up interest rates because the plethora of profitable opportunities leads investors demand more credit. But Ireland’s interest rates, for all intents and purposes, were governed by what was happening elsewhere in Europe, where growth was generally anemic. The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.

But if America already had a bubble, what lesson can we learn from Ireland? The simple answer is that we should learn to avoid making the same mistake over and over again. Easy money is a recipe for inflation and/or bubbles. Simply stated, excess money has to go someplace and the long-run results are never pleasant. Yet Ben Bernanke and the Federal Reserve have launched QE2, a policy explicitly designed to lower interest rates in hopes of artificially juicing the economy.

5. Housing Subsidies Reduce Prosperity – Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate. The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Since we just endured a financial crisis caused in large part by a corrupt system of housing subsidies for Fannie Mae and Freddie Mac, American policy makers should have learned this lesson already. But as Thomas Sowell sagely observes, politicians are still fixated on somehow re-inflating the housing bubble. The lesson they should have learned is that markets should determine value, not politics.

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Don’t Blame Ireland’s Mess on Low Corporate Tax Rates

Ireland is in deep fiscal trouble and the Germans and the French apparently want the politicians in Dublin to increase the nation’s 12.5 percent corporate tax rate as the price for being bailed out. This is almost certainly the cause of considerable smugness and joy in Europe’s high-tax nations, many of which have been very resentful of Ireland for enjoying so much prosperity in recent decades in part because of a low corporate tax burden.

But is there any reason to think Ireland’s competitive corporate tax regime is responsible for the nation’s economic crisis? The answer, not surprisingly, is no. Here’s a chart from one of Ireland’s top economists, looking at taxes and spending for past 27 years. You can see that revenues grew rapidly, especially beginning in the 1990s as the lower tax rates were implemented. The problem is that politicians spent every penny of this revenue windfall.

When the financial crisis hit a couple of years ago, tax revenues suddenly plummeted. Unfortunately, politicians continued to spend like drunken sailors. It’s only in the last year that they finally stepped on the brakes and began to rein in the burden of government spending. But that may be a case of too little, too late.

The second chart provides additional detail. Interestingly, the burden of government spending actually fell as a share of GDP between 1983 and 2000. This is not because government spending was falling, but rather because the private sector was growing even faster than the public sector.

This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

But big government is never a free lunch. Government spending diverts resources from the productive sector of the economy. This is now painfully apparent since there no longer is a revenue windfall to mask the damage.

There are lots of lessons to learn from Ireland’s fiscal/economic/financial crisis. There was too much government spending. Ireland also had a major housing bubble. And some people say that adopting the euro (the common currency of many European nations) helped create the current mess.

The one thing we can definitely say, though, is that lower tax rates did not cause Ireland’s problems. It’s also safe to say that higher tax rates will delay Ireland’s recovery. French and German politicians may think that’s a good idea, but hopefully Irish lawmakers have a better perspective.

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Greetings from Ireland

I spoke today before the 2010 Global Financial Services Centres Conference. Equally important, I got to meet with some of the nation’s top economic minds.

First, the good news: Ireland has no intention of giving up its low 12.5 percent corporate tax rates.

The bad news is that Ireland is drifting in the wrong direction. Bailouts, higher spending, more red tape, and social engineering are gradually eroding the benefits generated by a better tax system. Both government and private debt are too high.

Ireland probably still belongs in the world’s top 10, as determined by Economic Freedom of the World and the Index of Economic Freedom, but that is more a reflection of how few nations enjoy genuine economic liberty.

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International Evidence Shows Spending Restraint Is Best Way to Address Red Ink

Tyler Cowen’s recent New York Times column explains how nations as diverse as Ireland, Sweden, and Canada have successfully solved fiscal problems by limiting the growth of government spending:

America’s long-run fiscal outlook is bleak, mostly because of an aging population and rising health care costs. To close the gap between expenditures and revenue, …we’ll need to focus especially on reducing spending, largely because that taxes on the wealthy can be raised only so high. …Higher income tax rates would discourage hard work and encourage tax avoidance, thereby defeating the purpose of the tax increases. …Higher levels of government spending and taxation would also soak up resources that might otherwise foster innovation and new businesses. And sentiment would most likely turn ever stronger against those immigrants who consume public services and make the deficit higher in the short run. …The macroeconomic evidence also suggests the wisdom of emphasizing spending cuts. In a recent paper, Alberto Alesina and Silvia Ardagna, economics professors at Harvard, found that in developed countries, spending cuts were the key to successful fiscal adjustments — and were generally better for the economy than tax increases. …The received wisdom in the United States is that deep spending cuts are politically impossible. But a number of economically advanced countries, including Sweden, Finland, Canada and, most recently, Ireland, have cut their government budgets when needed. Most relevant, perhaps, is Canada, which cut federal government spending by about 20 percent from 1992 to 1997.

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Taxpayers vs. Bureaucrats, Part XVII

Finally, some good news to report in the battle between the people pulling the wagon and those riding in the wagon. Ireland may be in a recession (caused in large part by misguided housing subsidies), but there are two things worth admiring about the Emerald Isle’s public policy. Many wonks already know about the first policy, the 12.5 percent corporate tax rate that helped transform Ireland from the “sick man of Europe.” But it seems that Irish policymakers are reading Chris Edwards, because the second admirable policy is that lawmakers actually cut civil service compensation by 13.5 percent. And these are real cuts, not the type of phony gimmick you find in Washington, where something is called a “cut” simply because it didn’t increase as fast as previously planned. A columnist writing in the UK-based Times wonders why Irish bureaucrats did not go nuts with public protests and speculates that maybe they actually understand that they have a sweetheart deal compared to their brethren in the productive sector of the economy:

Because of the budget deficit, shrinking economy and untenable level of national debt, all public service salaries will be cut by an average of 13.5 per cent, with immediate effect. The charges will appear on your payslip as “government levy”, and will apply to frontline public workers in health, education, transport and local services and also to MPs, Ministers of State and the Attorney-General. …Couldn’t happen, could it? Actually it has, and close to home. …public sector pay in the Republic has been cut. Not frozen, sharply cut. …although the payslips have been changed for many months now, the schools are open, the hospitals treat the sick, rubbish is collected and paper pushed around briskly enough in public organisations. Belts are tight all right and pips are squeaking; but the country whose public pay once led the EU league has not imploded into the chaos of suicidal strikes, unburied bodies, closed schools and garbage mountains, which the UK or France would expect as a matter of course if a government did any such thing. …Yet the pay cuts — I say again, 10 to 15 per cent cuts in pay, real and immediate holes in the family budget — have not caused the enraged citizenry to pull down the pillars of the temple around their own heads and everybody else’s. They just haven’t. Why? …unlike the self-righteous whiners who speak for British public service unions, middle-Ireland still knows that a secure and pensionable job is a privilege: that working in the public sector is not an altruistic gift to the nation, but a damn lucky break. I saw a spirited, self-mocking sketch performed by 12-year-olds in a village hall entertainment the other night about “Marty Matchmaker O’Donoghue, where every ould stocking will find an ould shoe”. The girl being advertised to the men is talked up by the matchmaker as having “a Government Job! A clerk at the council office — I tell ye, she’s a laying hen!” Friends confirm that it’s an old saying: “Marry a teacher or a nurse, you’ve got a laying hen.” It does not seem that way in boom times, but even in the UK it is becoming true.

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Bad News from Ireland

There’s no sugar-coating the election results. Irish voters, hit hard by the global recession and plunging property values, inexplicably decided that these factors somehow justified voting for the Lisbon Treaty (a.k.a., the EU Constitution) and giving more power to the statist bureaucracy in Brussels. The Wall Street Journal Europe is appropriately skeptical about whether this was the right decision:

The people of Ireland approved the treaty 67.1% to 32.9%, with a 59% turnout—higher participation and wider margins than the “No” camp had been able to muster when the Irish rejected the same charter last year. …Brussels now tells us the vote was a resounding Yes for further centralization of power in the EU’s 27 member states, and represented satisfaction that Ireland had secured guarantees for its neutrality and abortion laws. A more convincing explanation is the global recession, which has hit the Celtic Tiger particularly hard. Irish unemployment now runs to 12.6%. Standard & Poor’s has yanked the country’s triple-A credit rating, which in turn has ratcheted up borrowing costs. All this made voters more susceptible to the argument that another “No” could have jeopardized Ireland’s membership in the euro club and its access to the EU’s single market—a baseless scenario that nonetheless was bound to have an effect on an electorate with pocketbook worries. …one wonders how much economic authority the Irish are really prepared to hand over to Brussels, especially if that means giving it an effective veto (in the name of eradicating “unfair tax competition”) over Dublin’s pro-growth tax policies. It was those policies—and not membership in the EU, which dates to the early 1970s—that were chiefly responsible for transforming Ireland from one of the poorest countries in Europe in the early 1990s to one of the richest. All the more remarkable is that Ireland did this in the teeth of resistance from the same Brussels bureaucracy in which it now puts its trust.

This means President Klaus of the Czech Republic is the only meaningful barrier standing in the way of further centralization of the European Union. This is the man who has resisted the fanatics on global warming hysteria, so he has backbone. On behalf of the 26 nations that were denied a vote, let’s hope he holds firm.

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