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Archive for the ‘OECD’ Category

At the risk of understatement, I’m not a fan of the Organization for Economic Cooperation and Development. Perhaps reflecting the mindset of the European governments that dominate its membership, the Paris-based international bureaucracy has morphed into a cheerleader for statist policies.

All of which was just fine from the perspective of the Obama Administration, which doubtlessly appreciated the OECD’s partisan work to promote class warfare and pimp for wasteful Keynesian spending.

What is particularly irksome to me is the way the OECD often uses dishonest methodology to advance the cause of big government.

But my disdain for the leftist political appointees who run the OECD doesn’t prevent me from acknowledging that the professional economists who work for the institution occasionally generate good statistics and analysis.

For instance, I’ve cited two  examples (here and here) of OECD research showing that spending caps are only effective fiscal rule. And I praised another OECD study that admitted the beneficial impact of tax competition. I even listed several good example of OECD research on tax policy as part of a column that ripped the bureaucracy for some very shoddy work in favor of Obama’s redistribution agenda.

And now we have some more good research to add to that limited list. A new working paper by two economists at the OECD contains some remarkable findings about the negative impact of government spending on economic performance. If you’re pressed for time, here’s the key takeaway from their research.

Governments in the OECD spend on average about 40% of GDP on the provision of public goods, services and transfers. The sheer size of the public sector has prompted a large amount of research on the link between the size of government and economic growth. …This paper investigates empirically the effect of the size and the composition of public spending on long-term growth… The main findings that emerge from the analysis are…Larger governments are associated with lower long-term growth. Larger governments also slowdown the catch-up to the productivity frontier.

For those who want more information, the working paper is filled with useful information and analysis.

Here’s one of the charts from the study, showing how government spending is allocated in OECD nations.

The report also acknowledges that there’s a lot of preexisting research showing that government spending hinders economic growth.

There is a vast empirical literature investigating the relationship between the size of the government and economic growth (see Slemrod, 1995; Myles 2009; Bergh and Henrekson, 2011 for overviews). A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study confirmed a negative relationship between the size of government and GDP growth (Fall and Fournier, 2015). …the link between the size of government and growth may vary with the income level and could be hump-shaped (Armey, 1995). A few studies have found support for the existence of a non-linear relationship between the size of government and growth (e.g. Vedder and Gallaway, 1998; Pevcin, 2004; Chen and Lee, 2005).

By the way, the reference to “hump-shaped” means that the OECD is even aware of the Rahn Curve.

The methodology in the paper is not ideal from my perspective. For all intents and purposes, the economists compare economic performance of the OECD’s big-government nations with the growth numbers from the OECD’s not-quite-as-big-government nations. But even with that limitation, the study generates some powerful results.

…the simulation assumes that in countries where the size of government is above the average level of countries in the bottom half of the sample, the government size will gradually converge to this level (36% of GDP). Similar to the spending mix reforms, this reform is phased in over 10 years. Such a reduction in the size of the government could increase long-term GDP by about 10%, with much larger effects in some countries with currently large or ineffective governments. …a reduction of the size of government has a positive, but moderate, effect on the income of the poor. The average disposable income also rises. However, the rich gain relatively more. Finally, in countries where the government is less effective (such as Italy) the growth effect dominates and a moderate reduction of the size of government would have a large growth effect, so that it would lift all boats.

And here’s a chart showing how much more growth would be possible if the countries with really-big government downsized their public sectors to the somewhat-big level.

Even with the methodology limitations I described, these results are astounding. Potential GDP gains of more than 30 percent for Greece and Italy. Gains of more than 20 percent for Slovenia, France, and Hungary. And more than 10 percent for Belgium, Czech Republic, Portugal, and Poland.

The working paper also looks at the composition of government spending. In other words, just as not all taxes are equally damaging, the same is true for spending programs.

The results from the estimation of the size of the government and the public spending mix illustrate that public spending matters for long-term growth…pension and subsidy spending [are] the two items with a significantly negative effect on growth. As each regression includes the size of government and one spending share, the estimates provide the effect of increasing this type of spending while decreasing spending on other items to keep the spending to GDP ratio unchanged… larger governments are in several specifications significantly and negatively associated with long-term growth. This is consistent with the literature… Larger governments can impede convergence (Table 8, columns 1 and 3), because they are associated with higher taxation that can discourage business investment including foreign investment and households to supply labour.

Pensions and subsidies seem to cause the most economic harm.

Reducing the share of pension spending in primary spending yields sizeable growth gains with no significant adverse effect on disposable income inequality. This reduction could be achieved by an increase in the effective retirement age or by cutting the replacement rate. …Cutting public subsidies boosts growth, as public subsidies…can distort the allocation of resources and undermine competition. …Education outcomes depend not only on education spending but also on the effectiveness of education policies, and the literature suggest the latter can be more important. Since the seminal work of Coleman (1966), a broad literature suggests that there is no clear link between education spending and education outcomes. …policies aimed at increasing education spending effectiveness can be more appropriate than an across-the-board rise of education spending. …It may be that, beyond a certain point, additional spending on investment has adverse effects, if poorly managed.

For those of you with statistical/econometric knowledge, here’s some relevant data from the study.

And you can match the numbers in Table 6 with these excerpts.

…pension spending reduces growth (Table 6, columns 2, 5, 7 and 10). Increasing the share of pension spending in primary spending by one percentage point (offset by a reduction in other spending) would decrease potential GDP by about 2%. …Public spending on subsidies also reduces growth (Table 6, columns 3, 5, 8 and 10). …increasing the share of public subsidies in primary spending by one percentage point would decrease potential GDP by about 7%.

If you’re not a stats wonk, these two charts may be more helpful and easy to understand.

What jumped out at me is how the normally sensible nation of Switzerland is very bad about subsidies. That’s a policy they obviously need to fix (along with the fact that they also have a wealth tax, which is very uncharacteristic for that country).

But I’m digressing.

Let’s return to the study. One of the interesting things about the working paper is that it notes that bad fiscal policy can be somewhat mitigated by having market-oriented policies in other areas, which is a point I always make when writing about Scandinavian nations.

…countries with a high level of public spending may also be characterised by features that partly offset the adverse growth effect of government size. …in Sweden the mix of growth-friendly structural policies…may have offset the adverse growth effect of a large government sector.

In other words, the moral of the story is that smaller government is good and free markets are good. Mix the two together and you have best of all worlds.

P.S. Even if the OECD published dozens of quality studies like this one, I would still argue that American taxpayers should no longer be forced to subsidize the Paris-based bureaucracy. And even if the OECD’s political types stopped pushing statist policies, I would still have the same view about ending handouts from American taxpayers. This has nothing to do with the fact that the bureaucrats once threatened to have me arrested and thrown in a Mexican jail. I simply don’t think taxpayers should fund international bureaucracies.

P.P.S. Other international bureaucracies, including the World Bank and European Central Bank, also have published good research about the negative effect of excessive government spending.

P.P.P.S. My general disdain for the OECD (notwithstanding my qualified praise today for their new study on spending) may be exceeded by my hostility for the International Monetary Fund. I’ve referred to the IMF as both “the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy.”

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Earlier this year, I criticized the Organization for Economic Cooperation and Development for endorsing an orgy of Keynesian spending.

Did my criticism have an effect? Well, the bureaucrats in Paris just issued a new report that bluntly suggests a reorientation of fiscal policy to achieve more growth.

…the global economy remains in a low-growth trap with weak investment, trade, productivity and wage growth and rising inequality in some countries. …a stronger fiscal policy response is needed to boost near-term growth and strengthen long-term prospects for inclusive growth.

Sounds good to me. I welcome sinners who want to repent. Is the OECD now recommending corporate tax rate reductions? A flat tax? Entitlement reform? Elimination of wasteful departments, agencies, and programs? A spending cap?

Don’t be silly. This is the OECD. Some of the professional economists are sensible and competent, but major policy initiatives almost always are determined by the high-level hacks who crank out proposals designed to give cover to politicians that want ever-more taxes and spending.

So when the bureaucrats in Paris suggest “a stronger fiscal policy response,” they’re actually advocating for more government. Which is exactly what they did back in February. And what they’ve been repetitively doing all during the Obama Administration. I’m not joking. Here are some further excerpts.

…this chapter emphasises the need for a fiscal initiative…to foster productivity in the medium to long term. Measures should be chosen depending on each country’s most pressing needs and could include not only raising soft and hard infrastructure or education spending… In many countries, such a package could be deficit-financed for a few years, before turning budget-neutral.

The OECD says that “stimulus” would be a good idea because nations now have more “fiscal space,” which is bureaucrat-speak for an estimate of how much additional red ink is supposedly feasible feasible given interest rates, existing debt levels, and other variables.

I’m more worried, for what it’s worth, about the level of spending. And on that basis, there’s less fiscal space. Here’s a comparison (based on the OECD’s own dataset) of the burden of spending before the great recession/global financial crisis and today. As you can see, government outlays are consuming almost 2-percentage points more of economic output.

Needless to say, there’s hasn’t been much “austerity” over the past decade (other than higher income taxes and higher VAT taxes, which means taxpayers have taken a hit but not bureaucrats and interest groups).

In any event, the OECD ignores all this evidence and thinks today is the perfect time for another spending binge. Here are additional details from the report.

OECD governments could finance a ½ percentage point of GDP productivity-enhancing fiscal initiative, for three to four years on average in OECD countries without raising the debt-to-GDP ratio in the medium term, provided the selected activities and projects are sound. Such an initiative could encompass high-quality spending on education, health and research and development as well as green infrastructure that all bring significant output gains in the long run. …the average output gains for the large advanced economies of such a fiscal initiative amount to 0.4-0.6% in the first year.

It’s laughable that the bureaucrats project more growth as a result of Keynesian “stimulus” even though we just suffered through the failure of Obama’s 2009 program (not to mention the repeated failure of Keynesian economics in Japan and elsewhere).

The only good news, if we grade on a curve, is that the bureaucrats apparently don’t think Keynesian “stimulus” would be that helpful for the American economy.

Though I’m worried this Table, buried four pages from the end of the report, won’t get much attention (just as other decent portions of the report, such as commentary about the damage caused by bad tax policy, also will get ignored).

If you think I’m being paranoid, check out these passages from a news report in the Wall Street Journal. The main takeaway from the OECD’s new publication, according to the reporter, is that politicians around the world have a green light for more wasteful spending.

Adding detail to earlier calls for a switch to budget stimulus from exhausted monetary policies, the Paris-based think tank said most governments have room to boost spending by half a percentage point of economic output over a period of three to four years without risking an increase in their already high debts. …The think tank calculates that an increase in spending on the scale it recommends would lift economic growth in the countries involved by between 0.4 and 0.6 of a percentage point, with an additional 0.2 percentage point boost if the effort were to be coordinated internationally. …If governments were to follow the OECD’s advice, it would mark a further turn away from the policies of austerity that were an immediate response to surging government debts in the aftermath of the 2008 financial crisis. …A slow shift toward a greater reliance on fiscal policy has been under way since last year, when Canada embarked on a fiscal stimulus, while the OECD noted that increases in spending are also under way in Germany, Italy and China. …“There is quite a bit more receptivity to the notion of using fiscal policy more actively,” said Ms. Mann.

And I’m worried that this kind of bad advice may influence President-Elect Trump, who already has made worrisome comments about spending for infrastructure and entitlements.

P.S. But I’m semi-hopeful that Trump won’t be a fan of the OECD in general, if for no other reason than the head bureaucrat in Paris called him a racist and was remarkably open about favoring Hillary Clinton’s election.

Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. “I think that because the American public is wise, it will then act in consequence,” Gurria adds.

I’ve previously argued that ending American subsidies for the OECD (and its leftist agenda) is an IQ test for Republicans. In prior years, GOPers on Capitol Hill have failed this test. Maybe Trump, if for no other reason than Secretary General Gurria’s harsh attack, will finally end the gravy train for this parasitical bureaucracy.

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I must be perversely masochistic because I have the strange habit of reading reports issued by international bureaucracies such as the International Monetary Fund, World Bank, United Nations, and Organization for Economic Cooperation and Development.

But one tiny silver lining to this dark cloud is that it’s given me an opportunity to notice how these groups have settled on a common strategy of urging higher taxes for the ostensible purpose of promoting growth and development.

Seriously, this is their argument, though they always rely on euphemisms when asserting that politicians should get more money to spend.

  • The OECD, for instance, has written that “Increased domestic resource mobilisation is widely accepted as crucial for countries to successfully meet the challenges of development and achieve higher living standards for their people.”
  • The Paris-based bureaucrats of the OECD also asserted that “now is the time to consider reforms that generate long-term, stable resources for governments to finance development.”
  • The IMF is banging on this drum as well, with news reports quoting the organization’s top bureaucrat stating that “…economies need to strengthen their fiscal frameworks…by boosting…sources of revenues.” while also reporting that “The IMF chief said taxation allows governments to mobilize their revenues.”
  • And the UN, which has “…called for a tax on billionaires to help raise more than $400 billion a year” routinely categorizes such money grabs as “financing for development.”

As you can see, these bureaucracies are singing from the same hymnal, but it’s a new version.

In the past, the left agitated for higher taxes simply in hopes for having more redistribution.

And they’ve urged higher taxes because of spite and hostility against those with high incomes.

Some folks on the left also have supported higher taxes on the theory that the economy’s performance is boosted when deficits are smaller.

But now, they are advocating higher taxes (oops, excuse me, I mean they are urging “resource mobilization” to generate “stable resources” so there can be “financing for development” in order to “strengthen fiscal frameworks”) on the theory that bigger government is the way to get more growth.

You probably won’t be surprised to learn, however, that these reports from international bureaucracies never provide any evidence for this novel hypothesis. None. Zero. Zilch. Nada. The null set.

They simply assert that governments will be able to make presumably wonderful growth-generating “investments” if politicians can squeeze more money from the private sector.

And I strongly suspect that this absence of evidence is deliberate. Simply stated, international bureaucracies are willing to produce shoddy research (just look at what the IMF and OECD wrote about the relationship between growth and inequality), but there’s a limit to how far data can be tortured and manipulated.

Especially when there’s so much evidence from real scholars that economic performance is weakened when government gets bigger.

Not to mention that most sentient beings can look around the world and look at the moribund economies of nations with large governments (such as France, Italy, and Greece) and compare them with the better performance of places with smaller government (such as Hong Kong, Switzerland, and Singapore).

But if you read the aforementioned reports from the international bureaucracies, you’ll notice that some of them focus on getting more growth in poor nations.

Perhaps, some statists might argue, government is big enough in Europe, but not big enough in poorer regions such as sub-Saharan Africa.

So let’s look at the numbers. Is it true that governments in the developing world don’t have enough money to provide core public goods?

The answer is no.

But before sharing those numbers, let’s look at some historical data. A few years ago, I shared some research demonstrating that countries in North America and Western Europe became rich in the 1800s and early 1900s when the burden of government spending was very modest.

One would logically conclude from this data that today’s poor nations should copy that approach.

Yet here’s the data from the International Monetary Fund on government expenditures in various poor regions of the world. As you can see, the burden of government spending in these areas is two or three times larger than it was in America and other nations that when they made the move from agricultural poverty to middle class prosperity.

The bottom line is that small government and free markets is the recipe for growth and prosperity in all nations.

Just don’t expect international bureaucracies to share that recipe since one of the obvious conclusions is that we therefore don’t need parasitical bodies like the IMF, OECD, World Bank, and UN.

P.S. Unsurprisingly, Hillary Clinton also has adopted the mantra of higher-taxes → bigger government → more growth.

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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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Okay, I’ll admit the title of this post is an exaggeration. There are lots of things you should know – most bad, though some good – about international bureaucracies.

That being said, regular readers know that I get very frustrated with the statist policy agendas of both the International Monetary Fund and the Organization for Economic Cooperation and Development.

I especially object to the way these international bureaucracies are cheerleaders for bigger government and higher tax burdens. Even though they ostensibly exist to promote greater levels of prosperity!

I’ve written on these issues, ad nauseam, but perhaps dry analysis is only part of what’s needed to get the message across. Maybe some clever image can explain the issue to a broader audience (something I’ve done before with cartoons and images about the rise and fall of the welfare state, the misguided fixation on income distribution, etc).

It took awhile, but I eventually came up with (what I hope is) a clever idea. And when a former Cato intern with artistic skill, Jonathan Babington-Heina, agreed to do me a favor and take the concept in my head and translate it to paper, here are the results.

I think this hits the nail on the head.

Excessive government is the main problem plaguing the global economy. But the international bureaucracies, for all intents and purposes, represent governments. The bureaucrats at the IMF and OECD need to please politicians in order to continue enjoying their lavish budgets and exceedingly generous tax-free salaries.

So when there is some sort of problem in the global economy, they are reluctant to advocate for smaller government and lower tax burdens (even if the economists working for these organizations sometimes produce very good research on fiscal issues).

Instead, when it’s time to make recommendations, they push an agenda that is good for the political elite but bad for the private sector. Which is exactly what I’m trying to demonstrate in the cartoon,

But let’s not merely rely on a cartoon to make this point.

In an article for the American Enterprise Institute, Glenn Hubbard and Kevin Hassett discuss the intersection of economic policy and international bureaucracies. They start by explaining that these organizations would promote jurisdictional competition if they were motivated by a desire to boost growth.

…economic theory has a lot to say about how they should function. …they haven’t achieved all of their promise, primarily because those bodies have yet to fully understand the role they need to play in the interconnected world. The key insight harkens back to a dusty economics seminar room in the early 1950s, when University of Michigan graduate student Charles Tiebout…said that governments could be driven to efficient behavior if people can move. …This observation, which Tiebout developed fully in a landmark paper published in 1956, led to an explosion of work by economists, much of it focusing on…many bits of evidence that confirm the important beneficial effects that can emerge when governments compete. …A flatter world should make the competition between national governments increasingly like the competition between smaller communities. Such competition can provide the world’s citizens with an insurance policy against the out-of-control growth of massive and inefficient bureaucracies.

Using the European Union as an example, Hubbard and Hassett point out the grim results when bureaucracies focus on policies designed to boost the power of governments rather than the vitality of the market.

…as Brexit indicates, the EU has not successfully focused solely on the potentially positive role it could play. Indeed, as often as not, one can view the actions of the EU government as being an attempt to form a cartel to harmonize policies across member states, and standing in the way of, rather than advancing, competition. …an EU that acts as a competition-stifling cartel will grow increasingly unpopular, and more countries will leave it.

They close with a very useful suggestion.

If the EU instead focuses on maximizing mobility and enhancing the competition between states, allowing the countries to compete on regulation, taxation, and in other policy areas, then the union will become a populist’s dream and the best economic friend of its citizens.

Unfortunately, I fully expect this sage advice to fall upon deaf ears. The crowd in Brussels knows that their comfortable existence is dependent on pleasing politicians from national governments.

And the same is true for the bureaucrats at the IMF and OECD.

The only practical solution is to have national governments cut off funding so the bureaucracies disappear.

But, to cite just one example, why would Obama allow that when these bureaucracies go through a lot of effort to promote his statist agenda?

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There are many reasons why I don’t like the Paris-based Organization for Economic Cooperation and Development, an international bureaucracy that ostensibly represents the developed world but in reality is controlled by European welfare states.

The main problem is that the OECD is financed by mostly left-leaning governments and supports policies that reflect the ideology of those governments. As such, the bureaucracy routinely advocates more statism. Oftentimes with shoddy and dishonest data manipulation.

Adding insult to injury, even though the US is only one of 34 member nations and even though OECD policies frequently are designed to undermine US competitiveness, American taxpayers finance the largest share of the organization’s lavish budget.

That bureaucracy’s new Economic Survey of the United States is a typical example of the OECD’s bias.

Here are the challenges identified by the bureaucrats and their recommendations. Since I’m a helpful person, I’ve added a column to summarize what the OECD is actually suggesting.

For those keeping score at home, the OECD is advocating 10 bad policies, one good policy, and has empty rhetoric on a few others.

I don’t like the support of Dodd-Frank and find it bizarre that the OECD wants to make women less attractive to employers, but the three most offensive and destructive recommendations are:

  1. The proposal for information exchange would make America less attractive for foreign investors.
  2. The proposal for a higher minimum wage would make it harder for low-skilled people to climb the economic ladder.
  3. The massive energy tax would be a heavy blow to American households.

By the way, my favorite part of the report is on page 29, where the OECD has a box showing “Past OECD recommendations on fiscal policy.” One of the recommendations from the 2014 survey was for the US to have more consumption taxation, which is their way of urging a value-added tax on top of the income tax. I’m glad to share that the OECD glumly reports that “No action taken.”

And I suppose it’s good news that the OECD didn’t even bother to include that recommendation this year, or any suggestions for higher income tax rates (though there are other suggestions to boost the overall tax burden).

My next favorite part of the report is where the OECD inadvertently showed that America’s more market-oriented (or less-statist) policies put us ahead of other member nations that generally have bigger burdens of government.

Yet notwithstanding the fact that Americans enjoy much higher living standards than people in nations with more government, the report is an awful compilation of statist proposals to make America more like France.

Which raises the important question of why American taxpayers are financing an organization that basically is a propaganda machine for Obama-style policies?

P.S. It’s possible that the IMF is even worse than the OECD. I confess I’m torn on which one deserves to be abolished first.

P.P.S. In the interest of fairness, the OECD isn’t always wrong. Its economists have concluded that spending caps are the only effective fiscal rule.

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The Foreign Account Tax Compliance Act (FATCA) arguably is the worst feature of the internal revenue code. It’s an odious example of fiscal imperialism that is based on a very bad policy agenda.

But there is something even worse, a Multilateral Convention on Mutual Administrative Assistance in Tax Matters that has existed for decades but recently has been dangerously modified. MCMAATM is a clunky acronym, however, so let’s go with GATCA. That’s because this agreement, along with companion arrangements, would lead to a Global Tax Compliance Act.

Or, as I’ve argued, it would be a nascent World Tax Organization.

And the United States would be the biggest loser. That’s because FATCA was bad legislation that primarily imposed heavy costs on – and caused much angst in – the rest of the world.

GATCA, by contrast, is an international pact that would impose especially heavy costs on the United States and threaten our status as the world’s biggest haven for investment.

Let’s learn more about this bad idea, which will become binding on America if approved by the Senate.

James Jatras explains this dangerous proposal in a column for Accounting Today.

Treasury’s real agenda is…a so-called “Protocol amending the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.” The Protocol, along with a follow-up “Competent Authority” agreement, is an initiative of the G20 and the Organization for Economic Cooperation and Development (OECD), with the support, unsurprisingly, of the Obama Administration. …the Protocol cannot be repaired. It is utterly inconsistent with any concept of American sovereignty or Americans’ constitutional protections. Ratification of the Protocol would mean acceptance by the United States as a treaty obligation of an international “common reporting standard,” which is essentially FATCA gone global—sometimes called GATCA. Ratifying the Protocol arguably would also provide Treasury with backdoor legal authority to issue regulations requiring FATCA-like reporting to foreign governments by U.S. domestic banks, credit unions, insurance companies, mutual funds, etc. This would mean billions of dollars in costs passed on to American taxpayers and consumers, as well as mandating the delivery of private data to authoritarian and corrupt governments, including China, Saudi Arabia, Mexico and Nigeria.

The Foreign Relations Committee unfortunately has approved the GATCA Protocol.

But Rand Paul, like Horatius at the bridge protecting Rome, is throwing sand in the gears and isn’t allowing easy passage by the full Senate.

…the senator is right to insist that the OECD Protocol is dead on arrival.

Taxpayers all over the world owe him their gratitude.

In a column for Investor’s Business Daily, Veronique de Rugy of the Mercatus Center warns that this pernicious and risky global pact would give the IRS power to collect and automatically share massive amounts of our sensitive financial information with some of the world’s most corrupt, venal, and incompetent governments.

During a visit to the World Bank this week, I got a sobering lesson about the degree to which the people working at international bureaucracies, including the Organization for Economic Cooperation and Development, dislike tax competition. For years, these organizations — which are funded with our hard-earned tax dollars — have bullied low-tax nations into changing their tax privacy laws so uncompetitive nations can track taxpayers and companies around the world. …they never tire of trying to raise taxes on everyone else. Take the Organization for Economic Cooperation and Development’s latest attempt to impose a one-size-fits-all system of “automatic information exchange” that would necessitate the complete evisceration of financial privacy around the world. A goal of the Convention on Mutual Administrative Assistance in Tax Matters is to impose a global network of data collection and dissemination to allow high-tax nations to double-tax and sometimes triple-tax economic activity worldwide. That would be a perfect tax harmonization scheme for politicians and a nightmare for taxpayers and the global economy.

But she closes with the good news.

Somehow the bureaucrats persuaded the lawmakers on the Senate Foreign Relations Committee to approve it. Thankfully, it’s currently being blocked by Sens. Rand Paul, R-Ky., and Mike Lee, R-Utah.

Actually, all that’s being blocked is the ability to ram the Multilateral Convention through the Senate without any debate or discussion.

John Gray explains the procedural issues in a piece for Conservative Review.

Senators Rand Paul (R-KY) and Mike Lee (R-UT)…aren’t blocking these treaties at all. Instead, they are just objecting to the Senate ratifying them by “unanimous consent.” The Senate leadership has the authority to bring these tax treaties to the floor for full consideration – debate, amendments, and votes. That is what Senators Paul and Lee are asking for. …Unanimous consent means that the process takes all of about 10 seconds; there is no time to review the treaties, there is no time for debate, and not a second of time to offer amendments.  They simply want them to be expedited through the Senate without transparency. …As sitting U.S. Senators, they have the right to ask for debate and amendments to these treaties. …These treaties are dangerous to our personal liberties.  Senator Paul and Senator Lee deserve the transparency and debate they’ve requested.

Amen.

For those of us who want good tax policy, rejecting this pact is vital.

An ideal fiscal system not only has a low rate, but also taxes income only one time and only taxes income earned inside national borders.

Yet the OECD Protocol to the Multilateral Convention is based on the notion that there should be pervasive double taxation of income that is saved and invested, and that these taxes should be levied on an extraterritorial basis.

For fans of the flat tax, national sales tax, or other proposals for tax reform, this would be a death knell.

But this isn’t just a narrow issue of tax policy. On the broader issue of privacy and government power, Professor Niall Ferguson of Harvard makes some very strong points in a column for the South China Morning Post.

I should be a paid-up supporter of the campaign to close down tax havens. I should be glad to see the back of 500-euro bills. …Nevertheless, I am deeply suspicious of the concerted effort to address all these problems in ways that markedly increase the power of states – and not just any states but specifically the world’s big states – at the expense of both small states and the individual.

He cites two examples, starting with the intrusive plan in the U.K. to let anybody and everybody know the owners of property.

The British government announced it will set up a publicly accessible register of beneficial owners (the individuals behind shell companies). In addition, offshore shell companies and other foreign entities that buy or own British property will henceforth be obliged to declare their owners in the new register. No doubt these measures will flush out or deter some villains. But there are perfectly legitimate reasons for a foreign national to want to own a property in Britain without having his or her name made public. Suppose you were an apostate from Islam threatened with death by jihadists, for example.

He also is uncomfortable with the “war against cash.”

…getting rid of bin Ladens is the thin end of a monetary wedge. …a number of economists…argue cash is an anachronism, heavily used in the black and grey economy, and easily replaced in an age of credit cards and electronic payments. But their motive is not just to shut down the mafia. It is also to increase the power of government. Without cash, no payment can be made without being recorded and potentially coming under official scrutiny. Without cash, central banks can much more easily impose negative interest rates, without fearing that bank customers may withdraw their money.

He’s right. The slippery slope is real. Giving governments some power invariably means giving governments a lot of power.

And that’s not a good idea if you’re a paranoid libertarian like me. But even if you have a more benign view of government, ask yourself if it’s a good idea to approve a global pact that is explicitly designed to help governments impose higher tax burdens?

Senators Paul and Lee are not allowing eight treaties to go forward without open debate and discussion. Seven of those pacts are bilateral agreements that easily could be tweaked and approved.

But the Protocol to the Multilateral Convention can’t be fixed. The only good outcome is defeat.

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