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Posts Tagged ‘Competititiveness’

When I give speeches on the importance of public policy, I frequently share data showing that pro-market nations are relatively prosperous when compared to countries with statist policies.

One of the most dramatic examples is South Korean prosperity versus North Korean deprivation.

It’s not that South Korea is perfect. After all, it only ranks #35 according to Economic Freedom of the World.

But that’s enough economic liberty to be in the “most free” category. And this helps to explain why South Korean living standards have climbed dramatically compared to the economic hellhole of North Korea (and you see something similar if you compare Venezuela and South Korea).

I’m definitely not the only person to notice the difference between the two Koreas. Here are some excerpts from one of Richard Rahn’s columns in 2017.

In 1960, South Korea and North Korea were similar in their poverty. Now, 50-plus years later, South Korea has a per-capita income more than 20 times that of North Korea, at approximately $38,000 per year, which is higher than that of Spain or Italy. South Koreans have gone from a per-capita income in 1970 that was about 10 percent of the average American to almost 70 percent today. …Koreans in both the North and South come from the same genetic stock, speak the same language, and occupy adjoining pieces of land with much of the same topography and limited natural resources. North Korea is the ultimate consequence of socialism, which always contains the seeds of its own destruction. Socialism goes against human nature, requiring its government to become increasingly authoritarian — North Korea being Exhibit A.

But Richard also warned that South Korea can’t rest on its laurels.

While economic growth per year averaged more than 9 percent from 1963 to 1990, it has now slowed down and last year was only 2.8 percent…a sharp drop from earlier decades. There is too much unneeded and counterproductive regulation, including the lack of ease of creating new businesses, barriers to imports and inward foreign investment. By any measure, South Korea has been a great success, but probably not as much as it could have been or can be if it followed more of a classic free trade and more limited-government model as practiced by Hong Kong and others. The country is increasingly exhibiting the disease of most other rich, developed democracies by allowing itself to be slowly seduced into the promise of more government services and attendant regulation, rather than the tougher and more competitive policies that created the wealth. Will South Korea avoid the stagnation of Japan and much of Europe? The jury is still out.

The jury may still be out, but there is growing evidence that South Korea is heading in the wrong direction because the nation’s relatively new President in increasing the burden of government.

Here are some passages from a report in the Japan Times.

Moon Jae-in began his second full year as South Korea’s president with a reminder of what didn’t work in the first — namely his economic policies. …The self-styled “jobs president” has seen his once sky-high poll numbers tumble… Moon, a progressive, was swept into office in 2017 promising a reversal from the conglomerate-focused economic agenda of ousted President Park Geun-hye. But his plan to raise the minimum wage 11 percent disappointed… More than three-quarters of the 30 experts surveyed by Bloomberg News last month predicted that employment growth would slow this year, in part because of the wage hike. …In a speech at his news conference Thursday, Moon…pledged to improve the safety net…and fix what he described as “the worst forms of polarized wealth and economic inequality in the world.” …More than half of South Koreans surveyed in another Gallup poll last month said that the administration needed “to focus on economic growth, rather than income distribution.”

By the way, the article doesn’t even mention that South Korea faces a major demographic challenge.

It has a catastrophically low fertility rate, which means that the tax-and-transfer welfare state will become increasingly unaffordable as the ratio of workers to recipients shifts in the wrong direction.

Entitlement reform is the sensible answer to this problem (see Hong Kong, for example).

But that’s obviously not happening under President Moon. Indeed, he wants to make matters worse by expanding the welfare state.

Some people in South Korea realize that demographics are a problem for their nation.

The U.K.-based Express looks at their attempted solution.

Seoul’s Dongguk and Kyung Hee universities say the courses on dating, sex, love and relationships target a generation which is shunning traditional family lives. …as part of the course, students have to date three classmates for a month each. …The course has expanded to Kyong Hee university, which offers “Love and Marriage” classes and Inha university in Incheon, a specialist engineering college, where students can now sign up to lessons on prioritising success and love. In 2016 the number of marriages hit its lowest since 1977, according to data from the government agency Statistics Korea. …The crude marriage rate – the annual number of marriages per 1,000 people – was 5.5 last year, compared with 295.1 when statistics began in 1970. Seoul has spent about £50 billion trying to boost the birth rate.

I’m skeptical of this approach, regardless of how much money the government spends.

Policy makers should focus instead on things they can control, such as fiscal policy and regulatory policy.

And this is why South Korea’s lurch to the left is so disappointing. Politicians are making things worse rather than better.

Even the New York Times is reporting that Moon’s statist agenda isn’t working.

Under President Moon Jae-in, South Korea has raised taxes and the minimum wage in the name of economic growth. So far, it hasn’t worked out as planned. Growth has slowed, unemployment has risen and small-business owners…are complaining. …With his progressive policies, President Moon is trying to tackle some of the same economic problems that plague the United States and much of the developed world. They include a widening wealth gap, slower growth and stagnant wages. …South Korea’s troubles suggest the limits of the state in solving economic problems, especially without addressing the underlying structural issues. …After his election in May 2017, Mr. Moon undertook a sharp shift in economic policy. He supported higher wages, tighter restrictions on working hours and greater welfare spending, funded by tax increases on companies and high-income earners. …Mr. Moon has paid a steep political price for his agenda. His approval rating has plummeted from 84 percent in mid-2017 to 45 percent in the most recent Gallup poll. …The 2019 budget represents the sharpest increase in spending in a decade… The minimum wage has also gone up again for 2019, by 11 percent.

More taxes, more spending, more regulation, and more intervention. Who does Moon think he is, Barack Obama or Richard Nixon?

On a serious note, it surely says something that even the New York Times is forced to acknowledge that statist policies backfire.

Let’s close by looking at how South Korea’s economic freedom score has evolved over time. As you can see, there was a lot of economic liberalization between 1975-2005. That’s the good news.

The bad news is that economic liberty has declined since the mid-2000s.

The drop is modest, at least in absolute terms. But it’s also important (as I explained when looking at Italy) to look at relative competitiveness.

South Korea’s current score of 7.53 isn’t that much lower than its 7.67 score in 2006. But that slight drop, along with pro-reforms steps that other nations have taken, means that South Korea is now ranked #35 instead of #20.

And the current scores are based on policy in 2016, before Moon moved South Korea in the direction of more statism. This doesn’t bode well.

P.S. I’m not expecting South Korea to become another Hong Kong or Singapore, but it should at least seek incremental progress rather than incremental deterioration. Taiwan is a good example of that approach.

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Another American company has decided to expatriate for tax reasons. This process has been going on for decades, with companies giving up their U.S. charters (a form of business citizenship) and redomiciling in low-tax jurisdictions such as Bermuda, Ireland, Switzerland, Panama, Hong Kong, and the Cayman Islands.

The companies that choose to expatriate usually fit a certain profile (this applies to individuals as well). They earn a substantial share of their income in other countries and they are put at a competitive disadvantage because of America’s “worldwide” tax system.

More specifically, worldwide taxation requires firms to not only pay tax to foreign governments on their foreign-source income, but they are also supposed to pay additional tax on this income to the IRS – even though the money was not earned in America and even though their foreign-based competitors rarely are subject to this type of double taxation.

In this most recent example, an energy company with substantial operations in Asia moved its charter to the Cayman Islands, as reported by digitaljournal.com.

Greenfields Petroleum Corporation…, an independent exploration and production company with assets in Azerbaijan, is pleased to announce that the previously announced corporate redomestication…from Delaware to the Cayman Islands has been successfully completed.

Because it is a small firm, the move by GPC probably won’t attract much attention from the politicians. But “corporate expatriation” has generated considerable controversy in recent years when involving big companies such as Ingersoll-Rand, Transocean, and Stanley Works (now Stanley Black & Decker).

Statists argue that it is unpatriotic for companies to redomicile, and they changed the law last decade to make it more difficult for companies to escape the clutches of the IRS. In addition to blaming “Benedict Arnold” corporations, leftists also attack low-tax jurisdictions for “poaching” companies.

Libertarians and conservatives, by contrast, explain that expatriation is the result of an onerous tax system that imposes high tax rates and requires the double taxation of foreign-source income. Expatriation is the only logical approach if companies want a level playing field when competing in global markets.

I cover this issue (and also explain that the Obama Administration is trying to make a bad system even worse) in the video below.

My recommendation, not surprisingly, is that politicians fix the tax code. Unfortunately, politicians prefer the blame-the-victim game, so they attack the companies instead of solving the underlying problem (and then they wonder why job creation is anemic).

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I’m not a big fan of the Internal Revenue Service, but I try not to demonize the bureaucrats because politicians actually deserve most of the blame for America’s complex, unfair, and corrupt tax system. The IRS generally is in the unenviable position of simply trying to enforce very bad laws.

But sometimes the IRS runs amok and the agency deserves to be held in contempt by the American people

Let’s look at a grotesque example of IRS misbehavior. It deals with a seemingly arcane issue, but it has big implications for the US economy, the rule of law, and human rights.

On January 7, the tax-collection bureaucracy proposed a regulation that, if implemented, would force American financial institutions to put foreign tax law above US tax law. Banks would be required to report to the IRS any interest they pay to foreigners, but not so the US government can collect tax, but in order to let foreign governments tax this US-source income.

This isn’t the first time the IRS has tried to pull this stunt. At the very end of the Clinton years, the agency proposed a rule to do the same thing. But the bureaucrats were thwarted because of overwhelming opposition from Capitol Hill, the financial services industry, and public policy experts. There was near-unanimous agreement that it would be crazy to drive job-creating capital out of the US economy and there was also near-unanimous agreement that the IRS had no authority to impose a regulation that was completely inconsistent with the laws enacted by Congress.

But like a zombie, this IRS regulation has risen from the grave.

I’m not sure what is most upsetting about this proposed rule, but there are five serious flaws in the IRS’s back-door scheme to turn American banks into deputy tax collectors for foreign governments.

1. The IRS is flouting the law, using regulatory dictates to overturn laws enacted through the democratic process.

Ever since 1921, and most recently reconfirmed by legislation in 1976 and 1986, Congress specifically has chosen not to tax interest paid to non-resident foreigners. Lawmakers wanted to attract money to the U.S. economy.

Yet rogue IRS bureaucrats want to impose a regulation to overturn the outcome of the democratic process. Heck, if they really think they have that sort of power, why don’t they do us a favor and unilaterally junk the entire internal revenue code and give us a flat tax?

2. The IRS has failed to perform a cost-benefit analysis, as required by executive order 12866.

Issued by the Clinton Administration, this executive order requires that regulations be accompanied by “An assessment of the potential costs and benefits of the regulatory action” for any regulation that will, “Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.”

Yet the IRS blithely asserts that this interest-reporting proposal is “not a significant regulatory action.” Amazing, we have trillions of dollars of foreign capital invested in our economy, perhaps $1 trillion of which is deposited in banks, and we know some of which definitely will be withdrawn if this regulation is implemented, but the bureaucrats unilaterally decided the regulation doesn’t require a cost-benefit analysis.

During a previous incarnation of this regulation, the IRS’s failure to comply with the rules led the Office of Advocacy at the Small Business Administration to denounce the tax-collection bureaucracy, stating that “…there is ample evidence that the impact of the regulation is significant and that a substantial number of small businesses will be impacted.”

3. The IRS is imposing a regulation that puts America’s economy at risk.

According to the Commerce Department, foreigners have invested more than $10 trillion in the U.S. economy.

And according to the Treasury Department, foreigners have more than $4 trillion in American banks and brokerage accounts.

We don’t know how much money will leave America if this regulation is implemented, but there are many financial centers – such as London, Hong Kong, Cayman, Singapore, Tokyo, Zurch, Luxembourg, Bermuda, and Panama – that would gladly welcome the additional investment if the IRS makes the American financial services sector less attractive.

4. The IRS is destabilizing America’s already shaky financial system.

Five years ago, when the banking industry was strong, the IRS regulation would have been bad news. Now, with many banks still weakened by the financial crisis, the regulation could be a death knell. Not only would it drive capital to banks in other nations, it also would impose a heavy regulatory burden.

How bad would it be? Commenting on an earlier version of the regulation, which only would have applied to deposits from 15 countries, the Chairman of the Federal Deposit Insurance Corporation warned that, “[a] shift of even a modest portion of these [nonresident alien] funds out of the U.S. banking system would certainly be termed a significant economic impact.” He also noted that potentially $1 trillion of deposits might be involved. And a study from the Mercatus Center at George Mason University estimated that $87 billion would leave the American economy. And remember, that estimate was based on a regulation that would have applied to just 15 nations, not the entire world.

So what happens if more banks fail? I guess the bureaucrats at the IRS would probably just shrug their shoulders and suggest another bailout.

5. The IRS is endangering the lives of foreigners who deposit funds in America because of persecution, discrimination, abuse, crime, and instability in their home countries.

If you’re from Mexico you don’t want to put money in local banks or declare it to the tax authorities. Corruption is rampant and that information might be sold to criminal gangs who then kidnap one of your children. If you’re from Venezuela, you have the same desire to have your money in the United States, but perhaps you’re more worried about persecution or expropriation by a brutal dictatorship.

There are people all over the world who have good reasons to protect their private financial information. Yet this regulation would put them and their families at risk. The only silver lining is that these people presumably will move their money to other nations. Good for them, bad for America.

Let’s wrap this up. Under current law, America is a safe haven for international investors. This is good news for foreigners, and good news for the American economy. That’s why it is so outrageous that the IRS, unilaterally and without legal justification, is trying to reverse 90 years of law for no other reason than to help foreign governments.

By the way, you can add your two cents by clicking on this link which will take you to the public comment page for this regulation. Don’t be bashful.

One last point. The Obama Administration says this regulation is part of a global effort to improve tax compliance. But unless Congress changes the law, the IRS is not responsible for helping foreign tax collectors squeeze more money out foreign taxpayers. Moreover, the White House has been grossly misleading about U.S. compliance issues (as this video illustrates), so their assertions lack credibility.

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