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Posts Tagged ‘Estonia’

I like the Baltic nations, as illustrated by what I wrote last year.

I’m a big fan of…Estonia, Latvia, and Lithuania. These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economies. One key to their relative success is tax policy. All three nations have flat taxes. And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).

No wonder the Baltic nations are doing a good job of achieving economic convergence.

I’ve specifically praised Estonia on several occasions.

Estonia’s system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD. …Estonia…may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman.

Indeed, I strongly recommend this TV program that explored the country’s improbable success. And here’s some data showing that Estonia is leading the Baltics in convergence.

Now I have a new reason to admire Estonia. Having experienced the brutality of both fascism and communism, they have little tolerance for those who make excuses for totalitarianism. And the issue has become newsworthy since Greece decided to boycott a ceremony to remember the victims of communism and fascism.

Estonian Minister of Justice Urmas Reinsalu responded to his Greek counterpart, Stavros Kontonis following the uproar caused by the decision by Greece to not participate in the recent European Day of Remembrance for Victims of Stalinism and Nazism in Estonia.

The letter sent by Reinsalu is a masterpiece of moral clarity. He unambiguously condemns all ideologies that are contrary to free societies. Let’s look at some excerpts.

Our values are human rights, democracy and the rule of low, to which I see no alternative. This is why I am opposed to any ideology or any political movement that negates these values or which treads upon them once it has assumed power. In this regard there is no difference between Nazism, Fascism or Communism.

Amen. That’s basically what I wrote just a few days ago.

Reinsalu points out that free societies (sometimes called liberal democracies, with “liberal” used in the “classical liberal” sense) don’t oppress people, which is inherent with fascist and communist regimes.

Condemnation of crimes against humanity must be particularly important for us as ministers of justice whose task it is to uphold law and justice. …Every person, irrespective of his or her skin colour, national or ethnic origin, occupation or socio-economic status, has the right to live in dignity within the framework of a democratic state based on the rule of law. All dictatorships – be they Nazi, Fascist or Communist – have robbed millions of their own citizens but also citizens of conquered states and subjugated peoples.

The Estonian Justice Minister refers to the bitter experience of his nation.

Unlike Greece, Estonia has the experience of living under two occupations, under two totalitarian dictatorships. …In light of the experience of my country and people, I strongly dispute your claim that Communism also had positive aspects. ……in 1949, …the communist regime deported nearly 2 percent of the population of Estonia only because they as individual farmers refused to go along with the Communist agricultural experiment and join a collective farm. This was in addition to the tens of thousands who had already been imprisoned in the Gulag prison camps or deported and exiled earlier. Thousands more would follow, taken into prison up to mid-1950.

He points out that communism is incompatible with freedom.

…it is not possible to build freedom, democracy and the rule of law on the foundation of Communist ideology. …this has been attempted… This has always culminated in economic disaster and the gradual destruction of the rule of law…there are also countries and peoples for whom the price of a lesson in Communism has been millions of human lives.

The bottom line, he writes, is that all forms of totalitarianism should be summarily rejected.

…we must condemn all attempts or actions that incite others to destroy peoples or societal groups…there is no need to differentiate. It makes no difference to a victim if he is murdered in the name of a better future for the Aryan race or because he belongs to a social class that has no place in a Communist society. We must remember all of the victims of all totalitarian and authoritarian dictatorships.

Kudos for Minister Reinsalu. He doesn’t shrink from telling the truth about communism and other forms of dictatorship.

None of this should be interpreted to mean that western societies are perfect. Heck, I spend most of my time criticizing bad policy in the United States and other western nations. But there’s no moral equivalence.

Here’s Reinsalu’s entire letter, which contains additional points.

I’ll close by elaborating on one of his points. Reinsalu wrote about the miserable track record of communism and made some powerful points.

But I think he was too diplomatic. He should have highlighted the jaw-dropping body count of communist regimes.

He did mention some of the horrid policies of the Soviet Union (perhaps more than 60 million victims), but he also could have listed the incomprehensible misery that communism caused in places such as Cuba, Cambodia, and North Korea. Or China back in the Mao era.

That being said, his letter is a very powerful indictment of the moral bankruptcy of his Greek counterpart (which perhaps isn’t a surprise given the ideology of the Syriza government).

And it’s also an indictment of all of the apologists for communist tyranny.

P.S. Poland is another country that experienced the dual brutality of fascism and communism. So it shouldn’t be surprise that Poles share the same moral clarity as Estonians.

Perhaps this is why Poland has done a reasonably good job of undoing bad Soviet policies.

P.P.S. While I’m a fan of nations such as Estonia and Poland, they need further market-based reforms to compensate for demographic decline.

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I’m a fan of the Baltic nations in part because they were among the first to adopt flat tax systems after the collapse of the Soviet empire. But tax reform was just the beginning. Estonia, Latvia, and Lithuania have liberalized across the board as part of their efforts to become prosperous.

Economic Freedom of the World is always the first place to check when you want to understand whether countries have good policy. And the dataset for the Baltic nations does show that all three nations are in the top quartile, with Lithuania and Estonia cracking the top 20.

So are these market-oriented policies paying dividends? Has the shift in the direction of free markets and limited government resulted in more prosperity?

The short answer is yes. The European Central Bank has released some very interesting analysis on the economic performance of these countries.

The Baltic States have been able to maintain an impressive rate of convergence towards the average EU per capita income over the past 20 years. …these three countries have each pursued a strongly free-market and pro-business economic agenda… The three countries are different in many ways, but share a number of key features: very high levels of trade and financial openness and very high labour mobility; high economic flexibility with wage bargaining mainly at firm level; relatively good institutional framework conditions; and low levels of public debt.

And this has translated into strong growth, which has resulted in higher incomes.

The Baltic States are among the few euro area countries (along with Slovakia) in which real GDP per capita in purchasing power standard (PPS) terms has shown substantial convergence towards the EU average over the last 20 years. While in 1995 their average per capita income (in PPS) stood at only around 28% of the EU15 average, in 2015 it reached 66.5% (see Chart A).

Here’s the chart showing how quickly the Baltic countries are catching up to Western Europe.

The ECB report also measured how fast the Baltic nations have grown compared to theory.

The long-term convergence performance of the Baltic States has exceeded what would have been expected based on their initial income level.

And here’s the chart showing how they have over-performed.

The ECB study says that the Baltic countries have been especially good about replacing cronyism with the rule of law.

One of the possible reasons for the fairly strong convergence performance of the Baltic States is the strong improvement in institutional quality in these countries… The Worldwide Governance Indicators of the World Bank, which is a composite indicator of institutional quality, suggests that institutional quality has improved markedly in the Baltic States – especially in Estonia – over the recent decades.

I agree. Indeed, I’ve written that Estonia is a good role model, having reduced corruption by limiting the power of politicians and bureaucrats.

The report also credits the three countries with rapid rebounds from the financial crisis, which is a point I made back in 2011.

While the crisis hit the Baltic States hard, the adjustment of imbalances was very fast. The rapid adjustment in fiscal balances and private sector balance sheets implied that the Baltic States could avoid the accumulation of a large debt overhang. In addition, the fast reduction in unemployment helped to decrease the risk of hysteresis, thus avoiding lasting consequences for potential growth. …The external adjustment of the Baltic States was facilitated by painful but effective internal devaluation. …This relatively fast adjustment in the Baltic States was facilitated in part by a strong initial rebound in employment growth, supported by an adjustment in labour costs.

I also think genuine spending cuts helped produce the quick economic rebound.

Though the report does warn that there are not guarantees that the Baltic countries will fully converge with Western Europe.

International experience suggests that countries that reach a middle income level, like the Baltic States, tend to find it difficult to converge further and achieve a high income level. A World Bank study suggests that out of 101 middle-income economies in 1960, only 13 had become high-income economies by 2008.

This is a good point. As I explained two years ago, full convergence is very difficult. North America and Western Europe became rich in part because of very small public sectors in the 1800s and early 1900s. Indeed, there was virtually no welfare state until the 1930s and the level of redistribution was comparatively small until the 1960s.

Unfortunately, this is one area where the Baltic nations are weak. Yes, the burden of government spending may be modest compared to other EU countries, but the public sector nonetheless consumes more than 35 percent of GDP. And even though these nations have flat taxes, they also have stifling payroll taxes and government-fueling value-added taxes.

Another problem (not just in the Baltic region, but all through Eastern Europe) is that the demographic outlook is unfriendly, which means that the welfare state automatically will become a bigger burden over time.

If the Baltic countries want genuine convergence (or if they want to surpass Western Europe), that will require additional reform, particularly efforts to reduce the burden of government spending to the levels found in Hong Kong and Singapore.

Unfortunately, it’s more likely that policy will move in the other direction. There are constant efforts to repeal the flat tax systems in the Baltic countries. And efforts by the European Commission to harmonize business taxation ultimately may undermine the pro-growth approach to business taxation in the region as well.

P.S. For those who want an in-depth look at a Baltic nation, I recommend this video about Estonia. And if you want some amusement, check out how Paul Krugman wanted people to believe that Estonia’s 2008 recession was caused by 2009 spending cuts.

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I’m a big fan of the Baltic nations of Estonia, Latvia, and Lithuania.

These three countries emerged from the collapse of the Soviet Empire and they have taken advantage of their independence to become successful market-driven economies.

One key to their relative success is tax policy. All three nations have flat taxes. Estonia’s system is so good (particularly its approach to business taxation) that the Tax Foundation ranks it as the best in the OECD.

And the Baltic nations all deserve great praise for cutting the burden of government spending in response to the global financial crisis/great recession (an approach that produced much better results than the Keynesian policies and/or tax hikes that were imposed in many other countries).

But good policy in the past is no guarantee of good policy in the future, so it is with great dismay that I share some very worrisome news from two of the three Baltic countries.

First, we have a grim update from Estonia, which may be my favorite Baltic nation if for no other reason than the humiliation it caused for Paul Krugman. But now Estonia may cause sadness for me. The coalition government in Estonia has broken down and two of the political parties that want to lead a new government are hostile to the flat tax.

Estonia’s government collapsed Wednesday after Prime Minister Taavi Roivas lost a confidence vote in Parliament, following months of Cabinet squabbling mainly over economic policies. …Conflicting views over taxation and improving the state of Estonia’s economy, which the two junior coalition partners claim is stagnant, is the main cause for the breakup. …The core of those policies is a flat 20 percent tax on income. The Social Democrats say the wide income gaps separating Estonia’s different social groups would best be narrowed by introducing Nordic-style progressive taxation. The two parties said Wednesday that they will immediately start talks on forming a coalition with the Center Party, Estonia’s second-largest party, which is favored by the country’s sizable ethnic-Russian majority and supports a progressive income tax.

And Lithuanians just held an election and the outcome does not bode well for that nation’s flat tax.

After the weekend run-off vote, which followed a first round on October 9, the centrist Lithuanian Peasants and Green Union party LGPU) ended up with 54 seats in the 141-member parliament. …The conservative Homeland Union, which had been tipped to win, scored a distant second with 31 seats, while the governing Social Democrats were, as expected, relegated to the opposition, with just 17 seats. …The LPGU wants to change a controversial new labour code that makes it easier to hire and fire employees, impose a state monopoly on alcohol sales, cut bureaucracy, and above all boost economic growth to halt mass emigration. …Promises by Social Democratic Prime Minister Butkevicius of a further hike in the minimum wage and public sector salaries fell flat with voters.

The Social Democrats sound like they had some bad idea, but the new LGPU government has a more extreme agenda. It already has proposed to create a special 4-percentage point surtax on taxpayers earning more than €12,000 annually (the government also wants to expand double taxation, which also is contrary to the tax-income-only-once principle of a pure flat tax).

So the bad news is that the flat tax could soon disappear in Estonia and Lithuania.

But the good news, based on my discussions with people in these two nations, is that the battle isn’t lost. At least not yet.

In both cases, policy can’t be changed unless all parties in the coalition government agree. Fortunately, they haven’t reached that point.

And hopefully that point will never be reached if Estonia and Lithuania want long-run success.

All of the Baltic nations get reasonably good scores from Economic Freedom of the World. Ditching the flat tax will cause their scores to decline.

Given that fiscal policy is only 20 percent of a nation’s grade, adopting some bad tax policy may not seem like the end of the world.

But the flat tax isn’t just good policy. It also has symbolic value, telling both domestic entrepreneurs and global investors that a country has a commitment to a system that won’t impose extra punishment just because a person contributes more to national economic output.

By the way, the LPGU Party is very correct to worry about emigration. The Baltic nations (like most countries in Eastern Europe) face a very large demographic problem. And every time a young person leaves for better opportunities elsewhere (even if that better opportunity is a big welfare check), that makes the long-run outlook even more challenging.

But imposing a more punitive tax system is exactly the opposite of what should happen if the goal is faster growth so that people don’t leave the nation.

Let’s close with a famous quote from John Ramsay McCulloch, a Scottish economist from the 1800s.

To be sure, progressive taxation didn’t lead to total catastrophe, so McCulloch’s warning may seem overwrought by today’s standards.

But the so-called progressive income tax did lead to the modern welfare state. And the modern welfare state, when combined with demographic change, is threatening immense economic and societal damage in many nations.

So what he wrote in 1863 may turn out to be very prescient for historians in 2063 who wonder why the western world collapsed.

P.S. If Estonia and Lithuania move in the wrong direction, Latvia could be a big winner. That nation already has received some positive attention for being fiscally responsible, and it also has withstood pressure from the IMF to impose bad tax policy. So Latvia is well positioned to reap the benefits if Estonia and Lithuania shoot themselves in the foot.

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A couple of days ago, I wrote about the new rankings from the World Economic Forum’s Global Competitiveness Report and noted that America’s private sector is considered world class but that our public sector ranks poorly compared to many other developed nations.

To elaborate on the depressing part of that observation, let’s now look at the Tax Foundation’s recently released International Tax Competitiveness Index.

Lots of data and lots of countries. Estonia gets the top score, and deservedly so. It has a flat tax and many other good policies. It’s also no surprise to see New Zealand and Switzerland near the top.

If you’re curious about America’s score, you’ll have to scroll way down because the United States ranks #31, below even Belgium, Spain, and Mexico.

If you look at how the U.S. ranks in the various categories, we have uniformly poor numbers for everything other than “Consumption Taxes.” So let’s be very thankful that the United States doesn’t have a value-added tax (VAT). If we did, even France would probably beat us in the rankings (I hope Rand Paul and Ted Cruz are paying attention to this point).

And if you wonder why some nations with higher top tax rates rank above the U.S. in the “Individual Taxes” category, keep in mind that there are lots of variables for each category. And the U.S. does poorly in many of them, such as the extent to which there is double taxation of dividends and capital gains.

By the way, there is some “good” news. Compared to the 2014 ranking, the United States is doing “better.” Back then, there were only two nations with lower scores, Portugal and France. In the new rankings, the U.S. still beats those two nations, and also gets a better score than Greece and Italy.

But we’re only “winning” this contest of weaklings because the scores for those nations are falling faster than America’s score.

Here’s the 2014-2016 data for the United States. As you can see, we’ve dropped from 54.6 to 53.7.

P.S. The Tax Foundation’s International Tax Competitiveness Index is superb, but I hope they make it even better in the future by adding more jurisdictions. As of now, it only includes nations that are members of the OECD. That’s probably because there’s very good and comparable data for those countries (the OECD pushes very bad policy, but also happens to collect very detailed numbers for its member nations). Nonetheless, it would be great to somehow include places such as Hong Kong, Singapore, Bermuda, and the Cayman Islands (all of which punch way above their weight in the international economy). It also would be desirable if the Tax Foundation added an explicit size-of-government variable. Call me crazy, but Sweden probably shouldn’t be ranked #5 when the nation’s tax system consumes 50.4 percent of the economy’s output (this size-of-government issue is also why I asserted South Dakota should rank above Wyoming in the Tax Foundation’s State Business Tax Climate Index).

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Communism is an evil system. Freedom is squashed and people are merely cogs in a system where government exercises total control over the economy and destroys the lives of ordinary people.

It also erodes the social capital of a people, telling them that individual initiative and success are somehow exploitative and evil.

So when such a system ultimately collapses after being in place for decades, one would not expect a fast rebound. After all, it’s presumably difficult to restore the characteristics of a free society such as a work ethic, personal responsibility, and a spirit of entrepreneurship.

This is why Estonia is such an improbable success. It was under the heel of Soviet communism from World War II until the early 1990s.

Yet as illustrated by this television program about Estonia, which recently aired across the country, there’s been a remarkable recovery and renaissance in this small Baltic republic.

The program mostly focuses on the entrepreneurial success of Estonia, so I want to augment the policy discussion.

There are five big reasons why Estonia is a role model for post-communist societies.

First, Estonia is a leader in the global flat tax revolution. It has a simple and fair system with a relatively reasonable rate of 20 percent.

Second, the flat tax rate has been continuously lowered from the original 26 percent rate when the system was adopted in the early 1990s.

Third, the business tax system is remarkably benign with a rate of 20 percent that is imposed only on dividends.

Fourth, the combination of these factors helps give Estonia the most attractive tax system of all OECD nations according to the Tax Foundation.

Estonia currently has the most competitive tax code in the OECD. Its top score is driven by…positive features of its tax code. First, it has a 20 percent tax rate on corporate income that is only applied to distributed profits. Second, it has a flat 20 percent tax on individual income that does not apply to personal dividend income.

Fifth, there are other pro-market policies. Estonia is ranked #22 in Economic Freedom of the World, putting it in the “most free” category. That’s only six spots behind the United States.

But good policy is not the same as perfect policy.

So while there’s much to admire about Estonia, here are five things about the country that could be improved.

First, the burden of government spending is excessive in Estonia. According to the most recent OECD figures (see annex table 25), 38.5 percent of economic output is diverted to the state, leading to substantial misallocation of labor and capital.

Second, like other nations in the former Soviet Bloc, there’s a demographic challenge. The welfare state may be modest by European standards, but in the long run it is very unaffordable in part because of a fertility rate of 1.59, which ranks 183 out of 224 jurisdictions.

Third, there was a very impressive burst of liberalization after escaping Soviet tyranny, but the commitment to economic reform has since stagnated. Estonia’s EFW score peaked at 7.90 in 2005, 9th-highest in the world, and is now down to 7.61, which puts Estonia in 22nd place.

Though it’s worth noting some of the erosion in economic liberty is the result of European Union rules that require trade barriers on non-EU products (which is the same reason why the UK may enjoy higher trade over time if it votes to leave the EU).

Fourth, the social insurance tax rate is a stifling 33 percent, driving a significant wedge between what an employer must pay and what an employee actually receives. The only mitigating factor is that a small portion of that money goes to a funded pension system (i.e., a partially privatized Social Security system).

Fifth, it is too cold and dark for much of the year. To be sure, that’s not a complaint about policy. But it’s one of the reasons why I recommend Australia for people seeking a haven from bad U.S. policy.

All things considered, Estonia deserves a lot of praise. The problems that remain are modest compared to the nation’s major achievements.

P.S. Lest I forget, one of the admirable things about Estonia was the way the government cut spending in response to the economic crisis at the end of last decade. And I’m talking genuine reductions in spending, not the make-believe we-didn’t-increase-spending-as-fast-as-we-planned “cuts” that often take place in Washington.

P.P.S. In a shocking display of either sloppiness or malice, Paul Krugman blamed Estonia’s 2008 recession on the spending cuts that took place in 2009.

In reality, Estonia’s relative spending discipline has paid dividends. The economy quickly recovered and is out-performing other European nations that chose either tax increases or Keynesian spending binges.

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I’m a big fan of Estonia.

According to both the Fraser Institute and the Heritage Foundation, it has considerable economic freedom.

It has a low-rate flat tax, meaning that investors, entrepreneurs, and small-business owners aren’t punished for contributing more to the nation’s economic output.

It responded to the 2008 crisis by cutting spending rather than engaging in a Keynesian spending binge (which also led to an exploding cigar for Paul Krugman).

Now I have another reason to like Estonia.

It’s a role model for how to reduce corruption by shrinking the size and scope of government.

First, some background.

Neil Abrams and Professor Steven Fish have a column in the Washington Post about the seemingly intractable problem of boosting the rule of law in developing and transition economies.

Western aid agencies and scholars agree that the rule of law is required before developing countries can reduce poverty and corruption. For decades, they have supported aid programs designed to help developing countries establish law-based states. …In a rule-of-law state, the rules apply even to the rulers, not just the ordinary folks. The rule of law is not the same as democracy. Scores of developing countries have demonstrated that establishing democracy is the easy part. The rule of law is harder to attain. From India and the Philippines to Argentina, democracy coexists with endemic corruption, and elites remain largely exempt from the rules.

They then explain that its well-nigh impossible to create the rule of law in a society that has a big government.

…our research suggests that they have the sequence backward. Before urging governments to adopt the rule of law, they must first advise reformers to take one key step: eliminating the government subsidies that sustain criminal elites and replacing the compromised bureaucrats who patronize them.

Now for the big takeaway from their column: Estonia is the role model for how this can happen.

Our research shows that a few good policies can pave the way for the rule of law. For instance, Estonia’s clean and capable state administration represents a model of post-communist success. But this was not always the case. In 1991, when communism collapsed, Estonia, like other post-Soviet countries, had almost no working institutions and a burgeoning class of economic predators, nor was Estonia economically privileged. In the early post-Soviet years, its income per capita was only 10 to 20 percent higher than that of Russia and Romania and 20 to 30 percent lower than that of Croatia, Slovakia and Hungary. But Estonian leaders acted boldly. …early Estonian governments ended practically all subsidies to state and private enterprises. …in developing countries, state subsidies almost always benefit corrupt elites more than ordinary people. This policy cut off the budding economic criminals who profit from state largesse rather than entrepreneurial aptitude — and made it possible for real entrepreneurs to thrive. Deprived of subsidies, old-guard enterprise directors and crony capitalists could not muster enough political influence to hold governments hostage.

Sadly, other nations are not copying Estonia, in part because the international bureaucracies and national agencies that dispense foreign aid don’t support policies to shrink government in recipient nations.

Unfortunately, Estonia is the exception and not the rule. That’s  not for lack of trying on the part of the West. The United States, the European Union, the World Bank, the European Bank for Reconstruction and Development and the United Nations have spent billions of dollars for the express purpose of helping countries build a rule of law. …But they’re stumbling. The Western effort assumes that the rule of law will flourish only if developing countries receive enough education, guidance, training and money. In fact, a growing body of research throws such optimism into doubt.

In other words, foreign aid – at best – is useless. And it may be harmful by financing a bigger role for recipient governments.

The authors close by emphasizing the need (assuming genuine rule of law is the goal) to prune the bureaucracy and public sector.

Scholars often treat the rule of law as a prerequisite for market-oriented economic policies such as liberalizing prices and trade and eradicating wasteful subsidies. They’re getting it backward. Instead, first eliminate the subsidies and purge the compromised bureaucrats who stand in the rule of law’s way. This is hard to do. It will provoke tremendous resistance from those who profit from the status quo. But it’s far more realistic and effective than simply encouraging countries to adopt the rule of law.

So what are the implications of this analysis for the United States?

Given that America now ranks below Estonia for rule of law, and given that rule of law is gradually eroding in the United States, the obvious lesson is that the public sector in America needs to shrink.

The real challenge, though, is convincing politicians to give up power.

Professor Glenn Reynolds of the University of Tennessee Law School explains in USA Today that a larger government is good for politicians because it creates opportunities for graft.

The explanation for why politicians don’t do all sorts of reasonable-sounding things usually boils down to “insufficient opportunities for graft.” And, conversely, the reason why politicians choose to do many of the things that they do is … you guessed it, sufficient opportunities for graft. That graft may come in the form of bags of cash, or shady real-estate deals, or “consulting” gigs for a brother-in-law or child, but it may also come in broader terms of political support.

Glenn notes that there’s an entire school of thought in economics that analyzes this unfortunate tendency of politicians to conspire with interest groups at the expense of taxpayers and consumers.

…there’s a whole field of economics based on this view, called “Public Choice Economics.” Nobel prize winning economist James Buchanan referred to public choice economics as “politics without romance.” Instead of being selfless civil servants motivated solely by the public good, public choice economics assumes that politicians are, like other human beings, heavily influenced by self-interest. …You pick a car because it’s the best car for you that you can afford. Politicians pick policies because they’re the best policies — for them — that they can achieve. …the entire system is designed — by politicians, naturally — to make it harder for voters to keep track of what politicians are doing. The people who have a bigger stake in things — the real estate developers or construction unions — have an incentive to keep track of things, and to influence them.

Having received my Ph.D. from George Mason University, home of the Center for the Study of Public Choice, I echo Glenn’s comments about the value of this theory.

So what’s the moral of the story?

As summarized by Professor Reynolds, bigger government means more corruption and smaller government means less corruption.

The more the government does and the more decisions that are relegated to bureaucrats, “guidance” and other forms of decisionmaking that are far from the public eye, the more freedom politicians have to pursue their own interest at the expense of the public — all while, of course, claiming to do just the opposite.

Now let’s look at some real-world examples from Washington.

By the way, I’m not writing to specifically condemn Obama and his team, even though I’m quite confident that the Chicago machine produces people who excel at unethical behavior.

Republicans also get their hands dirty by steering undeserved wealth to special interests, as explained here, here, and here.

That being said, most Washington corruption today seems associated with the Democrat Party for the simple reason that Democrats control the bureaucracy.

For instance, here are some of the key points from a New York Times report.

The State Department, under Secretary Hillary Rodham Clinton, created an arrangement for her longtime aide and confidante Huma Abedin to work for private clients as a consultant while serving as a top adviser in the department. Ms. Abedin did not disclose the arrangement — or how much income she earned — on her financial report. It requires officials to make public any significant sources of income.

To be blunt, this stinks to high heaven.

…the picture that emerges from interviews and records suggests a situation where the lines were blurred between Ms. Abedin’s work in the high echelons of one of the government’s most sensitive executive departments and her role as a Clinton family insider. While continuing her work at the State Department, in the latter half of 2012, she also worked for Teneo, a strategic consulting firm, which was founded by Doug Band, a former adviser to President Bill Clinton. Teneo has advised corporate clients like Coca-Cola and MF Global, the collapsed brokerage firm run by Jon S. Corzine, a former governor of New Jersey.

The Daily Caller also has been doing some first-rate work on the cronyism and corruption inside Washington.

One of their stories, for instance, exposed the left-wing connections of the supposedly “apolitical” bureaucrat at the heart of the IRS scandal.

IRS Exempt Organizations Division director Lois G. Lerner, who has been described as “apolitical” in mainstream press coverage of the IRS scandal, is married to tax attorney Michael R. Miles, a partner at the law firm Sutherland Asbill & Brennan.

And why does that matter?

The 400-attorney firm hosted an organizing meeting at its Atlanta office for people interested in helping with voter registration for the Obama re-election campaign. …Lerner personally signed the tax-exemption approval for a shady charity run by Obama’s half-brother, after an inexplicably brief one-month application process.

Time to wrap this up.

I enjoy Mark Steyn for his biting humor, but he makes a very serious and relevant point is his latest column.

A civil “civil service” requires small government. Once government is ensnared in every aspect of life a bureaucracy grows increasingly capricious. The U.S. tax code ought to be an abomination to any free society, but the American people have become reconciled to it because of a complex web of so-called exemptions that massively empower the vast shadow state of the permanent bureaucracy. Under a simple tax system, your income is a legitimate tax issue. Under the IRS, everything is a legitimate tax issue: The books you read, the friends you recommend them to. There are no correct answers, only approved answers.

I made a similar point, arguing that you can’t have a competent government unless it’s a small government.

But as the public sector expands, effective management becomes much harder.

And, as discussed in an interview with John Stossel, you also get corruption, mixed with incompetence and thuggery.

Let’s close by re-issuing my video explaining how big government enables pervasive corruption. It’s never been more timely and appropriate.

P.S. There are some countries with big governments that are not plagued by corruption. The Nordic nations, for instance, rank at or near the top in many economic indications, including high-quality rule of law. Though it’s worth noting that these jurisdictions scored highly in these areas before the burden of government was expanded.

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I’m very fond of Estonia, and not just because of the scenery.

Back in the early 1990s, it was the first post-communist nation to adopt a flat tax.

More recently, it showed that genuine spending cuts were the right way to respond to the 2008 crisis (notwithstanding Paul Krugman’s bizarre attempt to imply that the 2008 recession was somehow caused by 2009 spending cuts).

This doesn’t mean Estonia is perfect. It is ranked #22 by Economic Freedom of the World, which is a respectable score, but that puts them not only behind the United States (#12), but also behind Switzerland (#4), Finland (#10), the United Kingdom (#12), Ireland (#14), and Denmark (#19).

And you can see from the chart that Estonia’s overall score has dropped slightly since 2006.

But I don’t believe in making the perfect the enemy of the good. Estonia is still a reasonably good role model for reform, particularly for nations that emerged from decades of communist enslavement.

You can see how good policy makes a difference, for instance, by comparing Estonia with Croatia (#70). At the time of the breakup of the Soviet Empire, living standards in Croatia were low, but they were about twice as high as they were in Estonia. Today, though, per-capita economic output in Estonia is about $4000 higher than in Croatia.

That’s a dramatic turnaround and it shows that markets are much better for people than statism. Sort of like the lesson we learn by comparing Poland (#48) and Ukraine (#122).

Let’s now take a closer look at one of the policies that has helped Estonia prosper. The flat tax was first adopted in 1994 and the rate was 26 percent. Since then, the rate has been gradually reduced and is now 20 percent.

For some people, the most amazing aspect of the Estonian flat tax is its simplicity, as noted by Kyle Pomerleau of the Tax Foundation.

Republican Presidential hopeful Jeb Bush claimed that it only takes 5 minutes to file taxes in Estonia. This claim was confirmed by a number of reporters and tax authorities in Estonia. For those of us that do our taxes by hand, this sounds like a dream. Depending on your situation, filing your taxes can tax a significant amount of time and due to the numerous steps involved (especially if you are claiming credits) may lead some to make errors. According to the IRS, it takes an average taxpayer with no business income 8 hours to fill out their 1040 and otherwise comply with the individual income tax. Triple that for those with business income.

For those keeping score, this means Estonia is kicking America’s derriere.

But Kyle is even more impressed by other features of the Estonian system.

…that it is not the best part of the Estonian tax code. The best part of the Estonian tax code has more to do with its tax base (what it taxes) rather than how fast people can pay their taxes. Specifically, the Estonian tax code has a fully-integrated individual and corporate income tax. This means that corporate income is taxed only once either at the entity level or at the individual level.

And this means Estonia’s flat tax is far better for growth than America’s system, which suffers from pervasive and destructive double taxation.

In total, the tax rate on corporate income is 20 percent in Estonia. Compare this to the integrated tax rate on corporate profits of 56 percent in the United States. Even more, this tax system provides de facto full expensing for capital investments because the corporate tax is only levied on the cash distributed to shareholders, which is also a significant boon to investment and economic growth.

Wow. No double taxation and expensing of business investment.

There is a lot to admire about Estonia’s sensible approach to business taxation.

Particularly when compared to America’s masochistic corporate income tax, which ranks below even the Greek, Italian, and Mexican systems.

Having the world’s highest statutory corporate tax rate is part of the problem. But as Kyle pointed out, the problem is actually far worse when you calculate how the internal revenue code imposes extra layers of tax on business income.

That’s why, at a recent tax reform event at the Heritage Foundation, I tried to emphasize why it’s economically misguided to have a tax bias against saving and investment.

The bottom line is that high taxes on capital ultimately lead to lower wages for workers.

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