Debating the European Union

Most Americans pay little or no attention to the European Union and its various bureaucratic and political arms in Brussels.

But that’s unwise. What happens in Europe can have an impact on policy in the United States.

For instance, I have been very critical of the European Union because the bureaucrats and politicians in Brussels push for dirigiste policies such as tax harmonization and climate protectionism.

And I was a huge fan of Brexit (the United Kingdom voting to leave the E.U.).

On the other hand, I have tepidly written that E.U. membership may make sense for nations from Eastern Europe.

It seems like I can’t make up my mind, but my views are simple and (I like to think) very rational.

• If E.U. membership will push a nation in the right direction, I’m for it.
• If E.U. membership will push a nation is the wrong direction, I’m against it.

Given my interest in Europe and the European Union, I was understandably interested when I saw that Reason published a pro-con article on the topic.

Dan Hannan, a former member of the European Parliament from the U.K., argues that the E.U. was a mistake.

Unlike NAFTA or the European Free Trade Association (EFTA), the EEC was not a free trade area but a customs union, controlling all commerce on behalf of its members and artificially redirecting trade away from the rest of the world. …it was a club of nations rather than a superstate. …That changed when the Maastricht Treaty came into force in 1993. …it stopped being the EEC and became the European Union. …A big polity can prosper, but only if it behaves like a confederation of statelets. The supreme exemplar is the U.S., the only large nation that gets anywhere near the top of those GDP rankings… I’m not wild about the direction the U.S. has been taking… But the U.S. is starting from a much better place. It was designed according to Jeffersonian principles. Power was dispersed, decentralized, and democratized. The E.U., by contrast, was designed to weld nations into a supranational bloc. …Where the Declaration of Independence promises life, liberty, and the pursuit of happiness, its European equivalent, the Charter of Fundamental Rights, entitles people to “strike action,” “affordable housing,” and “free healthcare.”

Dalibor Rohac of the American Enterprise has a more optimistic assessment.

The Brussels machinery is bureaucratic and largely insulated from accountability. When it comes to new markets and new technologies, European institutions regulate first and ask questions later. The E.U. controls a sizable budget, part of it wasteful—including generous agricultural subsidies and transfer programs… Yet the E.U.’s existence is infinitely preferable to its absence. …The relevant comparison is between the E.U. and the politically plausible alternatives. Those alternatives almost certainly involve protectionism, heavy-handed industrial policy and planning, or state aid to politically connected companies… If it weren’t for the pressure of the European Commission in the late 1980s, it is fanciful to think that Italy or France would have just given up state ownership of utilities, banks, or their industrial giants. …Conversely, the United Kingdom has not become a free market paradise after leaving the European Union. Quite the opposite. …the E.U.’s “single market” is far from perfect. …it often goes hand in hand with harmonized European rules rather than with simple mutual recognition of national standards. …Has the E.U. lived up fully to the ideals of Hayekian international federalism? Of course not. But it is blindingly obvious that it has performed better than the relevant alternatives.

What’s my two cents.

I’m on Dan Hannan’s side and I think he made good points, but I would have made different arguments. My main concerns with the E.U. is that it is not only a protectionist club, but it also is far too supportive of harmonization, centralization, and bureaucratization.

Simply stated, the culture in Brussels is dirigiste and “public choice” tells us that it will get worse over time.

Dalibor Rohac made good points, to be sure, and he is right that the E.U. has been a net plus on some issues. And he’s also right that some nations might be further to the left if the E.U. didn’t exist.

But, on net, I think it leads to more statism rather than more markets.

P.S. Here’s a description of why “mutual recognition” is a good framework for international economic relations.

P.P.S. It’s good to favor globalization, but that does not imply support for global governance.

P.P.P.S. Rohac is right that the U.K. has not prospered in the post-Brexit years, but leaving the E.U. was a way of creating the opportunity for a better approach. The fact that British politicians have been increasing fiscal burdens simply means that the U.K is not taking advantage of the opportunity.

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The European Union Threatens Global Prosperity with Carbon Protectionism

Recent years have been very depressing for supporters of free trade.

Trump pushed protectionist policies.

Now Biden is pushing protectionist policies.

And the European Union is pushing protectionist policies using global warming as an excuse.

More specifically, EU politicians and bureaucrats in Brussels have rammed through a so-called Carbon Border Adjustment Mechanism (CBAM), which is euro-speak for a new protectionist tax on imports that are not sufficiently green.

The Wall Street Journal‘s editorial summarizes some of the problems.

The European Parliament this week pulled the trigger on the opening shot in a new climate trade war. …Foreign companies that haven’t paid for carbon emissions at home will have to pay a tariff when exporting goods to Europe. …Climate coercion advocates say a tariff is needed to avoid “carbon leakage,” which is their term for the flight of manufacturing to countries with less onerous emissions restrictions. This is a tacit admission that Europe’s climate policies are failing. …European consumers won’t pay higher prices for greener goods unless the Brussels tax man forces them to. …Foreign companies and governments have raised concerns about the European carbon border tax, which imposes complex and costly compliance burdens and then imposes steep default tariffs on companies that don’t play along. China and India are in the crosshairs of this border tax, although companies from any country that doesn’t impose emissions taxes will have to pay. That includes U.S. firms. …Consumers will be the big losers, first in Europe and then elsewhere.

In his Bloomberg column, Professor Tyler Cowen pointed out some practical problems with the EU’s scheme.

There is a right and a wrong way to encourage the world to use greener energy. Unfortunately, the European Union’s move toward a carbon tax on imports — essentially a tariff on products made using too much dirty energy — is the latter. …Economic changes take place at the margin, and currently the EU is engaged in substitution toward coal, a very dirty energy source. …The tariffs will lead to more coal use and a dirtier energy supply. Be suspicious of green energy policies which at first make the problem worse. …So, despite about as strong an incentive as possible — a war — the EU made the harmful rather than the beneficial adjustment. Now it is expecting that much poorer nations, often with worse governance structures, to do better. Not only is this naïve, but it is also protectionist….it’s easy to imagine China and India not improving their energy policies as a result of EU tariffs. They, like the EU, have domestic pressure groups… In general, Western attempts to shape those nations have failed more than they have succeeded. So again the negative short-term results of the policy — more European coal use — could outweigh any longer-run benefits. Even the positive long-run effects are up for grabs. …the tariff hike…makes the exporting nations poorer than they otherwise would be. Poorer nations tend to be less interested in improving their environments… And extreme poverty worsens other global problems… Should EU policy make it more difficult for Africa to industrialize? …Once protectionist measures are in place, they are hard to reverse. The EU would be reaping tariff revenue, and domestic EU industries would be receiving trade protection. Any reclassification of the imports as fundamentally “greener” would require an investigation across borders and clearance through multiple levels of bureaucracy. Such changes will not be easy to accomplish, especially in an era increasingly enamored of trade restrictions. …the most likely scenario will play itself out: The EU will spin its wheels, indulging in protectionism and feeling good about itself — all at the expense of our planet’s future.

The part about “reclassification of imports” is especially worrisome. For all intents and purposes, the EU will have a corruption-enabling process where industries on all sides will have incentives to hire lots of lobbyists.

That will line the pockets of bureaucrats who “retire” and become facilitators, but it won’t be good for anyone else.

Last but not least, Tori Smith explained for American Action Forum that the EU’s protectionist approach is a violation of trade commitments.

International trade law and WTO experts such as Joel Trachtman of Tufts University and Jennifer Hillman of the Council on Foreign Relations have examined at length the areas where a CBAM might trigger a WTO violation… there do seem to be three principles to follow to have a “reduced risk of violating WTO law” when considering a CBAM: (1) the carbon tax must apply to domestic goods and imports; (2) imports from all WTO members must be treated the same; and (3) rebates for exports cannot exceed the carbon tax. …The EU’s CBAM could run afoul of these commitments because it gives special treatment to countries that already have a carbon price. … Compliance with WTO commitments should be a top priority when considering any new tariff or tax.

Sadly, the World Trade Organization already has been weakened, so I won’t be surprised if officials somehow decide to give a green light to the EU’s protectionism.

Which will be a shame since the WTO for many years actually did a good job.

P.S. You won’t be surprised to learn that the Biden Administration also is interested in carbon protectionism. Indeed, there was plenty of green protectionism is his misnamed Inflation Reduction Act.

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German Government Endorses European-Wide Spending Caps

My “Golden Rule” of fiscal policy, first unveiled in 2011, is based on two principles.

• To enable more prosperity, the primary goal of fiscal policy should be to reduce the burden of government spending.
• To achieve good fiscal policy, cap government spending so that it grows slower than the economy’s productive sector.

When people ask whether a balanced budget should be primary goal, I explain that fiscal balance is good.

But I then point out that spending limits are the only effective way to achieve that goal.

If they don’t believe me, I direct them to pro-spending-cap studies from left-leaning bureaucracies such as the International Monetary Fund (here and here) and the Organization for Economic Cooperation and Development (here and here).

There are also similar studies from the European Central Bank (here and here).

And maybe in the future I can direct them to a proposal prepared for the European Commission by the German government.

In an article for the International Business Times, Jan Strupczewski explains the proposal to have nations abide by my Golden Rule.

…a German paper prepared for discussions on the rules to be held in the coming months…called for the use of the expenditure benchmark as a way to steer public spending, keeping increases in net primary expenditure below increases in potential growth rate of the economy. …The bigger a country’s debt, the bigger the gap between increases in spending and potential growth would have to be, leading to a overall decline in the government deficit and therefore also debt, the paper said.

Here are some additional details, as reported by the EU Observer.

Berlin proposes “common quantitative benchmarks”… The paper states that highly-indebted countries’ GDP growth should always exceed the growth of expenditure, a function described as the “convergence margin.” …If a country’s output is expected to be 1.5 percent, its spending is limited to 0.5 percent of GDP. …Limiting government spending to one percent beneath projected growth.

This is remarkable. Germany, governed by a Social Democrat, is proposing a spending cap that is even better than Switzerland’s debt brake.

P.S. There already are fiscal rules in the European Commission, but they are ineffective since they focus on red ink rather than government spending.

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European Commission Recommends Economic Suicide

What’s the main fiscal and/or economic problem in the European Union?

• Is it that the burden of taxes and spending is very onerous today?
• Or is it that the burden of taxes and spending will become more onerous in the future?

The easy and correct answer is that both are major problems.

But some people think the problem is that EU nations don’t tax and spend enough.

To make matters worse, this kind of thinking infects the bureaucrats at the European Commission, which has released a new report that reads like a Bernie Sanders campaign screed.

It starts by pretending that that Okun’s tradeoff doesn’t exist.

…taxation can contribute to both social justice and sustainable growth, as well as financing the benefits which underpin the social citizenship contract… Contrary to the rhetoric about the inevitability of a trade-off between social justice and economic growth and a fiscal crisis of the State, the problems of financing the welfare state are far from being inevitable. …everyone should be willing to pay their share of the costs involved, whether individuals or companies.

It then explicitly endorses “pay as you go” as a model for fiscal policy, even though that approach is utterly impractical for a region with aging populations and falling birthrates.

The first specific suggestion is that a PAYG approach is the best way to link the rights and duties of generations over time, in line with the social citizenship contract at the heart of the welfare state.

The report has 21 recommendations. Here are the ones that endorse and embrace new and expanded entitlements.

As you might expect, all that new spending is accompanied by a seemingly endless list of new and expanded taxes.

There are two main options for reforming the taxation of personal income. The first is to expand the tax base by limiting or reducing the many tax breaks that are currently present, from tax credits and tax allowances to tax exemptions and preferential treatment of different sources of income, such as income from capital… The second option for reform is to make the taxation of income more progressive. …Increasing corporate taxation. …As with preferential personal income tax regimes, the EU has an important role to play in levelling the playing field, so eliminating the negative externalities of tax competition and ending the ‘race to the bottom’, as well as making multinationals pay their fair share of tax. …there are a number of arguments for higher taxes on wealth. …Increasing taxes on wealth could help to achieve greater fairness, both in the tax system and in the distribution of resources… A tax on net wealth could complement taxes on income from capital… Indirect taxes…can make it easier to achieve social objectives, as in the case of ‘sin’ taxes… Measures such as the EU carbon tax border adjustment mechanism…can prevent unfair competition… Another option is to tax excess profits… A ‘web tax’ aimed at the excess profits of digital service companies, based on their turnover, could be a transitional step… A levy on financial transactions can also be justified, on grounds of fairness… A further option for Member States is to introduce a new tax, …a surcharge levied at source on all incomes… In summary, there are many options for achieving an adequate, fair, and sustainable means of financing of social protection at both EU and Member State levels.

That’s a frightening list.

And if it looks like it might get implemented, one can only imagine how productive people in Europe would start making plans to escape.

But the bureaucrats recommend Soviet-style exit taxes so they can continue grabbing more money.

Another option would be to tax expatriates for a given number of years after they leave the EU.

Let’s close by looking at one final excerpt.

Nations in the European Union supposedly are bound the “Maastricht Critieria” from something called the Stability and Growth Pact.

These fiscal rules focus on limiting deficits and debt and thus are not nearly as good as the spending cap in Switzerland’s “debt brake.”

But even these weak rules apparently are too stringent according to the report.

…there is widespread agreement on the value of social investment for sustaining the inclusive welfare state in the EU… But…the long-term benefits of social investment constantly come up against short-term pressure for fiscal consolidation. …A new system is needed for monitoring public finances in the EU that would allow policy-makers to identify productive social investment…a golden rule should be applied, allowing borrowing for social investment… A starting point should be to exempt social investment from the new Stability and Growth Pact rules.

The bottom line is that Europe already suffers from excessive fiscal burdens.

Yet the European Commission wants to drive even faster in the wrong direction.

I feel sorry for European taxpayers. Their tax dollars were used to prepare a report that outlines various ways of confiscating an even greater share of their money. That’s adding insult to injury.

P.S. The report discussed today is terrible, but probably not as bad as the European Commission’s lies about poverty or attempted brainwashing of children.

P.P.S. That being said, the EC will never be the worst international bureaucracy. The OECD and IMF compete for that honor.

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The Threat – and Soon Reality – of Climate Protectionism

For the first 50-plus years of my life, free trade was in the ascendancy.

Policy makers had learned a big lesson from the Great Depression about how protectionism was economic poison, and various trade agreements after World War II helped reduce trade taxes and other barriers to cross-border commerce.

It also helped that there was a “Washington Consensus” in the late 1900s that supported pro-market reforms in the developing world.

Unfortunately, trade liberalization has ground to a halt. In part, this is the fault of the United States, thanks to the protectionism of both Trump and Biden.

But let’s also make sure the European Union gets a a share of the blame as well. For instance, the one good thing about the EU (free trade among members) also happens to be one of the many bad things about the EU (protectionism against the rest of the world).

But being a protectionist bloc is a trivial problem compared to what is on the horizon. As reported yesterday by the Wall Street Journal, the EU has unveiled a scheme to use climate as an excuse to increase global trade barriers.

The European Union reached an agreement to impose a tax on imports based on the greenhouse gases emitted to make them, inserting climate-change regulation for the first time into the rules of global trade. …The EU is expected to adopt it in the coming weeks as part of a sweeping package of legislation… The plan…has rattled supply chains around the globe and angered the EU’s trading partners, particularly in the developing world… It has also unsettled manufacturers in the U.S. who are concerned the measure would create a new web of red tape to export to Europe. …Europe’s carbon border tax aims to protect European manufacturers from competitors in countries that haven’t regulated carbon-dioxide emissions. …The legislation would require importers to register with authorities and seek authorization to import goods covered by the tax.

Today, the editorial page of the WSJ weighed in on the proposal.

Christmas came early to Europe’s tax accountants this week, although companies might think the occasion feels more like April Fool’s Day. …Europe is…pushing ahead with a carbon border adjustment mechanism, or CBAM, to tax imports on their carbon intensity. Europeans say this border tax is necessary to “level the playing field” for manufacturers that must pay for carbon emissions credits under the Emissions Trading System (ETS). The ETS already makes it less economical for some industries to operate in Europe, leading green activists to note a rise in imports from countries that don’t impose the complex tax. Imagine that. The CBAM would apply to imports from countries that don’t tax carbon emissions. …The biggest losers will be beleaguered European consumers. …carbon tariffs show how climate policy has become an anti-growth project. A better U.S. Administration would fight this, but the Biden White House and Treasury are fellow travelers.

I explained last year why this was a bad idea, noting that it was bad economics and also that it would advance cronyism and be a windfall for lobbyists (especially once the EU tries to calculate the about of untaxed carbon in every product).

But I also wondered if the Biden White House would be on the right side. After all, the US (thankfully) does not have a carbon tax, so you would think that American officials would be fighting against this EU proposal.

Unfortunately, I was being naive. As noted in the WSJ’s editorial, Biden and his team are fellow travelers. Indeed, the nightmare scenario (perhaps even worse the the nightmare scenario of the Trump years) is that Biden will unilaterally impose a version of climate protectionism on the US economy.

P.S. Is anyone surprised that the French were early advocates of this approach?

P.P.S. I’m a fan of the World Trade Organization, but I doubt that the WTO has the will or the ability to save the global economy from climate protectionism.

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The European Union’s Carbon Protectionism

Over the past four years, Donald Trump presumably was the biggest threat to global trade.

His ignorant protectionism hurt American consumers and businesses – and undermined the competitiveness of the U.S. economy.

Over the next four years (and beyond), it’s quite likely that the biggest threat to global trade will be the European Union.

More specifically, politicians and bureaucrats in Brussels want to toss a hand grenade into cross-border commerce by imposing trade taxes on nations that don’t impose carbon taxes.

The Wall Street Journal has a must-read editorial about this threat to world commerce.

Western politicians have failed to persuade their own voters to commit economic suicide by banning fossil fuels, and forget about China, Russia or India. The climate lobby’s fallback, which is starting to emerge, is to punish the foreigners and their own consumers with climate tariffs. Bureaucrats at the European Commission are due to unveil the proposed Carbon Border Adjustment Mechanism (CBAM) later this month… Brussels wants to impose tariffs to bring the cost of carbon-dioxide emissions tied to an imported good into line with what a European producer would pay to produce the same good. …a carbon tariff would impose an enormous burden on companies seeking to sell to the EU—even the low-emitting firms—and as a result probably will trigger a trade war. …Under the leaked plan, foreign firms would have to undertake detailed carbon audits to report emissions to EU regulators, and then would have to work out what proportion of the emissions attributable to goods shipped to the EU already were covered by carbon taxes elsewhere. …The choice between costly compliance or a punitive default tariff risks deterring smaller foreign companies from trying to navigate this system.

Needless to say, the so-called carbon audits will create big openings for cronyism and favoritism.

Lobbyists will be fat and happy while businesses and consumers will get hit with higher costs.

The editorial’s conclusion wisely warns that it would be a big mistake for Europeans to trigger a trade war.

Western elites haven’t convinced their voters to pay the price of their climate obsessions. Like Donald Trump, they now want to blame foreigners. In the process they’ll force their consumers to pay more for imports and domestic goods, and they’ll harm their own exporters if countries retaliate. The last thing the world economy needs as it recovers from a pandemic is a climate-change trade war.

Writing for Forbes, Tilak Doshi speculates whether the United States will copy the Europeans.

…the European Parliament overwhelmingly endorsed the creation of a “carbon border adjustment mechanism” (CBAM) that would shield EU companies against cheaper imports from countries with “weaker” climate policies. …Now that the Biden administration has elevated climate change to its highest priority across the whole of government, it would seem that the EU and the US working together with like-minded governments in Canada and the UK would be in a position to set up a “trans-Atlantic climate club”  and thereby impose a global cost on carbon emissions. …Australian Trade Minister Dan Tehan labelled carbon tariffs “a new form of protectionism.” …For most developing countries, “worries of an increasing carbon footprint generated by economic growth are second to worries that growth many not happen at all.” …What sets off this new protectionism from its predecessors is the sheer scope of its application.

I’m actually hopeful on this issue.

Biden and his team doubtlessly are sympathetic to the E.U.’s initiative, but I don’t think Congress will approve a carbon tax on the American people.

And if the U.S. doesn’t have a carbon tax, there wouldn’t be any reason to impose discriminatory taxes on other nations that also don’t have that levy.

That being said, the Biden Administration would have some leeway to cause problems. For instance, would they push for the World Trade Organization to accept the E.U.’s attack on free trade?

When dealing with politicians, I always hope for the best, but assume the worst.

P.S. Here are my seven reasons to support free trade, as well as my eight questions for protectionists.

P.P.S. You shouldn’t be surprised to learn that the French were early advocates of carbon protectionism.

P.P.P.S. Some American politicians have pushed for regulatory protectionism.

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Great Moments in International Bureaucracy

A couple of days ago, I criticized officials at the United Nations for advocating higher taxes and bigger government.

Fortunately, that bureaucracy is so sclerotic and inefficient that its efforts to promote statism are not very effective

But it still galls me that international bureaucrats who receive lavish, tax-free salaries spend their days trying to promote higher taxes on everyone else.

And that’s also my view of the tax-loving bureaucrats at the International Monetary Fund, as well as their counterparts at the Organization for Economic Cooperation and Development.

Perhaps the logical takeaway is that international bureaucracies are inherently problematic, pushing misguided policy on their bad days and wasting money on their good days.

Here are some additional examples, starting with with the “Eurocrats” in Brussels. The U.K.-based Telegraph reports that they’ve been naughty hypocrites.

An MEP tried to escape through a window after police raided a 25-strong sex party in Brussels’ city centre for breaking Belgium’s coronavirus rules. …Police raided the flat after neigbours complained about the noise. …Belgian media reported two EU diplomats at the sex party… Police fined the 25 people, who were mostly naked men, at the orgy £225 each before releasing them. They broke rules limiting gatherings to groups of four. …A European Parliament source said: “There is nothing wrong to participate in a sex party of any kind. However, …parliamentary immunity does not exempt you from obeying the law.” Brussels hosts the major EU institutions, including one of the European parliament’s two seats.

Next, let’s take a look at the World Health Organization.

That bureaucracy is infamous for its bungled and politicized response to the coronavirus.

So maybe it’s a bit of karma that the bureaucracy is now suffering its own outbreak. Here are some excerpts from a story in the Las Angeles Times.

The World Health Organization has recorded 65 coronavirus cases among staff members based at its headquarters, despite the agency’s public assertions that there has been no transmission at the Geneva site, an internal email obtained by the Associated Press shows. …32 were found in staff who had been working at the headquarters building, suggesting that the health agency’s strict hygiene, screening and other prevention measures were not sufficient to spare it from the pandemic. …On Nov. 2, the WHO’s technical lead for the COVID-19 response, Maria Van Kerkhove, told reporters that there had been no transmission or clusters at headquarters.

Let’s wrap up by looking at the North Atlantic Treaty Organization (NATO).

You may have assumed this bureaucracy no longer exists since the Soviet Union (thankfully) no longer exists.

But not only is NATO still there, the Washington Free-Beacon reported that it built itself an opulent Taj Mahal-style headquarters.

…the new NATO headquarters…building cost an astounding $1.23 billion, according to a budget released by the North Atlantic Treaty Organization. Architecture, design, and quality management cost the alliance $129 million alone. Audio visual installations ran $29 million, while construction ran $514 million, the document states. …The alliance bragged that the structure is also a “green building for the future.” “The environment and sustainability have played a major role in the design process. The new building’s energy consumption has been optimized through the use of geothermal and solar energy and advanced lighting systems. …the buildings short wings will have green roofs,” the document states.

Lots of moral preening about being a “green building,” but nothing about whether this monument to extravagance will make NATO more effective as a fighting force.

Then again, as Mark Steyn observed many years ago, NATO nowadays is about as useful as “keeping forts in South Dakota to defend settlers against hostile Indians.”

In a perverse way, I almost have to admire NATO.

It takes special bureaucratic skills to survive the collapse of the Soviet Union and the end of the Warsaw Pact. And it takes super-special bureaucratic skills to then get a $1.23 billion headquarters when the organization’s reason for existing disappeared nearly three decades ago.

Ronald Reagan obviously would not be surprised.

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Using Coronavirus as an Excuse for More E.U. Centralization and Redistribution

I wrote earlier this month about coronavirus becoming an excuse for more bad public policy.

American politicians certainly have been pushing all sorts of proposals for bigger government, showing that they have embraced the notion that you don’t want to let a “crisis go to waste.”

But nothing that’s happening in the United States is as monumentally misguided as the effort to create a new method of centralized redistribution in the European Union.

Kai Weiss of the Vienna-based Austrian Economic Center explains what is happening in a column for CapX.

…‘never let a good crisis go to waste’ seems to have become the mantra of both the European Commission a number of national leaders. The coronavirus has become a justification for…‘more Europe’ (which tends to actually mean more EU, to the detriment of Europe). The clearest sign of this renewed Euro-fervour is the plan cooked up by Angela Merkel and Emmanuel Macron earlier this week… Seasoned Brussels observers will be shocked to learn that their proposals have very little to do with the pandemic, and everything to do with deepening the centralisation of EU power and top-down policymaking. While Germany has traditionally…opposed the idea of eurobonds or similar debt collectivisation instruments, it is now advocating for precisely those policies. A €500 billion Recovery Fund… the initial plan is for the European Commission to raise the money on the financial markets. It would subsequently be paid back by the member states and through increased “own resources” – i.e., new taxes levied directly by Brussels… The good news is that none of these policy proposals are yet set in stone. There are some big legal questions, particularly on the Recovery Fund, and national parliaments would need to agree to this expansion of Brussels’ writ. Already countries like the Netherlands, Austria, Denmark, and Sweden have voiced criticism… But for all these obstacles, the direction of travel looks alarmingly clear. The consensus among the EU’s power brokers, as with pretty much any major world event, is that the answer is ‘more Europe’. ..For Macron  Merkel and their allies, this is far too good a crisis to pass up.

A story in the New York Times has additional details, including a discussion of potential obstacles.

Ms. Merkel this week agreed to break with two longstanding taboos in German policy. Along with the French president, Emmanuel Macron, Ms. Merkel proposed a 500 billion euro fund… It would allow the transfer of funds from richer countries… And it would do so with money borrowed collectively by the European Union as a whole. …Whatever emerges from the European Commission will be followed by tough negotiations… Chancellor Sebastian Kurz of Austria has raised objections to the idea of grants rather than loans, saying that he has been in contact with the leaders of Sweden, the Netherlands and Denmark. “Our position remains unchanged,’’ he said. …opposition may also come from member states in Central and Eastern Europe. …Those countries are going to be reluctant…to see so much European aid — for which they will in the end have to help pay — skewed to southern countries that are richer than they are. …in northern countries, moves for collective debt to bail out poorer southern countries may feed far-right, anti-European populists like the Alternative for Germany or the Sweden Democrats. They are angry at the idea of subsidizing southerners who, they believe, work less hard and retire much earlier.

What’s depressing about this report is that it appears the battle will revolve around whether the €500 billion will be distributed as grants or loans.

The real fight should be whether there should be any expansion of intra-E.U. redistribution.

For what it’s worth, Germany used to oppose such ideas, especially if funded by borrowing. But Angela Merkel has decided to throw German taxpayers under the bus.

Let’s close with some analysis from Matthew Lynn of the Spectator.

Die-hard European Union federalists have plotted for it for years. …The Greeks and Italians have pleaded for it. And French presidents have made no end of grand speeches, full of references to solidarity and common visions, proposing it. The Germans have finally relented and agreed, at least in part, to share debt within the EU and the euro-zone, and bail-out the weaker members of the club. …The money will be borrowed, based on income from the EU’s future budgets, but it will in effect be guaranteed by the member states, based on the EU’s ‘capital key’. …the rescue plan is completely unfair on all the EU countries outside the euro-zone. …why should they pay for it? Poland…will still be expected to pay in five per cent (or 25bn euros (£22bn)) to bail-out of far richer Italy (Polish GDP per capital is $15,000 (£12,000) compared with $34,000 (£27,000) for Italy).

Pro-centralization politicians are claiming this fund is needed to deal with the consequences of the coronavirus, but that’s largely a smokescreen. It will take many months for this proposal to get up and running – assuming, of course, that Merkel and Macron succeed in bullying nations such as Austria and the Netherlands into submission.

By that time, even the worst-hit countries already will have absorbed temporary health-related costs.

The bottom line is that this initiative is really about the long-held desire by the left to turn the E.U. into a transfer union.

The immediate losers will be taxpayers in Germany, as well as those in Austria, Sweden, the Netherlands, Finland, and a few other nations.

But all of Europe will suffer in the long run because of an increase in the continent’s overall fiscal burden.

And keep in mind that this is just the camel’s nose under the tent. It’s just a matter of time before this supposedly limited step becomes a template for further expansions in the size and scope of government.

Yet another reason why E.U. membership is increasingly an anchor for nations that want more prosperity.

P.S. As suggested by Mr. Lynn’s column, countries in Eastern Europe should fight this scheme. After all, these countries are relatively poor (a legacy of communist enslavement) and presumably don’t want to subsidize their better-off cousins in places like Spain and Italy. But that argument also implies that they should have resisted the Greek bailout about ten years ago, yet they didn’t. Sadly, Eastern European governments acquiesce to bad ideas because their politicians are bribed with “structural adjustment funds” from the European Union.

P.P.S. The luckiest Europeans are the British. They wisely opted for Brexit so they presumably won’t be on the hook for this costly new type of E.U.-wide redistribution (indeed, my main argument for Brexit, which now appears very prescient, was that the E.U. would morph into a transfer union).

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Coronavirus and the Fiscal Future of the European Union

Libertarians and other supporters of limited government historically have mixed feelings about the European Union (and its various governmental manifestations).

On the plus side, there are no trade barriers between nations that belong to the EU, and membership also makes it difficult for countries to impose regulatory burdens that hinder trade. The EU also has helped to improve the rule of law in some nations, particularly for newer members from the former Soviet Bloc.

On the minus side, the EU imposes trade barriers against the rest of the world. There is also continuous pressure for tax harmonization policies and regulatory harmonization policies that increase the burden of government – compounded by efforts to export those bad polices to non-member nations.

Given these good and bad features, it’s understandable that proponents of economic liberty don’t have a consensus position on the European Union.

But views may become more universally hostile since some European politicians now want to use the coronavirus crisis as an excuse to expand redistribution and enable bailouts by changing existing EU rules.

Currently, there is very limited scope for bad European-wide fiscal policy because Article 125 of the Treaty on the Functioning of the European Union ostensibly prohibits cross-country redistribution or bailouts.

For what it’s worth, there is another provision for nations that use the euro currency. Article 136 of the Treaty allows for a “stability mechanism” to “safeguard the stability of the euro,” but also states that “the mechanism will be made subject to strict conditionality.”

Now let’s apply this background knowledge to the current situation.

As I wrote last month, the coronavirus-triggered economic mess is wreaking havoc with the finances of EU nations, especially for “Club Med” nations.

For example, Desmond Lachman of the American Enterprise Institute writes for the Hill about the potential consequences for Italy.

The Eurozone’s moment of truth has arrived with the coronavirus pandemic. …a supply side-shock of unprecedented size to Europe in general and to a highly indebted Italy in particular. Indeed, Italy, the Eurozone’s third-largest member country, is now at the epicenter of the pandemic and is being subject to an economic shock of biblical proportions. …That is all too likely to cause the country’s public debt to skyrocket to over 160 percent of GDP by year-end. It is also likely to put enormous strain on the country’s rickety banking system…it would seem to be only a matter of time before markets…became increasingly reluctant to buy Italian government bonds for fear of an eventual default. They would also…chose to move their deposits out of the Italian banks to safer havens abroad. …we should brace ourselves for an Italian exit from the euro that would almost certainly roil the world’s financial markets.

None of this should be a surprise. Italy is a fiscal mess and I’ve been making that point with tiresome regularity.

The coronavirus and the concomitant economic shutdown are merely a final (and very big) straw on the camel’s back.

So is Italy going to default? And maybe crash out of the euro? Or, alternatively, actually impose some long-overdue spending restraint?

Well, why make any tough decision if there’s a potential new source of money – i.e., cash from taxpayers in Germany, Finland, Austria, the Netherlands, Sweden, and other EU nations in Northern Europe.

Needless to say, that’s a very controversial concept. British newspapers have been writing about this issue.

Here are some passages from a report in the left-leaning Guardian.

The European Union has weathered the storms of eurozone bailouts, the migration crisis and Brexit, but some fear coronavirus could be even more destructive. …Jacques Delors, the former European commission president who helped build the modern EU, broke his silence last weekend to warn that lack of solidarity posed “a mortal danger to the European Union”. …The pandemic has reopened the wounds of the eurozone crisis, resurrecting stereotypes about “profligate” southern Europeans and “hard-hearted” northerners. …The Dutch finance minister, Wopke Hoekstra,…infuriat[ed] his neighbours by asking why other governments didn’t have fiscal buffers to deal with the financial shock of the coronavirus. His comments were described as “repugnant”, “small-minded” and “a threat to the EU’s future” by Portugal’s prime minister, António Costa.

Here are excerpts from a piece in the right-leaning Telegraph.

Italian politicians took out a full-page advertisement in one of Germany’s most prestigious newspapers…, urging parsimonious northern Europe to do more to help the south… They urged Berlin to drop its opposition to a proposed EU scheme to issue so-called “coronabonds” to raise funds to fight the crisis. And they accused the Netherlands, which has led opposition to the scheme, of operating as a tax haven and diverting revenue from other member states. …Several EU members – led by France, Italy, Spain and Belgium – have called for EU-wide “coronabonds” to help poorer member states borrow as they struggle with the economic impact of the crisis. But a rival faction of northern members, led by the Netherlands, Finland, Austria and Germany, has opposed what it sees as an attempt to saddle the countries with the debts of their more feckless neighbours.

An article in the Express highlighted divisions between Portugal and the Netherlands.

Portugal’s Prime Minister Antonio Costa has stunned fellow EU leaders after raising the idea…that the Netherlands could be kicked out of the European Union… The Netherlands held up the talks after blocking demands from Italy, Spain and France for so-called ‘corona-bonds’ where the EU would issue joint shared debt to help finance a recovery. …The Portuguese leader said: “If under these conditions it’s not possible for Europe to ensure a common response to this challenge, this is a sign of great concern for those who believe in Europe.” Mr Costa went on to question whether “there is anyone who wants to be left out” of the EU or eurozone. He added: “Naturally, I’m referring to the Netherlands. “There is at least one country in the euro zone that resists understanding that sharing a common currency implies sharing a common effort.”

The rest of this column is going to explain why it’s a very bad idea to have intra-EU redistribution and bailouts.

But I first want to debunk the claim from the Portuguese Prime Minister that a common currency requires a common fiscal policy.

Indeed, he’s not the only one to make this mistake. In a column for the U.K.-based Times, Iain Martin also asserts that a common currency somehow necessitates cross-country redistribution.

European finance ministers and leaders have spent the week arguing over desperate pleas from countries such as Italy…who want the European Central Bank and the EU to underpin common debt that will cover the epic bills being faced by national governments. …The fiscally conservative northern nations see no reason why they should take on the “pooled” debt of weaker southern European economies. …The core problem is what it has always been: the elementary design flaw of the euro. Currency blocs that work depend on that notion of common endeavour and “pooling” debt and risk, and ideally must function as one political organisation. …the euro needed an institutional structure that would operate roughly as the United States does. …This escalating economic emergency is a tragedy…a currency and monetary and fiscal construction that is not capable of swiftly transferring resources to the weak.

Both Costa and Martin are wrong.

Panama does very well using the dollar as its currency, yet there’s obviously no common fiscal policy with the United States. Other nations also have “dollarized” without any adverse impact.

Or consider the fiscal history of the United States. For much of American history, the federal government was trivially small. Most spending happened at the state and local level.

Needless to say, having a common currency in this decentralized system wasn’t a hindrance to U.S. economic development.

With this topic out of the way, let’s now deal with whether the coronavirus crisis should be used as an excuse to open the floodgates for intra-EU redistribution and bailouts.

Politicians from nations on the receiving end obviously approve.

But some Americans also like the idea.

Max Bergmann, a former Obama appointee at the State Department, likes the idea. He argues in the Washington Post for more centralization and more redistribution in the EU.

…this is in fact a fight over the future of Europe. The common European bond proposal hits at the core of what Europe’s union is for. It is an act of unity… A common E.U. bond would take the debt that individual European states accrue to fight this crisis and make it a collective European responsibility. …Moving ahead with it would entail a sweeping increase in the power of the federal union. …The move by…nine countries for a common E.U. bond was in fact a revolt against Europe’s status quo. It was at its core therefore a revolt against Merkel and the past decade of austerity in Europe. …Merkel is also the architect of a decade of devastating austerity that has caused economic devastation and deprivation… The crisis revealed that Europe’s new currency (the euro) had a design flaw. While the E.U. had a common monetary policy with its own central bank, it lacked a common fiscal policy. …Merkel could have pushed for that. …Merkel lectured southern European countries about profligacy. She turned what was a manageable crisis into a systemic shock to Europe’s economies. …As the coronavirus crisis hit, …Merkel has stuck to her guns.

The New York Times, unsurprisingly, has editorialized for centralization and redistribution.

…the European Union is…an alliance of sovereign countries, not a central government, and Brussels has control only over external trade and competition. For the rest, its executive branch, the European Commission, can only seek cooperation, not order it. The states that share the euro do not have true fiscal union, under which wealthier parts of the bloc would prop up the poorer. …Europe could do better. Much better. …Italians or Spaniards confronted with death and economic catastrophe…aren’t in a bind due to profligate spending; they’re in the throes of a plague… The question to ask is what’s the point of any union if it cannot find unity when it is needed most…true leadership requires knowing that we’re all in this together and can only conquer it together.

Is this correct? Would it be a good idea to have “a sweeping increase in the power of the federal union”? Would that be “true leadership”?

Gideon Rachman warns in the Financial Times that such policies will cause political fallout.

…northern Europeans will…feel exploited by the south. …The longer-term fears of the northern Europeans are also legitimate. …The northerners are alert to any sign that they are being sucked into permanent, large transfers of cash to heavily indebted EU partners. They are justifiably concerned that the current anguish is being used to push forward ideas that they have already rejected, many times over. …if political leaders renege on longstanding promises…, they should not be particularly surprised if voters then turn to populist, anti-European parties. …Anti-EU parties have already made strong gains across northern Europe in recent years.

That’s very sensible political analysis.

But the bigger problem, at least from my perspective, is that a common fiscal policy would be very bad economics.

It means more redistribution, with all the unfortunate incentives that creates for both those paying and those receiving (as illustrated by this cartoon).

And it means more overall government spending. The “Club Med” countries obviously would spend any money they got (whether from so-called coronabonds, a common-EU budget, or any other mechanism), and there’s no reason to think the nations in Northern Europe would reduce spending as their taxpayers started to underwrite the budgets of other nations.

This is a problem since government already is far too large in every EU country. Here’s the most-recent data from the European Commission. If you focus on the left, you’ll see the average fiscal burden in the EU is about 45 percent of GDP (and slightly higher in the subset of eurozone countries).

The bottom line is that countries such as Italy, Spain, Greece, and Portugal are in trouble because their governments have been spending too much.

Sadly, I fear it is just a matter of time before Article 125 is somehow sidelined and the profligacy of those “Club Med” nations is rewarded.

And if/when that happens, what’s good about the EU (open trade and the remnants of mutual recognition) definitely will be dwarfed by bad policy (bailouts, transfers, and others form of redistribution).

P.S. One of the strongest arguments for Brexit was that the EU inevitably would morph into a transfer union – and thus accelerate the economic decline of Europe. Given what’s now happening, the British were very wise to escape.

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Eurobonds: A Further Threat to the Long-Run Viability of the European Union

Motivated in part by a sensible desire for free trade, six nations from Western Europe signed the Treaty of Rome in 1957, thus creating the European Economic Community (EEC). Sort of a European version of the North American Free Trade Agreement (now known as USMCA).

Some supporters of the EEC also were motivated by a desire for some form of political unification and their efforts eventually led to the 1992 Maastricht Treaty, which created the European Union – along with increased powers for a Brussels-based bureaucracy (the European Commission).

There are significant reasons to think that this evolution – from a Europe based on free trade and mutual recognition to a Europe based on supranational governance – was an unfortunate development.

Back in 2015, I warned that this system would “morph over time into a transfer union. And that means more handouts, more subsidies, more harmonization, more bailouts, more centralization, and more bureaucracy.”

A few years earlier, when many of Europe’s welfare states were dealing with a fiscal crisis, I specifically explained why it would be a very bad idea to have “eurobonds,” which would mean – for all intents and purposes – that reasonably well governed nations such as Germany and Sweden would be co-signing loans for poorly governed countries such as Italy and Greece.

Well, this bad idea has resurfaced. Politicians from several European nations are using the coronavirus as an excuse (“never let a crisis go to waste“) to push for a so-called common debt instrument.

Letter from @emmanuelmacron @antoniocostapm et al to @eucopresident on the need for Common Debt Issuance. Note the absence to references to the ESM instruments… pic.twitter.com/69kLToQrxG

— Shahin Vallée (@Shahinvallee) March 25, 2020

Here are the relevant parts of the letter.

…we need to work on a common debt instrument issued by a European institution to raise funds on the market on the same basis and to the benefits of all Member States, thus ensuring stable long term financing… The case for such a common instrument is strong, since we are all facing a symmetric external shock, for which no country bears responsibility, but whose negative consequences are endured by all. And we are collectively accountable for an effective and united European response. This common debt instrument should have sufficient size and long maturity to be fully efficient… The funds collected will be targeted to finance in all Member States the necessary investments in the healthcare system and temporary policies to protect our economies and social model.

Lots of aspirational language, of course, but no flowery words change the fact that “collectively accountable” means European-wide debt and “social model” means welfare state.

I wrote last year that globalization is good whereas global governance is bad. Well, this is the European version.

The Wall Street Journal opined against the concept. Here’s some background information.

Bad crises tend to produce worse policy… We speak of proposals for “corona bonds,” an idea floated as a fiscal solution to Europe’s deepening pandemic. Italian Prime Minister Giuseppe Conte launched the effort, and French President Emmanuel Macron this week joined Mr. Conte and seven other leaders in backing such a bond issue for health-care expenditures and economic recovery. Some 400 economists have joined the chorus. …The bonds would be backed collectively by member governments. The proceeds could be allocated to members such as Italy that otherwise couldn’t borrow from private markets. …Calls for euro bonds last hit a crescendo during the debt crises of 2010-12, when they were pitched to fund bailouts of Greece and others. But the idea has never gone anywhere because it would transform the eurozone into something voters didn’t approve when the currency was created in the 1990s.

And here’s the editorial’s explanation of why eurobonds would be a very bad idea.

Europeans were promised the euro would not become an excuse or vehicle for large fiscal transfers between member states. …Proponents say corona bonds are a special case due to the unfolding economic emergency. But the Italian government that now can’t finance its own recovery was also one of the worst fiscal offenders before Covid-19… Claims that the corona bond would be temporary aren’t credible because European elites have wanted such a facility for years… Voters can assume that if they get these bonds in a crisis, they’ll be stuck with this facility forever. …euro bonds would create profound governance problems. …With corona bonds, German and Dutch taxpayers for the first time are being asked to write a blank check to Italy and perhaps others.

Amen.

Once the camel’s nose is under the tent, it would simply be a matter of time before eurobonds would become a vehicle for bigger government in general and more country-to-country transfers in particular.

Hopefully this terrible idea will be blocked by nations such as Germany, Sweden, and the Netherlands (this satirical video will give you an idea of the tension between the European nations that foot the bills and the ones looking for handouts).

Some advocates for eurobonds say there’s nothing to worry about since the European Commission and related pan-European bureaucracies currently don’t spend much money, at least when measured as a share of overall economic output.

Which is why I sometimes warn my European friends that the United States is an example of why they should be vigilant.

For much of American history, the central government in Washington was very small, as envisioned by the Founders. But beginning with the so-called Progressive Era and then dramatically accelerating under the failed policies of Hoover and Roosevelt, the federal government has expanded dramatically in both size and scope.

The lesson to be learned is that more centralization is a very bad idea, particularly if that centralized form of government gains fiscal power.

That’s especially true for Europe since the burden of government spending at the national level already is excessive. Eurobonds would exacerbate the damage by creating a new European-wide method of spending money.

P.S. While eurobonds are a very bad idea, it would be even worse (akin to the U.S. approving the 16th Amendment) if the European Union somehow got the authority to directly impose taxes.

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Happy Brexit Day

Today is Brexit Day. As of 6:00 P.M. EST (Midnight in Brussels), the United Kingdom no longer will be a member of the European Union.

This is definitely good news in the long run since the U.K. will now be somewhat insulated from inevitable economic crises caused by the European’s Union’s dirigiste economic model and grim demographic outlook.

Whether it’s also good news in the short run depends mostly on decisions in London, such as whether Prime Minister Boris Johnson and his Tory government expand economic freedom (which should be the case, but there are worrisome signs that the spending burden will increase).

But Washington and Brussels also will play a role since the U.K. wants to sign free-trade agreements. This could be a problem since the E.U. will be tempted to behave in a spiteful manner and Trump and his trade team are protectionists.

But let’s set that aside for the moment and look at the big picture.

The Wall Street Journal nicely summarized the key takeaways in yesterday’s editorial about Brexit.

The EU was founded on the notion that only an ever-deeper economic union—with an ever-closer political union close on its heels—could secure peace and prosperity… Most continental political leaders, if not their voters, still believe this. …British voters think otherwise. Their 2016 vote to leave the EU, ratified in December’s general election, was not a vote for war and poverty. …voters had the temerity to assert themselves despite resistance from a political and bureaucratic class invested in the status quo. …One feature of this new politics is how immune voters have become to economic scaremongering… Britons instead have heard European anxiety that Brexit will trigger a “race to the bottom” on economic policy. What this really means is that EU politicians are aware that a freer economy more open to commerce at home and trade outside the EU would deliver more prosperity to more people than continental social democracy. British voters may not embrace this open vision in the end, but they’ve given themselves the choice. …All of this frightens so-called good Europeans…because it’s a direct challenge to…their “European project.” Central to this worldview is a distrust of…markets… A Britain with greater political independence and deep trading ties to Europe without all the useless red tape and hopeless centralizing could be a model. …Britain’s voters in 2016, and again in 2019, chose peaceful and prosperous coexistence with their neighbors rather than mindless but relentless integration. It’s the most consequential choice any European electorate has made in at least a generation.

Amen.

Brexit is very good news (December’s election in the U.K., which ensured Brexit, was the best policy-related development of 2019).

It means more jurisdictional competition, which is good news for those of us who want some sort of restraint on government greed.

And it means less power for the E.U. bureaucracy, which has a nasty habit of trying to export bad tax policy and bad regulatory policy.

Brexit also is a victory for Nigel Farage. Here are his final remarks to the European Parliament.

After 25 years of fighting for independence, this is my final contribution in the European Parliament.

We were told to leave with our British flags, and that's exactly what we did. pic.twitter.com/cBfycWfsN7

— Nigel Farage (@Nigel_Farage) January 29, 2020

Farage has been called the “most consequential political figure in a generation in Europe, perhaps the whole of the West.”

This actually may be true. Brexit almost surely happened because of Farage’s efforts.

And to achieve that goal in the face of unified establishment opposition is truly remarkable.

Speaking of establishment opposition, let’s close today with an updated version of a PG-13 song about how the British people responded to the practitioners of “Project Fear.”

P.S. You can enjoy other Farage speeches by clicking here, here, and here.

P.P.S. And you can enjoy more Brexit-themed humor by clicking here, here, and here.

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European Tax Greed and American Tech Companies

There are many boring topics in tax policy, such as the debate between expensing and depreciation for business investment.

International tax rules also put most people to sleep, but they’re nonetheless important.

Indeed, the United States government is currently squabbling with several European governments about the appropriate tax policy for U.S.-based tech companies.

A report from the New York Times last July describes the controversy.

France is seeking a 3 percent tax on the revenues that companies earn from providing digital services to French users. It would apply to digital businesses with annual global revenue of more than 750 million euros, or about $845 million, and sales of €25 million in France. That would cover more than two dozen companies, many of them American, including Facebook, Google and Amazon. …Mr. Lighthizer said the United States was “very concerned that the digital services tax which is expected to pass the French Senate tomorrow unfairly targets American companies.” …France’s digital tax adds to the list of actions that European authorities have taken against the tech industry… And more regulation looms. Amazon and Facebook are facing antitrust inquiries from the European Commission. …Britain provided further details about its own proposal to tax tech companies. Starting in 2020, it plans to impose a 2 percent tax on revenue from companies that provide a social media platform, search engine or online marketplace to British users.

For the latest developments, here are excerpts from an article in yesterday’s New York Times.

A growing movement by foreign governments to tax American tech giants that supply internet search, online shopping and social media to their citizens has quickly emerged as the largest global economic battle of 2020. …At the core of the debate are fundamental questions about where economic activity in the digital age is generated, where it should be taxed and who should collect that revenue. …The discussions, which are expected to last months, could end with an agreement on a global minimum tax that all multinational companies must pay on their profits, regardless of where the profits are booked. The negotiations could also set a worldwide standard for how much tax companies must remit to certain countries based on their digital activity. …Mr. Mnuchin expressed frustration on Thursday in Davos that a digital sales tax had become such a focus of discussion at the World Economic Forum. …American tech firms are eager for a deal that would prevent multiple countries from imposing a wide variety of taxes on their activities.

Daniel Bunn of the Tax Foundation has an informative summary of the current debate.

In March of 2018, the European Commission advanced a proposal to tax the revenues of large digital companies at a rate of 3 percent. …The tax would apply to revenues from digital advertising, online marketplaces, and sales of user data and was expected to generate €5 billion ($5.5 billion) in revenues for EU member countries. The tax is inherently distortive and violates standard principles of tax policy. Effectively, the digital services tax is an excise tax on digital services. Additionally, the thresholds make it function effectively like a tariff since most of the businesses subject to the tax are based outside of the EU. …the European Commission was unable to find the necessary unanimous support for the proposal to be adopted. The proposal was laid aside… the French decided to design their own policy. The tax was adopted in the summer of 2019 but is retroactive to January 1, 2019. Similar to the EU proposal, the tax has a rate of 3 percent and applies to online marketplaces and online advertising services. …The United Kingdom proposed a digital services tax at 2 percent as part of its budget in the fall of 2018. The tax has already been legislated and will go into force in April of 2020. …The tax will fall on revenues of search engines, social media platforms, and online marketplaces. …The OECD has been working for most of the last decade to negotiate changes that will limit tax planning opportunities that businesses use to minimize their tax burdens. …The reforms have two general objectives (Pillars 1 and 2): 1) to require businesses to pay more taxes where they have sales, and 2) to further limit the incentives for businesses to locate profits in low-tax jurisdictions. …This week in Davos, the U.S. and France…agreed to continue work on both Pillar 1 and Pillar 2… The burden of proof is on the OECD to show that the price the U.S. and other countries may have to pay in lost revenue or higher taxes on their companies (paid to other countries) will be worth the challenge of adopting and implementing the new rules.

At the risk of over-simplifying, European politicians want the tech companies to pay tax on their revenues rather than their profits (such a digital excise tax would be sort of akin to the gross receipts taxes imposed by some American states).

And they want to use a global formula (if a country has X percent of the world’s Internet users, they would impose the tax on X percent of a company’s worldwide revenue).

Though all you really need to understand is that European politicians view American tech companies as a potential source of loot (the thresholds are designed so European companies would largely be exempt).

For background, let’s review a 2017 article from Agence France-Presse.

…are US tech giants the new robber barons of the 21st century, banking billions in profit while short-changing the public by paying only a pittance in tax? …French President Emmanuel Macron…has slammed the likes of Google, Facebook and Apple as the “freeloaders of the modern world”. …According to EU law, to operate across Europe, multinationals have almost total liberty to choose a home country of their choosing. Not surprisingly, they choose small, low tax nations such as Ireland, the Netherlands or Luxembourg. …Facebook tracks likes, comments and page views and sells the data to companies who then target consumers. But unlike the economy of old, Facebook sells its data to French companies not from France but from a great, nation-less elsewhere… It is in states like Ireland, whose official tax rate of 12.5 percent is the lowest in Europe, that the giants have parked their EU headquarters and book profits from revenues made across the bloc. …France has proposed an unusual idea that has so far divided Europe: tax the US tech giants on sales generated in each European country, rather than on the profits that are cycled through low-tax countries. …the commission wants to dust off an old project…the Common Consolidated Corporate Tax Base or CCCTB — an ambitious bid to consolidate a company’s tax base across the EU. …tax would be distributed in all the countries where the company operates, and not according to the level of booked profit in each of these states, but according to the level of activity.

This below chart from the article must cause nightmares for Europe’s politicians.

As you can see, both Google and Facebook sell the bulk of their services from their Irish subsidiaries.

When I look at this data, it tells me that other European nations should lower their corporate tax rates so they can compete with Ireland.

When European politicians look at this data, it tells them that they should come up with new ways of extracting money from the companies.

P.S. The American tech companies are so worried about digital excise taxes that they’re open to the idea of a global agreement to revamp how their profits are taxed. I suspect that strategy will backfire in the long run (see, for instance, how the OECD has used the BEPS project as an excuse to impose higher tax burdens on multinational companies).

P.P.S. As a general rule, governments should be free to impose very bad tax policy on economic activity inside their borders (just as places such as Monaco and the Cayman Islands should be free to impose very good tax policy on what happens inside their borders). That being said, it’s also true that nations like France are designing their digital taxes American companies are the sole targets. An indirect form of protectionism.

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Taxpayer-Subsidized Corruption in Europe

The Department of Agriculture should be abolished. Yesterday, if possible.

It’s basically a welfare scam for politically connected farmers and it undermines the efficiency of America’s agriculture sector.

Some of the specific handouts – such as those for milk, corn, sugar, and even cranberries – are unbelievably wasteful.

But the European Union’s system of subsidies may be even worse. As reported by the New York Times, it is a toxic brew of waste, fraud, sleaze, and corruption.

…children toil for new overlords, a group of oligarchs and political patrons…a feudal system…financed and emboldened by the European Union. Every year, the 28-country bloc pays out $65 billion in farm subsidies… But across…much of Central and Eastern Europe, the bulk goes to a connected and powerful few. The prime minister of the Czech Republic collected tens of millions of dollars in subsidies just last year. Subsidies have underwritten Mafia-style land grabs in Slovakia and Bulgaria. …a subsidy system that is deliberately opaque, grossly undermines the European Union’s environmental goals and is warped by corruption and self-dealing. …The program is the biggest item in the European Union’s central budget, accounting for 40 percent of expenditures. It’s one of the largest subsidy programs in the world. …The European Union spends three times as much as the United States on farm subsidies each year, but as the system has expanded, accountability has not kept up. …Even as the European Union champions the subsidy program as an essential safety net for hardworking farmers, studies have repeatedly shown that 80 percent of the money goes to the biggest 20 percent of recipients. …It is a type of modern feudalism, where small farmers live in the shadows of huge, politically powerful interests — and European Union subsidies help finance it.

Is anyone surprised that big government leads to big corruption?

By the way, the article focused on the sleaze in Eastern Europe.

The problem, however, is not regional. Here’s a nice visual showing how there’s also plenty of graft lining pockets in Western Europe.

P.S. I imagine British politicians will concoct their own system of foolish subsidies, but the CAP handouts are another reason why voters were smart to vote for Brexit.

P.P.S. The CAP subsidies are one of many reasons why the European Union has been a net negative for national economies.

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Air Travel and Taxation: A Case Study of Statism in the European Union

I’ve argued for many years that a Clean Brexit is the right step for the United Kingdom for the simple reason that the European Union is a slowly sinking ship.

Part of the problem is demographics. Europe’s welfare states are already very expensive and the relative costs will increase dramatically in coming years because of rising longevity and falling birthrates. So I expect more Greek-style fiscal crises.

The other part of the problem is attitudinal. I’m not talking about European-wide attitudes (though that also is something to worry about, given the erosion of societal capital), but rather the views of the European elites.

The notion of “ever closer union” is not just empty rhetoric in European treaties. It’s the ideological preference of senior European leaders, including in many nations and definitely in Brussels (home of the European Commission and the European Parliament).

In practical terms, this means a relentless effort for more centralization.

• It means unending pressure for European-wide taxes.
• It means unending pressure for tax harmonization.
• It means unending pressure for regulatory harmonization.
• It means unending pressure for a transfer union.

All policies that will accelerate Europe’s decline.

What’s happening with the taxation of air travel is a good example. Here are some excerpts from a story in U.S. News & World Report.

The Netherlands and France are trying to convince fellow European nations at a conference in The Hague to end tax exemptions on jet fuel and plane tickets… In the first major initiative on air travel tax in years, the conference on Thursday and Friday – which will be attended by about 29 countries – will discuss ticket taxes, kerosene levies and value-added tax (VAT) on air travel. …The conference will be attended by European Union economics commissioner Pierre Moscovici and finance and environment ministers. …The conference organizers hope that higher taxes will lead to changes in consumer behavior, with fewer people flying

The politicians, bureaucrats, and environmental activists are unhappy that European consumers are enjoying lightly taxed travel inside Europe.

Oh, the horror!

A combination of low aviation taxes, a proliferation of budget airlines and the rise of Airbnb have led to a boom in intra-European city-trips. …Research has shown that if the price of air travel goes up by one percent, demand will likely fall by about one percent, according to IMF tax policy division head Ruud De Mooij. He said that in a typical tank of gas for a car, over half the cost is tax…”Airline travel is nearly entirely exempt from all tax… Ending its undertaxation would level the playing field versus other modes of transport,” he said. …Environmental NGOs such as Transport and Environment (T&E) have long criticized the EU for being a “kerosene tax haven”.”Europe is a sorry story. Even the U.S., Australia and Brazil, where climate change deniers are in charge, all tax aviation more than Europe does,” T&E’s Bill Hemmings said. …The EU report shows that just six out of 28 EU member states levy ticket taxes on international flights, with Britain’s rates by far the highest at about 14 euros for short-haul economy flights and up to 499 euros for long-haul business class. …Friends of the Earth says there are no easy answers and that the only way to reduce airline CO2 emissions is by constraining aviation trough taxation, frequent flyer levies and limiting the number of flights at airports.

The only semi-compelling argument in the story is that air travel is taxed at preferential rates compared to other modes of transportation.

Assuming that’s true, it would be morally and economically appropriate to remove that distortion.

But not as part of a money-grab by European politicians who want more money and more centralization.

As you can see from this chart, the tax burden in eurozone nations is almost 50 percent higher than it is in the United States (46.2 percent of GDP compared to 32.7 percent of GDP according to OECD data for 2018).

And it’s lower-income and middle-class taxpayers who are paying the difference.

So here’s a fair trade. European nations (not Brussels) can impose additional taxes on air travel if they are willing to lower other taxes by a greater amount. Maybe €3 of tax cuts for every €1 of additional taxes on air travel?

Needless to say, nobody in Brussels – or in national capitals – is contemplating such a swap. The discussion is entirely focused on extracting more tax revenue.

P.S. There’s some compelling academic evidence that the European Union has undermined the continent’s economic performance. Which is sad since the EU started as a noble idea of a free trade area and instead has become a vehicle for statism.

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The European Union and Economic Performance

Thanks to the glorious miracle of capitalism, I’m writing this column 36,000 feet above the Atlantic Ocean.

I’m on my way back from Europe, where I ground through about a dozen presentations as part of a swing through 10 countries.

Most of my speeches were about the future of Europe, which was the theme of the Austrian Economic Center’s 2019 Free Market Road Show.

So it was bad timing that I didn’t have a chance until now to comb through a new study from three scholars about the economic impact of the European Union. As they point out at the start of their research, EU officials clearly want people to believe European-wide governance is a recipe for stronger growth.

The great European postwar statesmen, including the EU founding fathers, clearly…envisaged the establishment of a common political and economic entity as a guarantor of…domestic economic progress. …Article 2 of the foundational Treaty of Rome explicitly talked about “raising the standard of living.” … in practice EU today mainly emphasizes growth, as is evident from its most ambitious recent policy agendas. In 2000, a stated aim of the Lisbon Agenda was to make the European economy the “most competitive and knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion.” And all seven of the Flagship Initiatives adopted as part of the Europe 2020 Strategy were about growth—smart, sustainable, and inclusive.

Here’s a bit of background on their methodology.

…the focus of the present paper will be on prosperity as the key outcome that the EU will be measured up against… Our approach in the present paper is to use different empirical strategies (difference-in-differences type setups and standard growth regressions); slice the length of the panel in various ways (e.g., dropping post crisis observations); look at different samples of countries (e.g., a global sample, the sample of original OECD countries, the sample of formerly planned economies, and the sample of EU member countries); pay attention to spatial dependencies; and, finally, require manipulability of the treatment variable.

And what did they find?

It seems that the European Union has not triggered or enabled better economic performance.

The conclusion that emerges upon looking systematically at the data is that EU membership has no impact on economic growth. …We start by simply looking at the comparative performance of the EU and the United States, which is the comparison that Niall Ferguson makes. The IMF’s World Economic Outlook Database provides real GDP growth rates going back to 1980 for the EU and the US. These are plotted in Figure 1. The EU only managed to outperform the US economy in terms of real GDP growth in ten out of the 35 years between 1980 and 2015. …With these growth rates, the US economy would double its size every 27 years, whereas the corresponding number for the EU is 36 years. This hardly amounts to stellar performance on part of the EU.

What makes this data so remarkable is that convergence theory tells us that poorer nations should grow faster than richer nations.

So EU countries should be catching up to America.

Yet the opposite is happening. Here’s the relevant chart on US vs. EU performance.

The scholars conducted various statistical tests.

Many of those test actually showed that EU membership is associated with weaker performance.

…we basically measure pre- and post-entry growth for the EU countries up against the growth trajectories of all other countries. …EU membership is associated with lower economic growth in all columns. …where we use the maximum length WDI sample (i.e., 1961-2015), EU entry is associated with a statistically significant growth reduction of roughly 1.8 percentage points per year. When we remove the period associated with the sovereign debt crisis in the Eurozone (i.e., 2010-15), the reduction remains significant but is lower (1.27 percentage points per year). Finally, when we remove the global financial crisis of 2008-09, the reduction (which is now statistically insignificant) is 0.5 percentage points per year. Using GDP per worker growth from PWT gives roughly similar results… Consequently, in a difference-in-differences type setting EU entry seems to have reduced economic growth.

Moreover, a bigger EU (i.e., more member nations) is associated with slower average growth.

Last but not least, the authors compared former Soviet Bloc nations to see if linking up with the EU led to improvements in economic performance.

…we ask whether growth picked up in the new Eastern European EU countries after accession vis-à-vis growth in 18 formerly planned non-EU countries. …Of the 11 accession countries, not a single one had higher average annual real GDP per capita growth in the period after the EU accession as compared to the period before.

Ouch.

These are not flattering results.

Here’s a look at the relevant chart.

These findings leave me with a feeling of guilt. For almost twenty years, I’ve been telling audiences in Eastern Europe that they probably should join the EU.

Yes, I realized that meant a lot of pointless red tape from Brussels, but I always assumed that those costs would be acceptable because the EU would give them expanded trade and help improve the rule of law.

I’ll have to do some thinking about this issue before my next trip.

P.S. In case you’re wondering why I’ve been telling Eastern European nations to join the EU while telling the United Kingdom to go for a Clean Brexit, my analysis (at least up til now) has been that market-oriented nations are held back by being in EU while poorer and more statist economies are improved by EU membership.

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Tax Harmonization Will Accelerate the Economic Decline of Europe

There’s a very strong economic argument for Brexit which is partly based on an independent United Kingdom having more leeway to adopt pro-market policies.

This case for Brexit is also based – indeed, primarily based – on the fact that the European Union is a slowly sinking ship thanks to horrible demographics and economic weakness. I think the Brits made the right choice (assuming Prime Minister May doesn’t sabotage the process) in voting to get in a lifeboat.

By the way, the chronic stagnation in Europe is largely the fault of member nations.

For instance, I don’t blame the euro (the common currency used in 19 nations) or the European Commission (the easy-to-mock Brussels-based bureaucracy of the EU) for the bad policies adopted in nations such as France, Italy, and Greece.

That being said, the European Commission and its political supporters want the power to make things worse. Actually, they want two powers to make things worse.

1. The first bad idea, generally supported by the French and Germans, is to give Brussels direct fiscal powers. This almost certainly would mean E.U.-wide taxes imposed by Brussels, presumably accompanied by expanded levels of intra-E.U. redistribution.
2. The second bad idea, also supported by France and Germany, would be E.U.-wide rules to force national governments to adopt bad policy. This almost certainly would mean greater levels of tax harmonization, presumably accompanied by mandates to expand the welfare state.

I’ve written before about the first bad idea, so let’s focus today on the threat of Brussels-mandated tax harmonization.

The main obstacle to this bad idea is a “unanimity rule” that basically prevents further centralization of tax policy unless every member nation concurs.

This rule is what saved the E.U. from prior attempts to force member nations to adopt anti-growth policy.

…efforts to create a tax cartel have a long history, beginning even before Reagan and Thatcher lowered tax rates and triggered the modern era of tax competition. The European Commission originally wanted to require a minimum corporate tax rate of 45 percent. And as recently as 1992, there was an effort to require a minimum corporate tax rate of 30 percent.

But the bureaucrats in Brussels have not given up.

Politico reports on the latest effort to weaken fiscal sovereignty.

The European Commission…is set to unveil a communication…that will call on the bloc’s leaders to consider moving to qualified majority voting in EU taxation policy. That system would allow a tax initiative to become EU law as long as 16 out of the 28 countries agree on it. Any tax-related decision currently requires unanimity, leaving many tax proposals doomed to fail. The tax veto has undermined the bloc’s policy ambitions…the…veto…has left several tax files gathering dust on Brussels’ shelves, like the financial transactions tax, which the Commission first proposed in 2011. …The communication is set to suggest introducing qualified majority “step-by-step” for tax… The French commissioner discussed the plan over a lunch with EU ambassadors… “Ireland, Malta, Sweden and Cyprus were against it,” one diplomat that received a debrief on the meeting said. “The rest were cautious and few were for it.” France, Spain, Italy and Portugal were among the few that spoke in favor of the plan. …The Commission is determined to make its case. …The tax veto has…deprived national coffers of billions of euros, according to the draft communication… The digital and financial transaction taxes alone would have generated over €60 billion a year in revenue, the document says.

I do give the European Commission credit for honesty.

The bureaucrats are openly stating they want to get rid of the unanimity rule so that politicians in 16 member nations can force all 28 member nations to have high taxes.

You may be wondering, incidentally, why the European Commission, and the pro-tax governments like France want one-size-fits-all rules for the European Union? Why not have a let-a-thousand-flowers-bloom approach so that all 28 nations to make their own choices?

Once again, they are brutally honest. They unabashedly state that they want harmonized rules so they can eliminate tax competition (the left fears a “race to the bottom“).

Speaking of which, the bottom line is that Europe will decay and decline much faster if the European Commission is successful in its latest effort to kill the unanimity requirement. The last thing the E.U. needs is more taxes and higher spending.

P.S. There already are rules for harmonized VAT taxation in Europe, which predictably has enabled ever-higher tax rates.

P.P.S. The European Commission even tries to brainwash children into supporting higher taxes.

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Whether through Incompetence or Malice, Theresa May Is Sabotaging Brexit

I just spent several days in London, where I met with journalists and experts at think tanks to find out what’s happening with Brexit.

By way of background, I think voters in the UK made the right decision for the simple reason that the Brussels-based European Union is a slowly sinking ship based on centralization, harmonization, and bureaucratization.

Membership already involves onerous regulations, and remaining a member of the EU would mean – sooner or later – sending ever-larger amounts of money to Brussels, where it then would be used to prop up Europe’s failing welfare states.

Getting out may involve some short-term pain, but it will avert far greater pain in the future.

At least that was the theory.

The reality is that the Tory-led government in London has made a mess of the negotiations. The newly announced deal isn’t a real Brexit.

Writing for the Telegraph, Dan Hannan, a British member of the European Parliament, sums up why the deal is a joke.

The deal, as one Italian newspaper puts it, represents “a resounding victory for the EU over Her Majesty’s subjects”. Yet there was nothing inevitable about this climbdown. On the contrary, there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …there is something extraordinary, awe-inspiring even, about the slow-witted cowardice that led British negotiators to this point. …the disastrous acceptance of the EU’s sequencing, which meant that all British leverage, including the exaggerated financial contributions, would be tossed away before the EU even began to discuss trade. …Can you blame Eurocrats for gloating? They sensed right at the start that they were dealing with a defeated and dispirited British team, whose only objective was to come back with something – anything – that could be described as a technical fulfilment of the referendum mandate. …we have ended up with the sort of deal that a defeated nation signs under duress. Britain will be subject to all the costs and obligations of EU membership with no vote, no voice and no veto.

But it gets worse.

Unbelievably, Britain has given the EU a veto over whether it can leave these arrangements: unlike EU membership itself, we have no right to walk away. Brussels will run our trade policy, our economy, even elements of our taxation for as long as it likes. As the usually Euro-fanatical Bloomberg asked incredulously last week, “Once Britain has acceded to this, what reason is there for the EU to agree to any other kind of deal?” …Leavers never did “own” this process. From the start, it has been controlled by those who wished it wasn’t happening, and who defined success as salvaging as much as they could of the old dispensation.

That final sentence is key. Theresa May was not a Brexit supporter. She failed to play some very strong cards and she basically worked to come up with a fake Brexit.

It remains to be seen, though, whether Parliament will approve this humiliating package. The House of Commons will vote in about two weeks and here’s how the UK-based Times describes the possible outcomes if the plan gets rejected.

Scenario 1: a second Commons vote The prime minister fails to secure Commons support for her withdrawal agreement… Her response is to…then bring…it back for a second vote…, as happened in America after Congress initially rejected its government’s bank rescue plan in 2008. …Scenario 2: change of prime minister May fails to get the deal through and either resigns, or faces a confidence vote among Tory MPs which, if she lost, would also see her step down. …The question for Tory MPs would then be whether to back the deal mainly negotiated under May… Scenario 3: a second referendum A defeat for May could result in a second referendum but only if she or her successor supported it. Tory policy is to oppose a second referendum. …Scenario 4: no-deal Brexit Tory Brexiteers in the cabinet and in the party would respond to a defeat for the May proposals by pushing for a no-deal Brexit, or a “managed” no-deal. …Scenario 5: the Norway option Though there is no parliamentary majority at present for the May deal, or for no deal, there could be for a closer relationship with the EU. This could take the form of…the EEA (European Economic Area), the so-called Norway option.

For what it’s worth, I fear “Scenario 1.” Members of the Conservative Party are like American Republicans. They occasionally spout the right rhetoric, but most of them are go-along-to-get-along hacks who happily will trade their votes for a back-room favor.

So I will be disappointed but not surprised if this deal is enacted. It’s even possible it will be approved on the first vote.

My preference is for “Scenario 4” leading to something akin to “Scenario 5.”

A report from the Adam Smith Institute offers a user-friendly description of this “Norway option.”

We cannot however be subordinate to a supranational institution… Nor should we make do with a semi-detached position inside the EU that also gives us semi-detached influence while still constraining the UK in the wider world. …we have to leave and reform the relationship in a characteristically British, outward-looking and open way. …The UK therefore requires something of a “soft” exit that maintains open trade but removes Britain from political union and from all that Britain has consistently struggled with – the Common Agricultural Policy, the Common Fisheries Policy, the hollowing out and the outsourcing of democracy, the constraints on global trade deals.

And what does that look like?

…the most optimal way to exit would be to take up a position outside the EU but inside the European Economic Area (‘EEA’), which very likely means re-joining the European Free Trade Association (‘EFTA’). As Britain is already a contracting party to the EEA Agreement there would be no serious legal obstacle and it would mean no regulatory divergence or tariffs but it would mean retaining freedom of movement for EU/EEA nationals. …Such a deal would require agreement from the EU and EFTA but both would have strong reasons for allowing it…with the UK on board, EFTA would instantly become the fourth largest trade grouping in the world. …In short, EEA countries have a market-based relationship with the EU by having full single market access. They are free of the EU’s political union ambitions, and can class themselves as self-governing nation states. …The EEA position also opens up the ability to make trade agreements with third countries (something the UK cannot do now), would provide the UK with the freedom to set its own levels of VAT, and would allow the UK to step away from its joint liability of EU debts. That would be very attractive to Britain seeking a liberal soft exit.

Here’s a table showing the difference between EU membership and EEA membership.

Sounds like the outline of a acceptable deal, right?

Not so fast. The crowd in Brussels doesn’t want a good deal, even though it would be positive for the economic well-being of EU member nations. They have an ideological desire to turn the European Union into a technocratic superstate and they deeply resent the British for choosing self-government and democracy.

As such, the goal is to either maneuver the British government into a humiliating surrender (Theresa May was happy to oblige) or to force a hard Brexit, which would probably cause some short-term economic disruption.

But there was also resistance on the British end to this option since it ostensibly (but perhaps not necessarily) requires free movement of people. In other words, it might mean unchecked migration from EU/EEA nations, which arouses some nativist concerns.

Since I mentioned that a hard Brexit could lead to potential short-term economic disruption, this is a good opportunity to cite a very key section of Mark Littlewood’s recent column in the UK-based Times.

The Treasury has suggested that GDP could fall by as much as 7.7 per cent if Britain exited the EU without a deal. However, is there any reason to treat this projection any more seriously than the Treasury’s view that the Leave vote itself would lead to a recession and a reduction in GDP by between 3 per cent and 6 per cent? Almost all official predictions relating to the economic impact of the Brexit vote have been shown to be enormously over-pessimistic. Why should one assume that present forecasts are not beset by the same flaws?

Amen. The anti-Brexit crowd (the “remainers”) tried to win by arguing that a vote for Brexit would cause an economic collapse. That “Project Fear” was exposed as a joke (and was the target of some clever humor).

And the new version of Project Fear is similarly dishonest.

In a column for CapX, Julian Jessop of the Institute of Economic Affairs has additional details.

The public is being bombarded with warnings of potentially devastating impacts on the economy, their security and their welfare if the UK becomes a “third country” at 11pm on 29th March 2019, without the Withdrawal Agreement and framework for a future relationship anticipated in Article 50. …the daftest headline…is that a “no-deal” Brexit means that the UK would run out of food by August 2019 (the 7th, to be precise). This relies on the bizarre assumption that the UK would no longer be able to import food, not just from the EU but from anywhere in the world, and that we would continue to export food even as our own people starve. …it is often assumed that the EU would ignore its other legal obligations, including WTO rules. …the EU would not be able to treat the UK any less favourably than other WTO members.. Relying on the courts to fix things is also ra.rely a good idea. But it is absolutely right that the EU can’t go out of its way to make life difficult for the UK either.

Run out of food? Good grief, I thought the global-warming Cassandras were the world’s worst when it comes to exaggeration, but they’re amateurs compared to the anti-Brexit crowd.

Anyhow, this column is already too long, but here are links to four other CapX columns for interested parties.

I especially like the last column. One of the behind-the-scenes aspects of the Brexit debate is that the eurocrats in Brussels are scared that the UK will become more market-oriented once it has escaped the EU’s regulatory clutches.

And just as the EU has gone after Ireland and Switzerland for supposedly insufficient taxation, it also now is trying to hamstring the United Kingdom. All the more reason to escape and become the Singapore of Europe.

P.S. Donald Trump could help the United Kingdom by negotiating a quick and clean free-trade agreement. Sadly, that violates his protectionist instincts.

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A Helpful Solution to Italy’s Budget Standoff with the European Commission

I’ve warned many times that Italy is the next Greece.

Simply stated, there’s a perfect storm of bad news. Government is far too big, debt is too high, and the economy is too sclerotic.

I’ve always assumed that the country would suffer a full-blown fiscal crisis when the next recession occurs. At that point, tax receipts will fall because of the weak economy and investors will realize that the nation no longer is able to pay its bills.

But it may happen even sooner thanks to a spat between Italy’s left-populist government and the apparatchiks at the European Commission.

Here’s what you need to know. There are (poorly designed) European budget rules, known as the Maastricht Criteria, that supposedly require that nations limit deficits to 3 percent of GDP and debt to 60 percent of GDP.

With cumulative red ink totaling more than 130 percent of GDP, Italy obviously fails the latter requirement. And this means the bureaucrats at the European Commission can veto a budget that doesn’t strive to lower debt levels.

At least that’s the theory.

In reality, the European Commission doesn’t have much direct enforcement power. So if the Italian government tells the bureaucrats in Brussels to go jump in a lake, you wind up with a standoff. As the New York Times reports, that’s exactly what’s happened.

In what is becoming a dangerous game of chicken for the global economy, Italy’s populist government refused to budge on Tuesday after the European Union for the first time sent back a member state’s proposed budget because it violated the bloc’s fiscal laws and posed unacceptable risks. …the commission rejected the plan, saying that it included irresponsible deficit levels that would “suffocate” Italy, the third-largest economy in the eurozone. Investors fear that the collapse of the Italian economy under its enormous debt could sink the entire eurozone and hasten a global economic crisis unseen since 2008, or worse. But Italy’s populists are not scared. They have repeatedly compared their budget, fat with unemployment welfare, pension increases and other benefits, to the New Deal measures of Franklin D. Roosevelt.

Repeating the failures of the New Deal?!? That doesn’t sound like a smart plan.

That seems well understood, at least outside of Italy.

The question for Italy, and all of Europe, is how far Italy’s government is willing to go. Will it be forced into submission by the gravity of economic reality? Or will Italian leaders convince their voters that the country’s financial health is worth risking in order to blow up a political and economic establishment that they say is stripping Italians of their sovereignty? And Brussels must decide how strict it will be. …the major pressure on Italy’s budget has come from outside Italy. Fitch Ratings issued a negative evaluation of the budget, and Moody’s dropped its rating for Italian bonds to one level above “junk” last week.

So now that Brussels has rejected the Italian budget plan, where do things go from here?

According to CNBC, the European Commission will launch an “Excessive Deficit Procedure” against Italy.

…a three-week negotiation period follows in which a potential agreement could be found on how to lower the deficit (essentially, Italy would have to re-submit an amended draft budget). If that’s not reached, punitive action could be taken against Italy. Lorenzo Codogno, founder and chief economist at LC Macro Advisors, told CNBC…“it’s very likely that the Commission will, without making a big fuss, will move towards making an ‘Excessive Deficit Procedure’…to put additional pressure on Italy…” Although it has the power to sanction governments whose budgets don’t comply with the EU’s fiscal rules (and has threatened to do so in the past), it has stopped short of issuing fines to other member states before. …launching one could increase the already significant antipathy between Brussels and a vociferously euroskeptic government in Italy. Against a backdrop of Brexit and rising populism, the Commission could be wary of antagonizing Italy, the third largest euro zone economy. It could also be wary of financial market nerves surrounding Italy from spreading to its neighbors… Financial markets continue to be rattled over Italy’s political plans. …This essentially means that investors grew more cautious over lending money to the Italian government.

For those who read carefully, you probably noticed that the European Commission doesn’t have any real power. As such, there’s no reason to think this standoff will end.

The populists in Rome almost certainly will move forward with their profligate budget. Bureaucrats in Brussels will complain, but to no avail.

Since I’m a nice guy, I’m going to give the bureaucrats in Brussels a much better approach. Here’s the three-sentence announcement they should make.

1. The European Commission recognizes that it was a mistake to centralize power in Brussels and henceforth will play no role is overseeing fiscal policy in member nations.
2. The European Commission (and, more importantly, the European Central Bank) henceforth will have a no-bailout policy for national governments, or for those who lend to national governments.
3. The European Commission henceforth advises investors to be appropriately prudent when deciding whether to lend money to any government, including the Italian government.

From an economic perspective, this is a far superior approach, mostly because it begins to unwind the “moral hazard“that undermines sound financial decision making in Europe.

To elaborate, investors can be tempted to make unwise choices if they think potential losses can be shifted to taxpayers. They see what happened with the various bailouts in Greece and that tells them it’s probably okay to continue lending money to Italy. To be sure, investors aren’t totally blind. They know there’s some risk, so the Italian government has to promise higher interest payments

But it’s highly likely that the Italian government would have to pay even higher rates if investors were convinced there would be no bailouts. Incidentally that would be a very good outcome since it would make it more costly for Italy’s politicians to continue over-spending.

In other words, a win-win situation, with less debt and more prudence (and maybe even a smaller burden of government!).

My advice seems so sensible that you’re probably wondering if there’s a catch.

There is, sort of.

When I talk to policy makers, they generally agree with everything I say, but then say my advice is impractical because Italy’s debt is so massive. They fret that a default would wipe out Italy’s banks (which imprudently have bought lots of government debt), and might even cause massive problems for banks in other nations (which, as was the case with Greece, also have foolishly purchased lots of Italian government debt).

And if banks are collapsing, that could produce major macroeconomic damage and even lead/force some nations to abandon the euro and go back to their old national currencies.

For all intents and purposes, the Greek bailout was a bank bailout. And the same would be true for an Italian bailout.

In any event, Europeans fear that bursting the “debt bubble” would be potentially catastrophic. Better to somehow browbeat the Italian government in hopes that somehow the air can slowly be released from the bubble.

With this in mind, it’s easy to understand why the bureaucrats in Brussels are pursuing their current approach.

So where do we stand?

• In an ideal world, the problem will be solved because the Italian government decides to abandon its big-spending agenda and instead caps the growth of spending (as I recommended when speaking in Milan way back in 2011).
• In an imperfect world, the problem is mitigated (or at least postponed) because the European Commission successfully pressures the Italian government to curtail its profligacy.
• In the real world, though, I have zero faith in the first option and very little hope for the second option. Consider, for instance, the mess in Greece. For all intents and purposes, the European Commission took control of that nation’s fiscal policy almost 10 years ago. The results have not been pretty.

So this brings me back to my three-sentence prescription. Yes, it almost certainly would be messy. But it’s better to let the air out of bubbles sooner rather than later.

P.S. The so-called Basel Rules contribute to the mess in Europe by directing banks to invest in supposedly safe government debt.

P.P.S. If the European Union is going to impose fiscal rules on member nations, the Maastricht criteria should be jettisoned and replaced with a Swiss-style spending cap.

P.P.P.S. Some of the people in Sardinia have the right approach. They want to secede from Italy and become part of Switzerland. The Sicilians, by contrast, have the wrong mentality.

P.P.P.P.S. Italy is very, very, very well represented in the Bureaucrat Hall of Fame.

P.P.P.P.P.S. You’ll think I’m joking, but a columnist for the New York Times actually argued the United States should be more like Italy.

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Fake Poverty Data from the European Commission and New York Times

If you look at the top of your screen on my home page, you’ll notice that I have a collection of special pages such as the Bureaucrat Hall of Fame and examples of what happens when you mix government and sex.

I’m thinking of creating a new page, but I need a pithy way of describing leftists who lie about poverty. And there are plenty of them.

• The United Nations.
• The Organization for Economic Cooperation and Development.
• The Equal Welfare Association.
• Germany’s Institute of Labor Economics.
• The Obama Administration.

Today, we identify some additional members who are eligible for this disreputable club.

And we’ll start with the European Commission.

Here’s a chart from a recent report that supposedly shows poverty rates in various European nations.

If you compare the “at-risk-of-poverty rate” for various nations, you’ll notice some very odd outcomes.

For instance, the tiny tax haven of Luxembourg is one of the world’s wealthiest nations, yet it supposedly has more poverty than Hungary. And super-rich Switzerland has more poverty than Slovakia. And oil-rich Norway has more poverty than the Czech Republic.

Are all those rich nations in Western Europe really suffering from higher poverty rates than some of the Eastern European countries still recovering from communist rule?

Of course not. The chart is based on a big, fat lie.

And I know it’s a lie because if you look in the glossary at the end of the long report, you’ll see that the bureaucrats openly admit that their so-called poverty chart has nothing to do with poverty and nothing to do with living standards (I’ve underlined the most important parts).

Interestingly, the bureaucrats in Brussels included a chart in the study revealing the level of inaccuracy for each country.

Here’s a look at the dishonest poverty rate (the blue diamond) compared to a measure of “severe material deprivation” that presumably does a better job of showing the real number of poor people (the red diamond).

By the way, I’m not a huge fan of the European Commission’s measure of “severe material deprivation” since it includes variables such as having a car, a color TV, and the money to take a one-week vacation.

But that’s a separate story.

Let’s look at other new members of our club.

An Eduardo Porter column in the New York Times also used the dishonest definition of poverty.

How can it be that the United States spends so much money fighting poverty and still suffers one of the highest child poverty rates among advanced nations? One in five American children is poor by the count of LIS, a data archive tracking well-being and deprivation around the world. …the United States tolerated more child poverty in 2012 than 30 of the 35 countries in the Organization for Economic Cooperation and Development, a grouping of advanced industrialized nations. The percentage of children who are poor is more than three times as high in the United States as it is in Norway or the Netherlands. America has a larger proportion of poor children than Russia.

And here’s a chart from the article that definitely makes the United States look bad.

But, unless you read the column carefully, you would have missed this all-important detail.

…international standards that set the poverty line at one-half the income of families on the middle rung of the income ladder.

In other words, everything in the article, and all the numbers in the chart, have nothing to do with actual poverty. Instead, we’re simply looking at an indirect measure of income distribution.

And the United States is made to look bad because our median income is generally much higher than it is in other nations.

How absurd.

You’ll think I’m joking, but you can dramatically reduce “poverty,” based on this dishonest definition, if you randomly kill rich people.

Let’s conclude by looking at the U.K.-based Guardian‘s article about supposed poverty in Hong Kong.

A record number of Hong Kong residents live in poverty, with one fifth of the population falling below the poverty line despite economic growth, according to new government figures. The number of people living below the poverty line rose to 1.35 million in 2016, about 20% of the city’s population. The number is the highest number of poor since the government began publishing statistics in 2009. Despite opulent wealth, Hong Kong is a deeply unequal society. …The number of poor rose despite the government raising the poverty line last year. For single person households it is set at HK$4,000 (£388). It is HK$9,000 (£873) for a two person home and HK$15,000 (£1,455) for a family of three.

There’s a small problem and big problem with this article. The small problem is that it states that the number of poor people increased “despite” an increase in the poverty line.

Huh?!?

If the government raises the threshold, of course it will seem like more people are poor. The article should replace “despite” with “because.”

Tom Worstall, writing for CapX, explains the big problem in the article.

One of the great injustices of our age is, as The Guardian reported…, that 20 per cent of the people in Hong Kong, one of the richest places on the planet, live in poverty. …The Guardian [is] waxing indignant over things it doesn’t understand. …there’s an important underlying point: inequality – not poverty – is being measured here. The international definition of poverty is less than $1.90 a day. There’s no one in Hong Kong on this at all, therefore there’s no poverty. …we’re told that the poverty line in Hong Kong is HK $4,000 per month (roughly £380) for an individual which certainly doesn’t seem like much. Yet when we plug that into a comparison of global incomes we find that, accounting for price differences across geography, it’s firmly in the top fifth of all global incomes. In other words, the poorest 20 per cent in Hong Kong are still find themselves in the richest 20 per cent of all humans.

Given the praise I’ve heaped on Hong Kong, I also can’t resist sharing this excerpt even though it’s a separate topic.

As Hong Kong so vividly demonstrates, the…economy in which the poverty line is defined as being rather rich by global standards must have something going for it. According to the World Bank’s figures, back in 1960 Hong Kong was at around the average level of income for the planet, with GDP per capita at a little over $400 (in 1960 dollars). Today the figure is slightly over $40,000 per head while the global average has only struggled up to $10,000 or so. An over performance by a factor of four isn’t that bad over half a century, is it?

Amen.

If we actually care about reducing genuine poverty, there’s no substitute for the miracle of compounding growth.

Which is why our friends on the left, if they actually cared about poor people (and I think most of them genuinely do care), should focus on growth rather than being fixated on redistribution.

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European Bureaucrats Threatening Swiss Gun Rights

As an economist, I admire Switzerland for its sensible approach to issues such as spending restraint and taxation.

As an observer of political systems, I admire Switzerland for its robust federalism.

As a supporter of human rights, I admire Switzerland’s protection of financial privacy (sadly weakened because of external pressure).

As an advocate of freedom, I admire Switzerland because there is a tradition of gun rights.

Indeed, there is a gun store less than a mile from the federal parliament in Bern that sells (gasp!) military-style assault rifles.

Sadly, it wasn’t open when I walked by this past weekend, so I could only snap a photo of the display window.

I couldn’t help but mentally compare the Swiss capital, where guns are sold, with the U.S. capital, where favors are sold.

There’s also a pro-gun culture in Switzerland, as reflected in this article.

“Shooting is becoming increasing popular again among the young, and the federal decision to lower the age of access to lessons is a big part of it,” says a happy Christoph Petermann, deputy chief of communications for the Swiss Target Shooting Federation. In 2016, the government lowered the age at which young people can attend target shooting lessons from 17 to 15. “In addition, we’re particularly pleased with the number of girls and young women who choose shooting…” When it comes to training children how to shoot, …Children are admitted from the age of five – but not to shoot with an assault rifle. This young, they train with pistols, air rifles, crossbows or bows. It gets serious from the age of ten – with small-calibre weapons – and from 12, in general, with assault rifles.

Unfortunately, Swiss gun rights are being attacked.

The problem isn’t the politicians in Bern. It’s the bureaucrats at the European Commission.

The Swiss media is covering the issue.

…the EU gun control plans, due to be completed by 2019, aim to curb online weapons sales and impose tight restrictions on assault weapons. …Swiss army-issue weapons would still be allowed to be kept at home after military service, in keeping with tradition. Hunters are also not affected by the plan. But certain semi-automatic weapons – such as those with magazines holding over 20 rounds of ammunition – and some high-capacity shoulder-supported rifles would be banned. …Gun collectors will be required to catalogue and report their collections to the authorities.

Needless to say, Swiss gun groups are not happy.

Critics…say the government proposal was decided undemocratically and the clampdown will have no influence on public safety or terrorism in Europe. They are concerned about its impact on their right to bear arms and are particularly unhappy with restrictions on certain categories of semi-automatic weapons and magazines, the possible impact on army-issue guns, and additional bureaucracy. …Jean-Robert Consolini, the owner of Lagardere Armoury, said he would fight the proposal. “These terror attacks were carried out by people using guns from the black market, not from a legal trade via an armoury. So, this directive won’t prevent the traffic of weapons…” Today, Switzerland has among the highest gun ownership rates per capita among Western countries. It is thought that around two million are in circulation. High rates of ownership and existing gun laws reflect the country’s deep-rooted belief in the right to bear arms and the needs of its militia army.

Monsieur Consolini is completely correct, by the way, about the EU directive having no effect on terrorists, who invariably can get weapons on the black market.

In any event, American gun groups have sympathy for their Swiss counterparts.

The National Rifle Association has opined about the controversy.

Switzerland…has the most civilian-owned firearms per capita in Europe and ranks third worldwide… The experience of Switzerland, just like many parts of the United States, serves to refute gun control advocates’ contention that more firearm ownership means more violence. Unfortunately, …a tradition of peaceful gun ownership will not dissuade gun prohibitionists. …the latest push for gun control in Switzerland stems from the updates to the European Union Firearms Directive Brussels adopted in April 2017. …The most controversial change to EU gun law…classified handguns equipped with a magazine with a capacity greater than 20 rounds and long guns equipped with a magazine with a capacity greater than 10 rounds as Category A firearms. Category A firearms are generally prohibited for civilian use. Further, the legislation required EU Member States to create firearms registries… Switzerland is not a member of the EU, however, the country is a member of the Schengen Area… As such, Switzerland is obligated to conform to the EU’s firearms restrictions.

Here are more details from the NRA report.

On April 9, Swiss gun rights organization ProTell (named for legendary marksman William Tell…) expressed their opposition to the EU changes to the Swiss legislature. Calling Switzerland’s gun laws “an expression of trust and respect between citizen and state,”… In December, ProTell made clear that it is willing to fight any further restrictions on gun rights through the referendum process. The Swiss People’s Party has also registered its staunch opposition to the new EU restrictions.

So what’s going to happen?

There are two possible positive outcomes.

First, as I noted last year, the Czech Republic is on the right side of this fight. And its government is challenging the European Commission’s interference in what should be a matter decided by national governments.

The Czech Republic filed a lawsuit…against a new European Union directive tightening gun ownership, aimed at limiting access to semi-automatic and other weapons… EU interior ministers gave a final nod to the changes…despite the Czech Republic, Luxembourg and Poland voicing opposition. The Czech Interior Ministry said the directive was too harsh, affecting for example thousands of hunters – a popular activity with a long tradition in the central European country. …“Such a massive punishment of decent arms holders is unacceptable, because banning legally-held weapons has no connection with the fight against terrorism,” Interior Minister Milan Chovanec said in a statement. “This is not only a nonsensical decision once again undermining people’s trust in the EU, but implementing the directive could also have a negative impact on the internal security of the Czech Republic, because a large number of weapons could move to the black market,” he said. …The lower chamber of the Czech parliament approved a bill in June putting gun owners’ rights in the constitution.

In theory, the Czech government’s legal argument should prevail since “subsidiarity” is ostensibly enshrined in European treaties.

But I fear that principle of decentralization will be overlooked because of the pro-harmonization ideology that is so prevalent in EU institutions.

So the second option for a positive outcome is a referendum in Switzerland, which has a long tradition of direct democracy.

And since the Swiss tend to be very sensible when voting on national issues, we can hope that they reject gun control and – for all intents and purposes – tell the European Commission to take a hike.

Let’s hope so. There are very few libertarian-minded jurisdictions in the world. It would be a shame if the Swiss rolled over and let EU bureaucrats dictate their gun laws.

P.S. For more info on global gun control data on information, click here and here.

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In a Display of Moral Blindness, President of European Commission Celebrates Marxist Totalitarianism

The evil ideology known as communism left a track record of unimaginable horror. Experts estimate that 100 million people were killed by Marxist regimes.

Some were murdered. Other starved to death because of the pervasive economic failure of communism.

Yet there are dupes and apologists who overlook all this death and misery.

One of them is Jean-Claude Juncker, the President of the European Commission. A few days from now, this über-bureaucrat will help celebrate the 200th birthday of Karl Marx.

The European Commission President will travel to Trier, Germany, where he will give a speech to celebrate the 200th anniversary of Marx’s birth. …The Commission President will give a speech at the opening ceremony of the Karl Marx exhibition in the city. …The chief eurocrat’s trip has received critics, who have suggested the 63-year-old forgetting how Marx’s “warped ideology” led to millions of deaths across the world. Ukip MEP and the party’s former leader Paul Nuttall said: “It is appalling that Jean-Claude Juncker feels it necessary to commemorate a man whose ideology – Marxism/Communism – led to more than 100 million deaths. …Conservative MP Daniel Kawczynski…, who as a seven-year-old boy fled to Britain with his family from the Communist regime in Poland, said Mr Juncker should reject any invitations to commemorate the event. He said: “I think it’s in very poor taste we have to remember that Marxism was all about ripping power and individual means away from people and giving to State. “Marxism led to the killing of millions around the world as it allowed a small band of fanatics to suppress the people we must learn the lessons from this and share with our children.”

How disgusting.

And let’s not forget that communism is still claiming victims in places such as Cuba and North Korea.

Here’s the part of the story that caused my jaw to drop.

A commission spokeswoman defending Mr Juncker’s visit… She said: …“I think that nobody can deny that Karl Marx is a figure who shaped history in one way or the other.

In that case, why not celebrate Hitler’s birthday as well?

Writing for the Atlas Society, Alan Charles Kors expresses dismay that communism does not receive the same treatment as its sister ideology of National Socialism.

No cause, ever, in the history of all mankind, has produced more cold-blooded tyrants, more slaughtered innocents, and more orphans than socialism with power. It surpassed, exponentially, all other systems of production in turning out the dead. The bodies are all around us. And here is the problem: No one talks about them. No one honors them. No one does penance for them. No one has committed suicide for having been an apologist for those who did this to them. …The West accepts an epochal, monstrous, unforgivable double standard. We rehearse the crimes of Nazism almost daily, we teach them to our children as ultimate historical and moral lessons, and we bear witness to every victim. We are, with so few exceptions, almost silent on the crimes of Communism. So the bodies lie among us, unnoticed, everywhere. We insisted upon “de-Nazification,” and we excoriate those who tempered it in the name of new or emerging political realities. There never has been and never will be a similar “de-Communization,” although the slaughter of innocents was exponentially greater, and although those who signed the orders and ran the camps remain. In the case of Nazism, we hunt down ninety-year-old men because “the bones cry out” for justice. In the case of Communism, we insisted on “no witch hunts”… The Communist holocaust should have brought forth a flowering of Western art, and witness, and sympathy. It should have called forth an overflowing ocean of tears. Instead, it has called forth a glacier of indifference. Kids who in the 1960s had portraits of Mao and Che on their college walls —the moral equivalent of having hung portraits of Hitler, Goebbels, or Horst Wessel in one’s dorm—now teach our children about the moral superiority of their political generation. Every historical textbook lingers on the crimes of Nazism, seeks their root causes, and announces a lesson that should be learned. Everyone knows the number “six million.” By contrast, it is always “the mistakes” of Communism or of Stalinism (repeated, by mistake, again, and again, and again). Ask college freshmen how many died under Stalin’s regime, and they will answer, even now, “Thousands? Tens of thousands?”

Of course, some of these kids are probably wearing t-shirts celebrating Che Guevara, so it goes without saying that they are ignorant.

Or, if they actually know Che’s track record, the kids are immoral punks.

In any event, Jean-Claude Juncker should know better. Sounds like he wants his name to be added to the biggest-clown-in-Brussels contest.

P.S. I’m embarrassed to admit that some economists were apologists for communism.

P.P.S. There’s a very small silver lining to the dark cloud of communism. You can click here, here, here, and here to enjoy some clever anti-communism humor.

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The Macron Paradox: Internal Liberalization, External Statism

In last year’s French presidential election between Emmanuel Macron and Marine Le Pen, I joked that voters should choose the socialist over the socialist, but made a serious point that Macron – despite having been part of Hollande’s disastrous government – was preferable since there was at least a hope of market-oriented reform.

…the chance of Macron being good are greater than zero. After all, it was the left-wing parties that started the process of pro-market reforms in Australia and New Zealand. And it was a Social Democrat government in Germany that enacted the labor-market reforms that have been so beneficial for that nation.

And after Macron won the election, I reviewed some of his initiatives to restrain government, including plans to reduce the burden of government spending, lower France’s corporate tax rate, and to shrink the size of the bureaucracy.

His ideas sounded so good that I wrote – only partly in jest – that “I wish the Republicans in Washington were as sensible as these French socialists.”

We’re not quite to the one-year anniversary of his election, but let’s take a look at Macron’s track record. And we’ll start with a very encouraging report from the New York Times.

…if France’s young president, Emmanuel Macron, has made one thing clear, it is that he is not afraid to shake up France and take on its venerable institutions. Now it is the turn of the heavily subsidized and deeply indebted French rail system. Mr. Macron says he wants to erase the railway workers’ special status, which gives them more generous benefits than almost any other workers, including a guarantee of early retirement. In doing so, he has set himself a new and formidable challenge in his expanding campaign to reshape France’s society and economy, which started last year with a law that made it easier for private companies to hire and fire workers, a near revolution for France.

Macron has a difficult task.

…the railway workers are a public-sector work force, one of the most powerful in the country, with a chokehold on as many as five million riders daily. When they go on strike, the whole country feels it. …rail unions have already pledged to join a strike by public-sector employees planned for Thursday… The rail workers then plan weeks of strikes starting in April that will be staged on a rolling basis.

Here’s some of what Macron wants to fix.

French rail workers’ current, ample benefits — including in some cases, the option of retiring at 52 — date to the first half of the 20th century, when many railway jobs involved hard, physical labor… Mr. Macron…to push for a broader overhaul that, for new hires, would end advantages like guaranteed jobs, automatic pay raises and generous social security benefits. …The French rail system is both heavily subsidized and deeply in debt, to the tune of 55 billion euros, or about $68 billion.

And if the French President succeeds, there are other reforms on the horizon.

Mr. Macron has pledged to follow the railway plan with an overhaul of the unemployment system later in the year. Next year he intends to take on the French pension system. …changing the employment terms for railway workers appears to be part of a larger crusade to push French workers into the 21st century.

Good. Similar reforms were very beneficial for German workers and the German economy, so I’m sure Macron’s proposals will produce good results in France.

Writing last October for CapX, Diego Zuluaga expressed optimism about Macron’s agenda.

…it is the French government that is tackling the big barriers to growth and dynamism that have stifled their economy since 1975. …Emmanuel Macron…has vowed to attack this status quo. He aims to deconstruct the onerous French labour market law, the infamous Code du travail. This is a 1,600-page, 10,000-article gargantuan piece of legislation which is blamed for clobbering employment in France over the past 25 years. …Macron may be able to deliver considerable reforms when it comes to the labour market. His cabinet intends to move a larger share of collective bargaining to the firm level, remove the requirement of union representation for small- and medium-sized businesses, limit severance pay – right now it averages €24,000 per dismissal – to give employers greater certainty about the costs of hiring… Spain reformed its dysfunctional hiring and firing regulations in 2012, and robust employment growth followed. Now, it is long-ossified France that is taking up the baton.

If you stopped reading at this point, you might conclude that Macron is a French version of Ronald Reagan or Margaret Thatcher.

But that would be a considerable exaggeration. The French President also is pushing some questionable policies, such as higher taxes on luxury goods. But, in Macron’s defense, those class-warfare taxes are an offset for the abolition of the wealth tax, which was a very good reform.

Emmanuel Macron’s administration will propose a tax on luxury yachts, supercars and precious metals in France’s 2018 budget. Lawmakers will propose amendments after critics attacked the President’s move to scrap the wealth tax in France. Mr Macron abolished the tax, which has been seen as a symbol of social justice for the left but blamed by others for driving thousands of millionaires abroad. …The wealth tax, introduced by the Socialists in the 1980s, was levied on individuals with assets above 1.3 million euros (£1.2 million).

Since I’m not familiar with the details (i.e., do these changes result in a revenue-neutral shift, a net tax cut, or a net tax increase?), there’s no way to determine if swapping the wealth tax for luxury taxes is a net positive or a negative. Though I assume the overall effect is positive because wealth taxes are a very bad idea and luxury taxes, while self-destructive, generally are futile.

But this doesn’t let Macron off the hook. Even if we decide that he’s a pro-market reformer inside his country, he has a very bad habit of promoting statism at the European level.

The Wall Street Journal opined unfavorably last year on his plan for greater centralization.

…the French President issued a call for more, more and more Europe. …His EU would be responsible for many of the functions traditionally performed by a nation-state, such as defense, taxation, migration control and economic regulation. …The problem is…Mr. Macron’s dreams of fiscal and economic union. He wants to create an EU finance ministry, funded by corporate and other taxes, that can spend money across the bloc with minimal interference from national capitals. Mr. Macron also wants to harmonize—eurospeak for raise—corporate taxes across the EU. He’d further establish Franco-German regulatory excess as the benchmark for the rest of the EU… This is a recipe for political failure because Europeans already know these policies are economic duds.

Writing for the New York Times, a German journalist poured cold water on Macron’s plan to give redistribution powers to the European Union.

It would be funny if it weren’t dangerous — the solution offered by the new, pro-Europe president, Emmanuel Macron, is to create a eurozone budget, with its own finance minister. …Mr. Macron’s proposal is a disaster in the making. It will only further alienate Europeans from one another and weaken the bloc economically. …Brussels’s money has often been Europe’s curse. The Greek government, for instance, knew it could take for granted the support of the other euro members for its unsustainable budget after Chancellor Angela Merkel of Germany recklessly declared, “If the euro fails, Europe fails.” Athens slowed down on reform, knowing Brussels would bail it out, and northern Europeans grew angry. In the worst case, Mr. Macron’s plan could turn this disincentive into a characteristic feature of the European Union. …Brussels would end up holding the purse but not the purse strings.

So what’s the story with Macron’s schizophrenic approach? Why is he a pro-market Dr. Jekyll for French policy but a statist Mr. Hyde for European policy?

I don’t have the answer, but Diego Zuluaga wrote about this dichotomy for CapX.

The puzzle of Macronism is that it tends to advocate dynamism at home, but stasis abroad. The French President, both during his tenure in Hollande’s cabinet and in his new office, has championed reform of the country’s bewilderingly byzantine employment code, which has promoted social exclusion and led to a high rate of structural unemployment. …But Macron’s liberalism seemingly stops at France’s borders. On the EU level, he has called for increased risk-sharing among euro member states, a eurozone budget and finance minister… Whatever one makes of his climate-change activism, it is nothing if not dirigiste in the extreme, wishing to curb carbon emissions through bureaucratic pacts on a global level. What we are left with is the pro-market equivalent of Stalin’s pre-WWII economic policy of  “socialism in one country”. Liberalism in one country acknowledges the need for economic flexibility and a greater reliance on market forces at home. It champions tax reform and deregulation of industry and hiring. But it shuns those principles on the international level.

By the way, Mr. Zuluaga is using “liberalism” in the classic sense, meaning pro-market policies.

Let’s close with a couple of items that show France still has a long way to go.

First, a leftist columnist wants us to believe that recent riots, caused by a sale on Nutella, are symbolic of a dystopian future.

You may have seen the videos: in French supermarkets Intermarché, customers are rushing towards shelves of Nutella jars. They’re running, shouting, fighting, rummaging to grab a jar of the chocolate flavoured paste… This mess happened simultaneously in various French supermarkets when grocery chain Intermarché advertised a massive sale on 1kg Nutella jars, priced at €1,41 instead of the usual €4,50. …I don’t find this news funny, not even remotely. …it is telling of a France that is more and more divided… The massive response to this sale shines light…on the precarious position in which many French workers, and shoppers, find themselves. …And it’s not going to get any better for them. Macron’s looming labour reform is already eroding French workers’ rights… Macron’s great vision for France increasingly looks like a country where only the rich and “successful” will be able to afford Nutella – and those who “are nothing” will be left to fight for sale prices.

This type of over-wrought analysis makes me want to cheer for Macron.

Why? Because I understand that the best hope for workers is faster growth, not “labor-protection policies” that actually undermine job creation and cause wages to stagnate.

Second, we have a story that highlights the impossible regulatory burden in France.

A French boulanger has been ordered to pay a €3,000 fine for working too hard after he failed to close his shop for one day a week last summer. …Under local employment law, two separate regulations from 1994 and 2000 require bakers’ shops to close once a week… He has been advised the only way to get around the regulations would be to open a second boulangerie with different opening hours. …The federation of Aube boulangeries and patisseries questioned 126 members at the end of last year: the majority were in favour of maintaining the obligatory one-day closure. Eric Scherrer of the retail union CLIC-P, said French employment laws were there to protect workers and employers and had to be respected. …“These people need to have a rest day each week. We can’t just allow them to work non-stop. It’s absolutely necessary that both bosses and employees have a day of rest.”

The bottom line is that Macron should drop his statist European-wide proposals and put all of his focus on fixing France.

If you look at his country’s scores from Economic Freedom of the World, he should be working day and night to reduce the fiscal burden of government.

And lowering the regulatory burden should be the second-most important priority.

P.S. If the numbers in this poll are still accurate, Macron better fix his nation’s bad policies or his productive citizens will escape to America. After all, France is a great place to live if you’re already rich, but not so good if you aspire to become rich.

P.P.S. Here’s a story highlighting the lavish government-financed benefits for the privileged class in France.

P.P.P.S. My favorite French-themed cartoon features Obama and Hollande.

P.P.P.P.S. And let’s not forget Paul Krugman’s conspiracy theory about a “plot against France.”

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Feckless Tories Should Realize They Hold a Very Strong Hand in Brexit Negotiations

If I was a citizen of the United Kingdom, I would have voted to leave the European Union for the simple reason that even a rickety lifeboat is better than a slowly sinking ship.

More specifically, demographic changes and statist policies are a crippling combination for continental Europe, almost surely guaranteeing a grim future, and British voters wisely decided to escape. Indeed, I listed Brexit as one of the best things that happened in 2016.

This doesn’t mean the U.K. has ideal policies, but Brexit was a good idea precisely because politicians in London will now have more leeway and incentive to liberalize their economy.

Though I wonder whether Prime Minister May and the bumbling Tories will take advantage of the situation.

The Financial Times has a report that captures the real issue driving Brexit discussions. Simply stated, the European Union is scared that an independent U.K. will become more market-friendly and thus put competitive pressure on E.U. welfare states.

The EU is threatening sanctions to stop Britain undercutting the continent’s economy after Brexit…the bloc wants unprecedented safeguards after the UK leaves to preserve a “level playing field” and counter the “clear risks” of Britain slashing taxes or relaxing regulation. Brussels…wants…to enforce restrictions on taxation…and employment rights. …the EU negotiators highlight the risk of Britain ‘undermining Europe as an area of high social protection’…the UK is “likely to use tax to gain competitiveness” and note it is already a low-tax economy with a “large number of offshore entities”. …On employment and environmental standards, the EU negotiators highlight the risk of Britain “undermining Europe as an area of high social protection”.

In case you don’t have a handy statism-to-English dictionary handy, you need to realize that “level playing field” means harmonizing taxes and regulations at very high level.

Moreover, “employment rights” means regulations that discourage hiring by making it very difficult for companies to get rid of workers.

And “high social protection” basically means a pervasive and suffocating welfare state.

To plagiarize from the story’s headline, these are all policies that belong in a bonfire.

And the prospect of that happening explains why the politicians and bureaucrats in continental Europe are very worried.

…senior EU diplomats, however, worry that the political expectations go beyond what it is possible to enforce or agree. “This is our big weakness,” said one. Theresa May, the British prime minister, last year warned the EU against a “punitive” Brexit deal, saying Britain would fight back by setting “the competitive tax rates and the policies that would attract the world’s best companies and biggest investors”.

Sadly, Theresa May doesn’t seem very serious about taking advantage of Brexit. Instead, she’s negotiating like she has the weak hand.

Instead, she has the ultimate trump card of a “hard Brexit.” Here are four reasons why she’s in a very strong position.

First, the U.K. has a more vibrant economy. In the latest estimates from the Fraser Institute’s Economic Freedom of the World, the United Kingdom is #6.

And how does that compare to the other major economies of Europe?

Well, Germany is #23, Spain is #36, France is #52, and Italy is #54.

So it’s easy to understand why the European Union is extremely agitated about the United Kingdom becoming even more market oriented.

Indeed, the only area where the U.K. is weak is “size of government.” So if Brexit led the Tories to lower tax rates and shrink the burden of government spending, it would put enormous pressure on the uncompetitive welfare states on the other side of the English Channel.

Second, the European Union is horrified about the prospect of losing membership funds from the United Kingdom. That’s why there’s been so much talk (the so-called divorce settlement) of ongoing payments from the U.K. to subsidize the army of bureaucrats in Brussels. A “hard Brexit” worries British multinational companies, but it worries European bureaucrats even more.

Third, the European Union has very few options to punitively respond because existing trade rules (under the World Trade Organization) are the fallback option if there’s no deal. In other words, any protectionist schemes (the “sanctions” discussed in the FT article) from Brussels surely would get rejected.

Fourth, European politicians may hate the idea of an independent, market-oriented United Kingdom, but the business community in the various nations of continental Europe will use its lobbying power to fight against self-destructive protectionist policies and other punitive measures being considered by the spiteful political class.

P.S. Here’s a Brexit version of the Bayeux Tapestry that probably won’t be funny unless one is familiar with the ins and outs of British politics.

P.P.S. Here are some easier-to-understand versions of Brexit humor.

P.P.P.S. And here’s some mockery of senior politicians of the European Commission.

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Fiscal Child Abuse: The European Commission Wants to Brainwash Kids in Favor of High Taxes

I’m not a fan of what is sometimes called the “European Project.”

Yes, one of the original goals – free trade between European nations – was admirable and has generated significant benefits.

But what started as a positive idea has morphed into a Brussels-based superstate that pushes bureaucratization, centralization, and harmonization.

This is why I was – and still am – a fan of Brexit. And I hope other nations escape as well.

I’m sometimes asked whether it would be a better idea if there was sweeping reform in the European Union. In other words, would I favor the European Project if it basically focused on free trade and competition in a framework of “mutual recognition.”

Of course that would be preferable, but it’s not an option.

Instead, the bureaucrats keep pushing for more bad policy. Policies to penalize on tax competition. Policies to penalize low-tax jurisdictions. Policies to penalize American companies. Policies to penalize European companies.

And don’t forget bailouts, cartelization, subsidies, waste, corruption, and self-aggrandizement.

But if you really want to know why the European Union is a lost cause, just consider that the bureaucrats at the European Commission actually created an online game designed to brainwash students into supporting higher taxes.

I’m not joking. If you play Taxlandia (I selected the 18-25 age group), you’re asked to pick an aggregate tax burden.

So I selected 5 percent of GDP, which seems like the right level to provide core public goods (and also would be close to the tax burden that existed in the 1800s when Europe became rich).

As you can see, the game did not approve of low taxes and small government. I failed.

Needless to say, I automatically became very suspicious that the “correct” answer would be much higher.

So I selected a tax burden of 50 percent of GDP, basically about what you find in France and Greece.

And guess what? I passed!

So what happens if you go even farther and impose a tax burden of 75 percent of GDP?

Keep in mind that no country has ever been in this range (governments own all production in communist nations, so they don’t have conventional systems of taxation).

But if the kids in Europe choose that level of taxation it’s not a problem. They pass!

Heck, an 80 percent tax burden gets a passing grade. As does an 85 percent tax burden.

The good news is that even the EU bureaucrats don’t think a 100 percent tax is workable. As a matter of fact, once players picks a tax burden that exceeds 87.5 percent of economic output, they fail.

It’s good to see confirmation of my hypothesis that even EU bureaucrats are capable of recognizing that taxes can be excessive at some point. That’s not good new for the former French President. Or the ghost of FDR.

It’s difficult to pick the worst part of this taxpayer-funded propaganda exercise, but I was quite irked by the accompanying video that extolled the wonder and joy of paying tax and getting freebies from the government.

Just in case you think I’m exaggerating, this is how the bureaucrats describe the video.

To be fair, the Taxlandia game also allows passing grades for relatively low levels of taxation. Even a tax burden of 10 percent of GDP will allow students to get to the next round of the game.

But don’t be deceived by this seeming evidence of even-handedness. Once you pick a level of taxation that allows you to pass to the next fiscal year, you’re then presented with a bunch of options designed to make it seem like higher taxes are needed to have good dams, airports, railways, Internet, and sports facilities.

At no point is there any option for private provision of those supposed “public goods.”

That’s a rigged game.

Moreover, it’s also a dishonest game.

Given the options that are presented, unknowing students will think that government budgets are basically about physical capital (infrastructure, etc). In reality, though, the vast majority of government spending is for the ever-expanding social welfare state and the accompanying bureaucracy.

And it’s a misleading game since there’s no feedback mechanism showing that higher taxes are associated with slower growth and lower living standards.

As you might suspect, students never learn that high-tax Europe is much less prosperous than medium-tax America or low-tax Hong Kong and Singapore. Or that rich European nations would be poor states if they were part of America.

The bottom line is that European bureaucrats are the ones who deserve to fail for putting together such deceptive propaganda.

P.S. About what you would expect from a group that wants to censor Christmas.

P.P.S. Speaking of games from Brussels, can you pick the bigger clown?

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How the United Kingdom Can Prosper in a Post-Brexit World

Since I’m in London for a couple of speeches, I’ve taken advantage of this opportunity to make sure I’m up to speed on Brexit.

Regular readers may recall that I supported the U.K.’s decision to leave the European Union. Simply stated, the European Union is a slowly sinking ship. Getting in a lifeboat doesn’t guarantee a good outcome, I noted, but at least there’s hope.

The European Union’s governmental manifestations…are – on net – a force for statism rather than liberalization. Combined with Europe’s grim demographic outlook, a decision to remain would guarantee a slow, gradual decline. A vote to leave, by contrast, would create uncertainty and anxiety in some quarters, but the United Kingdom would then have the ability to make decisions that will produce a more prosperous future. Leaving the EU would be like refinancing a mortgage when interest rates decline. In the first year or two, it might be more expensive because of one-time expenses. In the long run, though, it’s a wise decision.

Others reached the same conclusion.

“Black Swan” author Nassim Nicholas Taleb…told CNBC’s “Power Lunch” the EU has become a “metastatic and rather incompetent bureaucracy” that is too intrusive. “The way they’ve been building it top down from Brussels is doomed to fail. This is 2016. They are still thinking 1950 economics,” said Taleb, who is also the author of “Antifragile” and is an advisor to Universa Investments. Taleb has warned about an EU breakup for some time, calling it a horrible, stupid project back in 2012.

That being said, there is a lot of angst in the U.K. about what will happen during the divorce process, in part because of the less-than-stellar performance of the Tory leadership.

There are three things, however, that British politicians need to remember.

First, the EU bureaucrats are terrified at the prospect of losing $10 billion of annual payments from the U.K., which is why they are desperately trying to convince politicians in London to cough up a big pile of money as part of a “divorce” settlement.

And “desperately” is probably an understatement.

The UK…contributions to the EU do come to over €10 billion a year. That is a substantial fiscal hole for the European Commission to plug… The Commission would prefer not to reduce expenditure since the structural funds and agricultural subsidies it distributes help to justify the EU’s existence. …it is not surprising that the Brexit divorce bill has become a sticking point in the negotiations. If the amount is big enough, it could tide the EU over for a few years. In Brussels, a problem kicked down the road is treated as a problem solved. This gives the British some leverage because it is most unlikely that the Commission will have lined up any new sources of funding, or agreed what it can cut, before March 29, 2019, when negotiations have to be completed. With no deal, the EU might end up with nothing at all.

Second, European politicians are terrified that the U.K., which already has the world’s 10th-freest economy, will slash tax rates and become even more competitive in a post-Brexit world.

If you don’t believe me, maybe you’ll believe European officials who say the same thing.

European leaders will insist that the UK rules out tax dumping as part of any trade deal struck during Brexit negotiations… Matthias Machnig, the German deputy economy minister, called for a “reasonable framework” in tax and regulation, and warning “a race to the bottom in tax and regulation matters would make trade relations difficult”. Donald Tusk, the European Council president, also warned this morning that a deal must “…encompass safeguards against unfair competitive advantages through, inter alia, fiscal, social and environmental dumping”. The fear is that unless the trade deal which binds the UK into the European standards on tax, competition and state aid the UK will lead a regulatory “race to the bottom”.

Third, failure to reach a deal (also know as a “hard Brexit”) isn’t the end of the world. It’s not even a bad outcome. A hard Brexit simply means that the U.K. trades with Europe under the default rules of the World Trade Organization. That’s not complete, unfettered free trade, but it means only modest trade barriers. And since Britain trades quite successfully with the rest of the world under those rules, there’s no reason to fear a collapse of trade with Europe.

Moreover, don’t forget that many industries in Europe will pressure their politicians to continue free trade because they benefit from sales to U.K. consumers.

Around one in seven German cars is exported to the UK. Around 950,000 newly registered vehicles in the UK last year were made in Germany. As many as 60,000 automotive jobs in Germany are dependent on exports to the UK. Deloitte have explored the potential effect of a “tariff war” on the industry. …German politicians are realising this. The Bavarian Minister for Economic Affairs, Ilse Aigner, has said that “Great Britain is one of the most important trading partners in Bavaria. We must do everything we can to eliminate the uncertainties that have arisen.” …The Minister is correct. …A comprehensive free trade agreement is not only vital, but should be easy to achieve. In other words, spiteful protectionism from the Commission would accomplish nothing but impoverishing all sides.

The bottom line is that the U.K. has plenty of negotiating power to get a good outcome.

So what does this mean? How should British politicians handle negotiations, considering that they would like free trade with Europe?

Part of the answer is diplomatic skill. British officials should quietly inform their counterparts that they understand a hard Brexit isn’t a bad outcome. And they should gently remind EU officials that a hard Brexit almost certainly guarantees a more aggressive agenda of tax cuts and deregulation.

But remember that it’s in the interest of U.K. policymakers to adopt good policy regardless of what deal (if any) is made with the European bureaucrats.

The first thing that should happen is for British politicians to adopt a low-tax model based on Singapore. Some experts in the U.K. are explicitly advocating this approach.

I call this the Singapore effect. When Singapore separated from the Malaysian Federation in 1965, it apparently faced a grim future. But the realisation that no one was going to do it any favours acted as a spur to effective government – with spectacular results. We could do the same. We need a strategy that lays out the path to reductions in corporation tax, lower personal tax.

Marian Tupy of the Cato Institute explains why copying Singapore would be a very good idea.

Why Singapore? Let’s look at a couple of statistics. In 1950, GDP per capita adjusted for inflation and purchasing power parity was $5,689.91 in Singapore. It was $11,920.58 in the U.K. Average income in Singapore, in other words, amounted to 48 percent of that in the U.K. In 2016, income in Singapore was $82,168.33 and $42,287.17 in the U.K. Put differently, Singaporeans earned 94 percent more than the British. During the intervening years, Singaporean incomes rose by 1,344 percent, while British incomes rose by 256 percent. …the “threat” of Singaporean tax rates and regulatory framework ought not to be a mere negotiating strategy for the British government vis-a-vis the EU. It ought to be a goal of the British decision makers—regardless of what the EU decides!

Here’s a chart from Marian’s article.

Or the U.K. could copy Hong Kong, as a Telegraph columnist suggests.

Our political leaders still seem to lack a vision of what Britain can achieve outside the EU… Perhaps they are lacking in inspiration. If so, …Hong Kong…is now one of the richest places in the world, with income per capita 40 per cent higher than Britain’s.

And much of the credit belongs to John Cowperthwaite, who unleashed great prosperity in Hong Kong by limiting the role of government.

Faced with…the approach being taken in much of the West: deficit financing, industrial planning, state ownership of industry, universal welfare and higher taxation. How much of this did the British civil servant think worth transposing to Hong Kong? Virtually nothing. He had a simple alternative: government spending depended on government revenues, and this in turn was determined by the strength of the economy. Therefore, the vital task for government was to facilitate growth. …He believed in the freest possible flow of goods and capital. He kept taxes low in order that savings could be reinvested in businesses to boost growth. …Cowperthwaite’s view was that higher government spending today destroys the growth of tomorrow. Indeed, over the last 70 years Hong Kong has limited the size of the state to below 20 per cent of GDP (in Britain it is over 40 per cent) and growth has been substantially faster than in the UK. He made a moral case for limiting the size of government, too.

In other words, the United Kingdom should seek comprehensive reforms to reduce the burden of government.

That includes obvious choices like lower tax rates and less red tape. And it also means taking advantage of Brexit to implement other pro-market reforms.

One example is that the U.K. will now be able to assert control over territorial waters. That should be immediately followed by the enactment of a property rights-based system for fisheries. It appears that Scottish fishermen already are agitating for this outcome.

The Scottish Fishermen’s Federation says the UK’s exit from the European Union will boost jobs in the sector, reports The Guardian. It’s chief executive Bertie Armstrong said the exit will give them “the ability to recover proper, sustainable, rational stewardship through our own exclusive economic zone for fisheries”.

Let’s close with some Brexit-related humor.

I already shared some examples last year, and we can augment that collection with this video. It’s more about USexit, but there’s some Brexit material as well.

And here’s some more satire, albeit unintentional.

The President of the European Commission is so irked by Trump’s support for Brexit that he is threatening to campaign for secession in the United States.

In an extraordinary speech the EU Commission president said he would push for Ohio and Texas to split from the rest of America if the Republican president does not change his tune and become more supportive of the EU. …A spokesman for the bloc later said that the remarks were not meant to be taken literally, but also tellingly did not try to pass them off as humorous and insisted the EU chief was making a serious comparison.

I have no idea why Juncker picked Ohio and Texas, but I can state with full certainty that zero people in either state will care with a European bureaucrat thinks.

And speaking of accidental satire, this tweet captures the mindset of the critics who wanted to pretend that nativism was the only reason people were supporting Brexit.

https://twitter.com/pmarca/status/749705222969184257

Last but not least, we have another example of unintentional humor. The pro-tax bureaucrats at the OECD are trying to convince U.K. lawmakers that tax cuts are a bad idea.

The head of tax at the Organization for Economic Co-operation and Development, which advises developed nations on policy, said the UK could use its freedom from EU rules to slash corporate tax but the political price would be high. …”A further step in that direction would really turn the UK into a tax haven type of economy,” he said, adding that there were practical and domestic political barriers to doing this. …The UK is already in the process of cutting its corporate tax rate to 17 percent.

Though maybe I shouldn’t list this as unintentional humor. Maybe some British politicians will be deterred simply because some tax-free bureaucrats in Paris expressed disapproval. If so, the joke will be on British workers who get lower wages as a result of foregone investment.

By the way, here’s a reminder, by Diana Furchtgott-Roth in the Washington Examiner, of why Brexit was the right choice.

As we celebrate Independence Day on July 4, we can send a cheer across the pond to the British, who declared independence from the European Union on June 23. For the British, that means no more tax and regulatory harmonization without representation. Laws passed by Parliament will no longer have to be EU-compatible. It even means they will be able to keep their high-efficiency kettles, toasters, hair dryers and vacuum cleaners. As just one example of the absurdity of EU regulation, vacuum cleaners with over 1600 watts were banned by Brussels in 2014, and those over 900 watts are scheduled to be phased out in 2017. Brussels bureaucrats say that these vacuum cleaners use too much energy. No matter that the additional energy cost of a 2300-watt vacuum cleaner compared with a 1600-watt model is less than $20 a year, that it takes more time to vacuum with a low-energy model, and, most important, people should be able to choose for themselves how they want to spend their time and money. I, for one, prefer less time housecleaning.

Amen. As much as I despise the busybodies in Washington for subjecting me to inferior light bulbs, substandard toilets, second-rate dishwashers, weak-flow showerheads, and inadequate washing machines, I would be far more upset if those nanny-state policies were being imposed by some unaccountable international bureaucracy.

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Centralization and the Decline of Europe

The famous French diplomat Charles Maurice de Talleyrand supposedly said that a weakness of the Bourbon monarchs was that they learned nothing and forgot nothing.

If so, the genetic descendants of the Bourbons are now in charge of Europe.

But before explaining why, let’s first establish that Europe is in trouble. I’ve made that point (many times) that the continent is in trouble because of statism and demographic change.

What’s far more noteworthy, though, is that even the Europeans are waking up to the fact that the continent faces a very grim future.

For instance, the bureaucrats in Brussels are pessimistic, as reported by the EU Observer.

…the report warns of a longer term risk for the EU economy. “As expectations of low growth ahead affect investment today, there is potential for a vicious circle,” the commission’s director general for economic and financial affairs writes in the report’s foreword. “In short, the projected pace of GDP growth may not be sufficient to prevent the cyclical impact of the crisis from becoming permanent (hysteresis), ” Marco Buti writes.

The people of Europe share that grim assessment.

Pew has some very sobering data on angst across the continent.

Support for European economic integration – the 1957 raison d’etre for creating the European Economic Community, the European Union’s predecessor – is down over last year in five of the eight European Union countries surveyed by the Pew Research Center in 2013. Positive views of the European Union are at or near their low point in most EU nations, even among the young, the hope for the EU’s future. The favorability of the EU has fallen from a median of 60% in 2012 to 45% in 2013.

Here’s the relevant chart.

Establishment-oriented voices in the United States also agree that the outlook is rather dismal.

Writing in the Washington Post, Sebastian Mallaby offers a grim assessment of Europe’s future.

…since 2008…, the 28 countries in the European Union managed combined growth of just 4 percent. And in the subset consisting of the eurozone minus Germany, output actually fell. …most of the Mediterranean periphery has suffered a lost decade. …The unemployment rate in the euro area stands at 9.8 percent, more than double the U.S. rate. Unemployment among Europe’s youth is even more appalling: In Greece, Spain, France, Croatia, Italy, Cyprus and Portugal, more than 1 in 4 workers under 25 are jobless.

The bottom line is that there’s widespread consensus that Europe is a mess and that things will probably get worse unless there are big changes.

But the key question, as always, is whether the changes are positive or negative. And this is why I started with a reference to the Bourbon kings. European leaders today also are infamous for learning nothing and forgetting nothing.

Indeed, the proponents of bad policy want to double down on the mistakes of bigger government and more centralization.

The International Monetary Fund (aka, the “Dr. Kevorkian” or “dumpster fire” of the global economy), led by France’s Christine Lagarde, actually is urging a new form of redistribution in Europe.

The International Monetary Fund called on Thursday for the creation of a fund…in the euro zone… Managing Director Christine Lagarde said… “countries would be pooling budgetary resources in a common pot which could be used for projects and certain operations”

Lagarde says the new fund should have strings attached, so that nations could access the loot if they complied with the EU’s budget rules, and also if they use the money for structural reform.

That sounds prudent, but only until you look at the fine print.

The current budget rules are misguided and are more likely to encourage tax hikes rather than spending restraint. And while many European nations need good structural reform, that’s not what the IMF has in mind.

Lagarde told a news conference the new fund could pay for projects related to migration, refugees, security, energy and climate change.

Instead, it appears that this is just a scheme to transfer money from countries such as Germany and Estonia that have restrained spending in recent years.

Germany, Estonia and Luxembourg are the only EU countries that have posted budget surpluses since 2014. Lagarde said the pooling of budgetary resources could put these surpluses to good use.

Sigh.

But the problem goes way beyond an international bureaucracy led by someone from Europe. This is the mentality that is deeply embedded in most European policymakers.

Simply stated, the people who helped create the European mess by pushing for bigger government and more centralization agree that the time if right for…you guessed it…bigger government and more centralization. Here’s an excerpt from a report by the Delors Institute.

…a true economic and monetary union still needs to be built. It will have to be based on significant risk sharing and sovereignty sharing within a coherent and legitimate framework of supranational economic governance. This third building block includes turning the ESM into a fully-fledged European Monetary Fund.

The bureaucrats in Brussels predictably agree that they should get more power, as noted in a story from the EU Observer.

The EU should raise its own taxes and use Brexit as an opportunity to push for the idea, a report by a group of top officials says. …”The Union must mobilise common resources to find common solutions to common problems,” says the document, seen by EUobserver. …The paper also proposes a EU-level corporate income tax that would be combined with a common consolidated corporate tax base… Other proposals include a bank levy, a financial transaction tax, or a European VAT that would top national VATs. …The new budget EU commissioner Guenther Oettinger said that the report was “of great quality”.

And the senior politicians in Brussels are also beating the drum for added centralization.

…divergence creates fragility… Progress must happen…towards a genuine Economic Union…towards a Fiscal Union…need to shift from a system of rules and guidelines for national economic policy-making to a system of further sovereignty sharing within common institutions…some degree of public risk sharing…including a ‘social protection floor’…a shared sense of purpose among all Member States

Wow. I don’t know if I’ve ever read something so wildly wrong. As Nassim Nicholas Taleb has sagely observed, it is centralization and harmonization that creates systemic risk.

And all this talk about “common resources” and “public risk sharing” is simply the governmental version of co-signing a loan for the deadbeat family alcoholic.

Yet Europe’s ideologues can’t resist their lemming-like march in the wrong direction.

What makes this especially odd is that there is so much evidence that Europe originally became rich for the opposite reason.

It was decentralization and jurisdictional competition that enabled prosperity.

Matt Ridley, writing for the UK-based Times, drives this point home.

…the leading theory among economic historians for why Europe after 1400 became the wealthiest and most innovative continent is political fragmentation. Precisely because it was not unified, Europe became a laboratory for different ways of governing, enabling the discovery of regimes that allowed free markets and invention to flourish, first in northern Italy and some parts of Germany, then the low countries, then Britain. By contrast, China’s unity under one ruler prevented such experimentation. …Baron Montesquieu…remarked, Europe’s “many medium-sized states” had incubated “a genius for liberty, which makes it very difficult to subjugate each part and to put it under a foreign force other than by laws and by what is useful to its commerce”. …David Hume…mused…Europe is the continent “most broken by seas, rivers, and mountains” and so “the divisions into small states are favourable to learning, by stopping the progress of authority as well as that of power”. …the idea has gained almost universal agreement among historians that a disunited Europe, while frequently wracked by war, was also prone to innovation and liberty — thanks to the ability of innovators and skilled craftsmen to cross borders in search of more congenial regimes.

But now Europe has swung completely in the other direction.

The European Commission’s obsession with harmonisation prevents the very pattern of experimentation that encourages innovation. Whereas the states system positively encouraged governments to be moderate in political, religious and fiscal terms or lose their talent, the commission detests jurisdictional competition, in taxes and regulations. The larger the empire, the less brake there is on governmental excess.

Ralph Raico echoes these insights in an article for the Foundation for Economic Education.

In seeking to answer the question why the industrial breakthrough occurred first in western Europe, …what was it that permitted private enterprise to flourish? …Europe’s radical decentralization… In contrast to other cultures — especially China, India, and the Islamic world — Europe comprised a system of divided and, hence, competing powers and jurisdictions. …Instead of experiencing the hegemony of a universal empire, Europe developed into a mosaic of kingdoms, principalities, city-states, ecclesiastical domains, and other political entities. Within this system, it was highly imprudent for any prince to attempt to infringe property rights in the manner customary elsewhere in the world. In constant rivalry with one another, princes found that outright expropriations, confiscatory taxation, and the blocking of trade did not go unpunished. The punishment was to be compelled to witness the relative economic progress of one’s rivals, often through the movement of capital, and capitalists, to neighboring realms. The possibility of “exit,” facilitated by geographical compactness and, especially, by cultural affinity, acted to transform the state into a “constrained predator”.

In other words, the “stationary bandit” couldn’t steal as much and that gave the private sector the breathing room that’s necessary for growth.

But today’s politicians in Europe want to strengthen the ability of governments to seize more money and power.

That strategy may work in the short run, but bailouts, redistribution, easy money, and statism are not a good long-run strategy.

So perhaps it’s appropriate that we conclude with a warning. As reported in a column for the UK-based Telegraph, one of the architects of the euro fears that bailouts are crippling the continent-wide currency.

The European Central Bank is becoming dangerously over-extended and the whole euro project is unworkable in its current form, the founding architect of the monetary union has warned. “One day, the house of cards will collapse,” said Professor Otmar Issing, the ECB’s first chief economist… Prof Issing lambasted the European Commission as a creature of political forces that has given up trying to enforce the rules in any meaningful way. “The moral hazard is overwhelming,” he said. The European Central Bank is on a “slippery slope” and has in his view fatally compromised the system by bailing out bankrupt states in palpable violation of the treaties. “…Market discipline is done away with by ECB interventions. …The no bailout clause is violated every day,” he said… Prof Issing slammed the first Greek rescue in 2010 as little more than a bailout for German and French banks, insisting that it would have been far better to eject Greece from the euro as a salutary lesson for all.

For what it’s worth, I fully agree that Greece should have been cut loose.

But European politicians and bureaucrats, driven by an ideological belief in centralization (and a desire to bail out their big banks), instead decided to undermine the euro by creating a bigger mess in Greece and sending a very bad signal about bailouts to other welfare states.

And keep in mind that the fuse is still burning on the European fiscal crisis.

As the old saying goes, this won’t end well.

P.S. While my prognosis for Europe is relatively bleak, there were some hopeful signs in the aforementioned Pew data.

First, Europeans at some level understand that government is simply too big. Indeed, they recognize that economic growth is far more likely to occur if fiscal burdens are reduced rather than increased.

Second, they also realize that the euro, while weakened and flawed, is a better option than restoring national currencies, which would give their governments the power to finance bigger government by printing money.

P.P.S. I can’t resist sharing one final bit of polling data from Pew. I’m amused that every nation sees itself as the most compassionate (though if you look at real data, all European nations lag the USA in real compassion). Meanwhile, the prize for self-doubt (or perhaps self-awareness?) goes to the Italians, who labeled themselves as least trustworthy. The schizophrenia prize goes to the Poles, who simultaneously view the Germans as the most trustworthy and least trustworthy.

Oh, and there’s probably some lesson to be learned from Germany dominating the data for being most trustworthy and least compassionate.

Maybe this poll should be added to my European humor collection.

P.P.P.S. Given the sorry state of Europe, now perhaps skeptics will understand why Brexit was the only good option for Brits.

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

I’ve previously written about the bizarre attack that the European Commission has launched against Ireland’s tax policy. The bureaucrats in Brussels have concocted a strange theory that Ireland’s pro-growth tax system provides “state aid” to companies like Apple (in other words, if you tax at a low rate, that’s somehow akin to giving handouts to a company, at least if you start with the assumption that all income belongs to government).

This has produced two types of reactions. On the left, the knee-jerk instinct is that governments should grab more money from corporations, though they sometimes quibble over how to divvy up the spoils.

Senator Elizabeth Warren, for instance, predictably tells readers of the New York Times that Congress should squeeze more money out of the business community.

Now that they are feeling the sting from foreign tax crackdowns, giant corporations and their Washington lobbyists are pressing Congress to cut them a new sweetheart deal here at home. But instead of bailing out the tax dodgers under the guise of tax reform, Congress should seize this moment to…repair our broken corporate tax code. …Congress should increase the share of government revenue generated from taxes on big corporations — permanently. In the 1950s, corporations contributed about $3 out of every $10 in federal revenue. Today they contribute $1 out of every $10.

As part of her goal to triple the tax burden of companies, she also wants to adopt full and immediate worldwide taxation. What she apparently doesn’t understand (and there’s a lot she doesn’t understand) is that Washington may be capable of imposing bad laws on U.S.-domiciled companies, but it has rather limited power to impose bad rules on foreign-domiciled firms.

So the main long-run impact of a more onerous corporate tax system in America will be a big competitive advantage for companies from other nations.

The reaction from Jacob Lew, America’s Treasury Secretary, is similarly disappointing. He criticizes the European Commission, but for the wrong reasons. Here’s some of what he wrote for the Wall Street Journal, starting with some obvious complaints.

…the commission’s novel approach to its investigations seeks to impose unfair retroactive penalties, is contrary to well established legal principles, calls into question the tax rules of individual countries, and threatens to undermine the overall business climate in Europe.

But his solutions would make the system even worse. He starts by embracing the OECD’s BEPS initiative, which is largely designed to seize more money from US multinational firms.

…we have made considerable progress toward combating corporate tax avoidance by working with our international partners through what is known as the Base Erosion and Profit Shifting (BEPS) project, agreed to by the Group of 20 and the 35 member Organization for Economic Cooperation and Development.

He then regurgitates the President’s plan to replace deferral with worldwide taxation.

…the president’s plan directly addresses the problem of U.S. multinational corporations parking income overseas to avoid U.S. taxes. The plan would make this practice impossible by imposing a minimum tax on foreign income.

In other words, his “solution” to the European Commission’s money grab against Apple is to have the IRS grab the money instead. Needless to say, if you’re a gazelle, you probably don’t care whether you’re in danger because of hyenas or jackals, and that’s how multinational companies presumably perceive this squabble between US tax collectors and European tax collectors.

On the other side of the issue, critics of the European Commission’s tax raid don’t seem overflowing with sympathy for Apple. Instead, they are primarily worried about the long-run implications.

Veronique de Rugy of the Mercatus Center offers some wise insight on this topic, both with regards to the actions of the European Commission and also with regards to Treasury Secretary Lew’s backward thinking. Here’s what she wrote about the never-ending war against tax competition in Brussels.

At the core of the retroactive penalty is the bizarre belief on the part of the European Commission that low taxes are subsidies. It stems from a leftist notion that the government has a claim on most of our income. It is also the next step in the EU’s fight against tax competition since, as we know, tax competition punishes countries with bad tax systems for the benefit of countries with good ones. The EU hates tax competition and instead wants to rig the system to give good grades to the high-tax nations of Europe and punish low-tax jurisdictions.

And she also points out that Treasury Secretary Lew (a oleaginous cronyist) is no friend of American business because of his embrace of worldwide taxation and BEPS.

…as Lew’s op-ed demonstrates, …they would rather be the ones grabbing that money through the U.S.’s punishing high-rate worldwide-corporate-income-tax system. …In other words, the more the EU grabs, the less is left for Uncle Sam to feed on. …And, as expected, Lew’s alternative solution for avoidance isn’t a large reduction of the corporate rate and a shift to a territorial tax system. His solution is a worldwide tax cartel… The OECD’s BEPS project is designed to increase corporate tax burdens and will clearly disadvantage U.S. companies. The underlying assumption behind BEPS is that governments aren’t seizing enough revenue from multinational companies. The OECD makes the case, as it did with individuals, that it is “illegitimate,” as opposed to illegal, for businesses to legally shift economic activity to jurisdictions that have favorable tax laws.

John O’Sullivan, writing for National Review, echoes Veronique’s point about tax competition and notes that elimination of competition between governments is the real goal of the European Commission.

…there is one form of European competition to which Ms. Vestager, like the entire Commission, is firmly opposed — and that is tax competition. Classifying lower taxes as a form of state aid is the first step in whittling down the rule that excludes taxation policy from the control of Brussels. It won’t be the last. Brussels wants to reduce (and eventually to eliminate) what it calls “harmful tax competition” (i.e., tax competition), which is currently the preserve of national governments. …Ms. Vestager’s move against Apple is thus a first step to extend control of tax policy by Brussels across Europe. Not only is this a threat to European taxpayers much poorer than Apple, but it also promises to decide the future of Europe in a perverse way. Is Europe to be a cartel of governments? Or a market of governments? A cartel is a group of economic actors who get together to agree on a common price for their services — almost always a higher price than the market would set. The price of government is the mix of tax and regulation; both extract resources from taxpayers to finance the purposes of government. Brussels has already established control of regulations Europe-wide via regulatory “harmonization.” It would now like to do the same for taxes. That would make the EU a fully-fledged cartel of governments. Its price would rise without limit.

Holman Jenkins of the Wall Street Journal offers some sound analysis, starting with his look at the real motives of various leftists.

…attacking Apple is a politically handy way of disguising a challenge to the tax policies of an EU member state, namely Ireland. …Sen. Chuck Schumer calls the EU tax ruling a “cheap money grab,” and he’s an expert in such matters. The sight of Treasury Secretary Jack Lew leaping to the defense of an American company when in the grips of a bureaucratic shakedown, you will have no trouble guessing, is explained by the fact that it’s another government doing the shaking down.

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

Tax harmonization is a final refuge of those committed to defending Europe’s stagnant social model. Even Ms. Vestager’s antitrust agency is jumping in, though the goal here oddly is to eliminate competition among jurisdictions in tax policy, so governments everywhere can impose inefficient, costly tax regimes without the check and balance that comes from businesses being able to pick up and move to another jurisdiction. In a harmonized world, of course, a check would remain in the form of jobs not created, incomes not generated, investment not made. But Europe has been wiling to live with the harmony of permanent recession.

Even the Economist, which usually reflects establishment thinking, argues that the European Commission has gone overboard.

…in tilting at Apple the commission is creating uncertainty among businesses, undermining the sovereignty of Europe’s member states and breaking ranks with America, home to the tech giant… Curbing tax gymnastics is a laudable aim. But the commission is setting about it in the most counterproductive way possible. It says Apple’s arrangements with Ireland, which resulted in low-single-digit tax rates, amounted to preferential treatment, thereby violating the EU’s state-aid rules. Making this case involved some creative thinking. The commission relied on an expansive interpretation of the “transfer-pricing” principle that governs the price at which a multinational’s units trade with each other. Having shifted the goalposts in this way, the commission then applied its new thinking to deals first struck 25 years ago.

Seeking a silver lining to this dark cloud, the Economist speculates whether the EC tax raid might force American politicians to fix the huge warts in the corporate tax system.

Some see a bright side. …the realisation that European politicians might gain at their expense could, optimists say, at last spur American policymakers to reform their barmy tax code. American companies are driven to tax trickery by the combination of a high statutory tax rate (35%), a worldwide system of taxation, and provisions that allow firms to defer paying tax until profits are repatriated (resulting in more than $2 trillion of corporate cash being stashed abroad). Cutting the rate, taxing only profits made in America and ending deferral would encourage firms to bring money home—and greatly reduce the shenanigans that irk so many in Europe. Alas, it seems unlikely.

America desperately needs a sensible system for taxing corporate income, so I fully agree with this passage, other than the strange call for “ending deferral.” I’m not sure whether this is an editing mistake or a lack of understanding by the reporter, but deferral is no longer an issue if the tax code is reformed to that the IRS is “taxing only profits made in America.”

But the main takeaway, as noted by de Rugy, O’Sullivan, and Jenkins, is that politicians want to upend the rules of global commerce to undermine and restrict tax competition. They realize that the long-run fiscal outlook of their countries is grim, but rather than fix the bad policies they’ve imposed, they want a system that will enable higher ever-higher tax burdens.

In the long run, that leads to disaster, but politicians rarely think past the next election.

P.S. To close on an upbeat point, Senator Rand Paul defends Apple from predatory politicians in the United States.

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José Manuel Barroso, the European Commission, Goldman Sachs, Corruption, and Cronyism

Why did a for-profit college pay former President Bill Clinton the staggering sum of $16.5 million to serve as an “honorary chancellor for Laureate International Universities”? Was it because he had some special insight or expertise on how to improve education?

Why did Goldman Sachs pay former Secretary of State Hillary Clinton hundreds of thousands of dollars for a couple of speeches? Was it because she had valuable observations about the economy and investments?

The answer to all those questions is that companies sometimes are willing to transfer large sums of money to influential politicians because they want something in exchange.

In some cases, they want help from powerful insiders so they can use the coercive power of government to take other people’s money, which is reprehensible and disgusting. In other cases, they are seeking to guard against being victimized with high taxes and punitive regulations and so they pay “protection money” to powerful insiders in hopes of being left alone, which is unfortunate but understandable.

In either case (one moral and the other immoral), the companies are making rational decisions. Politicians have immense ability to tax, spend, and regulate, so it makes sense to get on their good side, either by giving them money directly or contributing to their campaigns.

This is a problem in the United States, of course, but it’s also a problem in Europe.

Consider the curious case of José Manuel Barroso, the recently retired President of the European Commission who was recently hired by Goldman Sachs to be “non-executive chairman of Goldman Sachs International.” According the press release from the company, he will…well, it’s not clear what his role will be or what value he will provide. All we get is fluff about his political career and a murky statement that, “He will also be an advisor to Goldman Sachs.”

So let’s look at his Wikipedia bio. Maybe we’ll find some evidence that he has great expertise on investment matters. But all we find there is that he’s been a career politician, first in Portugal and then in Brussels (where he was a bit of a laughingstock).

There’s no indication that he ever held a job in the private sector. But we do get this tidbit.

In his university days, he was one of the leaders of the underground Maoist MRPP (Reorganising Movement of the Proletariat Party, later PCTP/MRPP, Communist Party of the Portuguese Workers/Revolutionary Movement of the Portuguese Proletariat).

That doesn’t sound like the pedigree of someone who just landed a lavishly compensated position in the supposed temple of global capitalism.

But the real story is that Barroso isn’t a communist (at least not now) and Goldman Sachs isn’t a bastion of free markets. Instead, both of them are expert practitioners of cronyism.

Indeed, the cronyism angle is so obvious in this case that the European Commission has launched an ethics probe.

Which is very upsetting to Senor Barroso. The Financial Times reported on the controversy.

José Manuel Barroso has accused the European Commission — a body he led for 10 years — of being “discriminatory” and “inconsistent” after the EU’s executive arm set up an ethics probe to examine his new role at Goldman Sachs. …Mr Barroso vigorously defended his decision to take a job as adviser with the US investment bank, which triggered a backlash across the EU. …French president François Hollande described the appointment as being “legally possible, but morally unacceptable”. …The committee will examine Mr Barroso’s contract to ascertain whether it complies with Mr Barroso’s obligation under EU law “to behave with integrity and discretion” when taking appointments or benefits after leaving office. Campaigners have argued that Mr Barroso could be stripped of his pension — worth €15,000 per month — if he is found to have violated these rules. …Other former members of the commission have gone on to take high-profile roles with big businesses, leading some to claim that Goldman Sachs has been singled out because of its role in the financial crisis.

Though it’s worth noting that Barroso is simply the latest example of a revolving door between senior euro-crats and Goldman Sachs.

The bottom line is that Barroso hasn’t behaved with integrity. But that’s true of his entire career. Taking a position with Goldman Sachs is simply a way of monetizing decades of cronyism.

P.S. Shifting back to the US version of cronyism, Kevin Williamson has a must-read analysis of the corrupt nexus of Wall Street and Washington.

P.P.S. The solution to this mess (other than Glenn Reynold’s revolving-door surtax) is to dramatically shrink the size and scope of government. When there’s less to steal, there will be fewer thieves.

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

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

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

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

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

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

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

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

Here’s what I said about this issue yesterday.

There are three things about this interview are worth highlighting.

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

I also chatted with the folks from the BBC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Amen.

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

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

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

Wow, think about what this implies.

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

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

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

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

Let’s close by looking at one final story.

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

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

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

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

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

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

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

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

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The European Commission’s War against Pro-Growth Corporate Tax Policy

I have a love-hate relationship with corporations.

On the plus side, I admire corporations that efficiently and effectively compete by producing valuable goods and services for consumers, and I aggressively defend those firms from politicians who want to impose harmful and destructive forms of taxes, regulation, and intervention.

On the minus side, I am disgusted by corporations that get in bed with politicians to push policies that undermine competition and free markets, and I strongly oppose all forms of cronyism and coercion that give big firms unearned and undeserved wealth.

With this in mind, let’s look at two controversies from the field of corporate taxation, both involving the European Commission (the EC is the Brussels-based bureaucracy that is akin to an executive branch for the European Union).

First, there’s a big fight going on between the U.S. Treasury Department and the EC. As reported by Bloomberg, it’s a battle over whether European governments should be able to impose higher tax burdens on American-domiciled multinationals.

The U.S. is stepping up its effort to convince the European Commission to refrain from hitting Apple Inc. and other companies with demands for possibly billions of euros… In a white paper released Wednesday, the Treasury Department in Washington said the Brussels-based commission is taking on the role of a “supra-national tax authority” that has the scope to threaten global tax reform deals. …The commission has initiated investigations into tax rulings that Apple, Starbucks Corp., Amazon.com Inc. and Fiat Chrysler Automobiles NV. received in separate EU nations. U.S. Treasury Secretary Jacob J. Lew has written previously that the investigations appear “to be targeting U.S. companies disproportionately.” The commission’s spokesman said Wednesday that EU law “applies to all companies operating in Europe — there is no bias against U.S. companies.”

As you can imagine, I have a number of thoughts about this spat.

• First, don’t give the Obama Administration too much credit for being on the right side of the issue. The Treasury Department is motivated in large part by a concern that higher taxes imposed by European governments would mean less ability to collect tax by the U.S. government.
• Second, complaints by the US about a “supra-national tax authority” are extremely hypocritical since the Obama White House has signed the Protocol to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, which effectively would create a nascent World Tax Organization (the pact is thankfully being blocked by Senator Rand Paul).
• Third, hypocrisy by the US doesn’t change the fact that the European Commission bureaucrats are in the wrong because their argument is based on the upside-down notion that low tax burdens are a form of “state aid.”
• Fourth, Europeans are in the wrong because the various national governments should simply adjust their “transfer pricing” rules if they think multinational companies are playing games to under-state profits in high-tax nations and over-state profits in low-tax nations.
• Fifth, the Europeans are in the wrong because low corporate tax rates are the best way to curtail unproductive forms of tax avoidance.
• Sixth, some European nations are in the wrong if they don’t allow domestic companies to enjoy the low tax rates imposed on multinational firms.

Since we’re on the topic of corporate tax rates and the European Commission, let’s shift from Brussels to Geneva and see an example of good tax policy in action. Here are some excerpts from a Bloomberg report about how a Swiss canton is responding in the right way to an attack by the EC.

When the European Union pressured Switzerland to scrap tax breaks for foreign companies, Geneva had most to lose. Now, the canton that’s home to almost 1,000 multinationals is set to use tax to burnish its appeal. Geneva will on Aug. 30 propose cutting its corporate tax rate to 13.49 percent from 24.2 percent…the new regime will improve the Swiss city’s competitive position, according to Credit Suisse Group AG. “I could see Geneva going up very high in the ranks,” said Thierry Boitelle, a lawyer at Bonnard Lawson in the city. …A rate of about 13 percent would see Geneva jump 13 places to become the third-most attractive of Switzerland’s 26 cantons.

This puts a big smile on my face.

Geneva is basically doing the same thing Ireland did many years ago when it also was attacked by Brussels for having a very low tax rate on multinational firms while taxing domestic firms at a higher rate.

The Irish responded to the assault by implementing a very low rate for all businesses, regardless of whether they were local firms or global firms. And the Irish economy benefited immensely.

Now it’s happening again, which must be very irritating for the bureaucrats in Brussels since the attack on Geneva (just like the attack on Ireland) was designed to force tax rates higher rather than lower.

As a consequence, in one fell swoop, Geneva will now be one of the most competitive cantons in Switzerland.

Here’s another reason I’m smiling.

The Geneva reform will put even more pressure on the tax-loving French.

France, which borders the canton to the south, east and west, has a tax rate of 33.33 percent… Within Europe, Geneva’s rate would only exceed a number of smaller economies such as Ireland’s 12.5 percent and Montenegro, which has the region’s lowest rate of 9 percent. That will mean Geneva competes with Ireland, the Netherlands and the U.K. as a low-tax jurisdiction.

Though the lower tax rate in Geneva is not a sure thing.

We’ll have to see if local politicians follow through on this announcement. And there also may be a challenge from left-wing voters, something made possible by Switzerland’s model of direct democracy.

Opposition to the new rate from left-leaning political parties will probably trigger a referendum as it would only require 500 signatures.

Though I suspect the “sensible Swiss” of Geneva will vote the right way, at least if the results from an adjoining canton are any indication.

In a March plebiscite in the neighboring canton of Vaud, 87.1 percent of voters backed cutting the corporate tax rate to 13.79 percent from 21.65 percent.

So I fully expect voters in Geneva will make a similarly wise choice, especially since they are smart enough to realize that high tax rates won’t collect much money if the geese with the golden eggs fly away.

Failure to agree on a competitive tax rate in Geneva could result in an exodus of multinationals, cutting cantonal revenues by an even greater margin, said Denis Berdoz, a partner at Baker & McKenzie in Geneva, who specializes in tax and corporate law. “They don’t really have a choice,” said Berdoz. “If the companies leave, the loss could be much higher.”

In other words, the Laffer Curve exists.

Now let’s understand why the development in Geneva is a good thing (and why the EC effort to impose higher taxes on US-based multinational is a bad thing).

Simply stated, high corporate tax burdens are bad for workers and the overall economy.

In a recent column for the Wall Street Journal, Kevin Hassett and Aparna Mathur of the American Enterprise Institute consider the benefits of a less punitive corporate tax system.

They start with the theoretical case.

If the next president has a plan to increase wages that is based on well-documented and widely accepted empirical evidence, he should have little trouble finding bipartisan support. …Fortunately, such a plan exists. …both parties should unite and demand a cut in corporate tax rates. The economic theory behind this proposition is uncontroversial. More productive workers earn higher wages. Workers become more productive when they acquire better skills or have better tools. Lower corporate rates create the right incentives for firms to give workers better tools.

Then they unload a wealth of empirical evidence.

What proof is there that lower corporate rates equal higher wages? Quite a lot. In 2006 we co-wrote the first empirical study on the direct link between corporate taxes and manufacturing wages. …Our empirical analysis, which used data we gathered on international tax rates and manufacturing wages in 72 countries over 22 years, confirmed that the corporate tax is for the most part paid by workers. …There has since been a profusion of research that confirms that workers suffer when corporate tax rates are higher. In a 2007 paper Federal Reserve economist Alison Felix used data from the Luxembourg Income Study, which tracks individual incomes across 30 countries, to show that a 10% increase in corporate tax rates reduces wages by about 7%. In a 2009 paper Ms. Felix found similar patterns across the U.S., where states with higher corporate tax rates have significantly lower wages. …Harvard University economists Mihir Desai, Fritz Foley and Michigan’s James R. Hines have studied data from American multinational firms, finding that their foreign affiliates tend to pay significantly higher wages in countries with lower corporate tax rates. A study by Nadja Dwenger, Pia Rattenhuber and Viktor Steiner found similar patterns across German regions… Canadian economists Kenneth McKenzie and Ergete Ferede. They found that wages in Canadian provinces drop by more than a dollar when corporate tax revenue is increased by a dollar.

So what’s the moral of the story?

It’s very simple.

…higher wages are relatively easy to stimulate for a nation. One need only cut corporate tax rates. Left and right leaning countries have done this over the past two decades, including Japan, Canada and Germany. Yet in the U.S. we continue to undermine wage growth with the highest corporate tax rate in the developed world.

The Tax Foundation echoes this analysis, noting that even the Paris-based OECD has acknowledged that corporate taxes are especially destructive on a per-dollar-raised basis.

In a landmark 2008 study Tax and Economic Growth, economists at the Organization for Economic Cooperation and Development (OECD) determined that the corporate income tax is the most harmful tax for economic growth. …The study also found that statutory corporate tax rates have a negative effect on firms that are in the “process of catching up with the productivity performance of the best practice firms.” This suggests that “lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth.”

Sadly, there’s often a gap between the analysis of the professional economists at the OECD and the work of the left-leaning policy-making divisions of that international bureaucracy.

The OECD has been a long-time advocate of schemes to curtail tax competition and in recent years even has concocted a “base erosion and profit shifting” initiative designed to boost the tax burden on businesses.

In a study for the Institute for Research in Economic and Fiscal Issues (also based, coincidentally, in Paris), Pierre Bessard and Fabio Cappelletti analyze the harmful impact of corporate taxation and the unhelpful role of the OECD.

…the latest years have been marked by an abundance of proposals to reform national tax codes to patch these alleged “loopholes”. Among them, the Base Erosion and Profit Shifting package (BEPS) of the Organization for Economic Cooperation and Development (OECD) is the most alarming one because of its global ambition. …The OECD thereby assumes, without any substantiation, that the corporate income tax is both just and an efficient way for governments to collect revenue.

Pierre and Fabio point out that the OECD’s campaign to impose heavier taxes on business is actually just a back-door way of imposing a higher burden on individuals.

…the whole value created by corporations is sooner or later transferred to various individuals, may it be as dividends (for owners and shareholders), interest payments (for lenders), wages (for employees) and payments for the provided goods and services (for suppliers). Second, corporations as such do not pay taxes. …at the end of the day the burden of any tax levied on them has to be carried by an individual.

This doesn’t necessarily mean there shouldn’t be a corporate tax (in nations that decide to tax income). After all, it is administratively simpler to tax a company than to track down potentially thousands – or even hundreds of thousands – of shareholders.

But it’s rather important to consider the structure of the corporate tax system. Is it a simple system that taxes economic activity only one time based on cash flow? Or does it have various warts, such as double taxation and deprecation, that effectively result in much higher tax rates on productive behavior?

Most nations unfortunately go with the latter approach (with place such as Estonia and Hong Kong being admirable exceptions). And that’s why, as Pierre and Fabio explain, the corporate income tax is especially harmful.

…the general consensus is that the cost per dollar of raising revenue through the corporate income tax is much higher than the cost per dollar of raising revenue through the personal income tax… This is due to the corporate income tax generating additional distortions. … Calls by the OECD and other bodies to standardize corporate tax rules and increase tax revenue in high-tax countries in effect would equate to calls for higher prices for consumers, lower wages for workers and lower returns for pension funds. Corporate taxes also depress available capital for investment and therefore productivity and wage growth, holding back purchasing power. In addition, the deadweight losses arising from corporate income taxation are particularly high. They include lobbying for preferential rates and treatments, diverting attention and resources from production and wealth creation, and distorting decisions in corporate financing and the choice of organizational form.

From my perspective, the key takeaway is that income taxes are always bad for prosperity, but the real question is whether they somewhat harmful or very harmful. So let’s close with some very depressing news about how America’s system ranks in that regard.

The Tax Foundation has just produced a very helpful map showing corporate tax rates around the world. All you need to know about the American system is that dark green is very bad (i.e., a corporate tax rate that is way above the average) and dark blue is very good.

And to make matters worse, the high tax rate is just part of the problem. A German think tank produced a study that looked at other major features of business taxation and concluded that the United States ranked #94 out of 100 nations.

It would be bad to have a high rate with a Hong Kong-designed corporate tax structure. But we have something far worse, a high rate with what could be considered a French-designed corporate tax structure.

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