Time to (Finally) Defund the OECD?

Nearly 13 years ago, I narrated this video about the Organization for Economic Cooperation and Development, a Paris-based international bureaucracy that uses American tax dollars to advocate for bigger government and higher taxes.

Everything I said in that video is still true, except now the federal budget is far bigger and the OECD has had about a dozen more years to push for dirigiste policies.

It is particularly disgusting (and hypocritical) that the OECD is a big cheerleader for higher taxes, yet its bureaucrats get tax-free salaries.

Not only does the OECD urge higher taxes in countries all around the world (even poor countries!), it also lobbies to undermine tax competition by advocating for policies such as Joe Biden’s corporate tax cartel.

And it adds insult to injury that American taxpayers are subsidizing this nonsense.

But maybe that will come to an end. Reporting for Bloomberg Tax, Samantha Handler and Chris Cioffi explain that Republicans are threatening to end U.S. subsidies for the Paris-based bureaucracy.

Republicans are plotting ways to push back on the landmark global tax deal agreed to by nearly 140 countries, including by calling to pull US funding for the OECD that’s leading the negotiations. …“There’s concerns about the work product of the OECD,” said Rep. Adrian Smith (R-Neb.), the Ways and Means trade subcommittee chairman. …The US currently funds 19.1% of Part I of the OECD’s budget, according to the letter addressed to House Appropriations State, Foreign Operations, and Related Programs Chairman Mario Diaz-Balart (R-Fla.) and ranking member Rep. Barbara Lee (D-Calif.). …Chairman Jason Smith (R-Mo.) sent a letterlast month to the OECD Secretary-General Mathias Cormann, urging him to reject all proposals that would affect US jobs and tax revenue. Jason Smith called Pillar Two’s undertaxed profits rule “fundamentally flawed.”

Needless to say, Republicans should defund the OECD. Giving American tax dollars to the bureaucrats in Paris is a subsidy for the left.

For all intents and purposes, this is an IQ test for Republicans. Presumably, they are smart enough to understand that they should not send money to the Democratic National Committee or MSNBC. You would think they would also be smart enough not to subsidize a bureaucracy that advocates for the DNC/MSNBC agenda.

Unfortunately, Republicans have a well-deserved reputation for being the “stupid party.”

• They had total control of Washington from 2002-2006 during the Bush year. Did they defund the OECD? No.
• They had todal control of Washington from 2017-2018 during the Trump years. Did they defund the OECD? No.

To make matters worse, Republicans are sometimes so stupid that they actively help the OECD push for bad policy. Here’s another blurb from the article.

Momentum started building on the global tax talks under the Trump administration, with the US participating actively in the negotiations.

To be fair, the Trump Administration sort of proposed to defund the OECD back in 2017, but there was zero follow-through (hardly a surprise since Trump wound up being a big spender).

Instead, his dilettante Treasury Secretary actively supported the OECD.

The bottom line is that I’m happy that some Republicans are threatening to defund the OECD but I’m not overflowing with confidence that they will have the intelligence and diligence to make it happen. Even if they wind up back in power after the 2024 election.

P.S. There is at least one Republican who is very principled on the issue of the OECD.

P.P.S. The OECD sometimes resorts to grotesque dishonesty while pushing for bigger government.

P.P.P.S. I’ve been accused of “trading with the enemy” because I argue against the OECD. Heck, the bureaucrats even threatened to throw me in a Mexican jail.

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Applause for Globalization, not Global Governance

If globalism means free trade and peaceful interaction among peoples, sign me up. I’m a big supporter.

But if globalism means international bureaucracies working to increase the power of governments (i.e., dirigiste forms of global governance), then I’m a big opponent.

Because the word means different things to different people, I’ve explored various ways to compare and contrast “good globalism” vs “bad globalism.”

For what it’s worth, I think my 2×2 matrix needs to be revised.

One reason for an update is that “globalism” now seems more closely linked with bad policies

In an article for the US-based version of the Spectator, Roger Kimball warns against the statist version of “globalism.”

Globalism…is the enemy of freedom. Why? Because globalism systematically attacks and undermines the moral and political filiations that make genuine freedom possible. …A sterling contemporary example is the Great Reset, recently proposed by the Davos-based World Economic Forum… Here at last was an opportunity to enact a worldwide tax on wealth, a far-reaching (and deeply impoverishing) “green-energy” agenda…the WEF plan involved nothing less than the absorption of liberty by the extension of bureaucratic power. …The globalist alternative dangled before us is a version of utopia. But like The Wizard of Oz, it is all show and no substance. Or rather, the substance is an erosion of traditional sources of strength.

More specifically, the folks at the World Economic Forum are pushing a “great reset” based on “stakeholder capitalism” (which is largely repackaged “cronyism”).

Samuel Gregg of the Acton Institute opined on this issue for the Australian version of the Spectator.

The WEF is a dangerous force in global politics. …In October 2020, Schwab stated that…”Free-market fundamentalism has eroded…economic security, triggered a deregulatory race to the bottom and ruinous tax competition.” Precisely how and where ‘free-market fundamentalism’ has run amuck remains a mystery. After all, we live in a world in which most governments in developed nations routinely control 40 per cent or more of their nation’s GDP. Nor does the regulatory and welfare state’s relentless growth in, say, the European Union, Britain and America suggest that free market radicals have been in charge in Brussels, London or Washington for decades. …Ignoring these inconvenient facts, Schwab believes that the world needs a ‘Great Reset.’ …For all his invocation of the predictable woke pieties, Schwab’s core commitment is to political and economic arrangements which used to be known as corporatism. …The language of corporatism, like that of Schwab’s WEF, may be one of coordinated consultation, but the agenda is one of control. …On an economic level, corporatism discourages innovation, produces inflexible labour markets dominated by unions whose priority is maintaining the status quo, and riddle the marketplace with privileges for well-connected businesses. …anyone who believes in preserving things like liberty, sovereignty, and the decentralisation of power should be concerned.

Writing back in 2020 for the Wall Street Journal, Richard Shinder opined about the dirigiste agenda of modern-day globalists compared to the good version of globalism that existed in the 19th century.

Globalism touts the supremacy of supranational bodies and accords—the United Nations, the Paris climate agreement and the like. …many aspects of today’s globalism—or at least its promotion of market economies, capital mobility, and mostly free trade—aren’t in conflict with nationalism. In one sense of the word, the greatest “globalist” age in history was the period before World War I. Trade among western European countries increased to 10% of the region’s GDP in 1900 from 1% in 1830. Supply chains extended across the globe, and capital and labor flowed freely across borders. The “long” 19th century…was also a time of industrialization, enormous poverty reduction, wealth creation and global economic integration. This unabashed age of nation-states wasn’t all roses, but it was one of free markets, free trade and unrestricted capital flows. …this period demonstrates that globalism need not be unaccountable nor collectivist. …international institutions…shouldn’t impinge on national sovereignty. Sovereign nations consenting to play by an agreed set of rules, or banding together in service of a common objective, differs radically from unaccountable transnational elites engineering outcomes, often without scrutiny. …Nationalism as a response to a collectivist and unaccountable globalism—whether in dealing with a “climate crisis,” “inequality,” or something else—need not be nativist or protectionist. …the nation-state remains the most successful vehicle for advancing liberty, economic advancement and individual achievement in the history of the world.

For a differing perspective, Dalibor Rohac of the American Enterprise Institute made the case for globalism in a column for the Washington Examiner.

Humankind has become vastly more prosperous with extensive international cooperation. Since 1950, the world’s population has roughly tripled; over the same time, real output has increased by more than a factor of 10. In Botswana and South Korea, real per capita incomes have grown 38 and 30 times, respectively. Global prosperity is a direct outcome of economic globalization. Compared to automation, trade accounts for a tiny fraction of total job losses in the U.S. Meanwhile, cheaper consumer products imported from overseas have been among the most effective anti-poverty “policies” in the Western world. …This would not be possible without…the open trading environment created by successive rounds of multilateral trade liberalization under the General Agreement on Tariffs and Trade and, later, the World Trade Organization.

I fully agree about the global benefits of free trade, and the World Trade Organization has played a helpful role.

Moreover, Dalibor also mentions other international agreements and entities that are unobjectionable.

Or even desirable. After all, does anyone oppose the parts of the “rules-based postwar order” that facilitate things such as cross-border air travel, international shipping, and global telecommunications?

But the helpful work of those bodies doesn’t change the fact that major international bureaucracies engage in activities that are counterproductive. A “rules-based order” is only good, after all, if it advancing good rules.

• Is it helpful for the OECD to push for rules hindering tax competition?
• Is it helpful for the IMF to push for rules exacerbating moral hazard?
• Is it helpful for the EU to push for rules requiring tax harmonization?
• Is it helpful for the UN to push for rules undermining civil liberties?’
• Is it helpful for the Basel folks to push for rules increasing systemic risk?

The bottom line is that governments should be competing against each other, not conspiring with each other.

Which leads me to a revised version of my 2×2 matrix (the upper-right quadrant is empty because protectionist nations, by definition, don’t want jurisdictional competition).

To summarize, yes to globalization, no to global governance.

P.S. If the choice is nation states vs. global governance, the answer is obvious.

P.P.S. While I prefer nation states over global governance, I’m not happy that the European Union is morphing from an international bureaucracy into a nation state.

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Plenty of Fat and Waste to Cut at the United Nations, Part II

Compared to international bureaucracies such as the IMF and OECD, the United Nations has very little power to impose bad policy.

But that does not mean it should be immune from criticism. There’s an anti-market ideology at the UN and I have specifically condemned the bureaucrats for sloppy and misguided work on taxes (here and here), poverty (here and here), and guns (here and here).

Needless to say, there’s also a lot of waste and corruption at the UN.

I wrote about that topic back in 2017, so let’s take a follow-up look at how our tax money is being spent.

Let’s start with a just-released report in the New York Times. Written by David Fahrenthold and Farnaz Fassihi, it is a depressing snapshot of how money is squandered by insiders at the bureaucracy.

At the United Nations, two officials had a problem. The little-known agency they ran found itself with an extra $61 million, and they didn’t know what to do with it. Then they met a man at a party. Now, they have $25 million less. …experienced diplomats entrusted tens of millions of dollars…to a British businessman after meeting him at the party. They also gave his daughter $3 million to produce a pop song, a video game and a website promoting awareness of environmental threats… Things did not go well. …U.N. auditors said the man’s businesses defaulted on more than $22 million in loans — all money meant to aid the developing world…diplomats and former U.N. officials say the tale also demonstrates what critics say is a serious problem with the U.N.: a culture of impunity among some top leaders, who wield huge budgets with little outside oversight. …The top official at the Office for Project Services, Grete Faremo of Norway, remains in her post.

Some of the previous scandals at the UN have involved more than money.

Kathryn Snowdon’s 2018 report in the Huffington Post is very disturbing.

Charity workers from 15 international aid organisations have been implicated in a sex-for-food scandal at refugee camps in west Africa, according to a new leaked report… The 84-page document…identified more than 40 aid organisations “whose workers are alleged to be in sexually exploitative relationships with refugee children”. …Researchers spoke to 1,500 people, and said claims against 67 people were passed to senior UNHCR officials, but…none were prosecuted.

Some readers may wonder if the UN’s failures are the result of inadequate funding.

Hardly. As explained in National Review by Brett Schaefer, the bureaucracy is adept at playing games to ensure it always has plenty of cash.

Between 1960 and 2016, there have only been two times when an initially approved U.N. regular budget was lower than the preceding budget. …the U.N. General Assembly approved a $285 million (5 percent) cut in the two-year regular UN budget for 2018-2019, U.N. watchers took notice, but cautioned that…the U.N. adjusts its two-year budget at the mid-point to account for new expenditures and expenses. …Not only did the “cut” announced by the U.S. Mission to the United Nations…disappear, but the regular budget is actually $130 million higher than the final budget for 2016-2017. …this outcome is typical. …In 2012, the Obama administration bragged that the agreed-upon budget was “the first U.N. regular budget since 1998 – and only the second in the last 50 years – that has gone down in comparison to the previous budget’s actual expense.” The 2012 budget, however, also ended up being significantly higher than the initial budget after mid-biennium additions.

Here’s a chart from the article showing overall spending on the left axis, along with the additional spending that sneaks in during the mid-point of the budget cycle.

Brett explains there is a tiny bit of good news.

…the U.N. regular budget will shift to an annual budget starting in 2020. …This change will help, but will not cure the fundamental problem.

I confess, by the way, that I have no idea if that change actually happened.

But I feel confident in predicting that the UN’s budget has gone up rather than down.

Last but not least, even Richard Haass of the Council on Foreign Relations concedes the United Nations has a dubious track record. Here are some passages from his 2020 article published by Project Syndicate.

The United Nations has fallen far short of its goals to “maintain international peace and security,” “develop friendly relations among nations’’ and “achieve international cooperation in solving international problems.” …The UN Security Council, the most important component of the UN system, has made itself largely irrelevant. …The organization’s own shortcomings haven’t helped: a spoils system that puts too many people in important positions for reasons other than competence, lack of accountability, and hypocrisy (such as when countries that ignore human rights sit on a UN body meant to uphold them).

I’ll close with the observation that I’ve met plenty of nice and sincere people when participating in programs at the United Nations.

But the understanding of economic policy at the UN is utterly abysmal. Until and unless that statist mindset is eliminated, giving more money to the bureaucracy would be rewarding the pursuit of bad policy.

P.S. Maybe international bureaucrats would have a better understanding of economic policy if they weren’t exempt from the income tax.

P.P.S. The United Nations almost surely wastes the talents of some very capable people.

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The OECD’s Narrow (and Warped) Perspective on Taxation

More than 11 years ago, the Center for Freedom and Prosperity released this video about the OECD, a Paris-based bureaucracy subsidized by American taxpayers.

As outlined in the video, there are many reasons to dislike the Organization for Economic Cooperation and Development.

As a fan of tax competition, I don’t like the OECD because the bureaucrats persecute jurisdictions with low tax burdens.

But the bureaucracy’s pro-tax harmonization campaign is a symptom of a broader problem, which is that the OECD relentlessly advocates for higher taxes.

Consider the recent publication entitled “Fighting Tax Crime – The Ten Global Principles.” As you can see, nine of those ten principles involve more power and authority for government.

Since I’m not an anarcho-capitalist, I realize some taxation is necessary (ideally only the amount needed to finance genuine public goods).

As such, I don’t necessarily condemn enforcement policies.

But I am irked by a big sin of omission. If the bureaucrats at the OECD should have added an 11th principle about modest tax rates.

Why?

Because the academic literature very clearly shows that low tax rates are correlated with better tax compliance.

And those low tax rates also are better for prosperity, which is something that should be of interest to a bureaucracy with the words “economic” and “development” as part of its name.

Heck, some OECD economists have written about these benefits of low tax rates.

But none of that now matters. The bureaucrats today are totally fixated on carrying water for the world’s uncompetitive, high-tax governments.

Which is why I’m a big fan of defunding the OECD.

P.S. I suppose we should be happy that the bureaucrats acknowledge that taxpayers should have rights.

P.P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending and expenditure limits.

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The IMF, Special Drawing Rights, and Expanding the Burden of Government

At the risk of understatement, I’m not a fan of the International Monetary Fund.

My main objection is that the bureaucracy’s various policies – especially bailouts – make it easier for irresponsible politicians to expand the burden of government spending and increase deficits and debt.

Needless to say, that approach doesn’t work. The best evidence is that many governments wind up in a never-ending cycle of tax-spend-debt-crisis-bailout, followed by further rounds of tax-spend-debt-crisis-bailout.

Moreover, the net effect of these policies is to divert capital from the economy’s productive sector. So it’s the economic equivalent of a lose-lose policy.

When criticizing the IMF, I usually focus on how the bureaucrats relentlessly urge higher taxes. Indeed, I often complain about how the bailouts are provided only if countries agree to raise taxes (another lose-lose situation).

Today, though, I want to write about another bad IMF policy. Earlier this year, the bureaucrats (with support from the Biden Administration) allocated $650 billion of new Special Drawing Rights (SDRs) – sort of a version of IMF-created money.

You can learn about SDRs by clicking here and here, so I won’t bore people with a description of how they work.

For purposes of our discussion, what matters is that the IMF uses SDRs to enable more government spending.

And that’s not a recipe for prosperity, either for national economies or the global economy.

Earlier this year, Mary Anastasia O’Grady of the Wall Street Journal highlighted how SDRs are rewarding very dodgy governments in Latin America.

Nicaraguan dictator Daniel Ortega is jailing, killing and disappearing his political opponents. …At the International Monetary Fund, he’s a valued member. So too are the governments of socialist, deadbeat Argentina and of El Salvador, which every day slips further into arbitrary, authoritarian rule. These are some of the bad actors in the Western Hemisphere who received more “special drawing rights” from the IMF on Aug. 23 as part of a new $650 billion general allocation. …SDRs are created out of thin air but can be converted, on demand, into hard currency. …Treasury Secretary Janet Yellen, who led the charge for this new round of SDRs, claims the transaction is cost-free… In fact, the conversion of SDRs to dollars is a subsidized, perpetual loan. For poor countries the subsidy is above 90% of the loan value. …There was a time when large multilateral handouts were conditioned on attempts at good governance. Those days are gone.

In a column last month for the Wall Street Journal, D.J. Nordquist and Dan Katz also analyzed the impact of the IMF’s policy.

…the International Monetary Fund announced in August a new general allocation of special drawing rights equivalent to $650 billion. …All IMF members, even rogue nations, receive them, so Iran got some $5 billion and Belarus $1 billion. …The allocation added more than $17 billion to Russia’s record-high reserves…the IMF and other proponents justified the SDR allocation on grounds that its benefits outweighed the harms… But because of the IMF shareholding formula… Only 3% of the general allocation flowed to low-income countries. …the IMF publicly indicated it would collaborate with the World Bank and other international financial institutions to ensure that SDRs were put to productive uses… Unfortunately, the IMF appears to have fallen into a classic trap of international organizations: acting based on aspirations rather than binding agreements. …Public confidence in international financial institutions has been understandably shaken as a result of corruption investigations into the IMF’s emergency pandemic-relief loans, theft of World Bank assistance by elite government officials, and serious questions regarding inappropriate Chinese influence at the World Bank, the World Health Organization, and elsewhere.

I’ll close by noting that SDRs are a great deal for politicians and bureaucrats. They get more spending, all of which seems free. And since almost nobody understands how this racket works, there’s near-zero democratic accountability.

P.S. Shifting gears, here’s are some excerpts from an article on the IMF’s website. It has nothing to do with the SDR issue, but it is a window into the the IMF’s statist mindset. The bureaucracy is lauding an economist, Mariana Mazzucato, who argues for industrial policy.

Mazzucato has been stirring the pot in economics and public policy for nearly a decade. Her main message is that governments around the world need to seize their power to lead innovation for the betterment of humanity. …Government is for setting big goals, defining the missions necessary for achieving them, encouraging and investing in innovation, and governing the process so that the public benefits. …She made the case for rethinking the role of government in her 2013 book, The Entrepreneurial State: Debunking Public vs. Private Sector Myths. …“State capacity has really been hollowed out because of the narrow way that we think about the state,” she says. …That’s particularly evident in the United Kingdom and the United States, where political leaders defunded public health and devalued government itself, eroding public trust and government’s capacity to respond to crises, she says. …Mazzucato urged “citizens’ dividends” and government equity stakes in businesses linked to government funding.

As illustrated by this video, letting politicians distort the economy is a recipe for stagnation and corruption.

P.P.S. There are many good economists who work at the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analyses doesn’t seem to have any impact on the policy decisions of the organization’s top bureaucrats.

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The IMF Should Be Eliminated, not Expanded

I’m not a fan of the International Monetary Fund (IMF).

Since I work mostly on fiscal issues, I don’t like the fact that the bureaucracy is an avid cheerleader for ever-higher taxes (which is disgustingly hypocritical since IMF employees get lavish, tax-free salaries).

But the biggest problem with the IMF is that it promotes “moral hazard.” More specifically, it provides bailouts for irresponsible governments and for those who foolishly lend to those governments.

The net result is that bad behavior is rewarded, which is a recipe for more bad behavior.

All of which explains why some nations (and their foolish lenders) have received dozens of bailouts.

Oh, and let’s not forget that these endless bailouts also lead to a misallocation of capital, thus reducing global growth.

In an article for the New York Times, Patricia Cohen reports on discussions to expand the IMF’s powers.

Once narrowly viewed as a financial watchdog and a first responder to countries in financial crises, the I.M.F. has more recently helped manage two of the biggest risks to the worldwide economy: the extreme inequality and climate change. …long-held beliefs like the single-minded focus on how much an economy grows, without regard to problems like inequality and environmental damage, are widely considered outdated. And the preferred cocktail for helping debt-ridden nations that was popular in the 1990s and early 2000s — austerity, privatization of government services and deregulation — has lost favor in many circles as punitive and often counterproductive.

There’s a lot to dislike about the above excerpts.

Starting with the article’s title, since it would be more accurate to say that the IMF’s bailout policies encourage fires.

Multiple fires.

Looking at the text, the part about “extreme inequality” is nonsensical, both because the IMF hasn’t done anything to “manage” the issue, other than to advocate for class-warfare taxes.

Moreover, there’s no support for the empty assertion that inequality is a “risk” to the world economy (sensible people point out that the real problem is poverty, not inequality).

Ms. Cohen also asserts that the “preferred cocktail” of  pro-market policies (known as the Washington Consensus) has “lost favor,” which certainly is accurate.

But she offers another empty – and inaccurate – assertion by writing that it was “counterproductive.”

Here are some additional excerpts.

The debate about the role of the I.M.F. was bubbling before the appointment of Ms. Georgieva… But she has embraced an expanded role for the agency. …she stepped up her predecessors’ attention to the widening inequality and made climate change a priority, calling for an end to all fossil fuel subsidies, for a tax on carbon and for significant investment in green technology. …Sustainable debt replaced austerity as the catchword. …The I.M.F. opposed the hard line taken by some Wall Street creditors in 2020 toward Argentina, emphasizing instead the need to protect “society’s most vulnerable” and to forgive debt that exceeds a country’s ability to repay.

The last thing the world needs is “an expanded role” for the IMF.

It’s especially troubling to read that the bureaucrats want dodgy governments to have more leeway to spend money (that’s the real meaning of “sustainable debt”).

And if the folks at the IMF are actually concerned about “society’s most vulnerable” in poorly run nations such as Argentina, they would be demanding that the country copy the very successful poverty-reducing policies in neighboring Chile.

Needless to say, that’s not what’s happening.

The article does acknowledge that not everyone is happy with the IMF’s statist agenda.

Some stakeholders…object to what’s perceived as a progressive tilt. …Ms. Georgieva’s activist climate agenda has…run afoul of Republicans in Congress… So has her advocacy for a minimum global corporate tax.

It would be nice, though, if Ms. Cohen had made the article more balanced by quoting some of the critics.

The bottom line, as I wrote last year, is that the world would be better off if the IMF was eliminated.

Simply stated, we don’t need an international bureaucracy that actually argues it’s okay to hurt the poor so long as the rich are hurt by a greater amount.

P.S. The political leadership of the IMF is hopelessly bad, as is the bureaucracy’s policy agenda. That being said, there are many good economists who work at the IMF and they often produce high-quality research (see here, here, here, here, here, here, here, here, here, and here). Sadly, their sensible analyses doesn’t seem to have any impact on the decisions of the organization’s top bureaucrats.

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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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Should the United Nations Decide that Low Taxes Are a Violation of Human Rights?

Professor James Buchanan won a Nobel Prize for developing the theory of “public choice,” which looks at how politicians, bureaucrats, and voters seek to maximize their self interest, generally in ways that lead to an ever-expanding burden of government.

Some people wonder why Buchanan’s analysis was prize-worthy when the unseemly nature of government has long been understood (as illustrated by the quote from Thomas Jefferson).

But it was a revelation for most academic economists, who – when they did policy analysis – naively assumed that people in government were motivated only by a desire to improve society.

I’m starting today’s column with this bit of background because I want to remind people that government has a natural tendency to expand. Often in an economically suicidal fashion, as we see from nations such as Greece and Venezuela.

Indeed, that’s the reason for my theorem on “Goldfish Government.”

But awful policy doesn’t have to be the outcome. The final part of the theorem says that bad results can be averted if there’s some sort of external constraint on rapacious government.

In the United States, our Founders gave us a Constitution that was explicitly designed to constrain the power of government. And it worked, at least up until FDR’s Supreme Court decided to put ideology above the law.

“Tax competition” is another constraint on government greed. This is the premise that the “stationary bandit” of government won’t tax and spend as much when politicians know that people and businesses can move across borders to escape bad policy.

And tax competition works. In recent decades, politicians have faced pressure to lower tax rates. Even for groups that they normally target, such as corporations and upper-income taxpayers.

Needless to say, politicians don’t like this development. Interest groups don’t like this development. International bureaucracies don’t like this development. And folks on the left don’t like this development.

Indeed, the non-profit groups on the left are vociferous opponents of tax competition, precisely because they understand it is a threat to their agenda.

I’ve previously written about the dodgy work of Oxfam. Today, let’s look at the agenda of Christian Aid (they obviously believe in Socialist Jesus rather than Libertarian Jesus).

Sorley McCaughey is with the Irish branch of that organization and he argues in the Irish Times that low taxes are a violation of human rights, as defined by the United Nations.

I’m not joking. Here are some excerpts from his column.

…the United Nations General Assembly adopted the Convention on the Rights of the Child. …Ratified by Ireland and more than 120 countries, signatory states are bound by the obligations within the treaty and compliance is assessed by the UN Committee on the Rights of the Child every five years. In a landmark decision earlier this month, the committee confirmed that their current review of Ireland will, for the first time, consider the country’s role in facilitating tax avoidance and whether it undermines the ability of developing countries to raise revenue and guarantee the rights of children. …The decision…has the potential to change the way tax competition between countries is assessed. …Justice demands a reorientation of tax policy that puts principles of international cooperation, equality and human rights – including those of children – at its core.

As you might expect, there are plenty of people in the United Nations who also are pushing an anti-tax competition agenda.

And it’s been going on for a while. Here are some excerpts from a 2016 story.

A United Nations human rights expert has urged the…UN secretary-general to make the elimination of tax havens a priority to ensure that corporations, billionaires and ‘kleptocrats’ pay their fair share of taxes. …American law professor Alfred de Zayas also urged Antonio Guterres…to call a world conference on phasing out the offshore havens. …De Zayas urged the General Assembly to draft a convention to outlaw tax havens worldwide.

And here are passages from another report that year.

Juan Pablo Bohoslavsky, the UN Independent Expert on foreign debt and human rights, and two members of the Human Rights Council Advisory Committee, Obiora Okafor and Jean Ziegler, stressed the importance of establishing a UN body designated specifically to target and eliminate tax heaven secrecy. …countries lose hundreds of billions of dollars every year…funds that could and should be used to fund public services such as health care, schools, housing, social security… “States must set uniform minimum taxation floors, to prevent individuals and business entities from shopping for the lowest possible tax rates,” experts stated.

The following year, in 2017, I took part in a meeting of the U.N.’s so-called Committee of Experts on International Cooperation in Tax Matters, as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters.

At the risk of understatement, it was an eye-opening experience as participant after participant discussed ways of extracting more money from the productive sector of the economy (very similar to what I observed when participating in conferences at the U.N. in 2012 and 2019).

And I’ve written over the years about various U.N. proposals for global taxes on financial transactions, energy, wealth, tobacco, air travel, and the Internet.

All of these proposals are based on the flawed theory that bigger government can promote development. And all of the proposals also are hypocritical since U.N. bureaucrats, like their counterparts at other international bureaucracies, are exempt from tax.

Maybe the moral of the story is that we should tighten belts at the United Nations rather than allow the bureaucrats to push policies that tighten the belts of people who actually pay taxes?

P.S. James Buchanan was the target of a despicable smear by a taxpayer-funded academic hack.

P.P.S. If it’s even possible, the work the United Nations does on poverty is even worse than its work on taxation.

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The IMF Urges Nations to Adopt Greek-Style Fiscal Policy

Bernie Sanders was considered a hard-core leftist because his platform was based on higher taxes and higher spending.

Elizabeth Warren also was considered a hard-core leftist because she advocated a similar agenda of higher taxes and higher spending.

And Joe Biden, even though he is considered to be a moderate, is currently running on a platform of higher taxes and higher spending.

Want to know who else is climbing on the economically suicidal bandwagon of higher taxes and higher spending? You probably won’t be surprised to learn that the pro-tax International Monetary Fund just published its World Economic Outlook and parts of it read like the Democratic Party’s platform.

Here are some of the ways the IMF wants to expand the burden of government spending.

Investments in health, education, and high-return infrastructure projects that also help move the economy to lower carbon dependence… Moreover, safeguarding critical social spending can ensure that the most vulnerable are protected while also supporting near-term activity, given that the outlays will go to groups with a higher propensity to spend their disposable income… Some fiscal resources…should be redeployed to public investment—including in renewable energy, improving the efficiency of power transmission, and retrofitting buildings to reduce their carbon footprint. …social spending should be expanded to protect the most vulnerable where gaps exist in the safety net. In those cases, authorities could enhance paid family and sick leave, expand eligibility for unemployment insurance, and strengthen health care benefit coverage…social spending measures…strengthening social assistance (for example, conditional cash transfers, food stamps and in-kind nutrition, medical payments for low-income households), expanding social insurance (relaxing eligibility criteria for unemployment insurance…), and investments in retraining and reskilling programs.

And here’s a partial list of the various class-warfare taxes that the IMF is promoting.

Although adopting new revenue measures during the crisis will be difficult, governments may need to consider raising progressive taxes on more affluent individuals and those relatively less affected by the crisis (including increasing tax rates on higher income brackets, high-end property, capital gains, and wealth) as well as changes to corporate taxation that ensure firms pay taxes commensurate with profitability. …Efforts to expand the tax base can include reducing corporate tax breaks, applying tighter caps on personal income tax deductions, instituting value-added taxes.

Oh, by the way, if nations have any rules that protect the interests of taxpayers, the IMF wants “temporary” suspensions.

Where fiscal rules may constrain action, their temporary suspension would be warranted

Needless to say, any time politicians have a chance to expand their power, temporary becomes permanent.

When I discuss IMF malfeasance in my speeches, I’m frequently asked why the bureaucrats propose policies that don’t work – especially when the organization’s supposed purpose is to promote growth and stability.

The answer is “public choice.” Top IMF officials are selected by politicians and are given very generous salaries, and they know that the best way to stay on the gravy train is to support policies that will please those politicians.

And because their lavish salaries are tax free, they have an extra incentive to curry favor with politicians.

P.S. I wish there was a reporter smart enough and brave enough to ask the head of the IMF to identify a single nation – at any point in history – that became rich by expanding the size and cost of government.

P.P.S. There are plenty of good economists who work for the IMF and they often write papers pointing out the economic benefits of lower taxes and smaller government (and spending caps as well!). But the senior people at the bureaucracy (the ones selected by politicians) make all the important decisions.

 

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The World Health Organization’s Predictable Coronavirus Failure

Reviewing public policy and the coronavirus, I’ve mostly focused on the manifest failures of Washington bureaucracies.

But let’s not overlook the politicized incompetence of the World Health Organization, a U.N.-connected bureaucracy that ostensibly exists to prevent global pandemics.

Much of that criticism, as illustrated by this National Review column by Senator Marco Rubio, has focused on the WHO’s ties to China.

…there is grave cause for concern over the independence of the United Nations’ World Health Organization (WHO). …a systemic problem within WHO leadership: a subservience to Beijing that comes at the expense of its stated commitment to public health. …the WHO refused to act on or publicize Taiwan’s warning that the new respiratory infection emerging in China could pass from human to human. …the organization repeated the CCP’s lie that there was no evidence of human-to-human transmission. …the WHO, at Beijing’s behest, also blocked Taiwan from participating in critical meetings to coordinate responses to the coronavirus and even reportedly provided wrong information about the virus’s spread in Taiwan. …the U.S. — the WHO’s largest financial contributor, giving five times as much money as obligated… I will also work with my colleagues in Congress to review U.S. contributions to the WHO.

None of this is surprising. International bureaucracies are politicized, and their activities are designed and packaged in part to please the nations that provide funds (especially since the bureaucrats at places such as the WHO get lucrative tax-free remuneration and they don’t want to derail the gravy train).

I’ve made this same point when writing about how European welfare states, which dominate the membership of the Organization for Economic Cooperation and Development, pushed the Paris-based bureaucracy into fighting against tax competition. So it’s not simply a China-specific problem.

The bigger issue is that the WHO, like almost all bureaucracies, has become sclerotic and self-aggrandizing.

For instance, it has sought to expand its power and budget by getting involved in lifestyle issues.

I’ve previously written about the WHO’s reprehensible efforts to harmonize tobacco taxation (including a column about the bureaucracy’s attempted censorship).

But that didn’t have any effect. A few years ago, the then-Director General of the WHO co-authored a column in the Washington Post extolling the bureaucracy’s attempts to dictate global tobacco taxation.

…tobacco taxes have already been formally endorsed by governments representing 90 percent of the world’s people, through a legally binding global treaty — the World Health Organization Framework Convention on Tobacco Control… The United Nations should encourage countries to raise tobacco taxes to support the world’s development goals.

Peter Suderman points out another bizarre example of WHO mission creep.

Last year, the World Health Organization (WHO) officially classified video game addiction as a mental disorder. …But now, with much of the global economy shuttered due to a pandemic, and health experts issuing increasingly strenuous recommendations for people to avoid leaving the house whenever possible, the WHO is encouraging people to stay home—and play video games.

And Matt Ridley authored a persuasive indictment of the WHO for the U.K.-based Telegraph, including a critique of the bureaucracy for getting involved in extraneous issues such as obesity and climate change.

There are three charges against WHO. First, it failed to prepare the world for a pandemic, spending the years since the Sars and ebola alarms talking more about climate change, obesity and tobacco… Second, once the epidemic began in China, WHO downplayed its significance… The third charge against WHO is that it has failed before. When the ebola outbreak in West Africa that was to kill 11,000 people began in late 2013, on its own admission WHO hindered the fight against the virus… WHO gives the impression it would rather reprimand rich countries for climate change or bad eating habits than worry about epidemics. It’s also a bit obsessed with celebrities. …On 28 March this year, Tedros found time to tweet about having had “a very good call with @ladygaga.” …It is an open secret among international diplomats and public health experts that WHO is “not fit for mission” (as one of them put it to me), riddled with politics and bureaucracy.

So what’s the bottom line?

The Wall Street Journal‘s editorial aptly summarizes the situation, suggesting that it may be time to end subsidies for the WHO from American taxpayers.

The coronavirus pandemic will offer many lessons in what to do better to save more lives and do less economic harm the next time. But there’s already one way to ensure future pandemics are less deadly: Reform or defund the World Health Organization (WHO). …Much of the blame for WHO’s failures lies with Dr. Tedros, who is a politician, not a medical doctor. As a member of the left-wing Tigray People’s Liberation Front, he rose through Ethiopia’s autocratic government as health and foreign minister. After taking the director-general job in 2017, he tried to install Zimbabwe dictator Robert Mugabe as a WHO goodwill ambassador. …If WHO is merely a politicized Maginot Line against pandemics, then it is worse than useless and should receive no more U.S. funding. And if foreign-policy elites want to know why so many Americans mistrust international institutions, WHO is it.

I’ll close with an article for the Federalist by Richard Tren. He starts by acknowledging that the WHO did good work in its early days, but then sacrificed lives to appease a handful of rich donor nations.

Early in the organization’s history, when it was allowed to take a more paternalistic approach to disease control in poor countries, it recorded considerable progress against diseases such as river blindness, yaws, leprosy, polio, and malaria. …By the 1970s, however, there was a general move away from disease-specific programs and toward more holistic health programs. …this change of focus had disastrous consequences for malaria control. …The WHO’s global malaria eradication program, which it began in the 1950s and was largely based on the use of public health insecticides, …saved about 1 billion lives, which is a remarkable achievement by anyone’s standards. The move against insecticides and the focus on family planning meant the disease slowly started to reemerge. By the early 2000s, about 1 million people were dying of malaria every year. …wealthy donor countries, such as Sweden and Canada, kept pressure on the WHO to stop the use of these life-saving chemicals.

Interestingly, he concludes with a story about WHO bureaucrats admitting their employer should be shut down.

Several years ago, while visiting Geneva during the WHO’s annual World Health Assembly, I had a fascinating discussion with two long-term WHO staffers… The two, who shall remain nameless, had worked for the organization for many years in various locations around the world and knew the WHO well. In our conversations, I thought I would be criticizing the WHO and they would be defending it. Far from it. They described the backstabbing and the politics, both internal and external, which had frustrated their work and probably cost lives. “But surely we need something like the WHO to control things like global pandemics and other emergencies,” I said. “No,” they both responded. These long-standing public health professionals argued the world didn’t need the WHO, even when dealing with a pandemic. They believed it should be shut down. The Wuhan virus has shown that even during pandemics, the WHO will put politics ahead of public health.

I’ve had current and former OECD employees say the same thing, so I’m not surprised that some bureaucrats at the WHO have the same attitude.

It must be depressing to be a non-ideological professional and watch your organization get hijacked by those who care primarily about budgetary expansion and personal aggrandizement.

So if we ever get to that wonderful day when Washington puts an end to taxpayer subsidies for the OECD, maybe they’ll simultaneously defund the WHO as well.

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Yes to Globalization, No to Global Governance

I’m a big fan of globalization, so does that make me a globalist?

That depends on what is meant by that term. If it means free trade and peaceful interaction with other nations, the answer is yes.

But if it means global governance by anti-market bureaucracies such as the United Nations, International Monetary Fund, and Organization for Economic Cooperation and Development, the answer is a resounding no.

So I have mixed feelings about this video from Dalibor Rohac of the American Enterprise Institute.

I can’t resist nit-picking on some of his points.

• Brexit was unquestionably a vote about the merits of membership in the European Union. The 2016 presidential election was about a lot of issues (trade, immigration, Hillary Clinton, etc). The United Nations was an asterisk at most.
• A nation can import flags (or anything else) while retaining sovereignty. A nation can also make a sovereign choice to abide by a certain set of trade rules, such as the World Trade Organization.
• In reference to the Hanseatic League and the Holy Roman Empire, trade pacts and military alliances also can be seen as expressions of sovereignty.

While I have disagreements with Dalibor, that definitely doesn’t put me in the same camp as Donald Trump.

The President is an incoherent mix. He combines odious protectionism with mostly-empty rhetoric about globalism. And he does all that without understanding issues – and, in some cases, his actions are contrary to his rhetoric.

Dan Henninger wrote about these issues two days ago for the Wall Street Journal.

He wisely warns that failures by national governments (most notably unaffordable welfare states and incompetent administrative states) are creating openings for unpalatable alternatives.

Global governance is one distressing possibility. Henninger worries about Chinese-style administrative authoritarianism.

President Trump at the United Nations this week elaborated on his long-running antagonism toward globalism. …There is merit to these concerns, but I think the critics of “globalism,” including most prominently Mr. Trump, underestimate the near-term danger of the serious difficulties appearing today in national democratic governance. Democracies maintain their legitimacy in the public’s eye only if they demonstrate a reasonable capacity to address society’s inevitably complex challenges. …it’s clear that many of the 21st century’s independent nations are having a remarkably difficult time executing their sovereign responsibilities. …Mr. Trump’s concerns about undemocratic governance by remote international bureaucracies are plausible, but the greater threat is more imminent. If the expansion of an increasingly dysfunctional administrative state inside the world’s sovereign democracies is inexorable and unreformable, the future will belong to China’s brand of administrative authoritarianism. …Elizabeth Warren and her multiple plans—heavily dependent on criminal prosecutions and intense oversight—is flirting with a milder version of this future.

Henninger is certainly correct that nations mostly get in trouble because of their own mistakes.

For instance, I’ve pointed out that the fiscal crisis in Europe should not be blamed on the euro.

That being said, global governance often creates moral hazard, which tends to exacerbate and encourage bad policy by national governments.

Let’s now look at an interesting column that John Bolton (Trump’s former National Security Advisor) wrote on global governance for the U.K.-based Times back in 2016. Here are some of the key passages.

He makes the should-be-obvious point that not all international bureaucracies are alike.

…international organisations sometimes act as if they are governments rather than associations of governments and sprout bureaucracies with pretensions beyond those of cosseted elites in national capitals. …International bodies take many different forms, and it serves no analytical purpose to treat them interchangeably. Nato, for example, is not equivalent to the United Nations. Neither is equivalent to the European Union. Each has different objectives, and different implications for constitutional and democratic sovereignty. …Nato is America’s kind of international partnership: a classic politico-military alliance of nation states. It has never purported to assume sovereign functions, and is as distant as is imaginable from the EU paradigm.

He explains that some of them – most notably the IMF – are counterproductive and should be shut down.

Proposals to reform the UN and its affiliated bodies such as the World Bank and the IMF are almost endless. The real question is whether serious, sweeping reform of these organisations…is ever possible. …In 1998, during the Asian financial crisis, the former secretaries of the Treasury William Simon and George Shultz, and Walter Wriston, a former chairman of Citibank, wrote in The Wall Street Journal: “The IMF is ineffective, unnecessary, and obsolete. We do not need another IMF, as Mr. [George] Soros recommends. Once the Asian crisis is over, we should abolish the one we have.” …We should consider privatising all the development banks… We should ask why US taxpayers are compelled to provide subsidised interest rates for loans by international development banks.

Amen.

He also opines about Brexit.

…the Brexit referendum was, above all else, a reassertion of British sovereignty, a declaration of independence from would-be rulers who, while geographically close, were remote from the peasantry they sought to rule. …The Brexit decision was deplored by British and American elites alike… It does not surprise Americans that British elites have not reconciled themselves to losing… London and Washington can fashion a new economic relationship, perhaps involving Canada, with the potential for significant economic growth. Let the EU wallow in strangling economic regulation, and the euro albatross that Britain wisely never joined.

He’s right, especially the final sentence of that excerpt.

I’ll conclude by reiterating my observation that we should distinguish between good globalization and bad globalization.

The good kind involves trade, peaceful interaction, and jurisdictional competition, all of which are consistent with sovereignty.

The bad kind of globalism involves international bureaucracies acting as supranational governments – almost always (as Nobel laureate Edward Prescott observed) with the goal of enabling and facilitating a larger burden of government.

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Four Things to Understand about the Taxation of International Businesses

A few years ago, I put together a basic primer on corporate taxation. Everything I wrote is still relevant, but I didn’t include much discussion about international topics.

In part, that’s because those issues are even more wonky and more boring than domestic issues such as depreciation. But that doesn’t mean they’re not important – especially when they involve tax competition. Here are some comments I made in March of last year.

The reason I’m posting this video about 18 months after the presentation is that the issue is heating up.

The tax-loving bureaucrats at the International Monetary Fund have published a report whining about the fact that businesses utilize low-tax jurisdictions when making decisions on where to move money and invest money.

According to official statistics, Luxembourg, a country of 600,000 people, hosts as much foreign direct investment (FDI) as the United States and much more than China. Luxembourg’s $4 trillion in FDI comes out to $6.6 million a person. FDI of this size hardly reflects brick-and-mortar investments in the minuscule Luxembourg economy. …much of it is phantom in nature—investments that pass through empty corporate shells. These shells, also called special purpose entities, have no real business activities. Rather, they carry out holding activities, conduct intrafirm financing, or manage intangible assets—often to minimize multinationals’ global tax bill. …a few well-known tax havens host the vast majority of the world’s phantom FDI. Luxembourg and the Netherlands host nearly half. And when you add Hong Kong SAR, the British Virgin Islands, Bermuda, Singapore, the Cayman Islands, Switzerland, Ireland, and Mauritius to the list, these 10 economies host more than 85 percent of all phantom investments.

That’s a nice list of jurisdictions. My gut instinct, of course, is to say that high-tax nations should copy the pro-growth policies of places such as Bermuda, Singapore, the Cayman Islands, and Switzerland.

The IMF, however, thinks those are bad places and instead argues that harmonization would be a better approach.

…how does this handful of tax havens attract so much phantom FDI? In some cases, it is a deliberate policy strategy to lure as much foreign investment as possible by offering lucrative benefits—such as very low or zero effective corporate tax rates. …This…erodes the tax bases in other economies. The global average corporate tax rate was cut from 40 percent in 1990 to about 25 percent in 2017, indicating a race to the bottom and pointing to a need for international coordination. …the IMF put forward various alternatives for a revised international tax architecture, ranging from minimum taxes to allocation of taxing rights to destination economies. No matter which road policymakers choose, one fact remains clear: international cooperation is the key to dealing with taxation in today’s globalized economic environment.

Here’s a chart that accompanied the IMF report. The bureaucrats view this as proof of something bad

I view it as prudent and responsible corporate behavior.

At the risk of oversimplifying what’s happening in the world of international business taxation, here are four simple points.

1. It’s better for prosperity if money stays in the private sector, so corporate tax avoidance should be applauded. Simply stated, politicians are likely to waste any funds they seize from businesses. Money in the private economy, by contrast, boosts growth.
2. Multinational companies will naturally try to “push the envelope” and shift as much income as possible to low-tax jurisdictions. That’s sensible corporate behavior, reflecting obligation to shareholders, and should be applauded.
3. Nations can address “profit shifting” by using rules on “transfer pricing,” so there’s no need for harmonized rules. If governments think companies are pushing too far, they can effectively disallow tax-motivated shifts of money.
4. A terrible outcome would be a form of tax harmonization known as “global formula apportionment.” This wouldn’t be harmonizing rates, as the E.U. has always urged, but it would force companies to overstate income in high-tax nations.

Why does all this wonky stuff matter?

As I said in my presentation, we will suffer from “goldfish government” unless tax competition exiss to serve as a constraint on the tendency of politicians to over-tax and over-spend.

P.S. Sadly, America’s Treasury Secretary is sympathetic to global harmonization of business taxation.

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A Primer on Tax Competition and the OECD

Speaking in Europe earlier this year, I tried to explain the entire issue of tax competition is less than nine minutes.

To some degree, those remarks were an updated version of a video I narrated back in 2010.

You’ll notice that I criticized the Organization for Economic Cooperation and Development in both videos.

And with good reason. The Paris-based OECD has been trying to curtail tax competition in hopes of propping up Europe’s uncompetitive welfare states (i.e., enabling “goldfish government“).

As I stated in the second video, the bureaucrats sometimes admit this is their goal. In recent years, though, OECD officials have tried to be more clever, even claiming that they’re pushing for higher taxes because that approach somehow is a recipe for higher growth.

Let’s look at a new example of OECD malfeasance.

We’ll start with something that appears to be innocuous. Or even good news. A report from the OECD points out that corporate tax rates are falling.

Countries have used recent tax reforms to lower taxes on businesses… Across countries, the report highlights the continuation of a trend toward corporate income tax rate cuts, which has been largely driven by significant reforms in a number of large countries with traditionally high corporate tax rates. The average corporate income tax rate across the OECD has dropped from 32.5% in 2000 to 23.9% in 2018. …the declining trend in the average OECD corporate tax rate has gained renewed momentum in recent years.

Sounds good, right?

From the OECD’s warped perspective, however, good news for the private sector is bad news for governments.

As a result, the bureaucrats are pushing for policies that would penalize jurisdictions with low tax rates.

The Organisation for Economic Co-operation and Development is going to propose a global minimum tax that would apply country by country before the next meeting of G‑20 finance ministers and central bankers set for 17 Oct. in Washington, DC. …The OECD’s head of tax policy, Pascal Saint-Amans, said a political push was needed to relaunch the discussions and used the case of the Cayman Islands to explain the proposal. “The idea is if a company operates abroad, and this activity is taxed in a country with a rate below the minimum, the country where the firm is based could recover the difference.” …While this framework is based on an average global rate, Saint-Amans said the OECD is working on a country-by-country basis. Critics of the proposal have said that this would infringe on the fiscal sovereignty of countries.

And as I’ve already noted, the U.S. Treasury Department is not sound on this issue.

This would work in a similar way to the new category of foreign income, global intangible low-tax income (GILTI), introduced for US multinationals by the 2017 US tax reform. GILTI effectively sets a floor of between 10.5% and 13.125% on the average foreign tax rate paid by US multinationals.

There are two aspects of this new OECD effort that are especially disturbing.

• First, there’s already an ongoing OECD project to increase the tax burden on the business community.
• Second, even the OECD’s own research shows that lower corporate rates haven’t resulted in less tax revenue.

In a perverse way, I admire the OECD’s aggressiveness.

Whatever is happening, the bureaucrats turn it into a reason why tax burdens should increase.

The inescapable conclusion, as explained by Dominik Feusi of Switzerland, is that the OECD is trying to create a tax cartel.

Under the pretext of taxing the big Internet companies, a working group of the OECD on behalf of the G-20 and circumventing the elected parliamentarians of the member countries to a completely new company taxation. …The competition for a good framework for the economy, including low corporate taxes, will not be abolished, but it will be useless. However, if countries no longer have to take good care of the environment, because they are all equally bad, then they will increase taxes together. …This has consequences, because wages, wealth, infrastructure and social security in Western countries are based on economic growth. Less growth means lower wages. The state can only spend what was first earned in a free economy… The OECD was…once a platform for sharing good economic policy for the common good. This has become today a power cartel of the politicians… They behave as a world government – but without democratic mission and legitimacy.

Veronique de Rugy of the Mercatus Center examined the OECD and decided that American taxpayers should stop subsidizing the Paris-based bureaucracy.

Taxpayers are spending millions of dollars every year funding an army of bureaucrats who advocate higher taxes and bigger government around the globe. Last year, the United States sent $77 million to the Organization for Economic Cooperation and Development, the largest single contribution and fully 21 percent of the Paris-based bureaucracy’s $370 million annual budget. Add to that several million dollars in additional expenses for special projects and the U.S. mission to the OECD. …despite the OECD’s heavy reliance on American taxpayer funds, the organization persistently works against U.S. interests, arguing for international tax cartels, the end of privacy, redistribution schemes and other big-government fantasies. Take its campaign for tax harmonization, begun as a way to protect high-tax nations from bleeding more capital to lower-tax jurisdictions. …The OECD may recognize competition is good in the private sector, but promotes cartelization policies to protect politicians. …The bureaucrats, abetted by the European Union and the United Nations, even started clamoring for the creation of some kind of international tax organization, for global taxation and more explicit forms of tax harmonization.

These articles are spot on.

As you can see from this interview, I’ve repeatedly explained why the OECD’s anti-market agenda is bad news for America.

Which is why, as I argue in this video, American taxpayers should no longer subsidize the OECD.

It’s an older video, but the core issues haven’t changed.

Acting on behalf of Europe’s uncompetitive welfare states, the OECD relentlessly promotes a statist agenda.

That’s a threat to the United States. It’s a threat to Europe. And it’s a threat to every other part of the globe.

P.S. To add more insult to all the injury, the tax-loving bureaucrats at the OECD get tax-free salaries. Must be nice to be exempt from the bad policies they support.

P.P.S. If you’re not already sick of seeing me on the screen, I also have a three-part video series on tax havens and even a video debunking some of Obama’s demagoguery on the topic.

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The IMF’s Brexit Analysis: Predictably Shoddy and Politicized

Back in 2016, I wrote “The Economic Case for Brexit.”

My argument was based on the fact the European Union was a slowly sinking ship, both because of grim demographics and bad public policy.

Getting in a lifeboat can be unnerving, but Brexit was – and still is – better than the alternative of continued E.U. membership.

But not everyone shared my perspective.

The BBC reported that year that Brexit would produce terrible consequences according to the International Monetary Fund.

Christine Lagarde said she had “not seen anything that’s positive” about Brexit and warned that it could “lead to a technical recession”. …The IMF said in a report on the UK economy that a leave vote could have a “negative and substantial effect”. It has previously said that such an outcome could lead to “severe regional and global damage”. The Fund said a Brexit vote would result in a “protracted period of heightened uncertainty” and could result in a sharp rise in interest rates, cause volatility on financial markets and damage London’s status as a global financial centre.

Yet none of these bad predictions were accurate.

Not right away and not in the three years since U.K. voters opted for independence.

Not that we should be surprised. The IMF has a very bad track record on economic forecasting. And the forecasts are probably especially inaccurate when the bureaucrats, given the organization’s statist bias, are trying to influence the outcome (the IMF was part of “Project Fear”).

But a history of bias and inaccuracy hasn’t stopped the IMF from continuing to interfere with British politics. Here are some excerpts from a story earlier this week.

Boris Johnson has been warned that a No Deal Brexit is one of the biggest risks facing the global economy. In a broadside against the new Prime Minister’s ‘do or die’ pledge to leave the European Union at the end of October with or without a deal, the International Monetary Fund said a chaotic departure could cause havoc across the world. …No Deal is one of the gravest threats to international economic performance, the IMF said. …Eurosceptics have long criticised the IMF for anti-Brexit rhetoric and it has been one of the loudest opponents of No Deal, saying in April that it could trigger a lengthy UK recession.

I was both disgusted and upset when I read this story.

I don’t like when the IMF subsidizes bad policy with bailouts, and I also don’t like when it promotes bad policy with analysis.

Fortunately, I don’t need to do any substantive number crunching because Professor Steve Hanke of Johns Hopkins University has a superb Forbes column on this exact issue.

No sooner than Boris Johnson put his foot over the threshold of 10 Downing Street, the International Monetary Fund (IMF) offered its unsolicited advice… In a preemptive strike, the Philosopher Kings threw cold water on the idea of a no deal, asserting that it would be a disaster. …such meddling is nothing new for the IMF. Indeed, a bipartisan Congressional commission (The International Financial Advisory Commission, known as the Meltzer Commission) concluded in 2000 that the IMF interferes too much in the domestic politics of member countries.

Professor Hanke is perplexed that anyone would listen to IMF bureaucrats given their awful track record.

…the IMF’s ability to…thrive…is quite remarkable in light of the IMF’s performance. As Harvard University’s Robert Barro put it, the IMF reminds him of Ray Bradbury’s Fahrenheit 451 “in which the fire department’s mission is to start fires.” Barro’s basis for that conclusion is his own extensive research.  His damning evidence finds that: A higher IMF loan participation rate reduces economic growth. IMF lending lowers investment. A greater involvement in IMF programs lowers the level of the rule of law and democracy. And if that’s not bad enough, countries that participate in IMF programs tend to be recidivists. In short, IMF programs don’t provide cures, but create addicts.

This is why I’ve referred to the IMF as the “dumpster fire” of the world economy and also called the bureaucracy the “Dr. Kevorkian” of international economic policy.

By the way, here’s Professor Hanke’s table of the IMF’s main addicts.

I wrote just two weeks ago about the IMF’s multiple bailouts of Pakistan, the net effect of what have been to subsidize bigger government.

Let’s close with more of Professor Hanke’s analysis.

The original reason for its creation has completely vanished.

The IMF, which was born in 1944, was designed to provide short-term assistance on the cheap to countries whose currencies were pegged to the U.S. dollar via the Bretton Woods Agreement. …But, in 1971, when President Richard Nixon closed the gold window, the Bretton Woods exchange-rate system collapsed. And, with that, the IMF’s original purpose was swept into the dustbin. However, since then, the IMF has used every rationale under the sun to reinvent itself and expand its scope and scale. …And, in the process of acquiring more power, it has become more political.

Sadly, he is not optimistic about shutting down this destructive – and cossetted – bureaucracy.

The IMF should have been mothballed and put in a museum long ago. After all, its original function was buried in 1971, and its performance in its new endeavors has been less than stellar. But, a museum for the IMF is not in the cards. …About all we can do is realize that the IMF is a political hydra with an agenda to serve the wishes of the political elites who allow it to grow new heads.

P.S. Here’s my explanation of how the U.K. can prosper in a post-Brexit world.

P.P.S. Here’s some academic research explaining how E.U. membership has undermined prosperity for member nations.

P.P.P.S. If you want Brexit-related humor, click here and here.

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The Sustainable Development Goals of the United Nations: Good Objectives, Wrong Policies

I’m doing my third field trip to the United Nations.

In 2012, I spoke at a conference that was grandiosely entitled, “The High Level Thematic Debate on the State of the World Economy.” I was a relatively lonely voice trying to explain that a bigger burden of government would hinder rather than promote economic development.

In 2017, I was a credentialed observer to the 14th Session of the Committee of Experts on International Cooperation in Tax Matters, as well as the Special Meeting of ECOSOC on International Cooperation in Tax Matters. I somehow survived having to spend several days listening to government officials wax poetic about various schemes to extract more money from the productive sector of the economy.

This year, I”m at the U.N. participating in the 17th International Forum of the Convention of Independent Financial Advisors. My panel focused on taxation and the U.N.’s Sustainable Development Goals.

Here are the goals, which presumably are widely desirable.

The controversial part is how to achieve these goals.

Many of the folks at the U.N. assert that governments need more money. A lot more money.

A new Fund to support UN activities that will help countries achieve the Sustainable Development Goals was launched today by UN Deputy-Secretary-General Amina Mohammed at a ministerial meeting to review financing for sustainable development. …Ms. Mohammed said the new Fund will “provide some muscle” to help UN country teams support countries’ efforts and priorities to achieve the 2030 Agenda – the global agenda that sets out 17 goals to promote prosperity and improve people’s well-being while protecting the environment. “It will help us hit the ground running and to pick up the pace,” for financing the Goals, she said, cautioning that it was still only part of the estimated $300 trillion that will be needed.

Needless to say, $300 trillion is a lot of money. Even when spread out between now and 2030.

To put that number in perspective, the annual GDP (economic output) of the United States is about $20 trillion.

My concern, whether the number is $300 or $300 trillion, is that folks at the United Nations have a very government-centric view of development.

Which is why I tried to explain that the only successful recipe for progress is free markets and small government.

Take a look at this list of the top-25 jurisdictions as ranked by the United Nations.

And what do these places have in common?

They generally became rich when government was a very minor burden.

This means the 1800s and early 1900s for nations in North America and Western Europe.

And it means the post-World War II era for some of the Pacific Rim jurisdictions.

I concluded with my challenge, asking participants to identify a single nation – anywhere in the world at any point in history – that became rich with big government and high taxes.

The answer is none. Zero. Zilch. Nada.

The bottom line is that many people at the U.N. have a sincere desire to help the world’s less-fortunate people. But they need to put facts and empirical data above statist ideology.

P.S. Maybe the U.N. doesn’t do the right thing about fighting poverty because it has some people who are very dishonest about the topic?

P.P.S. I don’t know whether to classify this as absurd or dishonest, but Jeffrey Sachs actually claimed that Cuba ranks about the United States in meeting the Sustainable Development Goals.

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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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Separate the Baby from the Bathwater to Defend the Rules-Based Postwar Order

Donald Trump and other populist leaders frequently are condemned for undermining the “rules-based system” that is the basis of the “postwar order.”

What exactly is meant by this criticism? In the case of Trump, is it disapproval of his protectionism?

Yes, but that’s just the tip of the iceberg.

The broader accusation is that Trump and the others are insufficiently supportive of the so-called “international architecture” of treaties and organizations (the United Nations, International Monetary Fund, World Trade Organization, World Bank, G-7, Organization for Economic Cooperation and Development, NATO, etc) that western nations created after World War II.

And the critics are right, in my humble opinion.

But that’s besides the point. What’s really needed is a case-by-case analysis to determine whether the aforementioned treaties and organizations are making the world a better place.

To help understand this topic, let’s look at some excerpts from an anonymously authored article in  the latest issue of Cayman Financial Review.

What is the oft-cited “postwar order” that ostensibly is being threatened by populism? …begin with some history. There have been three major attempts to create an international architecture in hopes of discouraging war and encouraging peaceful commerce among world’s countries. The first occurred after the Napoleonic wars, the second occurred after World War I, and the third occurred after World War II.

The article explains that first postwar order was a big success, with 100 years of relative peace and prosperity between 1815 and 1914.

But the second postwar order, which followed World War I, was a miserable failure.

…the urgent economic problems that World War I had created – the need for demobilization, the restoration of the gold standard, the resumption of international trade flows, and the reconstruction of war-ravaged areas. Reparations burdened Germany and contributed to hyperinflation. …Germany depended on American loans to make its reparations payments to France and the United Kingdom. In turn, France and the United Kingdom depended on German reparations to repay their wartime loans from the United States. This financial merry-go-round was inherently unstable. …In the 1930s, many countries tried economic nationalism to escape from the Great Depression. Abandonment of the interwar gold standard, high tariffs to discourage imports, and competitive devaluations to boost exports became widespread. However, these “beggar-thy-neighbor” failed economically, caused the collapse of international trade, and contributed to rising international tensions.

And this grim experience was in the minds of policymakers as they sought to restore a system based on peace and open commerce.

…neither Churchill nor Roosevelt wanted to punish ordinary Germans, Italians or Japanese. Instead of the postwar harshness of Clemenceau, Churchill and Roosevelt favored the postwar magnanimity of Metternich, in which Germany, Italy, and Japan would be reconstructed as democratic capitalist countries. …both Churchill and Roosevelt thought that other new international organizations would be needed to help finance postwar reconstruction, provide stable exchange rates, and promote the progressive liberalization of international trade. …At the risk of oversimplifying, there are four major pieces of what is now loosely though of as the postwar order.

1. The United Nations and other multilateral bodies
2. The International Monetary Fund and World Bank
3. The World Trade Organization and affiliated trade pacts
4. NATO and other military/security alliances

The article is filled with details on how these various institutions evolved.

But for our purposes, let’s focus on ostensible threats to this order. Here’s what “Hamilton” wrote.

All four components of the current international architecture have critics, but they should be examined separately.

1. The United Nations is routinely condemned for being ineffective, wasteful and anti-Western. However, the UN part of the post-war order is not under serious threat. However, the OECD is subject to considerable attacks because of its statist policy agenda.
2. The IMF and World Bank are routinely condemned for being wasteful and anti-market. The IMF also is singled out for bailout policies that are said to encourage profligacy in developing nation and to reward sloppy lending practices by big western banks. Notwithstanding the instability than many say is caused by the IMF, this part of the postwar order is not under serious threat.
3. The WTO and regional FTAs are under threat from a populist backlash in the United States and Europe, driven in large part by angst over financial prospects for lower-skilled workers. This part of the postwar order is under serious threat, especially because U.S. laws give the president significant unilateral powers over trade policy.
4. NATO and other security arrangements are being questioned for both cost and changing geopolitical factors (e.g., the rise of China, Islamic terrorism). While unlikely at this point, dramatic policy changes from the United States could substantially alter the structure and/or operation of these military alliances.

How depressing. The part I like is the part that is under assault.

Here are the key points from the article’s conclusion.

The so-called postwar order is not a monolithic entity. …Some have been very successful. Consider, for instance, the sweeping reduction in trade barriers and the concomitant rise in cross-border commerce. …But other parts of the post-war order do not have very strong track records. Bureaucracies such as the IMF and OECD arguably deserve some hostile attention because of their support for anti-market policies. Policymakers who want to preserve the best parts of the post-war order may want to consider whether it is time to jettison or reform the harmful parts.

This is spot on.

Parts of the “postwar order” should be preserved. The World Trade Organization definitely belongs on that list. And presumably nobody wants to disrupt or eliminate the parts of the “international architecture” that facilitate things such as cross-border air travel, international shipping, and global telecommunications.

But the helpful work of those entities doesn’t change the fact that other entities engage in activities that are counterproductive. A “rules-based order” is only good, after all, if it advancing good rules.

• Is it helpful for the OECD to push for rules hindering tax competition?
• Is it helpful for the IMF to push for rules exacerbating moral hazard?
• Is it helpful for the EU to push for rules requiring tax harmonization?
• Is it helpful for the UN to push for rules undermining civil liberties?’
• Is it helpful for the Basel folks to push for rules increasing systemic risk?

Needless to say, the answer to all of these questions is no.

Which brings to mind the old saying about “Don’t throw the baby out with the bathwater.”

As “Hamilton” wrote, the bad parts of the postwar order should be jettisoned to preserve the good parts.

For those interested in this topic, Adam Tooze of Columbia University has a very interesting article on the same topic.

Published in Foreign Policy, his article basically applies a “public choice” description of how the current postwar order evolved. And he says it initially was not very successful

For true liberals in both the United States and Europe, who hankered after the golden age of globalization in the late 19th century, the resulting Cold War economic order was a profound disappointment. The U.S. Treasury and the first generation of neoliberals in Europe fretted against the U.S. State Department and its interventionist economic tendencies. Mavericks such as the young Milton Friedman—true advocates of free markets in the way we take for granted today—demanded a bonfire of all regulations. …The reality of the liberal order that supposedly came into existence in the postwar moment was the more or less haphazard continuation of wartime controls. It would take until 1958 before the Bretton Woods vision was finally implemented. Even then it was not a “liberal” order by the standard of the gilded age of the 19th century or in the sense that Davos understands it today. International mobility of capital for anything other than long-term investment was strictly limited.

Tooze argues that genuine liberalism (i.e., open markets and trade) didn’t really take hold until the 1980s, with the market-based revolution of Thatcher and Reagan, the “Washington Consensus,” and the collapse of communism.

The stakeholders in the 1970s were obstreperous trade unions, and that kind of consultation was precisely the bad habit that the neoliberal revolutionaries set out to break. …the global victory of the liberal order required a more far-reaching struggle. …the market revolution of the 1980s…  the aftermath of the Cold War, the moment of Western triumph. …the defeat of inflation, this was the age of the Washington Consensus.

For those not familiar with this particular piece of jargon, the “Washington Consensus” refers to the 1980s-era acceptance of free markets as the ideal route for economic development.

And “neoliberal” refers to classical liberalism, not the modern dirigiste version of liberalism found in the United States.

I’ll close by recycling this visual, which attempts to distinguish between good globalism and bad globalism.

The image uses the example of trade and jurisdictional competition, so I don’t pretend is captures all the issues and controversies that we discussed today.

But it reinforces why it is wrong to blindly accept and support the anti-market components of the postwar order simply because there are other parts that deserve our support. The goal is more global prosperity, not less.

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The World Trade Organization Advances American Prosperity

Time for the final installment in my four-part video series on trade-related topics.

• Part I focused on the irrelevance of trade balances.
• Part II looked at specialization and comparative advantage.
• Part III explained trade and creative destruction.

Here’s Part IV, which looks at the very positive role of the World Trade Organization.

My basic argument is that it is a good idea to get other nations to reduce trade barriers, but tit-for-tat protectionism is not the right approach.

As I explained when writing about Chinese mercantilism, the U.S. would have far more success by using the WTO.

Let’s look at what experts have said.

Writing for the Wall Street Journal, Greg Rushford explained why the WTO is good for the United States.

President Harry S. Truman and Secretary of State George Marshall successfully pressed America’s war allies to create the General Agreement on Tariffs and Trade more than 70 years ago. Leaders across the globe, mindful of how economic nationalism in the 1930s had contributed to the devastation of World War II, wanted to open the world up again. The agreement focused on slashing of tariffs and other barriers to trade—bringing unprecedented prosperity to hundreds of millions of people. The GATT, which evolved into the World Trade Organization in 1995, became the world’s most successful international economic experiment. …Despite Mr. Trump’s assertion that the WTO has been “a disaster” for the U.S., Washington has won 85% of the 117 WTO cases it has brought against foreign trading partners. Japan complained in 2003 that WTO jurists had stretched the law by determining that Japanese health officials used phony science to ban American apples. The real U.S. gripe is that foreign governments have won most of the 145 cases that they have brought against American protectionist policies. …Both political parties would be well-advised to consider the wisdom of Truman and Marshall. They understood that true national-security imperatives meant resisting protectionism.

And here’s some more background information from a column in the WSJ by James Bacchus, who served as both a Member of Congress and as a Chief Judge at the WTO.

…let’s say Mr. Trump managed to get his way and pull the U.S. out of the WTO. The consequences for the world and U.S. economies would be immense. Among them: diminished trade growth, costly market and supply-chain disruptions, and the destruction of jobs and profits, especially in import- and export-dependent U.S. industries. The resulting trade barriers would compel some American companies either to downsize or move offshore. The global economic spiral set in motion by Mr. Trump’s reckless trade actions on steel, aluminum, Canada, Mexico, China, and Europe would accelerate. …WTO membership provides goods and services produced in the U.S. with protection against discrimination in foreign markets. Nondiscrimination rules are the heart of the WTO trading system, which currently applies in 164 countries and to 98% of all global commerce. …Instead of waging war on the WTO, the U.S. should help modernize it by making it more effective in addressing digital trade, services, subsidies, sustainability and intellectual property. Internationally agreed rules for international trade—and a process for resolving disputes about those rules—are an indispensable pillar of national prosperity.

I agree with everything in both columns.

And I’ll add one very simple – and hopefully very powerful – point.

Here’s a chart from the WTO showing that the United States is one of the world’s most pro-trade nations, with average tariffs of only 3.48 percent. Not as good as Hong Kong (0.0 percent) or Singapore (0.1 percent), but definitely good compared to most other nations.

In other words, it would be good if we could convince other nations to lower their trade barriers to our level.

Yet that’s exactly what’s been happening thanks to the WTO (and GATT, the predecessor pact). Here’s a chart prepared by the Confederation of British Industry, which shows how trade barriers have been continuously dropping. And dropping most rapidly in other nations, which is something Trump should be happy about.

The bottom line is that the WTO unambiguously advances U.S. interests, as I noted in the conclusion of the video.

But it actually advances the interests of all nations by gradually reducing global barriers to trade.

Is it as good as unilateral free trade? No, but it is a big win-win for America and the rest of the world.

Which is why, despite my usual disdain for international bureaucracies, I’m a big fan of the WTO.

Addendum: The original one-minute video no longer exists and has been replaced by a longer video that covers the same material in greater detail.

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After Trump Administration Approves More Funds, the World Bank Launches Attack on the Flat Tax

When asked to pick the worst international bureaucracy, I generally respond as follows.

The International Monetary Fund (IMF) or Organization for Economic Cooperation and Development (OECD) should be at the top of the list. Both of those bureaucracies aggressively push statist policies designed to give governments more power over people. I have mixed feelings about which one deserves to be called the worst bureaucracy.

Next on my list are the United Nations (UN) and European Bank for Reconstruction and Development (EBRD). Many people are surprised the UN isn’t higher on the list, but I point out that the organization generally is very ineffective. Meanwhile, the EBRD is relatively unknown, but I have total disdain for its cronyist business model (basically a global version of the Export-Import Bank).

At the bottom of my list is the World Bank (WB). I don’t have knee-jerk hostility to the WB, in part because the bureaucrats historically have their hearts in the right place (reducing poverty) and even occasionally support the right policies (social security reform and regulatory relief).

Nonetheless, I was disappointed earlier this year to learn that the Trump Administration decided to give more money to the World Bank.

The Trump administration is backing a $13 billion increase in funding for the World Bank… The change…will allow the bank to increase lending to poor-country clients… The U.S. is the only country with veto power over any changes in bank structure, so funding increases cannot proceed without Washington’s support. …The shift to U.S. support for more funding at the Bank took some European governments by surprise, said Suma Chakrabarti, president of the European Bank for Reconstruction and Development, a London-based multilateral bank lending in Europe, the Middle East and North Africa. He said in an interview Thursday that the capital increase is “very good news,” since it would help efforts to reduce global poverty. …Mr. Mnuchin said he would work with Congress to secure approval for the U.S. contribution, a step that has in the past proved challenging.

Hopefully it will prove impossible rather than challenging to get approval for more funding (though I haven’t been following the issue, so maybe Republicans in Congress already have okayed an expansion).

Assuming the decision hasn’t yet been made, I have some evidence showing why the World Bank doesn’t deserve more funding.

And not merely because aid is not the route to prosperity. Consider the misguided advice that the World Bank is pushing on Romania.

The Romanian government should…consider switching the flat income tax to a progressive tax, said World Bank chief economist for Europe and Central Asia, Hans Timmer. …The World Bank representative…referred to the flat tax rate…, stating that they should think about whether this system is still appropriate. The World Bank’s advice would be to rethink the entire labor market taxation system in coordination with other countries in the region, and not just make small changes. ”We can not tell you what the solution is, but you need to analyze everything, including the single tax, and whether you’d be better off implementing a progressive tax system, meaning those who earn more pay more,” Timmer said.

This is horrible advice. The flat tax is very conducive to prosperity and Romania needs fast growth to help offset the damage caused by decades of communist enslavement.

Moreover, there are problems with corruption in Romania and the World Bank has admitted that tax complexity facilitates corruption.

Given Mr. Timmer’s misguided musings, I may need to get a new version of my cartoon about international bureaucracies. Especially since the World Bank once produced a study giving nations higher grades for having more oppressive tax systems.

P.S. In fairness, the WB has produced some good work on government spending, dependency, financial regulation, and free markets.

P.P.S. And I especially like the World Bank’s comparison of Chile and Venezuela.

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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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The United Nations Disseminates Absurd Lies about Poverty in America

When writing about the statist agenda of international bureaucracies, I generally focus my attention on the International Monetary Fund and the Organization for Economic Cooperation and Development.

Today, let’s give some attention to the United Nations.

Based on this story from the Washington Post, the bureaucrats at the UN have concluded that America is a miserable and awful nation.

…a new United Nations report that examines entrenched poverty in the United States…calls the number of children living in poverty “shockingly high.” …the report, written by U.N. special rapporteur on extreme poverty and human rights Philip Alston, says the United States tops the developed world with the highest rates of youth poverty… The results of the report are not out of line with a number of others…in recent years by different organizations in which the United States has turned up at or near the top on issues such as poverty rates.

But I’ve learned from personal experience (see here and here) that the United Nations is guided by statist ideology and I should be extremely skeptical of any of its findings.

For instance, when it intervenes in policy (global warming and gun control, for instance, as well as the Internet, the War on Drugs, monetary policy, and taxpayer-financed birth control), the UN inevitably urges more power and control for government.

So let’s take a jaundiced look at some of the assertions in this new report, starting with that dramatic claim of record child poverty in America.

The United States…has the highest youth poverty rate in the Organization for Economic Cooperation and Development (OECD)… The consequences of neglecting poverty… The United States has one of the highest poverty…levels among the OECD countries… the shockingly high number of children living in poverty in the United States demands urgent attention. …About 20 per cent of children live in relative income poverty, compared to the OECD average of 13 per cent.

So is it true that poverty is very high in the USA and is it also true that America has the highest rate of child poverty of all OECD countries? Even higher than Mexico, Greece, and Turkey? And what is the source of this remarkable assertion?

If you look at footnote #51, you’ll see reference to an OECD publication that contains this supposedly damning chart.

But if you look at the fine print at the bottom, you’ll discover that the chart on child poverty doesn’t actually measure child poverty. Instead, the bureaucrats at the OECD have put together a measure of income distribution and decided that “relative poverty” exists for anyone who has less than 50 percent of the median level of disposable income.

In other words, the United States looks bad only because median income is very high compared to other nations.

Which is the same dishonest data manipulation that the OECD uses when exaggerating America’s overall poverty rate (other groups that have used this deliberately dishonest methodology include the Equal Welfare Association, Germany’s Institute of Labor Economics, and the Obama Administration).

The bottom line is that the key finding of the UN report is based on a bald-faced lie.

By the way, I’m not surprised to see that the UN report also cites the IMF to justify statist policies.

In a 2017 report, the International Monetary Fund (IMF) captured the situation…, stating that the United States economy “is delivering better living standards for only the few”, and that “household incomes are stagnating for a large share of the population, job opportunities are deteriorating, prospects for upward mobility are waning, and economic gains are increasingly accruing to those that are already wealthy” …A much-cited IMF paper concluded that redistribution could be good for growth, stating: “The combined direct and indirect effects of redistribution — including the growth effects of the resulting lower inequality — are on average pro-growth.”

For what it’s worth, the IMF’s research on growth and inequality is embarrassingly bad.

Here’s another big takeaway from the UN report.

The United States…has the highest…infant mortality rates among comparable OECD States. …The infant mortality rate, at 5.8 deaths per 1,000 live births, is almost 50 per cent higher than the OECD average of 3.9.

I’m not an expert on infant mortality. Indeed, I’ve never looked at infant mortality data. But given the UN’s reliance on dodgy and dishonest numbers in other areas, I’m skeptical whether these numbers are true.

And, according to Johan Norberg, the numbers about high levels of infant mortality in the United States are false.

The UN report contains many other ideologically motivated attacks on the United States.

For instance, America is a bad country because taxes supposedly are too low.

The United States has the highest rate of income inequality among Western countries. The $1.5 trillion in tax cuts in December 2017 overwhelmingly benefited the wealthy and worsened inequality. …The tax cuts will fuel a global race to the bottom, thus further reducing the revenues needed by Governments to ensure basic social protection and meet their human rights obligations. …There is a real need for the realization to sink in among the majority of the American population that taxes are not only in their interest, but also perfectly reconcilable with a growth agenda.

While the above passage is remarkable for the level of economic illiteracy, I confess that I chortled with glee when I read the part about how the recent tax reform “will fuel a global race to the bottom.”

As I wrote last year and this year, the fact that other governments will face pressure to reduce tax rates is something to celebrate.

Here’s one final excerpt. The UN report also bashes the United States because we don’t view dependency as a human right.

Successive administrations, including the current one, have determinedly rejected the idea that economic and social rights are full-fledged human rights, despite their clear recognition not only in key treaties that the United States has ratified… But denial does not eliminate responsibility, nor does it negate obligations. International human rights law recognizes a right to education, a right to health care, a right to social protection for those in need and a right to an adequate standard of living.

Needless to say, a problem with this vision of “positive rights” is that it assumes there will always be a supply of chumps willing to work hard so the government can tax away their money to finance all the goodies. But Greece shows us that it’s just a matter of time before that games ends with disaster.

In other words, Thomas Sowell is right and Franklin Roosevelt was wrong.

Let’s close with some good news. As the Washington Post just reported, the UN’s dishonest anti-American screed apparently will prove costly to that bloated bureaucracy.

Alston arrived in Washington last fall on a mission from the U.N. Human Rights Council to document poverty in America. …he was told by a senior State Department official that his findings may influence the United States’ membership in the human rights body. …“I think I was being sent a message.” Two other people at the meeting, speaking on the condition of anonymity, confirmed Alston’s account. …Nikki Haley announced this week that the United States would withdraw from the Human Rights Council.

Good for Ambassador Haley.

Her actions stand in stark contrast to some of her predecessors, who apparently believed in taxpayer-financed self-flagellation.

Alston said he was initially invited by the U.S. government under President Barack Obama to study poverty in America. The invitation was extended again by U.S. officials under then-Secretary of State Rex Tillerson in 2017, he said. “We look forward to welcoming Mr. Alston to the United States for a country visit this December,” Flacelia Celsula, part of the U.S. delegation at the United Nations, said in a meeting of the Human Rights Council on June 8, 2017.

It goes without saying that Mr. Alston should have the freedom write leftist reports. He also should have the freedom to spread lies in those reports. But I don’t want American tax dollars to finance his ideological bilge.

Which brings us to the obvious takeaway. As seems to be the case with all international bureaucracies, the United Nations wastes money at a prodigious pace. With any luck, Alston’s nonsense will convince American policymakers that deep budget cuts for the UN are long overdue.

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Trump and the G-7: Right Outcome, Wrong Reason

Back in 2015, I wrote about the scandal involving former House Speaker Dennis Hastert and said we got the right result (legal trouble for Hastert) for the wrong reason (government spying on financial transactions).

Something similar happened over the weekend with the G-7 meeting.

Largely because of his misguided protectionist views, Donald Trump refused to sign a joint statement with the other G-7 leaders (Germany, France, Italy, Canada, Japan, and the United Kingdom).

Trump’s protectionism is deeply troubling. It threatens American prosperity and could lead to tit-for-tat protectionism that caused so much damage to the global economy in the 1930s.

That being said, we shouldn’t shed any tears because a G-7 Summit ended in failure or that Trump didn’t sign the communique.

To be sure, the vast majority of the language in these statements is anodyne boilerplate. Sort of the international equivalent of “motherhood and apple pie.”

But it’s not all fuzzy rhetoric about “inclusive growth” and “clean water.” The bureaucrats who craft these statements for their political masters regularly use the G-7 to endorse statist policies.

It’s all very reminiscent of what Adam Smith wrote about how people in the same profession would like to create some sort of cartel to extract more money from consumers.

But Smith went on to explain that such efforts can’t succeed in the private sector unless there is some sort of government intervention to prohibit competition.

Unfortunately, when politicians meet to craft cartel-type policies to extract more money from their citizens, they rely on the power of government to enforce their anti-market policies.

Let’s look at some of the dirigiste language in the communique from this weekend, starting with the ever-present embrace of class warfare tax policy and support for tax harmonization.

…support international efforts to deliver fair, progressive, effective and efficient tax systems. We will continue to fight tax evasion and avoidance by promoting the global implementation of international standards and addressing base erosion and profit shifting. …We welcome the OECD interim report analyzing the impact of digitalization of the economy on the international tax system.

Keep in mind that “international standards” is their way of stating that low-tax jurisdictions should have to surrender their fiscal sovereignty and agree to help enforce the bad tax laws of uncompetitive nations (such as G-7 countries).

And the BEPS project and the digitalization project are both designed to help other governments skim more money from America’s high-tech companies.

The G-7 communique also endorsed the anti-empirical view that more foreign aid and higher taxes are necessary to generate more prosperity in the developing world.

Public finance, including official development assistance and domestic resource mobilization, is necessary to work towards the achievement of the Sustainable Development Goals of the 2030 Agenda.

The statement also recycled the myth of a big gender wage gap, even though even the female head of Obama’s Council of Economic Advisers admitted the wage gap numbers are nonsense.

Our path forward will promote women’s full economic participation through working to reduce the gender wage gap.

And there was the predictable language favoring more government intervention in energy markets, along with a threat that the hypocritical ideologues at the United Nations should have power over the global economy.

We reaffirm the commitment that we have made to our citizens to reduce air and water pollution and our greenhouse gas emissions to reach a global carbon-neutral economy over the course of the second half of the century. We welcome the adoption by the UN General Assembly of a resolution titled “Towards a Global Pact for the Environment” and look forward to the presentation of a report by the Secretary-General in the next General Assembly.

Given the G-7’s embrace of one-size-fits-all statism and government cartels, let’s look at how Professor Edward Prescott (awarded the Nobel Prize in economics in 2004) modified Adam Smith’s famous quote.

I’ll close by reporting that I asked several experts in international economics, mostly from the establishment (and therefore instinctively sympathetic to the G-7), whether they could tell me a single pro-growth accomplishment since these meetings started in the 1970s.

They couldn’t identify a single concrete achievement (several said it was good for politicians from different countries to develop relationships and some speculated that useful things may get done in so-called side meetings, but all agreed those things could – and would – happen without the G-7).

So why spend lots of money just so a bunch of politicians can have an annual publicity photo? And why give their retinues of hangers-on, grifters, hacks, and bureaucrats a taxpayer-financed annual vacation?

Needless to say, I’d much rather focus on defunding the OECD or defanging the IMF. But if Trump’s nonsensical protectionism somehow leads to the disintegration of annual G-7 schmooze-fests, I’ll view that as a silver lining to an otherwise dark cloud.

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The IMF’s Reprehensible Campaign for Continued Poverty in Sub-Saharan Africa

A couple of months ago, I thought I did something meaningful by sharing six separate examples of the International Monetary Fund pressuring sub-Saharan African nations to impose higher tax burdens. This was evidence, I suggested, that the IMF had a disturbing agenda of bigger government for the entire region.

I didn’t imply the bureaucrats were motivated by racism. After all, the IMF has pushed for higher taxes in the United States, in China, in Latin America, in the Middle East, and in Europe. (folks who work at the IMF don’t pay taxes on their own salaries, but they clearly believe in equal opportunity when urging higher taxes for everyone else).

Nonetheless, I thought it was scandalous that the IMF was systematically agitating for taxes in a region that desperately needs more investment and entrepreneurship. And my six examples were proof of a continent-wide agenda!

But it turns out that I wasn’t exposing some sort of sinister secret. The IMF just published a new report where the bureaucrats openly argue that there should be big tax hikes in all sub-Saharan nations.

Domestic revenue mobilization is one of the most pressing policy challenges facing sub-Saharan African countries. …the region as a whole could mobilize about 3 to 5 percent of GDP, on average, in additional revenues. …domestic revenue mobilization should be a key component of any fiscal consolidation strategy. Absent adequate efforts to raise domestic revenues, fiscal consolidation tends to rely excessively on reductions in public spending.

Notice, by the way, the term “domestic revenue mobilization.” Such a charming euphemism for higher taxes.

And it’s also worth pointing out that the IMF openly urges more revenue so that governments don’t have to impose spending restraint.

Moreover, the IMF is happy that there have been “substantial gains in revenue mobilization” over the past two decades.

Over the past three decades, many sub-Saharan African countries have achieved substantial gains in revenue mobilization. For the median sub-Saharan African economy, total revenue excluding grants increased from around 14 percent of GDP in the mid-1990s, to more than 18 percent in 2016, while tax revenue increased from 11 to 15 percent. …Two-thirds of sub-Saharan African countries now have revenue ratios above 15 percent, compared with fewer than half in 1995. …the region still has the lowest revenue-to-GDP ratio compared to other regions in the world. The good news is that there are signs of convergence. Over the past three decades, the increase in sub-Saharan Africa’s revenue ratio has been double that for all emerging market and developing economies.

To the bureaucrats at the IMF, the “convergence” toward higher taxes is “good news.”

However, there is some data in the report that is genuine good news.

In most regions of the world, there has been a trend in recent years toward reducing rates for the CIT and the personal income tax (PIT). In sub-Saharan African countries, the average top PIT rate has been reduced from about 44 to 32 percent since 2000, while average top CIT rates have been reduced by more than 5 percentage points during the same period.

Here are two charts showing the decline in tax rates, not only in Africa, but in most other regions.

By the way, the IMF bureaucrats appear to be surprised that revenues went up as tax rates went down. I guess they’ve never heard of the Laffer Curve.

Despite this decline in rates, total direct taxes (PIT and CIT) as a percentage of GDP have been trending upward.

But the IMF obviously didn’t learn from this evidence (or from the evidence it shared last year).

Rather than proposing lower tax rates, the report urges a plethora of tax hikes.

Successful experiences in revenue mobilization have relied on efforts to implement broad-based VATs, gradually expand the base for direct taxes (CIT and PIT), and implement a system to tax small businesses and levy excises on a few key items.

Wow. I don’t know what’s worse, claiming that tax increases are good for growth, or pushing higher taxes in the world’s poorest region.

Let’s close by debunking the IMF’s absurd contention that bigger government would be good for Africa.

I suppose the simplest response would be to share my video series about the economics of government spending, especially since I cite a wealth of academic research.

But let’s take an even simpler approach. The IMF report complained that governments in sub-Saharan Africa don’t have enough money to spend.

The good news, as illustrated by this chart (based on data from the bureaucracy’s World Economic Outlook database), is that the IMF is accurate about relative fiscal burdens.

The bad news is that the IMF wants us to believe that a low fiscal burden is a bad thing. The bureaucrats at the IMF (and at other international bureaucracies) actually want people to believe that bigger government means more prosperity. Which is why the report urges big tax hikes.

But you won’t be surprised to learn that the IMF doesn’t provide any evidence for this bizarre assertion.

Though I’ve had folks on the left sometimes tell me that bigger government must be good for growth because rich nations in the western world have bigger governments while poor nations in Africa have comparatively small governments.

If you want to get in the weeds of public finance theory, the IMF bureaucrats are misinterpreting Wagner’s Law.

But there’s no need to delve into theory. When people make this assertion to me, I challenge them to identify a poor nation that ever became a rich nation with big government.

It’s true, of course, that there are rich nations that have big governments, but all of those countries became rich in the 1800s when government was very small and welfare state programs were basically nonexistent.

So let’s take the previous chart, which supposedly showed too little spending in sub-Saharan Africa, and add another column (in red) showing the level of government spending in North America and Western Europe in the 1800s.

The obvious takeaway is that African nations should cut taxes and reducing spending. The exact opposite of what the IMF recommends.

In other words, the IMF’s agenda of bigger government and higher taxes is a recipe for continued poverty.

But keep in mind that fiscal policy is just one piece of the puzzle. As explained in Economic Freedom of the World, a nation’s prosperity also is affected by regulatory policy, trade policy, monetary policy, and quality of governance.

And nations in sub-Saharan Africa generally score even lower in those areas than they do for fiscal policy. So while those countries should reduce their fiscal burdens, it’s probably even more important for them to address other policy mistakes.

To end on an upbeat note, here’s a video from Reason about how free markets can help bring prosperity to Africa.

I also recommend this video from the Center for Freedom and Prosperity since it does a great job of debunking the argument that higher taxes and bigger government are a recipe for prosperity.

And this video about Botswana is a good case study of how African nations can enjoy more prosperity with market-oriented policy.

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Thanks to the EBRD, American Taxpayers Are Subsidizing Cronyism in Eastern Europe

Because of their aggressive support for bigger government, my least-favorite international bureaucracies are the International Monetary Fund and the Organization for Economic Cooperation and Development.

But I’m increasingly displeased by the European Bank for Reconstruction and Development, which is another international bureaucracy (like the OECD and IMF) that is backed by American taxpayers.

And what does it do with our money? As I explained earlier this month in this short speech to the European Resource Bank in Prague, the EBRD undermines growth with cronyist policies that distort the allocation of capital.

In some sense, the argument against the EBRD is no different than the standard argument against foreign aid. Simply stated, you don’t generate growth by having the government of a rich nation give money to the government of a poor nation.

Poor nations instead need to adopt good policy – something that’s less likely when profligate and corrupt governments in the developing world are propped up by handouts.

That being said, the downsides of the EBRD go well beyond the normal problems of foreign aid.

I recently authored a study on this bureaucracy for the Center for Freedom and Prosperity.

Here are some of the main findings.

The EBRD was created with the best of intentions. The collapse of communism was an unprecedented and largely unexpected event, and policymakers wanted to encourage and facilitate a shift to markets and democracy. …But good intentions don’t necessarily mean good results. Especially when the core premise was that growth somehow would be stimulated and enabled by the creation of another multilateral government bureaucracy. …Unfortunately, even though its founding documents pay homage to markets…, there’s nothing in the track record of the EBRD that indicates it has learned from pro-intervention and pro-statism mistakes made by older international aid organizations. Indeed, there’s no positive track record whatsoever.

• There is no evidence that nations receiving subsidies and other forms of assistance grow faster than similar nations that don’t get aid from the EBRD.
• There is no evidence that nations receiving subsidies and other forms of assistance enjoy more job creation than similar nations that don’t get aid from the EBRD,
• There is no evidence that nations receiving subsidies and other forms of assistance have better social outcomes than similar nations that don’t get aid from the EBRD.

I also delved into three specific downsides of the EBRD, starting with its role in misallocating capital.

In a normal economy, savers, investors, intermediaries, entrepreneurs, and others make decisions on what projects get funded and what businesses attract investment. These private-sector participants have “skin in the game” and relentlessly seek to balance risk and reward. Wise decisions are rewarded by profit, which often is a signal for additional investment to help satisfy consumer desires. There’s also an incentive to quickly disengage from failing projects and investments that don’t produce goods and services valued by consumers. Profit and loss are an effective feedback mechanism to ensure that resources are constantly being reshuffled in ways that produce the most prosperity for people. The EBRD interferes with that process. Every euro it allocates necessarily diverts capital from more optimal uses.

I explain why taxpayers shouldn’t be subsidizing cronyism.

…the EBRD is in the business of “picking winners and losers.” This means that intervention by the bureaucracy necessarily distorts competitive markets. Any firm that gets money from the EBRD is going to have a significant advantage over rival companies. Preferential financing for hand-picked firms from the EBRD also is a way of deterring new companies from getting started since there is not a level playing field or honest competition. … cronyism is a threat to prosperity. It means the playing field is unlevel and that those with political connections have an unfair advantage over those who compete fairly. To make matters worse, nations that receive funds from the ERBD already get dismal scores from Economic Freedom of the World for the two subcategories (“government enterprises and investment” and “business regulations”) that presumably are the best proxies for cronyism.

Here’s a chart from the study showing that recipient nations already get low scores from Economic Freedom of the World for variables that reflect the degree of cronyism in an economy.

Last but not least, I warn that the EBRD enables and facilitates corruption.

When governments have power to arbitrarily disburse large sums of money, that is a recipe for unsavory behavior. For all intents and purposes, the practice of cronyism is a prerequisite for corruption. The EBRD openly brags about the money it steers to private hands, so is it any surprise that people will engage in dodgy behavior in order to turn those public funds into private loot? …Recipient nations get comparatively poor scores for “legal system and property rights” from Economic Freedom of the World. They also do relatively poorly when looking at the World Bank’s “governance indicators.” And they also have disappointing numbers from Transparency International’s “corruption perceptions index.” So, it’s no surprise that monies ostensibly disbursed for the purpose of development assistance wind up lining the pockets of corrupt insiders. For all intents and purposes, the EBRD and other dispensers of aid enable and sustain patterns of corruption.

And here’s the chart showing that recipient nations have poor quality of governance, which means that EBRD funds are especially likely to get misused.

I also cite several EBRD documents that illustrates the bureaucracy’s hostility for free markets and limited government.

Just in case you didn’t want to watch the entire video, here’s the relevant slide from my presentation.

And remember that your tax dollars back this European bureaucracy. Indeed, American taxpayers have a larger exposure than any of the European countries.

P.S. I’m also not a fan of the United Nations, though I take comfort in the fact that the UN is not very effective in pushing statist policy.

P.P.S. I’m most tolerant of the World Bank, though that bureaucracy periodically does foolish things as well.

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The International Monetary Fund Doubles Down on a Pro-Tax Agenda

The worst-international-bureaucracy contest is heating up.

In recent years, the prize has belonged to the Paris-based Organization for Economic Cooperation and Development for reasons outlined in this interview. Indeed, I’ve even argued that subsidies for the OECD are the worst expenditure in the federal budget, at least when measured on a damage-per-dollar-spent basis.

But the International Monetary Fund stepped up its game in 2017, pushing statism to a much higher level.

• In June, I wrote about the IMF pushing a theory that higher taxes would improve growth in the developing world.
• In July, I wrote about the IMF complaining that tax competition between nations is resulting in lower corporate tax rates.
• In October, I wrote about the IMF asserting that lower living standards are desirable if everyone is more equally poor.
• Also in October, I wrote about the IMF concocting a measure of “fiscal space” to justify higher taxes across the globe.
• In November, I wrote about the IMF publishing a study expanding on its claim that equal poverty is better than unequal prosperity.

And the IMF is continuing its jihad against taxpayers in 2018.

The head bureaucrat at the IMF just unleashed a harsh attack on the recent tax reform in the United States, warning that other nations might now feel compelled to make their tax systems less onerous.

IMF Managing Director Christine Lagarde said the Trump administration’s $1.5 trillion tax cut could prompt other nations to follow suit, fueling a “race to the bottom” that risks hemming in public spending. …It also will fuel inflation, she said. “What we are beginning to see already and what is of concern is the beginning of a race to the bottom, where many other policy makers around the world are saying: ‘Well, if you’re going to cut tax and you’re going to have sweet deals with your corporates, I’m going to do the same thing,”’ Lagarde said.

Heaven forbid we have lower tax rates and more growth!

Though the really amazing part of that passage is that Ms. Lagarde apparently believes in the silly notion that tax cuts are inflationary. Leftists made the same argument against the Reagan tax cuts. Fortunately, their opposition we ineffective, Reagan slashed tax rates and inflation dramatically declined.

What’s also noteworthy, as illustrated by this next excerpt, is that Lagarde doesn’t even bother with the usual insincere rhetoric about using new revenues to reduce red ink. Instead, she openly urges more class-warfare taxation to finance ever-bigger government.

The IMF chief’s blunt assessment follows an unusually public disagreement between the fund and President Donald Trump’s administration last fall over an IMF paper arguing that developed nations can share prosperity more evenly, without sacrificing growth, by shifting the income-tax burden onto the rich. Competitive tax cuts risk holding back governments in spending on anything from defense and infrastructure to health and education, Lagarde said.

What makes her statements so absurd is that even IMF economists have found that higher taxes and bigger government depress economic activity. But Ms. Largarde apparently doesn’t care because she’s trying to please the politicians who appointed her.

By the way, keep in mind that Ms. LaGarde’s enormous salary is tax free, as are the munificent compensation packages of all IMF employees. So it takes enormous chutzpah for her to push for higher taxes on the serfs in the economy’s productive sector.

But it’s not just Lagarde. We also have a new publication by two senior IMF bureaucrats that urges more punitive taxes on saving and investment.

Although Thomas Piketty has famously proposed a coordinated global wealth tax of the wealthiest at two percent, there are now very few effective explicit wealth taxes in either developing or advanced economies. Indeed between 1985 and 2007, the number of OECD countries with an active wealth tax fell from twelve to just four. And many of those were, and are, of limited effectiveness. …This hot topic of how tax systems can assist in addressing excessive increases in wealth inequality was discussed at the regular IMF-World Bank session on taxation last October. …some among the very rich recognize some social benefit from being taxed more heavily (for instance, Bill Gates’ father). Perhaps then there is more that can be done to foster that sense of social responsibility… The exchange of tax information between countries is a powerful tool…and perhaps ultimately game-changing approach to the taxation of the wealthy…we do see good cause to be less pessimistic than even a few years ago.

Once again, we can debunk the IMF by….well, by citing the IMF. The professional economists at the bureaucracy have produced research showing that discriminatory taxes on capital are very bad for prosperity.

But the top bureaucrats at the organization are driven by either by statist ideology or by self interest (i.e., currying favor with the governments that decide senior-level slots).

The bottom line is that perhaps the IMF should be renamed the Anti-Empirical Monetary Fund.

And with regards to worst-international-bureaucracy contest, I fully expect the OECD to quickly produce something awful to justify its claim to first place.

P.S. I’m not a fan of the United Nations, but that bureaucracy generally is too ineffective to compete with the IMF and OECD.

P.P.S. The World Bank also does things I don’t like (as well as some good things), but it generally doesn’t push a statist policy agenda, at least compared to the nefarious actions of OECD and IMF.

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Plenty of Fat and Waste to Cut at the United Nations, Part I

I expressed approval when Trump proposed to reduce U.S. funding for international bureaucracies, mostly because of my disdain for the statist policy agenda of the International Monetary Fund and Organization for Economic Cooperation and Development.

Sadly, there’s has not been much follow-through by the White House, and it looks like Congress isn’t going to cut either the funding or the authority of these bloated institutions. And that means they will continue to advocate for class-warfare tax policy and bigger government.

But, as reported by AFP, some seeds were planted early in the year that may eventually save money for taxpayers.

…a draft executive order…prepared at the White House could deprive the United Nations of billions of dollars in US financial support. The United States is by far the UN’s biggest financial contributor, providing 22 percent of its operating budget and funding 28 percent of peacekeeping missions, which currently cost $7.8 billion annually. …The Trump administration is proposing a 40 percent cut in some US funding, according to the draft executive order titled “Auditing and Reducing US Funding of International Organizations.”

And it appears that some of the seeds germinated. According to the Associated Press, steps are being taken to reduce the fiscal burden of the United Nations.

The U.S. government says it has negotiated a significant cut in the United Nations budget. The U.S. Mission to the United Nations said on Sunday that the U.N.’s 2018-2019 budget would be slashed by over $285 million. The mission said reductions would also be made to the U.N.’s management and support functions. The announcement didn’t make clear the entire amount of the budget or specify what effect the cut would have on the U.S. contribution. U.S. ambassador to the U.N. Nikki Haley said that the “inefficiency and overspending” of the organization is well-known, and she would not let “the generosity of the American people be taken advantage of.”

By the way, “nicked” or “trimmed” would be more accurate than “slashed.”

Nonetheless, at least it’s a small step in the right direction.

And the recent U.N. vote against the U.S. may lead to additional budgetary savings, as explained in the Wall Street Journal by John Bolton, a former ambassador from the United States to that bureaucracy.

…the U.N. showed its true colors with a 128-9 vote condemning President Trump’s recognition of Jerusalem as Israel’s capital. …America is heard much more clearly at the U.N. when it puts its money where its mouth is. …the White House should also reconsider how Washington funds the U.N. more broadly. …Despite decades of U.N. “reform” efforts, little or nothing in its culture or effectiveness has changed. …Turtle Bay has been impervious to reform largely because most U.N. budgets are financed through effectively mandatory contributions. Under this system, calculated by a “capacity to pay” formula, each U.N. member is assigned a fixed percentage of each agency’s budget to contribute. The highest assessment is 22%, paid by the U.S. This far exceeds other major economies… The U.S. should reject this international taxation regime and move instead to voluntary contributions. This means paying only for what the country wants—and expecting to get what it pays for. Agencies failing to deliver will see their budgets cut, modestly or substantially. Perhaps America will depart some organizations entirely.

Bolton has some targets in mind.

…earlier this year the U.N. dispatched a special rapporteur to investigate poverty in the U.S.? American taxpayers effectively paid a progressive professor to lecture them about how evil their country is. The U.N.’s five regional economic and social councils, which have no concrete accomplishments, don’t deserve American funding either. …Next come vast swaths of U.N. bureaucracy. Most of these budgets could be slashed with little or no real-world impact. Start with the Office for Disarmament Affairs. The U.N. Development Program is another example. Significant savings could be realized by reducing other U.N. offices that are little more than self-licking ice cream cones, including many dealing with “Palestinian” questions. …Thus could Mr. Trump revolutionize the U.N. system. The swamp in Turtle Bay might be drained much more quickly than the one in Washington.

And Rich Lowry of National Review didn’t even wait for the latest controversy.

Here are some excerpts from a column he wrote in late 2016.

We are the chief funder of a swollen, unaccountable U.N. apparatus that has been a gross disappointment for more than 70 years now. …As early as 1947, a U.S. Senate committee flagged “serious problems of overlap, duplication of effort, weak coordination, proliferating mandates and programs, and overly generous compensation of staff within the infant, but rapidly growing, UN system.” And those were the early, lean years. We pay more than anyone else to keep the U.N. in business, about 22 percent of the U.N.’s regular budget. …Because nothing involving the U.N. is clean or straightforward, it’s hard to even know how much the U.S. pays in total into the U.N. system. But it’s probably around $8 billion a year. We should withhold some significant portion of it.

My view, for what it’s worth, is that the United Nations is better (less worse?) than the OECD or IMF.

But that’s mostly because it doesn’t have much power. When it does try to intervene in policy (global warming and gun control, for instance, as well as the Internet, the War on Drugs, monetary policy, and taxpayer-financed birth control), the U.N. inevitably urges more power and control for government.

If you think I’m exaggerating about a statist mindset at the United Nations, check out this jaw-dropping tweet from a high-level bureaucrat.

Wow. Before capitalism, as explained in videos by Deirdre McCloskey and Don Boudreaux, human existence was characterized by grinding poverty. But once free markets were unleashed, the world has enjoyed unprecedented prosperity.

Yet this liberating and enriching system is “an urgent threat” according to the United Nations.

Wouldn’t it be more appropriate if the bureaucrat who sent out this tweet instead focused on hellholes where the free market is suppressed and persecuted – such as Venezuela, North Korea, Zimbabwe, and Cuba?

My friend Walter Williams perhaps has the best response to the U.N.’s vapid sentiment (h/t: libertarian Reddit).

Others share my concern, as illustrated by this passage from a column in the U.K.-based Daily Telegraph.

Hillel Neuer, the head of UN Watch, a campaign group, called this a “loony tweet”, adding: “While millions of people are suffering from genocide, sexual slavery and starvation, it is far from clear why the UN would instead focus its attention on unidentifiable ‘urgent threats’, let alone on economic subjects about which it has neither competence nor expertise.” Mr Neuer pointed out that socialist economics had brought misery to Venezuela without drawing similar criticism from the UN. “The same UN human rights office has failed to issue a single tweet about this past month’s dire human rights crisis in Venezuela, where millions face mass hunger in part due to attacks on the free market,” he said.

Let’s look at other examples of U.N. statism.

For example, the bureaucrats are inserting themselves in American racial issues.

The history of slavery in the United States justifies reparations for African Americans, argues a recent report by a U.N.-affiliated group based in Geneva. …The group of experts, which includes leading human rights lawyers from around the world, presented its findings to the United Nations Human Rights Council on Monday, pointing to the continuing link between present injustices and the dark chapters of American history. “In particular, the legacy of colonial history, enslavement, racial subordination and segregation, racial terrorism and racial inequality in the United States remains a serious challenge, as there has been no real commitment to reparations and to truth and reconciliation for people of African descent,” the report stated. …The reparations could come in a variety of forms, according to the panel, including “a formal apology, health initiatives, educational opportunities … psychological rehabilitation, technology transfer and financial support, and debt cancellation.”

By the way, I’m fine with a formal apology (assuming one hasn’t already been issued). Slavery is a stain on American history, after all.

And I’d be delighted to see a massive school choice initiative, which would benefit students from all backgrounds, but I strongly suspect black kids would disproportionately gain.

I fear, though, that the U.N. panel is primarily interested in “financial support,” which is simply a euphemism for a bigger welfare state. And since the current welfare state already has caused great damage to the black community, making it even bigger would be very ill-advised.

Here’s another example of bizarre policy from a division of the United Nations. The bureaucrats at the World Health Organization want to classify the absence of a sexual partner as a disability.

…the World Health Organisation will change the standard to suggest that a person who is unable to find a suitable sexual partner or is lacking a sexual relationship to have children – will now be equally classified as disabled. WHO says the change will give every individual “the right to reproduce”. …Gareth Johnson MP, former chair of the All Parliamentary Group on Infertility, whose own children were born thanks to fertility treatment, said: “I’m in general a supporter of IVF. But I’ve never regarded infertility as a disability or a disease but rather a medical matter. …Dr David Adamson, an author of the new standards, argued…”It puts a stake in the ground and says an individual’s got a right to reproduce whether or not they have a partner. It’s a big change. …It sets an international legal standard. Countries are bound by it.”

Hey, I’m had many tragic periods of celibacy in my life and I never even got a handicapped parking sticker!

More seriously, I have great sympathy for people with fertility issues. Not only because I have empathy for them, but also because of my concerns about demographic decline.

But there’s a big difference between saying that people have a right to try to have children and the U.N.’s assertion that others are obliged to help people have children.

It doesn’t help that the U.N. newest top bureaucrat has a very dismal track record.

Here are some of the grim details from Claudia Rosett.

…former Prime Minister of Portugal Antonio Guterres…brings to the job a record that suggests he is a perfect fit to head a UN that is prone to overreach, mismanagement, waste, fraud, abuse and government meddling in every aspect of life — provided we all want even more of the same. …Guterres also served as president of the Socialist International, from 1999-2005… From 2005-2015, Guterres served as high commissioner of the UN agency for refugees (UNHCR)… That sounds great, except the UN’s own auditors…issued an audit report identifying a series of “critical” lapses by the UNHCR under Guterres’s management. …If that’s how Guterres managed — or mismanaged — a single UN agency while running it for more than a decade, is it likely he will do a better job as secretary-general? …we get a longtime socialist with a record of managerial incompetence, heading a multi-billion dollar, diplomatically immune, opaque, globe-girdling organization funded with billions of other people’s money (America, which bankrolls roughly one-quarter of the UN system with your tax dollars, being the largest contributor). What could go wrong?

The answer to Claudia’s question is that we’ll probably get business as usual.

And since that means more waste and more advocacy of bad policy, that’s unfortunate news for taxpayers all over the world.

So I’m keeping my fingers crossed that the Trump Administration does the right thing and puts the U.N. on a diet.

Let’s close with some humor. Here’s a Jeff MacNelly cartoon, presumably from way back in the 1970s.

P.S. In my experience, many U.N. officials and bureaucrats are smart, well-meaning people. But as I noted during a trip to Switzerland back in 2009, it would be much better if they were in the private sector where their skills and abilities could be used for expanding prosperity.

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Should Central America Listen to the WSJ and Copy Hong Kong, or Listen to the OECD and Copy Greece?

The great thing about the Economic Freedom of the World is that it’s like the Swiss Army Knife of global policy. No matter where you are or what issue you’re dealing with, EFW will offer insight about how to generate more prosperity.

Since today’s focus is Central America, let’s look at the EFW data.

As you can see, it’s a mixed bag. Some nations are in the top quartile, such as Costa Rica, Guatemala, and Panama, though none of them get high absolute scores. Mexico, by contrast, has a lot of statism and is ranked only #88, which means it is in the third quartile. And Belize is a miserable #122 and stuck in the bottom quartile (where Cuba also would be if that backwards country would be ranked if it produced adequate statistics).

One of the great challenges for development in central America (as well as other parts of the developing world) is figuring out how to get poor and middle-income nations to make the jump to the next level.

Mary Anastasia O’Grady of the Wall Street Journal has a column on how to get more growth in Central America. She focuses on Guatemala, but what she writes is applicable for all neighboring countries.

…faster economic growth is part of what’s needed for the region… To succeed, it will have to break with the State Department’s conventional wisdom that underdevelopment is caused by a paucity of taxes and regulation. It will also have to climb down from its view that trade is a zero-sum game. Policy makers might start by reading a new report on micro, small and medium-sized businesses in Guatemala by the Kirzner Center for Entrepreneurship at Francisco Marroquin University in Guatemala City. It measures—by way of household surveys in 179 municipalities and interviews with industry experts—“attitudes, activities and aspirations of the entrepreneur.” …the GEM study ranks Guatemala No. 1 for its positive view of entrepreneurship as a career choice. Guatemala also ranks high (No. 9) for the percentage of the population engaged in new businesses, defined as less than 3½ years old. And it ranks 12th in terms of the percentage of the population who “are latent entrepreneurs and who intend to start a business within three years.”

She explains that Guatemalan entrepreneurship is hampered by excessive taxation and regulation.

Yet Guatemalan eagerness to run a business has not translated into prosperity for the nation… The country ranks a lowly 59th in entrepreneurs’ expectations that they will create six or more jobs in five years. It also sinks to near the bottom of the pack (62nd) in creating business-service companies. …The World Bank’s 2017 “Doing Business” survey provides many clues about why the informal economy is so large. Guatemala ranks 88th out of 190 countries world-wide for ease of running an enterprise, but in key categories that make up the index it performs much worse. The survey finds that it takes 256 hours to comply with the tax code. The total tax take is 35.2% of profits. It takes almost 20 days to start a legal enterprise and costs 24% of per capita income. To enforce a contract it takes more than 1,400 days and costs more than 26% of the claim.

The good news is that we know the answers that will generate prosperity. The bad news is that Guatemala gets a lot of bad advice.

The obvious solution is an overhaul of the tax, regulatory and legal systems in order to increase economic freedom. A lower tax rate and a simpler code would give companies an incentive to operate legally, thereby broadening the base and improving access to credit. Instead the Guatemalan authorities—encouraged by the State Department and the International Monetary Fund—spend their resources trying to impose a complex, costly system in an economy of mostly informal businesses with a much-smaller number of legal, productive entrepreneurs. Recently the United Nations International Commission against Impunity in Guatemala recommended a new tax to fight “impunity.” This is no way to attract capital or raise revenue.

Speaking of bad advice, let’s now contrast the sensible recommendations of Ms. O’Grady to the knee-jerk statism of the Organization for Economic Cooperation and Development. In a new report on Costa Rica’s tax system, the OECD urged ever-higher fiscal burdens for the country. Including destructive class warfare.

Costa Rica’s tax revenues are…insufficient to finance the country’s current spending needs. …In addition to raising more tax revenue…, Costa Rica needs to…enhance the redistributive role of its tax system. …the role of the personal income tax (PIT) should be strengthened as it currently raises little revenue and does not contribute to reducing inequality. …Collecting greater revenues from the PIT, by lowering the income threshold above which PIT has to be paid as well as by introducing additional PIT brackets and gradually raising the top PIT rate, could contribute to reducing income inequality.

But the OECD doesn’t merely want to hurt successful taxpayers.

The bureaucracy is proposing other taxes that target everyone in the country. Including a pernicious value-added tax.

Costa Rica does not have a modern VAT system in place. …Costa Rica’s priority should be to introduce a well-designed and broad-based VAT system…to be able to generate additional revenues… There is scope to improve the environmental effectiveness of tax policy while also increasing revenue.

So why is the OECD so dogmatically in favor of higher taxes in Costa Rica?

Are revenues less than 5 percent of GDP, indicating that the country is unable to finance genuine public goods such as rule of law?

Is the government so starved of revenue that Costa Rico can’t replicate the formula – a public sector consuming about 10 percent of economic output – that enabled the western world to become rich?

Of course not. The report openly acknowledges that the Costa Rican tax system already consumes more than 23 percent of GDP.

The obvious conclusion if that the burden of government in Costa Rica should be downsized. And that’s true whether you think that the growth-maximizing size of government, based on the experience of the western world, is 5 percent-10 percent of GDP. Or whether you limit yourself to modern data and think the growth-maximizing size of government, based on Hong Kong and Singapore, is 15 percent-20 percent of economic output.

Here’s another amazing part of the report, as in amazingly bad and clueless.

The OECD actually admits that rising levels of government debt are the result of spending increases.

…significant increases in expenditures have not been matched by increases in tax revenues. …Between 2008 and 2013, overall government spending increased as a result of higher public sector remuneration as well as higher government transfers to finance public sector social programmes.

What’s particularly discouraging, as you just read, is that the higher spending wasn’t even in areas, such as infrastructure, where there might arguably be a potential for some long-run economic benefit.

Instead, the government has been squandering money on bureaucrat compensation and the welfare state.

Here’s another remarkable admission in the OECD report.

The high tax burden is a key driver of the informal economy in Costa Rica. The IMF estimated the size of the informal economy in Costa Rica at approximately 42% of GDP in the early 2000s… Past work from the IMF showed that rigidities in the labor market and the high tax burden were the most important drivers of informality.

Yet does the OECD reach the logical conclusion that Costa Rica needs deregulation and lower tax rates? Of course not.

The Paris-based bureaucrats instead want measures to somehow force workers into the tax net.

Bringing more taxpayers within the formal economy should be a key priority. …the tax burden in Costa Rica is borne by a small number of taxpayers. This puts a limit on the amount of tax revenue that can be raised…and puts a limit to the impact of the tax system in reducing inequality.

Ironically, the OECD report actually includes a table showing why the IMF is right in this instance. As you can see, social insurance taxes create an enormous wedge between what it costs to employ a worker and how much after-tax income a worker receives.

In other words, the large size of the underground economy is a predictable consequence of high tax rates.

Let’s conclude with the sad observation that the OECD’s bad advice for Costa Rica is not an anomaly. International bureaucracies are routinely urging higher tax burdens.

Indeed, I joked a few years ago in El Salvador that the nation’s air force should shoot down any planes with IMF bureaucrats in order to protect the country from bad economic advice.

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Whether for Reasons of Good Policy or Personal Revenge, Trump and Republicans Should End Subsidies for the OECD

If I was Captain Ahab in a Herman Melville novel, my Moby Dick would be the Organization for Economic Cooperation and Development. I have spent more than 15 years fighting that Paris-based bureaucracy. Even to the point that the OECD threatened to throw me in a Mexican jail.

• My main gripe is that the OECD, in hopes of propping up the European welfare states that dominate its membership, tries to enable big tax increases by undermining tax competition.
• It also galls me that the bureaucracy reflexively embraces just about every kind of tax hike, including class-warfare taxes on income, big new energy taxes, business taxes, and money-vacuuming value-added taxes.
• Additionally, I get irked when the OECD advocates other big-government policies such as Keynesian spending, green energy, and government-run healthcare.
• I also don’t like the OECD’s dodgy, dishonest, and misleading use of data on issues such as poverty, pay equity, inequality, and comparative economics.
• And, to add insult to injury, the bureaucrats at the OECD get a special exemption so their gold-plated salaries are tax free, even though they spend so much time trying to impose higher taxes on the rest of us.

So when I had a chance earlier today to comment on the OECD’s statist agenda, I could barely contain myself

Notwithstanding the glitch at the beginning (the perils of a producer talking in my ear), I greatly enjoyed the opportunity to castigate the OECD.

Indeed, returning to my Moby Dick analogy, I’m increasingly hopeful that the harpoons I keep throwing at the OECD may finally draw some blood.

In his budget, President Trump has proposed to cut overall spending for international organizations. And we’re talking about a real budget cut, not the phony kind of cut where spending merely grows at a slightly slower rate.

The budget doesn’t specify funding levels for the various bureaucracies, but various Administration officials have told me that their goal is to completely defund the Paris-based bureaucracy.

To quote Chris Matthews, this definitely sends a thrill up my leg.

But I’m trying not to get too excited. It’s still up to Congress to decide OECD funding, and the bureaucrats in Paris have been very clever about currying favor with the members of the subcommittee that doles out cash for international organizations.

Though as I mentioned in the interview, the OECD didn’t do itself any favors by openly trashing Trump last year. Even if they have their doubts about Trump, I suspect most GOPers in Congress aren’t happy that the bureaucrats in Paris were trying to tilt the election for Hillary Clinton.

Here are some examples.

The OECD’s number-two bureaucrat, Doug Frantz, actually equated America’s president with the former head of Germany’s National Socialist Workers Party.

The Deputy Secretary General of the OECD has described…Donald Trump as a “lunatic” whose political rise mirrors that of Hitler and Mussolini. …Speaking on RTÉ’s This Week, Doug Frantz said…“if you look at the basis ‘us and them’ that Donald Trump sets up, that Hitler set up, that Mussolini set up, then you can begin to at least be concerned and I’m concerned: I think any right-minded person should be concerned…The person who sits in the White House is the most powerful person in the world and if that person is someone who follows every whim and appeals to the most base instincts of a population, then we’re all under real threat”.

And another news report caught the OECD’s Secretary General, Angel Gurria, basically asserting that Trump is racist.

Angel Gurria, secretary general of the Organisation for Economic Cooperation and Development  and former Mexican foreign minister, says the word “racist” can be applied to Donald Trump. …Gurria tells UpFront’s Mehdi Hasan: “I would tend to agree with those who say that this is not only misinformed, but yes, I think the word racist can be applied. I think that because the American public is wise, it will then act in consequence,” Gurria adds.

By the way, I’m making sure to share these partisan statements with lots of people in Congress and the Administration.

In an ideal world, lawmakers would defund the OECD because it is an egregious waste of money. But if they defund the bureaucracy because its top two officials tried to interfere with the US election, I’ll still be happy with the final outcome.

I’ll close by recycling the video on the OECD that I narrated for the Center for Freedom and Prosperity.

P.S. In the interest of fairness, I’ll acknowledge that the OECD occasionally produces good work. I’ve even favorably cited research from the bureaucracy on issues such as government spending, tax policy, and expenditure limits.

But even if the bureaucracy ended its statist advocacy agenda and gave staff economists carte blanche to produce good papers, that still wouldn’t change my view that American tax dollars should not be funding the OECD. Though I confess it would be a much less attractive target if it returned to its original mission of collecting statistics and publishing studies.

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Sound Tax Advice from the International Monetary Fund?!?

Since I’ve written that the International Monetary Fund is “the Dumpster Fire of the Global Economy” and “the Dr. Kevorkian of Global Economic Policy,” I don’t think anyone could call me a fan of that international bureaucracy.

But I’ve also noted that the real problem with organizations like the IMF is that they have bad leadership. The professional economists at international bureaucracies often produce good theoretical and empirical work. That sensible research doesn’t make much difference, though, since the actual real-world policy decisions are made by political hacks with a statist orientation.

For instance, the economists at the IMF have produced research on the benefits of smaller government and spending caps. But the political leadership at the IMF routinely ignores that sensible research and instead has a dismal track record of pushing for tax increases.

Hope springs eternal, though, so I’m going to share some new IMF research on tax policy that is very sound. It’s from the second chapter of the bureaucracy’s newest Fiscal Monitor. Here are some excerpts, starting with an explanation of why the efficient allocation of resources is so important for prosperity.

A top challenge facing policymakers today is how to raise productivity, the key driver of living standards over the long term. …The IMF’s policy agenda has therefore emphasized the need to employ all policy levers, and in particular to promote growth-friendly fiscal policies that will boost productivity and potential output. Total factor productivity (TFP) at the country level reflects the productivity of individual firms…aggregate TFP depends on firms’ individual TFP and also on how available resources (labor and capital) are allocated across firms. Indeed, the poor use of existing resources within countries—referred to here as resource misallocation—has been found to be an important source of differences in TFP levels across countries and over time. …What is resource misallocation? Simply put, it is the poor distribution of resources across firms, reducing the total output that can be obtained from existing capital and labor.

The chapter notes that creative destruction plays a vital role in growth.

Baily, Hulten, and Campbell (1992) find that 50 percent of manufacturing productivity growth in the United States during the 1980s can be attributed to the reallocation of factors across plants and to firm entry and exit. Similarly, Barnett and others (2014) find that labor reallocation across firms explained 48 percent of labor productivity growth for most sectors in the U.K. economy in the five years prior to 2007.

And a better tax system would enable some of that growth by creating a level playing field.

Simply stated, you want people in the private sector to make decisions based on what makes economic sense rather than because they’re taking advantage of some bizarre quirk in the tax code.

Potential TFP gains from reducing resource misallocation are substantial and could lift the annual real GDP growth rate by roughly 1 percentage point. …Upgrading the design of their tax systems can help countries chip away at resource misallocation by ensuring that firms’ decisions are made for business and not tax reasons. Governments can eliminate distortions that they themselves have created. …For instance, the current debt bias feature of some tax systems not only distorts financing decisions but hampers productivity as well, especially in the case of advanced economies. …Empirical evidence shows that greater tax disparity across capital asset types is associated with higher misallocation.

One of the main problems identified by the IMF experts is the tax bias for debt.

And since I wrote about this problem recently, I’m glad to see that there is widespread agreement on the economic harm that is created.

Corporate debt bias occurs when firms are allowed to deduct interest expenses, but not returns to equity, in calculating corporate tax liability. …Several options are available to eliminate the distortions arising from corporate debt bias and from tax disparities across capital asset types, including the allowance for corporate equity system and a cash flow tax. …In the simplest sense, a CFT is a tax levied on the money entering the business less the money leaving the business. A CFT entails immediate expensing of all investment expenditures (that is, 100 percent first-year depreciation allowances) and no deductibility of either interest payments or dividends. Therefore, if it is well designed and implemented, a CFT does not affect the decision to invest or the scale of investment, and it does not discriminate across sources of financing.

By the way, regular readers may notice that the IMF economists favor a cash-flow tax, which is basically how the business side of the flat tax operates. There is full expensing in that kind of system, and interest and dividends are treated equally.

This is also the approach in the House Better Way tax plan, so the consensus for cash-flow taxation is very broad (though the House wants a destination-based approach, which is misguided for several reasons).

But let’s not digress. There’s one other aspect of the IMF chapter that is worthy of attention. There’s explicit discussion of how high tax rates undermine tax compliance, which is music to my ears.

Several studies have shown that tax policy and tax administration affect the prevalence of informality and thus productivity. Colombia provides an interesting case study on the effect of taxation on informality. A 2012 tax reform that reduced payroll taxes was found to incentivize a shift of Colombian workers out of informal into formal employment. Leal Ordóñez (2014) finds that taxes and regulations play an important role in explaining informality in Mexico. For Brazil, Fajnzylber, Maloney, and Montes-Rojas (2011) show that tax reductions and simplification led to a significant increase in formal firms with higher levels of revenue and profits. While a higher tax burden contributes to the prevalence of informality… For 130 developing countries, a higher corporate tax rate is found to increase the prevalence of cheats among small manufacturing firms, lowering the share of sales reported for tax purposes.

In closing, I should point out that the IMF chapter is not perfect.

For instance, even though it cites research about how high tax rates reduce compliance, the chapter doesn’t push for lower rates. Instead, it endorses more power for national tax authorities. Makes me wonder if the political folks at the IMF imposed that recommendation on the folks who wrote the chapter?

Regardless, the overall analysis of the chapter is quite sound. It’s based on a proper understanding that growth is generated by the efficient allocation of labor and capital, and it recognizes that bad tax policy undermines that process by distorting incentives for productive behavior.

The next step is convince Ms. Lagarde and the rest of the IMF’s leadership to read the chapter. They get tax-free salaries, so is it too much to ask that they stop pushing for higher taxes on the rest of us?

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New Video Shows the Simple Recipe for Poor Nations to Become Rich Nations – in Spite of Bad Advice from International Bureaucracies

The recipe for growth and prosperity isn’t very complicated.

Adam Smith provided a very simple formula back in the 1700s.

For folks who prefer a more quantitative approach, the Fraser Institute’s Economic Freedom of the World uses dozens of variables to rank nations based on key indices such as rule of law, size of government, regulatory burden, trade openness, and stable money.

One of the heartening lessons from this research is that countries don’t need perfect policy. So long as there is simply “breathing room” for the private sector, growth is possible. Just look at China, for instance, where hundreds of millions of people have been lifted from destitution thanks to a modest bit of economic liberalization.

Indeed, it’s remarkable how good policy (if sustained over several decades) can generate very positive results.

That’s a main message in this new video from the Center for Freedom and Prosperity.

The first part of the video, narrated by Abir Doumit, reviews success stories from around the world, including Hong Kong, Singapore, Chile, Estonia, Taiwan, Ireland, South Korea, and Botswana.

Pay particular attention to the charts showing how per-capita economic output has grown over time in these jurisdictions compared to other nations. That’s the real test of what works.

The second part of the video exposes the scandalous actions of international bureaucracies, which are urging higher fiscal burdens in developing nations even though no poor nation has ever become a rich nation with bigger government. Never.

Yet bureaucracies such as the United Nations, the International Monetary Fund, and the Organization for Economic Cooperation and Development are explicitly pushing for higher taxes in poor nations based on the anti-empirical notion that bigger government is a strategy for growth.

I’m not joking.

As Ms. Doumit remarks in the video, these bureaucracies never offer a shred of evidence for this bizarre hypothesis.

And what’s especially frustrating is that the big nations of the western world (i.e., the ones that control the international bureaucracies) all became rich when government was very small.

And while the bureaucracies never provide any data or evidence, the Center for Freedom and Prosperity’s video is chock full of substantive information. Consider, for instance, this chart showing that there was almost no redistribution spending in the western world as late as 1930.

Unfortunately, the burden of government spending in western nations has metastasized starting in the 1930s. Total outlays now consume enormous amounts of economic output and counterproductive redistribution spending is now the biggest part of national budgets.

But at least western nations became rich first and then made the mistake of adopting bad fiscal policy (fortunately offset by improvements in other areas such as trade liberalization).

The international bureaucracies are trying to convince poor nations, which already suffer from bad policy, that they can succeed by imposing additional bad fiscal policy and then magically hope that growth will materialize.

And having just spent last week observing two conferences on tax and development at the United Nations in New York City, I can assure you that this is what they really think.

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