Feeds:
Posts
Comments

Posts Tagged ‘International Monetary Fund’

The International Monetary Fund is a left-leaning bureaucracy that was set up to monitor the fixed-exchange-rate monetary system created after World War II.

Unsurprisingly, when that system broke down and the world shifted to floating exchange rates, the IMF didn’t go away. Instead, it created a new role for itself as self-styled guardian of economic stability.

Which is a bit of a joke since the international bureaucracy is most infamous for its relentless advocacy of higher taxes in economically stressed nations. So much so that I’ve labeled the IMF the Dr. Kevorkian of the world economy.

Or if that reference is a bit outdated for younger readers, let’s just say the IMF is the dumpster fire of international economics. Heck, if I was in Beijing, I would consider the bureaucracy’s recommendations for China an act of war.

To get an idea of the IMF’s ideological bias, let’s review it’s new report designed to discredit economic liberty (a.k.a., “neoliberalism” in the European sense or “classical liberalism” to Americans).

Here’s their definition.

The neoliberal agenda—a label used more by critics than by the architects of the policies— rests on two main planks. The first is increased competition—achieved through deregulation and the opening up of domestic markets, including financial markets, to foreign competition. The second is a smaller role for the state, achieved through privatization and limits on the ability of governments to run fiscal deficits and accumulate debt.

The authors describe the first plank accurately, but they mischaracterize the second plank.

At the risk of nitpicking, I would say “neoliberals” such as myself are much more direct than they imply. We want to achieve “a smaller role for the state” by reducing the burden of government spending.

Sure, we want to privatize government-controlled assets, but that’s mostly for reasons of economic efficiency rather than budgetary savings. And because we care about what actually works, we’re fans of spending caps rather than balanced budget rules.

But let’s set all that aside and get back to the report.

The IMF authors point out that governments have been moving in the right direction in recent decades.

There has been a strong and widespread global trend toward neoliberalism since the 1980s.

That sounds like good news.

And the report even includes a couple of graphs to show the trend toward free markets and limited government.

And the bureaucrats even concede that free markets and small government generate some good results.

There is much to cheer in the neoliberal agenda. The expansion of global trade has rescued millions from abject poverty. Foreign direct investment has often been a way to transfer technology and know-how to developing economies. Privatization of state-owned enterprises has in many instances led to more efficient provision of services and lowered the fiscal burden on governments.

But then the authors get to their real point. They don’t like unfettered capital flows and they don’t like so-called austerity.

However, there are aspects of the neoliberal agenda that have not delivered as expected. …removing restrictions on the movement of capital across a country’s borders (so-called capital account liberalization); and fiscal consolidation, sometimes called “austerity,” which is shorthand for policies to reduce fiscal deficits and debt levels.

Looking at these two aspects of neoliberalism, the IMF proposes “three disquieting conclusions.”

I’m much more worried about stagnation and poverty than I am about inequality, so part of the IMF’s analysis can be dismissed.

Indeed, based on the sloppiness of previous IMF work on inequality, one might be tempted to dismiss the entire report.

But let’s look at whether the authors have a point. Are there negative economic consequences for nations that allow open capital flows and/or impose budgetary restraint?

They argue that passive financial flows (indirect investment) can be destabilizing.

Some capital inflows, such as foreign direct investment—which may include a transfer of technology or human capital—do seem to boost long-term growth. But the impact of other flows—such as portfolio investment and banking and especially hot, or speculative, debt inflows—seem neither to boost growth nor allow the country to better share risks with its trading partners… Although growth benefits are uncertain, costs in terms of increased economic volatility and crisis frequency seem more evident. Since 1980, there have been about 150 episodes of surges in capital inflows in more than 50 emerging market economies…about 20 percent of the time, these episodes end in a financial crisis, and many of these crises are associated with large output declines… In addition to raising the odds of a crash, financial openness has distributional effects, appreciably raising inequality. …there is increased acceptance of controls to limit short-term debt flows that are viewed as likely to lead to—or compound—a financial crisis. While not the only tool available—exchange rate and financial policies can also help—capital controls are a viable, and sometimes the only, option when the source of an unsustainable credit boom is direct borrowing from abroad.

I certainly agree that there have been various crises in different nations, but I’m wondering whether the IMF is focusing on the symptoms rather than the underlying diseases.

What happened in the various nations, for instance, to trigger sudden capital flight? That seems to be a much more important question.

In some cases, such as Greece, the problem obviously isn’t capital flight. It’s the reckless spending by Greek politicians that created a fiscal crisis.

In other cases, such as Estonia, there was a bubble because of an overheated property market, and there’s no question the economy took a hit when that bubble popped.

But there’s a very strong case that Estonia’s open economy has generated plenty of strong growth over the years to compensate for that blip.

And it’s worth noting that criticisms of Estonia’s market-oriented policies often are based on grotesque inaccuracies, as was the case when Paul Krugman tried to blame the 2008 recession on spending cuts that occurred in 2009.

So I’m very skeptical of the IMF’s claim that capital controls are warranted. That’s the type of policy designed to insulate governments from the consequences of bad policy.

Now let’s shift to the fiscal policy issue. The IMF report correctly states that “Curbing the size of the state is another aspect of the neoliberal agenda.”

But the authors make a big (perhaps deliberate) mistake by then blaming neoliberals for adverse consequences associated with the “austerity” imposed by various governments.

Austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment. …in practice, episodes of fiscal consolidation have been followed, on average, by drops rather than by expansions in output. On average, a consolidation of 1 percent of GDP increases the long-term unemployment rate by 0.6 percentage point.

The problem with this analysis is that it doesn’t differentiate between tax increases and spending cuts.

And since much of the “austerity” is the former variety rather than the latter, especially in Europe, it borders on malicious for the IMF to blame neoliberals (who want less spending) for the economic consequences of IMF-endorsed policies (mostly higher taxes).

Especially since research from the European Central Bank and International Monetary Fund (!) show that spending restraint is the pro-growth way of dealing with a fiscal crisis.

Let’s now look at what the IMF authors suggest for future policy. More taxes and spending!

…policymakers should be more open to redistribution than they are. …And fiscal consolidation strategies—when they are needed—could be designed to minimize the adverse impact on low-income groups. But in some cases, the untoward distributional consequences will have to be remedied after they occur by using taxes and government spending to redistribute income. Fortunately, the fear that such policies will themselves necessarily hurt growth is unfounded.

Wow, the last couple of sentences are remarkable. The bureaucrats want readers to believe that a bigger fiscal burden of government won’t have any adverse consequences.

That’s a spectacular level of anti-empiricism. I guess they want us to believe that nations such as France are economically stronger economy than places such as Hong Kong.

Wow.

Last but not least, here’s a final excerpt that’s worth sharing just because of these two sentences.

IMF Managing Director Christine Lagarde said the institution believed that the U.S. Congress was right to raise the country’s debt ceiling “because the point is not to contract the economy by slashing spending brutally now as recovery is picking up.”  …Policymakers, and institutions like the IMF that advise them, must be guided not by faith, but by evidence of what has worked.

We’re supposed to believe the IMF is guided by evidence when the chief bureaucrat relies on Keynesian theory to make a dishonest argument. I wish that “slashing spending” was one of the options on the table when the debt limit was raised, but the fight was at the margins over how rapidly the burden of spending should climb.

But if Lagarde can make that argument with a straight face, I guess she deserves her massive tax-free compensation package.

P.S. Since IMF economists have concluded (two times!) that spending caps are the most effective fiscal rule, I really wonder whether the authors of the above study were being deliberately dishonest when they blamed advocates of lower spending for the negative impact of higher taxes.

P.P.S. I was greatly amused in 2014 when the IMF took two diametrically opposed positions on infrastructure spending in a three-month period.

P.P.P.S. The one silver lining to the dark cloud of the IMF is that the bureaucrats inadvertently generated some very powerful evidence against the VAT.

P.P.P.S. Let’s close with something positive. IMF researchers last year found that decentralized government works better.

Read Full Post »

I thought the Organization for Economic Cooperation and Development had cemented its status as the world’s worst international bureaucracy when it called for a Keynesian spending binge even though the global economy is still suffering from previous schemes for government “stimulus.”

But the International Monetary Fund is causing me to reconsider my views.

First, some background about the IMF. Almost all of the problems occur when the political appointees at the top of the organization make policy choices. That’s when you get the IMF’s version of junk science, with laughable claims about inequality and growth, bizarrely inconsistent arguments about infrastructure spending, calls for massive energy taxes,

By contrast, you do get some worthwhile research from the career economists (on issues such as spending caps, fiscal decentralization, and the Laffer Curve).

But that kind of professional analysis gets almost no attention. The IMF’s grossly overpaid (and untaxed!) Managing Director seemingly devotes all her energy to pushing and publicizing bad policies.

The Wall Street Journal reports, for instance, that the IMF is following the OECD down the primrose path of fiscal recklessness and is also urging nations to throw good money after bad with another Keynesian spending spree.

The world’s largest economies should agree to a coordinated increase in government spending to counter the growing risk of a deeper global economic slowdown, the International Monetary Fund said Wednesday. …the IMF is pushing G-20 finance ministers and central bankers meeting in Shanghai later this week to agree on bold new commitments for public spending.

Fortunately, at least one major economy seems uninterested in the IMF’s snake-oil medicine.

The IMF’s calls will face some resistance in Shanghai. Fiscal hawk Germany has been reluctant to heed long-issued calls by the U.S., the IMF and others to help boost the eurozone’s weak recovery with public spending.

Hooray for the Germans. I don’t particularly like fiscal policy in that nation, but I at least give the Germans credit for understanding at the end of the day that 2 + 2 = 4.

I’m also hoping the British government, which is being pressured by the IMF, also resists pressure to adopt Dr. Kevorkian economic policy.

The International Monetary Fund has urged the UK to ease back on austerity… IMF officials said the Treasury had done enough to stabilise the government’s finances for it to embark on extra investment spending… The Treasury declined to comment on the IMF report. The report said: “Flexibility in the fiscal framework should be used to modify the pace of adjustment in the event of weaker demand growth.” …Osborne has resisted attempts to coordinate spending by G20 countries to boost growth, preferring to focus on reducing the deficit in public spending to achieve a balanced budget by 2020.

But you’ll be happy to know the IMF doesn’t discriminate.

It balances out calls for bad policy in the developed world with calls for bad policy in other places as well. And the one constant theme is that taxes always should be increased.

I wrote last year about how the IMF wants to sabotage China’s economy with tax hikes.

Well, here are some excerpts from a Dow Jones report on the IMF proposing higher tax burdens, tax harmonization, and bigger government in the Middle East.

The head of the International Monetary Fund on Monday urged energy exporters of the Middle East to raise more taxes… “These economies need to strengthen their fiscal frameworks…by boosting non-hydrocarbon sources of revenues,” Christine Lagarde said at a finance forum in the United Arab Emirates capital. …Ms. Lagarde called on the Persian Gulf states to introduce a valued added tax, which, even at a relatively low rate, could lift gross domestic product by 2%, she said. …Ms. Lagarde, who on Friday clinched a second five-year term as the IMF’s managing director, also urged governments in the region to consider raising corporate income taxes and even prepare for personal income taxes. Income taxes in particular could prove a sensitive move in the Gulf, which in recent decades has attracted millions of workers from abroad by offering, among other things, light-touch tax regimes. Ms. Lagarde also wants to discourage “overly aggressive tax competition” among countries that allow international companies and wealthy individuals to shift their wealth to lower tax destinations.

Wow, Ms. Lagarde may be the world’s most government-centric person, putting even Bernie Sanders in her dust.

She managed, in a single speech, to argue that higher taxes “strengthen…fiscal frameworks” even though that approach eventually leads to massive fiscal instability. She also apparently claimed that a value-added tax could boost economic output, an idea so utterly absurd that I hope the reporter simply mischaracterized her comments and that instead she merely asserted that a VAT could transfer an additional 2 percent of the economy’s output into government coffers. And she even urged the imposition of income taxes, which almost certainly would be a recipe for turning thriving economies such as Dubai back into backward jurisdictions where prosperity is limited to the oil-dependent ruling class.

And it goes without saying that the IMF wants to export bad policy to every corner of the world.

The IMF chief said taxation allows governments to mobilize their revenues. She noted, however, that the process can be undermined by “overly aggressive tax competition” among countries, and companies abusing the system of international taxation. …She argued that the automatic exchange of taxpayer information among governments could make it harder for businesses to follow the scheme.

And don’t forget that the IMF oftentimes will offer countries money to implement bad policy, like when the bureaucrats bribed Albania to get rid of its flat tax.

P.S. Now perhaps you’ll understand why I was so disappointed that last year’s budget deal included a provision to expand the IMF’s authority to push bad policy around the world.

P.P.S. In other words, American taxpayers are being forced to subsidize the IMF so it can advocate higher taxes on American taxpayers! Sort of like having to buy a gun for the robber who wants to steal your money.

P.P.P.S. Though I’ll also be grateful that the IMF inadvertently and accidentally provided some very powerful data against the value-added tax.

Read Full Post »

What were the most noteworthy events from 2015?

Regarding bad news, there’s unfortunately a lot of competition. But if I’m forced to pick the very worst developments, here’s my list.

Resuscitation of the Export-Import Bank – I did a premature victory dance last year when I celebrated the expiration of the Export-Import Bank’s authority.  I should have known that corrupt cronyism was hard to extinguish. Sure enough, Republicans and Democrats conspired to re-authorize the Ex-Im Bank and transfer wealth from ordinary Americans to politically connected corporations.

Expansion of IMF authority – I also did a premature victory dance in 2014 when I lauded the fact that Congress did not approve increased bailout authority for the International Monetary Fund. Sadly, as part of the year-end spending agreement, Congress agreed to expand the IMF’s authority so it could continue to push for higher taxes around the world.

Busting the spending caps (again) – When I wrote last August that maintaining the spending caps was a key test of GOP integrity, I should have known that they would get a failing grade. Sure enough, Republicans deliberately fumbled the ball at the goal line and agreed to higher spending. Again.

Supreme Court ignores law to bail out Obamacare (again) – Back in 2012, the Supreme Court had a chance to rule whether Obamacare was an impermissible expansion of the power of the federal government. In a truly odious decision, Chief Justice John Roberts ignored the Constitution’s limits on federal powers and decided we could be coerced to buy health insurance. Last year, he did it again, this time by bailing out a key part of Obamacare by deciding to arbitrarily ignore the wording of the law.

Business-as-usual transportation bill – The desire of Congress to fund pork-barrel transportation projects is at least somewhat constrained by the amount of revenue generated by the gas tax. There was an opportunity for reform in 2015 because proposed spending was much higher than the trajectory of gas tax revenue, but rather than even engage in a discussion of good policy options, politicians merely bickered over what combination of tax hikes and budget gimmicks they could put together to keep the pork projects flowing.

Creeping support on the right for the value-added tax – When I wrote early last year that the 2016 election might create an opportunity for tax reform, I was being hopeful that we might get something close to a simple and fair flat tax. Yet probably the biggest news so far in this election cycle is that a couple of candidates who presumably favor small government – Rand Paul and Ted Cruz – have proposed to impose a value-added tax without fully repealing the income tax.

There’s very little good news to celebrate. Here’s my tragically sparse list, and you’ll notice that my list of victories is heavy on style and light on substance. But let’s take what we can get.

Semi-decent Republican budgets – The budget resolution produced by Congress technically doesn’t embrace specific policies, but the it’s nonetheless noteworthy that the House and Senate approved numbers that – at least conceptually – are based on genuine Medicaid and Medicare reform.

Support for spending caps – Notwithstanding the fact that GOP politicians won’t even abide by the limited spending caps that already exist, I’m somewhat encouraged by the growing consensus for comprehensive spending caps akin to the ones in place in Switzerland and Hong Kong. Heck, even international bureaucracies now agree spending caps are the only effective fiscal rule.

Good election results from the Wolverine State – It was great to see Michigan voters reject a gas tax increase that was supported by the political elite.

More companies escaping the IRS – I heartily applaud when companies figure out how to re-domicile in jurisdictions with better tax law to escape America’s high corporate tax rate and self-destructive worldwide tax system. And I’m glad these “inversions” continue to take place even though the Obama Administration is trying to stop them.

A glimmer of reality at the New York Times – I realize I’m scraping the bottom of the barrel in my search for good news, but the fact that the New York Times published a column acknowledging that feminist economic policies backfire against women hopefully is a sign that sensible thinking is possible in the establishment media.

Gun control flopping – It’s great to see that the left has totally failed in its effort to undermine 2nd Amendment rights.

Limits on asset forfeiture – The final bit of good news from 2015 was the just-before-Christmas announcement by the Obama Administration that the odious practice of asset forfeiture would be modestly curtailed.

I would offer predictions for 2016, but since my big prediction from last year that we would have gridlock was sadly inaccurate, I think I’ll avoid making a fool of myself this year.

Read Full Post »

In my speeches, I routinely argue that an aging population is one of the reasons why we need genuine entitlement reform.

A modest-sized welfare state may be feasible if a country has a “population pyramid,” I explain, Welfare State Wagon Cartoonsbut it’s a recipe for fiscal chaos when changing demographics result in fewer and fewer people pulling the wagon and more and more people riding in the wagon.

And if you somehow doubt that’s what is happening in America, check out this very sobering image showing that America’s population pyramid is turning into a population cylinder.

The bottom line is that demographics and entitlements will mean a Greek fiscal future for America and other nations.

To bolster my case (particularly for folks who might be skeptical of a libertarian message), I frequently cite pessimistic long-run fiscal data from international bureaucracies such as the IMF, BIS, and OECD.

I’m not a big fan of these organizations because they routinely endorse statist policies, but I figure skeptics will be more likely to listen to me if I point out that even left-leaning international bureaucracies agree the public sector is getting too large.

And now I have more evidence to cite. A new report from the International Monetary Fund explores “The Fiscal Consequences of Shrinking Populations.” Here’s what you need to know.

Declining fertility and increasing longevity will lead to a slower-growing, older world population. …For the world, the share of the population older than age 65 could increase from 12 percent today to 38 percent by 2100. …These developments would place public finances of countries under pressure, through two channels. First, spending on age-related programs (pensions and health) would rise. Without further reforms, these outlays would increase by 9 percentage points of GDP and 11 percentage points of GDP in more and less developed countries, respectively, between now and 2100. The fiscal consequences are potentially dire…large tax increases that could stymie economic growth.

Let’s now look at a couple of charts from the study.

The one of the left shows that one-third of developed nations already have negative population growth, and that number will jump to about 60 percent by 2050. And because that means fewer workers to support more old people, the chart on the right shows how the dependency ratio will worsen over time.

So what do these demographic changes mean for fiscal policy?

Well, if you live in a sensible jurisdiction such as Hong Kong or Singapore, there’s not much impact, even though birthrates are very low, because government is small and people basically are responsible for setting aside income for their retirement years.

And if live in a semi-sensible jurisdiction such as Australia or Chile, the impact is modest because personal retirement accounts preclude Social Security-type fiscal challenges.

But if you live just about anywhere else, in places where government somehow is supposed to provide pensions and health care, the situation is very grim.

Here’s another chart from the new IMF report. If you look at developed nations, you can see a big increase in the projected burden of government spending, mostly because of rising expenditures for health care.

At this stage, I can’t resist pointing out that this is one reason why the enactment of Obamacare was a spectacularly irresponsible decision.

But let’s not get sidetracked.

Returning to the IMF report, the authors contemplate possible policy responses.

They look at increased migration, but at best that’s a beggar-thy-neighbor approach. They look at increased labor force participation, which would be a very good development, but it’s hard to see that happening when nations have redistribution policies that discourage people from being in the workforce.

And the report is very skeptical about the prospects of government-induced increases in birthrates.

Boosting birth rates could slow down population aging and gradually reduce fiscal pressures. …However, a “birth rate” solution to aging is unlikely to work for most countries. The pronatalist policies seem to have only modest effects on the number of births, although they might affect the timing of births.

So that means the problem will need to be addressed through fiscal policy.

The IMF’s proposed solutions include some misguided policies, but I was surprisingly pleased by the recognition that steps were needed to limit the growth of government.

Regarding pensions, the IMF suggested higher retirement ages, which is a second-best option, while also suggesting private retirement savings, which is the ideal solution.

Reforming public pension systems can help offset the effects of aging. Raising retirement ages is an especially attractive option… For example, raising retirement ages over 2015–2100 by an additional five years (about 7 months per decade) beyond what is already legislated would reduce pension spending by about 2 percentage points of GDP by 2100 (relative to the baseline) in both the more and less developed countries. …increasing the role of private retirement saving schemes could be helpful in offsetting the potential decline in lifetime retirement income.

But if you recall from above, the biggest problem is rising health care costs.

And kudos to the IMF for supporting market-driven competition. Even more important, though, the international bureaucracy recognizes that the key is to limit the government’s health care spending to the growth of the private economy (sort of a a healthcare version of Mitchell’s Golden Rule).

…health care reform can be effective in containing the growth of public health spending. …There is past success in improving health outcomes without raising costs through promoting some degree of competition among insurers and service providers. …Containing the growing costs of health care would help reduce long-term fiscal risks. On average, health care costs are projected to increase faster than economic growth. …Assuming policies are able to keep the growth of health care costs per capita in line with GDP per capita, health care spending will increase at a slower rate, reflecting only demographics. Under this scenario, public health care spending pressures would be greatly subdued: by 2100, health spending would be reduced by 4½ percentage points of GDP in the more developed countries.

Interestingly, of all the options examined by the IMF, capping the growth of health care spending had the biggest positive impact on long-run government spending.

So what lessons can we learn?

Most important, the IMF study underscores the importance of the Medicaid reform and Medicare reform proposals that have been included in recent budgets on Capitol Hill.

In addition to making necessary structural changes, both of these reforms cap the annual growth of health care spending, which is precisely what the IMF report says will generate the largest savings.

So we’re actually in a very unusual situation. Some lawmakers want to do the right thing for the right reason at the right time.

But not all of them. Some politicians, either because of malice or ignorance, think we should do nothing, even though that will mean a very unpleasant future.

Read Full Post »

When I wrote the other day that the Organization for Economic Cooperation and Development was the worst international bureaucracy, I must have caused some envy at the International Monetary Fund.

One can imagine the tax-free bureaucrats from the IMF, lounging at their lavish headquarters, muttering “Mitchell obviously hasn’t paid enough attention to our work.”

And they may be right. The IMF has published some new research on inequality and growth that merits our attention. I hoped it would be a good contribution to the discussion, but I was disappointed (albeit not overly surprised) to see that the authors put ideology over analysis.

Widening income inequality is the defining challenge of our time. …Equality, like fairness, is an important value.

Needless to say, they never explain why inequality is a more important challenge than anemic growth.

Moreover, they never differentiate between bad Greek-style inequality that is caused by cronyism and good Hong Kong-style inequality that is caused by some people getting richer faster than other people getting richer in a free market.

And they certainly don’t define “fairness” in an adequate fashion.

But let’s not get hung up on the rhetoric. The most newsworthy part of the study is that these IMF bureaucrats produced numbers ostensibly showing that growth improves if more income goes to those at the bottom 20 percent.

…we find an inverse relationship between the income share accruing to the rich (top 20 percent) and economic growth. If the income share of the top 20 percent increases by 1 percentage point, GDP growth is actually 0.08 percentage point lower in the following five years, suggesting that the benefits do not trickle down. Instead, a similar increase in the income share of the bottom 20 percent (the poor) is associated with 0.38 percentage point higher growth.

And this correlation leads them to make a very bold assertion.

…there does not need to be a stark efficiency-equity tradeoff. Redistribution through the tax and transfer system is found to be positively related to growth for most countries.

Followed by some policy suggestions for more class-warfare tax policy to finance additional redistribution.

…the redistributive role of fiscal policy could be reinforced by greater reliance on wealth and property taxes, more progressive income taxation… In addition, reducing tax expenditures that benefit high-income groups most and removing tax relief—such as reduced taxation of capital gains, stock options, and carried interest—would increase equity.

Those are some bold leaps in logic that the authors make. And we’ll look at some new, high-quality research on the efficiency-equity tradeoff below, but first let’s consider the IMF’s supposed empirical findings on growth and income.

Several questions spring to mind:

  • Did they cherry pick the data? Why look at the relationship between growth and income gains in the previous five years rather than one year, three years, or ten years?
  • Why do they assume the correlation they found in the five-year data somehow implies causation for future growth? Roosters crow before the sun comes up, after all, but they don’t cause sunrises.
  • Was there any attempt to look at other hypotheses? One thing that instantly came to my mind was the possibility that recessions often are preceded by easy-money policies that create asset bubbles. And since those asset bubbles tend to artificially enrich savers and investors with higher incomes, perhaps that explains the correlation in the IMF’s data.
  • Perhaps most important, why assume that faster income growth for the bottom 20 percent automatically means there should be more redistribution through the tax and transfer system? Maybe that income growth is the natural – and desirable – outcome of good Hong Kong-type policies?

There are all sorts of other questions that could and should be asked, but let’s now shift to the IMF’s bold assertion that their ostensible correlation somehow proves that there’s no tradeoff between growth (efficiency) and redistribution (equity).

Kevin Hassett of the American Enterprise Institute investigated the degree to which Arthur Okun was right about a tradeoff between growth and redistribution.

Forty years ago, the economist Arthur Okun wrote a seminal book with a self-explanatory title: Equality and Efficiency: The Big Tradeoff.  …Okun’s tradeoff seems to be forgotten by many on the left, who advocate expanded government spending at every turn… What is needed is some kind of controlled experiment.. When the financial crisis began, countries varied tremendously in the extent to which they redistributed income. Some, such as Ireland and Sweden, redistributed a lot; others, such as the U.S. and Switzerland, not so much. Now, seven years later, some countries have recovered smartly. Others have not. If we go back and sort countries by how much they redistributed before the crisis, how does the growth experience compare? …The vertical axis plots how much redistribution there was in each country in 2008. The horizontal axis plots the rate of per capita national-income growth that each country averaged during the four years between 2008 and 2012. In some sense, then, the chart asks the question, “To what extent does variation in the size of the welfare state in 2008 explain variation in how economies recovered from the crisis between 2008 and 2012?” …As one can see in the chart, …the data show a clear pattern: the heavy redistributors have done much worse.

And here’s Kevin’s chart, and it clearly shows the redistribution-oriented nations had relatively slow growth (the top left of the chart).

The bottom line is that Kevin’s hypothesis and data are much more compelling that the junky analysis from the IMF.

But you don’t need to be an expert in economic jargon or statistical analysis to reach that conclusion.

Just look around the globe. The real-world evidence is so strong that only an international bureaucrat could miss it. The nations that follow the IMF’s advice, with lots of redistribution and class-warfare taxation, are the ones that languish.

After all, Greece, Italy, and France are not exactly role models.

While jurisdictions such as Hong Kong and Singapore routinely set the standard for growth.

And nations with medium-sized welfare states, such as Switzerland, Australia, and the United States, tend to fall in the middle. We out-perform Europe’s big-government economies, but we lag behind the small-government economies.

Let’s close by looking at some additional findings from the IMF study.

I was actually surprised to see that the bureaucrats admitted that inequality (more properly defined as some people getting richer faster than others get richer) was the natural result of positive economic developments.

We find that less-regulated labor markets, financial deepening, and technological progress largely explain the rise in market income inequality in our full sample over the last 30 years.

So why, then, is “inequality” a “defining challenge”?

Needless to say, the IMF never gives us a good answer.

I also was struck by this passage from the IMF study.

Figure 18 indicates that rising pre-tax income concentration at the top of the distribution in many advanced economies has also coincided with declining top marginal tax rates (from 59 percent in 1980 to 30 percent in 2009).

And here is the chart, which the IMF would like you to believe is evidence that lower tax rates have contributed to inequality (even though the bureaucrats already admitted that natural forces have led some to get richer faster than others).

Yet this chart simply shows that supply-siders were right. Reagan, Kemp, and other tax cutters argued that lower tax rates would lead rich people to earn – and declare – more taxable income.

And that’s exactly what happened!

Heck, I’ve already shared incredibly powerful data from the IRS on this occurring during the 1980s in the United States, so it’s no surprise it happened in other nations as well.

But I don’t want to be reflexively critical of the IMF. The study did have some useful data.

And there was even one very good recommendation for helping the poor by cutting back on misguided anti-money laundering laws.

Country experiences also suggest that policies such as granting exemptions from onerous documentation requirements, requiring banks to offer basic accounts, and allowing correspondent banking are useful in fostering inclusion.

Since I’ve written that anti-money laundering laws are ineffective at fighting crime while putting costly burdens on those with low incomes, I’m glad to see the IMF has reached the same conclusion.

And here’s a chart from the IMF study showing how poor people are less likely to have accounts at financial institutions.

By the way, the World Bank has produced some very good research on how the poor are hurt by inane anti-money laundering rules.

So kudos to some international bureaucracies for at least being sensible on that issue.

But speaking of international bureaucracies, I started this column by joking about the contest to see which one produced the worst research with the worst recommendations.

And while the IMF’s new inequality study definitely deserves to be mocked, I must say that it’s not nearly as bad as the drivel that was published by the OECD.

So our friends in Paris can rest on their laurels, confident that they do the best job of squandering American tax dollars.

P.S. Since I pointed out that the IMF inadvertently ratified one of the key tenets of supply-side economics, let’s remember that the IMF also confirmed one of the key reasons to oppose a value-added tax.

Read Full Post »

When I first came to Washington back in the 1980s, there was near-universal support and enthusiasm for a balanced budget amendment among advocates of limited government.

The support is still there, I’m guessing, but the enthusiasm is not nearly as intense.

There are three reasons for this drop.

  1. Political reality – There is zero chance that a balanced budget amendment would get the necessary two-thirds vote in both the House and Senate. And if that happened, by some miracle, it’s highly unlikely that it would get the necessary support for ratification in three-fourths of state legislatures.
  2. Unfavorable evidence from the statesAccording to the National Conference of State Legislatures, every state other than Vermont has some sort of balanced budget requirement. Yet those rules don’t prevent states like California, Illinois, Connecticut, and New York from adopting bad fiscal policy.
  3. Favorable evidence for the alternative approach of spending restraint – While balanced budget rules don’t seem to work very well, policies that explicitly restrain spending work very well. The data from Switzerland, Hong Kong, and Colorado is particularly persuasive.

Advocates of a balanced budget amendment have some good responses to these points. They explain that it’s right to push good policy, regardless of the political situation. Since I’m a strong advocate for a flat tax even though it isn’t likely to happen, I can’t argue with this logic.

Regarding the last two points, advocates explain that older versions of a balanced budget requirement simply required a supermajority for more debt, but newer versions also include a supermajority requirement to raise taxes. This means – at least indirectly – that the amendment actually is a vehicle for spending restraint.

This doesn’t solve the political challenge, but it’s why advocates of limited government need to be completely unified in favor of tax-limitation language in a balanced budget amendment. And they may want to consider being more explicit that the real goal is to restrain spending so that government grows slower than the productive sector of the economy.

Interestingly, even the International Monetary Fund (which is normally a source of bad analysis) understands that spending limits work better than rules that focus on deficits and debt.

Here are some of the findings from a new IMF study that looks at the dismal performance of the European Union’s Stability and Growth Pact. The SGP supposedly limited deficits to 3 percent of GDP and debt to 60 percent of GDP, but the requirement failed largely because politicians couldn’t resist the temptation to spend more in years when revenue grew rapidly.

An analysis of stability programs during 1999–2007 suggests that actual expenditure growth in euro area countries often exceeded the planned pace, in particular when there were unanticipated revenue increases. Countries were simply unable to save the extra revenues and build up fiscal buffers. …This reveals an important asymmetry: governments were often unable to preserve revenue windfalls and faced difficulties in restraining their expenditure in response to revenue shortfalls when consolidation was needed. …The 3 percent of GDP nominal deficit ceiling did not prevent countries from spending their revenue windfalls in the mid-2000s. … Under the SGP, noncompliance has been the rule rather than the exception. …The drawbacks of the nominal deficit ceiling are particularly apparent when the economy is booming, as it is compatible with very large structural deficits.

The good news is that the SGP has been modified and now (at least theoretically) requires spending restraint.

The initial Pact only included three supranational rules… As of 2014, fiscal aggregates are tied by an intricate set of constraints…government spending (net of new revenue measures) is constrained to grow in line with trend GDP. …the expenditure growth ceiling may seem the most appealing. This indicator is tractable (directly constraining the budget), easy to communicate to the public, and conceptually sound… Based on simulations, Debrun and others (2008) show that an expenditure growth rule with a debt feedback ensures a better convergence towards the debt objective, while allowing greater flexibility in response to shocks. IMF (2012) demonstrates the good performance of the expenditure growth ceiling

This modified system presumably will lead to better (or less worse) policy in the future, though it’s unclear whether various nations will abide by the new EU rules.

One problem is that the overall system of fiscal rules has become rather complicated, as illustrated by this image from the IMF study.

Which brings us back to the third point above. If the goal is to restrain spending (and it should be), then why set up a complicated system that first and foremost is focused on red ink?

That’s why the Swiss Debt Brake is the right model for how to get spending under control. And this video explains why the objective should be spending restraint rather than deficit reduction.

And for those who fixate on red ink, it’s worth noting that if you deal with the underlying disease of too much government, you quickly solve the symptom of deficits.

Read Full Post »

In early November of last year, I shared some remarkable data from a groundbreaking study published by the European Central Bank (ECB).

The study looking at public sector efficiency (PSE) in developed nations and found that “big governments spend a lot more and deliver considerably less.”

Later in the month, I wrote about a second ECB study that looked at a broader set of nations and further confirmed that smaller government produces better results.

The first ECB study clearly concluded that “small” government is more efficient and productive than either “medium” government or “big” government. Based on the second ECB study, we can conclude that it’s even better if government is…well, I guess we’ll have to use the term “smaller than small.”

Today, we can augment this research by looking at a new study from the International Monetary Fund.

The IMF’s new working paper on “Fiscal Decentralization and the Efficiency of Public Service Delivery” shows that it’s not only good to have small government, but that it’s also good to have decentralized government. Here are the main findings.

This paper analyzes the impacts of fiscal decentralization on the efficiency of public service delivery. …The paper’s findings suggest that fiscal decentralization can serve as a policy tool to improve performance… an adequate institutional environment is needed for decentralization to improve public service delivery. Such conditions include effective autonomy of local governments, strong accountability at various levels of institutions, good governance, and strong capacity at the local level. Moreover, a sufficient degree of expenditure decentralization seems necessary to obtain a positive outcome. And finally, decentralization of expenditure needs to be accompanied by sufficient decentralization of revenue to obtain favorable outcomes.

Here’s some explanation of why it’s better to have decisions made by sub-national governments.

Local governments possess better access to local preferences and, consequently, have an informational advantage over the central government in deciding which provision of goods and services would best satisfy citizens’ needs. …Local accountability is expected to put pressure on local authorities to continuously search for ways to produce and deliver better public service under limited resources, leading to “productive efficiency.” …Decentralization…encourages competition across local governments to improve public services; voters can use the performance of neighboring governments to make inferences about the competence or benevolence of their own local politicians… Fiscal decentralization may lead to a decrease in lobbying by interest groups.

I especially like the fact that the study recognized the valuable role of tax competition in limiting the greed of the political class.

The study also noted that genuine federalism leads to spending competition, though I get the impression that the authors seems to think this is a negative outcome.

Fiscal decentralization can also obstruct the redistribution role of the central government.

For what it’s worth (and based on previous academic research), I agree that decentralization makes it harder for government to be profligate.

But that’s a good thing. I want to “obstruct” economically destructive redistribution.

Now let’s look at the specific finding from the study.

…expenditure decentralization seems to improve the efficiency of public service delivery in advanced economies… To quantify this effect, one could say that a 5 percent increase in fiscal decentralization would lead to 2.9 percentage points of efficiency gains in public service delivery. …about one third of public expenditure would need to be shifted to the local authorities to obtain positive outcomes from fiscal decentralization.

Though it’s worth emphasizing that decentralization works when the sub-national levels of government are completely responsible for raising and spending their own money.

Revenue decentralization shows positive and statistically significant impacts on public service delivery for advanced economies and emerging economies and developing countries. …These findings might imply the need to accompany expenditure decentralization with sufficient revenue decentralization to ensure improvement of performance.

I’ve already argued that federalism is good politics and good policy.

Now we have evidence that it’s good government.

And who would have guessed that the normally statist IMF would be the bearer of this good news.

Read Full Post »

For the people of China, there’s good news and bad news.

The good news, as illustrated by the chart, is that economic freedom has increased dramatically since 1980. This liberalization has lifted hundreds of millions from abject poverty.

The bad news is that China still has a long way to go if it wants to become a rich, market-oriented nation. Notwithstanding big gains since 1980, it still ranks in the lower-third of nations for economic freedom.

Yes, there’s been impressive growth, but it started from a very low level. As a result, per-capita economic output is still just a fraction of American levels.

So let’s examine what’s needed to boost Chinese prosperity.

If you look at the Fraser Institute’s Economic Freedom of the World, there are five major policy categories. As you can see from this table, China’s weakest category is “size of government.” I’ve circled the most relevant data point.

The bottom line is that China could – and should – boost its overall ranking by improving its size-of-government score. And that means reducing the burden of government spending and lowering tax rates.

With this in mind, I was very interested to see that the International Monetary Fund just published a study entitled, “China: How Can Revenue Reforms Contribute to Inclusive and Sustainable Growth.”

Did this mean the IMF was recommending pro-growth tax reform? After reading the following sentence, I was hopeful.

We highlight tax policies that can facilitate economic transition to high income status, promote fiscal sustainability and make growth more inclusive.

After all, surely you make the “transition to high income status” with low tax rates rather than high tax rates, right?

Moreover, the study also acknowledged that China’s tax burden already is fairly substantial.

Tax revenue has accounted for about 22 percent of GDP in 2013…the overall tax burden is similar to the tax-to-GDP ratio for other Asian economies such as Australia, Japan, and Korea.

So what did the IMF recommend? A flat tax? Elimination of certain taxes? Reductions in double taxation? Lowering the overall tax burden?

Hardly.

The bureaucrats actually want China to become more like France and Greece.

I’m not joking. The IMF study actually wants people to believe that making the income tax more punitive will somehow boost prosperity.

Increasing the de facto progressivity of the individual income tax would promote more inclusive growth.

Amazingly, the IMF wants more “progressivity” even though the folks in the top 20 percent are the only ones who pay any income tax under the current system.

…around 80 percent of urban wage earners are not subject to the individual income tax because of the high basic personal allowance.

But a more punitive income tax is just the beginning. The IMF wants further tax hikes.

Broadening the base and unifying rates would increase VAT revenue considerably. …tax based on fossil fuel carbon emission rates can be introduced. …the current levies on local air pollutants such as SO2 and NOX emissions and small particulates could be significantly increased.

What’s especially discouraging is that the IMF explicitly wants a higher tax burden to finance an increase in the burden of government spending.

According to the proposed reform scenario, China could potentially aim to increase public expenditures by around 1 percent of GDP for education, 2‒3 percent of GDP for health care, and another 3–4 percent of GDP to fully finance the basic old-age pension and to gradually meet the legacy costs of current obligations. These would add up to additional social expenditures of around 7‒8 percent of GDP by 2030… The size of additional social spending is large but affordable as part of a package of fiscal reforms.

Indeed, the study explicitly says China should become more like the failed European welfare states that dominate the OECD.

Compared to OECD economies, China has considerable scope to increase the redistributive role of fiscal policy. …These revenue reforms serve as a key part of a package of reforms to boost social spending.

You won’t be surprised to learn, by the way, that the study contains zero evidence (because there isn’t any) to back up the assertion that a more punitive tax system will lead to more growth. Likewise, there’s zero evidence (because there isn’t any) to support the claim that a higher burden of government spending will boost prosperity.

No wonder the IMF is sometimes referred to as the Dr. Kevorkian of the global economy.

P.S. If you want to learn lessons from East Asia, look at the strong performance of Hong Kong, Taiwan, Singapore, and South Korea, all of which provide very impressive examples of sustained growth enabled by small government and free markets.

P.P.S. I was greatly amused when the head of China’s sovereign wealth fund mocked the Europeans for destructive welfare state policies.

P.P.P.S. Click here if you want some morbid humor about China’s pseudo-communist regime.

P.P.P.P.S. Though I give China credit for trimming at least one of the special privileges provided to government bureaucrats.

Read Full Post »

It’s not very often that I applaud research from the International Monetary Fund.

That international bureaucracy has a bad track record of pushing for tax hikes and other policies to augment the size and power of government (which shouldn’t surprise us since the IMF’s lavishly compensated bureaucrats owe their sinecures to government and it wouldn’t make sense for them to bite the hands that feed them).

But every so often a blind squirrel finds an acorn. And that’s a good analogy to keep in mind as we review a new IMF report on the efficacy of “expenditure rules.”

The study is very neutral in its language. It describes expenditure rules and then looks at their impact. But the conclusions, at least for those of us who want to constrain government, show that these policies are very valuable.

In effect, this study confirms the desirability of my Golden Rule! Which is not why I expect from IMF research, to put it mildly.

Here are some excerpts from the IMF’s new Working Paper on expenditure rules.

In practice, expenditure rules typically take the form of a cap on nominal or real spending growth over the medium term (Figure 1). Expenditure rules are currently in place in 23 countries (11 in advanced and 12 in emerging economies).

Such rules vary, of course, is their scope and effectiveness.

Many of them apply only to parts of the budget. In some cases, governments don’t follow through on their commitments. And in other cases, the rules only apply for a few years.

Out of the 31 expenditure rules that have been introduced since 1985, 10 have already been abandoned either because the country has never complied with the rule or because fiscal consolidation was so successful that the government did not want to be restricted by the rule in good economic times. … In six of the 10 cases, the country did not comply with the rule in the year before giving it up. …In some countries, there was the perception that expenditure rules fulfilled their purpose. Following successful consolidations in Belgium, Canada, and the United States in the 1990s, these countries did not see the need to follow their national expenditure rules anymore.

But even though expenditure limits are less than perfect, they’re still effective – in part because they correctly put the focus on the disease of government spending rather than symptom of red ink.

Countries have complied with expenditure rules for more than two-third of the time. …expenditure rules have a better compliance record than budget balance and debt rules. …The higher compliance rate with expenditure rules is consistent with the fact that these rules are easy to monitor and that they immediately map into an enforceable mechanism—the annual budget itself. Besides, expenditure rules are most directly connected to instruments that the policymakers effectively control. By contrast, the budget balance, and even more so public debt, is more exposed to shocks, both positive and negative, out of the government’s control.

One of the main advantages of a spending cap is that politicians can’t go on a spending binge when the economy is growing and generating a lot of tax revenue.

One of the desirable features of expenditure rules compared to other rules is that they are not only binding in bad but also in good economic times. The compliance rate in good economic times, defined as years with a negative change in the output gap, is at 72 percent almost the same as in bad economic times at 68 percent. In contrast to other fiscal rules, countries also have incentives to break an expenditure rule in periods of high economic growth with increasing spending pressures. … two design features are in particular associated with higher compliance rates. …compliance is higher if the government directly controls the expenditure target. …Specific ceilings have the best performance record.

And the most important result is that expenditure limits are associated with a lower burden of government spending.

The results illustrate that countries with expenditure rules, in addition to other rules, exhibit on average higher primary balances (Table 2). Similarly, countries with expenditure rules also exhibit lower primary spending. …The data provide some evidence of possible implications for government size and efficiency. Event studies illustrate that the introduction of expenditure rules is indeed followed by smaller governments both in advanced and emerging countries (Figure 11a).

Here’s the relevant chart from the study.

And it’s also worth noting that expenditure rules lead to greater efficiency in spending.

…the public investment efficiency index of DablaNorris and others (2012) is higher in countries that do have expenditure rules in place compared to those that do not (Figure 11b). This could be due to investment projects being prioritized more carefully relative to the case where there is no binding constraint on spending

Needless to say, these results confirm the research from the European Central Bank showing that nations with smaller public sectors are more efficient and competent, with Singapore being a very powerful example.

One rather puzzling aspect of the IMF report is that there was virtually no mention of Switzerland’s spending cap, which is a role model of success.

Perhaps the researchers got confused because the policy is called a “debt brake,” but the practical effect of the Swiss rule is that there are annual expenditures limits.

So to augment the IMF analysis, here are some excerpts from a report prepared by the Swiss Federal Finance Administration.

The Swiss “debt brake” or “debt containment rule”…combines the stabilizing properties of an expenditure rule (because of the cyclical adjustment) with the effective debt-controlling properties of a balanced budget rule. …The amount of annual federal government expenditures has a cap, which is calculated as a function of revenues and the position of the economy in the business cycle. It is thus aimed at keeping total federal government expenditures relatively independent of cyclical variations.

Here’s a chart from the report.

And here are some of the real-world results.

The debt-to-GDP ratio of the Swiss federal Government has decreased since the implementation of the debt brake in 2003. …In the past, economic booms tended to contribute to an increase in spending. …This has not been the case since the implementation of the fiscal rule, and budget surpluses have become commonplace. … The introduction of the debt brake has changed the budget process in such a way that the target for expenditures is defined at the beginning of the process, which must not exceed the ceiling provided by the fiscal rule. It has thus become a top-down process.

The most important part of this excerpt is that the debt brake prevented big spending increases during the “boom” years when the economy was generating lots of revenue.

In effect, the grey-colored area of the graph isn’t just an “ideal representation.” It actually happened in the real world.

Though the most important and beneficial real-world consequence, which I shared back in 2013, is that the burden of government spending has declined relative to the economy’s productive sector.

This is a big reason why Switzerland is in such strong shape compared to most of its European neighbors.

And such a policy in the United States would have prevented the trillion-dollar deficits of Obama’s first term.

By the way, if you want to know why deficit numbers have been lower in recent years, it’s because we actually have been following my Golden Rule for a few years.

So maybe it’s time to add the United States to this list of nations that have made progress with spending restraint.

But the real issue, as noted in the IMF research, is sustainability. Yes, it’s good to have a few years of spending discipline, but the real key is some sort of permanent spending cap.

Which is why advocates of fiscal responsibility should focus on expenditure limits rather than balanced budget requirements.

Read Full Post »

The International Monetary Fund isn’t my least-favorite international bureaucracy. That special honor belongs to the Organization for Economic Cooperation and Development, largely because of its efforts to undermine tax competition and protect the interests of the political class (it also tried to have me arrested, but I don’t hold that against them).

But the IMF deserves its share of disdain. It’s the Doctor Kevorkian of global economic policy, regularly advocating higher taxes and easy money even though that’s never been a recipe for national prosperity.

And it turns out that the IMF also is schizophrenic. The international bureaucracy’s latest big idea, garnering an entire chapter in the October World Economic Outlook, is that governments should spend more on infrastructure.

Barack Obama’s former chief economist supports the IMF scheme. Here some of what he wrote for the Washington Post.

…the IMF advocates substantially increased public infrastructure investment, and not just in the United States but in much of the world. It further asserts that under circumstances of high unemployment, like those prevailing in much of the industrialized world, the stimulative impact will be greater if this investment is paid for by borrowing… Why does the IMF reach these conclusions? …the infrastructure investment actually makes it possible to reduce burdens on future generations. …the IMF finds that a dollar of investment increases output by nearly $3. …in a time of economic shortfall and inadequate public investment, there is a free lunch to be had — a way that government can strengthen the economy and its own financial position.

Wow, That’s a rather aggressive claim. Governments spend $1 and the economy grows by $3.

Is Summers being accurate? What does the IMF study actually say?

It makes two big points.

The first point, which is reflected in the Summers oped, is that infrastructure spending can boost growth.

The study finds that increased public infrastructure investment raises output in the short term by boosting demand and in the long term by raising the economy’s productive capacity. In a sample of advanced economies, an increase of 1 percentage point of GDP in investment spending raises the level of output by about 0.4 percent in the same year and by 1.5 percent four years after the increase… In addition, the boost to GDP a country gets from increasing public infrastructure investment offsets the rise in debt, so that the public debt-to-GDP ratio does not rise… In other words, public infrastructure investment could pay for itself if done correctly.

But Summers neglected to give much attention to the caveats in the IMF study.

…the report cautions against just increasing infrastructure investment on any project. …The output effects are also bigger in countries with a high degree of public investment efficiency, where additional public investment spending is not wasted and is allocated to projects with high rates of return. …a key priority in economies with relatively low efficiency of public investment should be to raise the quality of infrastructure investment by improving the public investment process through, among others, better project appraisal, selection, execution, and rigorous cost-benefit analysis.

Perhaps the most important caveat, though, is that the study uses a “novel empirical strategy” to generate its results. That should raise a few alarm bells.

So is this why the IMF is schizophrenic?

Nope. Not even close.

If you want evidence of IMF schizophrenia, compare what you read above with the results from a study released by the IMF in August.

And this study focused on low-income countries, where you might expect to find the best results when looking at the impact of infrastructure spending.

So what did the author find?

On average the evidence shows only a weak positive association between investment spending and growth and only in the same year, as lagged impacts are not significant. Furthermore, there is little evidence of long term positive impacts. …The fact that the positive association is largely instantaneous argues for the importance of either reverse causality, as capital spending tends to be cut in slumps and increased in booms… In fact a slump in growth rather than a boom has followed many public capital drives of the past. Case studies indicate that public investment drives tend eventually to be financed by borrowing and have been plagued by poor analytics at the time investment projects were chosen, incentive problems and interest-group-infested investment choices. These observations suggest that the current public investment drives will be more likely to succeed if governments do not behave as in the past.

Wow. Not only is the short-run effect a mirage based on causality, but the long-run impact is negative.

But the real clincher is the conclusion that “public investment” is productive only “if governments do not behave as in the past.”

In other words, we have to assume that politicians, interest groups, and bureaucrats will suddenly stop acting like politicians, interest groups, and bureaucrats.

Yeah, good luck with that.

But it’s not just a cranky libertarian like me who thinks it is foolish to expect good behavior from government.

Charles Lane, an editorial writer who focuses on economic issues for the left-leaning Washington Post, is similarly skeptical.

Writing about the IMF’s October pro-infrastructure study, he thinks it relies on sketchy assumptions.

The story is told of three professors — a chemist, a physicist and an economist — who find themselves shipwrecked with a large supply of canned food but no way to open the cans. The chemist proposes a solvent made from native plant oils. The physicist suggests climbing a tree to just the right height, then dropping the cans on some rocks below. “Guys, you’re making this too hard,” the economist interjects. “Assume we have a can opener.” Keep that old chestnut in mind as you evaluate the International Monetary Fund’s latest recommendation… A careful reading of the IMF report, however, reveals that this happy scenario hinges on at least two big “ifs.”

The first “if” deals with the Keynesian argument that government spending “stimulates” growth, which I don’t think merits serious consideration.

But feel free to click here, here, here, and here if you want to learn more about that issues.

So let’s instead focus on the second “if.”

The second, and more crucial, “if” is the IMF report’s acknowledgment that stimulative effects of infrastructure investment vary according to the efficiency with which borrowed dollars are spent: “If the efficiency of the public investment process is relatively low — so that project selection and execution are poor and only a fraction of the amount invested is converted into productive public capital stock — increased public investment leads to more limited long-term output gains.” That’s a huge caveat. Long-term costs and benefits of major infrastructure projects are devilishly difficult to measure precisely and always have been. …Today we have “bridges to nowhere,” as well as major projects plagued by cost overruns and delays all over the world — and not necessarily in places you think of as corrupt. Germany’s still unfinished Berlin Brandenburg airport is five years behind schedule and billions of dollars over budget, to name one example. Bent Flyvbjerg of Oxford’s Said Business School studied 258 major projects in 20 nations over 70 years and found average cost overruns of 44.7 percent for rail, 33.8 percent for bridges and tunnels and 20.4 percent for roads.

Amen. Governments are notorious for cost overruns and boondoggle spending.

It happens in the United States and it happens overseas.

It’s an inherent part of government, as Lane acknowledges.

In short, an essential condition for the IMF concept’s success — optimally efficient investment — is both difficult to define and, to the extent it can be defined, highly unrealistic. As Flyvbjerg explains, cost overruns and delays are normal, not exceptional, because of perverse incentives — specifically, project promoters have an interest in overstating benefits and understating risks. The better they can make the project look on paper, the more likely their plans are to get approved; yet, once approved, economic and logistical realities kick in, and costs start to mount. Flyvbjerg calls this tendency “survival of the unfittest.” …Governments that invest in infrastructure on the assumption it will pay for itself may find out that they’ve gone a bridge too far.

Or bridge to nowhere, for those who remember the infamous GOP earmark from last decade that would have spent millions of dollars to connect a sparsely inhabited Alaska island with the mainland – even though it already had a very satisfactory ferry service.

Let’s close with two observations.

First, why did the IMF flip-flop in such a short period of time? It does seem bizarre for a bureaucracy to publish an anti-infrastructure spending study in August and then put out a pro-infrastructure spending study two months later.

I don’t know the inside story on this schizophrenic behavior, but I assume that the August study was the result of a long-standing research project by one of the IMF’s professional economists (the IMF publishes dozens of such studies every year). By contrast, I’m guessing the October study was pushed by the political bosses at the IMF, who in turn were responding to pressure from member governments that wanted some sort of justification for more boondoggle spending.

In other words, the first study was apolitical and the second study wasn’t.

Not that this is unusual. I suspect many of the economists working at international bureaucracies are very competent. So when they’re allowed to do honest research, they produce results that pour cold water on big government. Indeed, that even happens at the OECD.

But when the political appointees get involved, they put their thumbs on the scale in order to generate results that will please the governments that underwrite their budgets.

My second observation is that there’s nothing necessarily wrong with the IMF’s theoretical assertions in the August study. Infrastructure spending can be useful and productive.

It’s an empirical question to decide whether a new road will be a net plus or a net minus. Or a new airport runway. Or subway system. Or port facilities.

My view, for what it’s worth, is that we’re far more likely to get the right answers to these empirical questions if infrastructure spending is handled by state and local governments. Or even the private sector.

Read Full Post »

Since I’m an economist, I generally support competition.

But it’s time to admit that competition isn’t always a good idea. Particularly when international bureaucracies compete to see which one can promote the most-destructive pro-tax policies.

For instance, I noted early last year that the bureaucrats at the Organization for Economic Cooperation and Development (OECD) were pushing a new scheme to increase the global tax burden on the business community.

Then I wrote later in the year that the International Monetary Fund was even more aggressive about pushing tax hikes, earning it the label of being the Dr. Kevorkian of the world economy.

That must have created some jealousy at the OECD, so those bureaucrats earlier this year had a taxpalooza party and endorsed a plethora of class-warfare tax hikes.

Now the IMF has responded to the challenge and is pushing additional tax increases all over the world.

For example, the bureaucrats want much higher taxes on energy use, both in the United States and all around the world.

This chart from the IMF shows how much the bureaucracy thinks that the tax should be increased just on coal consumption.

The chart doesn’t make much sense, particularly if you don’t know anything about “gigajoules.” Fortunately, Ronald Bailey of Reason translates the jargon and tells us how this will impact the average American household.

The National Journal reports that the tax rate would be $8 per gigajoule of coal and a bit over $3 per gigajoule of natural gas. Roughly speaking a ton of coal contains somewhere around 25 gigajoules of energy, which implies a tax rate of $200 per ton. …The average American household uses about 11,000 kilowatt hours annually, implying a hike in electric rates of about $1,100 per year due to the new carbon tax. Since the average monthly electric bill is about $107, the IMF’s proposed tax hike on coal would approximately double how much Americans pay for coal-fired electricity. A thousand cubic feet (mcf) of natural gas contains about 1 gigajoule of energy. The average American household burns about 75 mcf of natural gas annually so that implies a total tax burden of $225 per residential customer.

To be fair, the IMF crowd asserts that all these new taxes can be – at least in theory – offset by lower taxes elsewhere.

…we are generally talking about smarter taxes rather than higher taxes. This means re-calibrating tax systems to achieve fiscal objectives more efficiently, most obviously by using the proceeds to lower other burdensome taxes. The revenue from energy taxes could of course also be used to pay down public debt.

Needless to say, I strongly suspect that politicians would use any new revenue to finance a larger burden of government spending. That’s what happened when the income tax was enacted. That’s what happened when the payroll tax was enacted. That’s what happened when the value-added tax was enacted.

If you think something different would happen following the implementation of an energy tax, you win the grand prize for gullibility.

But let’s give the IMF credit. The bureaucrats are equal opportunity tax hikers. They don’t just want higher taxes in the United States. They give the same message everywhere in the world.

Here are some excerpts from an editorial about Spanish fiscal policy in the Wall Street Journal.

Madrid last month cut corporate and personal tax rates, simplified Spain’s personal-income tax system and vowed to close loopholes. That’s good news… So leave it to the austerity scolds at the International Monetary Fund to call for tax increases. …Specifically, the Fund wants Spain to raise value-added taxes, alcohol and tobacco excise taxes, tourism taxes, and various environmental and energy levies: “It will be critical to protect the most vulnerable by increasing the support system for them via the transfer and tax system.”

Gee, I suppose that we should be happy the IMF didn’t endorse higher income taxes as well.

The good news is that the Spanish government may have learned from previous mistakes that tax hikes don’t work.

Rather than heed this bad advice, Prime Minister Mariano Rajoy and Finance Minister Cristobal Montoro are cutting government spending and eliminating wasteful programs to reduce pressure on the public fisc. Public spending amounted to 44.8% of GDP in 2013, which is still too high but down from 46.3% in 2010. The government projects it will fall to 40% by 2017.Madrid has also made clear that it believes private growth is the real answer to its fiscal woes. …In other words, economic growth spurred by low taxes and less state intervention yields more revenue over time. If Mr. Montoro can pursue the logic of that insight, there’s hope for Spain’s beleaguered economy.

I’m not overly confident about Spain’s future, but it is worth noting that, according to IMF data, government spending has basically been flat since 2010 (after rising by an average of about 10 percent annually in the previous three decades).

So if the politicians can maintain fiscal discipline by following my Golden Rule, maybe Spain can undo decades of profligacy and become the success story of the Mediterranean.

Let’s hope so. In any event, we know some Spanish taxpayers have decided that they’re tired of being fleeced.

We have one final example of the IMF’s compulsive tax-aholic instincts.

Allister Heath explains that the bureaucracy is pushing for a plethora of new taxes on the U.K. economy.

The IMF wants an increase in the VAT burden.

…the IMF wants to get rid or significantly reduce the zero-rated exemption on VAT, which covers food, children’s clothes and the rest. While it is true that the exemptions reduce economic efficiency, ditching them would necessitate a big hike in benefits and a major uplift in the minimum wage, which would be far more damaging to the economy’s performance and ability to create jobs for the low-skilled. It’s a stupid idea and one which would destroy any government that sought to implement it, with zero real net benefit. It would be a horrendous waste of precious political capital that ought instead to be invested in real reform of the public sector.

And an increase in energy taxes.

The report also calls for a greater reliance on so-called Pigouvian taxes, which are supposed to discourage externalities and behaviour which inflicts costs on others. It mentions higher taxes on carbon and on congestion as examples. But what this really means is that the IMF is advocating a massive tax increase on motorists, even though there is robust evidence which suggests that they already pay much more, in the aggregate, than any sensible measure of the combined cost of road upkeep and development, pollution and congestion.

And higher property taxes.

It gets worse: these days, one cannot read a document from an international body that doesn’t call for greater taxes on property. This war on homeowners is based on the faulty notion that taxing people who own their homes doesn’t affect their behaviour, which is clearly ridiculous. This latest missive from the IMF doesn’t disappoint on this front: it calls for the revaluation of property for tax purposes, which is code for a massive increase in council tax for millions of homes, especially in London and the home counties.

Understandably, Allister is not thrilled by the IMF’s proposed tax orgy.

The tax burden is already too high; increasing it further would be a terrible mistake. The problem is that spending still accounts for an excessively large share of the economy, and the political challenge is to find a way of re-engineering the welfare state to allow the state to shrink and the private sector to expand. The model should be Australia, Switzerland or Singapore, countries that boast low taxes and high quality services.

And I particularly like that Allister correctly pinpoints the main flaw in the IMF’s thinking. The bureaucrats look at deficits and they instinctively think about how to close the gap with tax hikes.

That’s flawed from a practical perspective, both because of the Laffer Curve and because politicians will respond to the expectation of higher revenue by boosting spending.

But it’s also flawed from a theoretical perspective because the real problem is that the public sector is far too large in all developed nations. So replacing debt-financed spending with tax-financed spending doesn’t address the real problem (even if one heroically assumes revenues actually materialize and further assumes politicians didn’t exacerbate the problem with more spending).

Here’s a remedial course for politicians, international bureaucrats, and others who don’t understand fiscal policy.

P.S. Wise people have speculated that international bureaucrats are quick to urge higher taxes because they don’t have to pay taxes on their lavish salaries.

P.P.S. This isn’t the first time the IMF has proposed massive tax hikes on energy consumption.

Read Full Post »

If some special-interest lobbies give money so that a left-wing group can propose something like a value-added tax to finance bigger government, that’s no surprise.

And if a bunch of subsidy recipients donate money to Barack Obama or some other statist politician because they hope for new programs, that’s also standard procedure in DC.

I’ll fight these initiatives, of course, but I don’t get overly upset when these things happen.

What does drive me crazy, though, is when proponents of big government want to use my money to subsidize left-wing activism.

This is why I’m against taxpayer handouts for groups such as Planned Parenthood and AARP. If they want to endorse bigger government, get voluntary contributions to push that destructive agenda.

All I ask is that you don’t coerce me to subsidize statism.

I get especially upset when international bureaucracies use my money to push for bigger government. And it the past few days, the International Monetary Fund (IMF) and Organization for Economic Cooperation and Development (OECD) have delivered a one-two punch for statism.

And they used our money!

The IMF advocated for more government in their recent survey of the United States.

The recent expansion of Medicaid and the increase in health insurance coverage have been concrete steps whose effect on poverty and health outcomes should become more evident over time. An expansion of the Earned Income Tax Credit—to apply to households without children, to older workers, and to low income youth—would be another effective tool to raise living standards for the very poor. …the minimum wage should be increased. …Action is also needed to achieve a sustained increase in both Federal and State spending on infrastructure paid for by…additional revenues, and an expansion of financing sources… The Federal gas tax should be significantly increased. …Some progress has already been made…through implementation of the Affordable Care Act… Addressing the expected depletion of the social security trust fund will require…increases the ceiling on taxable earnings for social security… In addition, the U.S. should introduce a broad-based carbon tax and move toward the introduction of a Federal-level VAT.

Keep in mind, by the way, that the IMF already has endorsed a giant energy tax on American consumers, as well as a value-added tax.

Though, to be fair, they’re not discriminating against Americans. The IMF has a long track record of pushing for bad policy in other nations.

Meanwhile, the statists at the OECD also are pushing for a wide range of bad policies.

The report encourages close cooperation between businesses and government… The Survey highlights that income inequality is high in the United States. …While this cannot be improved easily, the report praises reforms recently adopted or being considered: health care reform will help vulnerable families access high-quality care; OECD Carbon Obamadealing with mental health will help reduce job loss and disability; preschool education would be a good investment in children’s future and help middle-class parents; and paid maternity leave would help working women. …The OECD recommends introducing an adequate pricing of greenhouse gas emissions and supporting innovation in energy saving and low carbon technology.

Unsurprisingly, the OECD endorses a panoply of tax hikes to enable a bigger and more bloated public sector.

Act toward rapid international agreement and take measures to prevent base erosion and profit shifting… Make the personal tax system more redistributive… The federal government could…develop a social insurance programme for paid leave for all workers funded by a small increase in the payroll tax… Taxing the extraction of non-renewable resources offers the potential to raise revenue… Increase reliance on consumption taxation.

The OECD favors higher taxes for everyone, so it’s not as if they’re targeting Americans.

But it’s nonetheless irritating when a bunch of pampered international bureaucrats take money from American taxpayers and then use those funds to produce “research” calling for even higher tax burdens.

Especially when those bureaucrats are exempt from the income tax!!!

And keep in mind that this isn’t the first time that the OECD has acted as a public relations team for Obama’s statist agenda.

P.S. The one silver lining to the dark cloud of the IMF is that the bureaucrats inadvertently generated some very powerful evidence against the VAT.

P.P.S. And the OECD accidentally produced some data showing the poor results of governments schools in the United States, so that’s a bit of consolation as well.

Read Full Post »

When you support limited government and individual freedom, you don’t enjoy many victories. Particularly if you’re relying on the U.S. Senate.

But it occasionally happens.

The Senate held firm and stopped Obama from getting a fiscal cliff tax hike at the end of 2010.

The Senate overwhelmingly voted against a VAT.

The Senate unanimously rejected a Greek bailout.

To be sure, some of these votes were merely window dressing, but it’s still better to have symbolic victories rather than symbolic defeats.

Today, however, I want to report on a real victory against statism. The Senate Majority Leader, Harry Reid, has been forced to give up on his effort to ram through an expansion of IMF bailout authority as part of legislation giving money to Ukraine.

This is the second time that this White House initiative has been blocked.

Here are some blurbs from a report in Politico.

Senate Majority Leader Harry Reid will drop a provision to reform the International Monetary Fund from a bill to help Ukraine… Reid acknowledged that while the Ukraine package would likely have passed the Senate, it was “headed to nowhere” in the GOP-led House. …the administration did not hide its disappointment Tuesday afternoon over the removal of the IMF language. “We are deeply disappointed by the news that Republican opposition has forced the Senate to remove the [IMF] reforms from the Ukraine assistance package,” said Treasury Department spokeswoman Holly Shulman. …Backers of including the IMF reforms in the Ukraine deal note that it will help boost the organization’s lending capacity. …The United States is the lone holdout country that has not ratified the IMF deal, which was struck more than three years ago. But many congressional Republicans have raised concerns about potential taxpayer risk with the IMF agreement.

It goes without saying that the IMF won’t give up, and the Obama Administration is still pushing to expand the international bureaucracy’s bailout authority.

The battle will continue. Lew and ObamaIn preparation for the next skirmish, Desmond Lachmann at AEI debunks the White House’s empty talking points.

Next week, Treasury Secretary Jack Lew will make his case before the House Financial Service Committee for linking IMF reform to U.S. bilateral aid for Ukraine. If the past is any guide, he will do so by putting forward a set of disingenuous arguments in favor of his case. …The principal argument that Secretary Lew must be expected to make is that IMF quota reform is essential for large-scale IMF Ukrainian financial support. This argument glosses over the fact that under the IMF’s lending policy under “exceptional circumstances”, which has been resorted to on many occasions since the 1994 Mexican tequila crisis, the amount that the IMF can lend a country bears little relation to the size of that country’s IMF quota.  …Ukraine is reportedly currently seeking around a U.S. $15 billion IMF economic adjustment loan. If Mr. Lew were to be candid, he would inform Congress that such an amount represents only around 800 percent of Ukraine’s present IMF quota or less than half the amount of quota that the IMF recently committed to several countries in the European economic periphery. He would also inform Congress that the IMF presently has more than U.S. $400 billion in uncommitted loanable resources. This would make the IMF’s prospective loan to Ukraine but a drop in the IMF’s large bucket of available resources even without IMF reform.

Lachmann goes on to make additional points, including the fact that IMF bailouts create very real financial risks for American taxpayers.

The U.S. Treasury never tires of assuring Congress that large-scale IMF lending poses no risk to the US taxpayer. It bases its argument on the fact that the IMF enjoys preferred creditor status and that to date no major country has defaulted on its IMF loans. However, the Treasury conveniently glosses over the fact that IMF loan repayment experience with past IMF lending on a small scale might not be a good guide to what might happen on IMF loans of an unprecedentedly large scale. To understand that there now might be a real risk to the US taxpayer from IMF lending, one only need reflect on the IMF’s current Greek lending experience. Greece’s public debt is now mainly officially owned and it amounts to over 175 percent of GDP. It is far from clear that the European Central Bank will go along with the idea that the IMF enjoys senior status over the ECB in terms of Greece’s loan repayments.

His point about risks to taxpayers is right on the mark. In effect, the IMF is like Fannie Mae and Freddie Mac. For years, defenders of intervention in the housing market argued those government-created entities didn’t cost a penny. Then they suddenly cost a lot.

The same will happen with the IMF.

Lachmann closes by asking the right question, which is whether there’s any reason to expand the IMF’s authority.

I think that’s the real issue. And to answers that question, let’s go to Mark Hendrickson’s column in Forbes.

He starts by noting that the IMF has “re-invented” itself to justify its existence, even though it supposedly was created for a world – which no longer exists – of fixed exchange rates.

Bureaucracies are masters of mission creep. They constantly reinvent themselves, cleverly finding ways to expand in size, scope, power, and budget. The IMF has perfected this art, having evolved from its original purpose of trying to facilitate orderly currency exchange rates as countries recovered from World War II to morphing into a global busybody that makes loans—with significant strings attached—to bankrupt governments.

And what do we get in exchange for being the biggest backer of IMF bailouts?

What has the American taxpayer received in return for billions of dollars siphoned through the IMF to deadbeat governments? Nothing but ill will from abroad. First, the IMF’s policy of lending millions, or billions, to fiscally mismanaged governments is counterproductive: Such bailouts help to prop up inept and/or corrupt governments. Second, bailouts create moral hazard, inducing private corporations and banks to lend funds to poor credit risks, confident that IMF funds will make them whole. Third, typical IMF rescue packages demand…higher taxes in the name of balancing the budget.

It would be far better, Professor Hendrickson explains, if reckless governments had to immediately accept the market’s judgement whenever they overspent.

…it doesn’t take expert economists to figure out when a government is overspending. Markets will discipline spendthrift governments by ceasing to make funds available to them until they institute needed reforms. Without a bailout fairy like the IMF, government leaders will quickly learn that if they wish the government to remain viable, they must spend within available means. By telling governments what they “have” to do when it’s obvious they need to make those reforms anyhow, the IMF gives the recipient government a convenient scapegoat. It blames the pain of austerity on meddlesome foreigners, and since the U.S. is perceived as the real power in the IMF, we get painted as the bad guys. The bottom line: IMF use of our tax dollars buys us a ton of resentment from abroad.

He also points out that the IMF makes a habit of suggesting bad policy – even for the United States.

the IMF has waged war against American taxpayers and workers. Last October, the IMF released a paper suggesting both higher tax rates (mentioning a “revenue-maximizing” top marginal tax rate of around 60 percent) and possibly the confiscation of a sizable percentage of private assets to restore fiscal balance to the federal government. The IMF also has been one of the leading forces discouraging “tax competition” between countries. …It is using American tax dollars to lobby the American government to increase the flow of tax dollars from our Treasury to the IMF. We shouldn’t be surprised, then, that the IMF released a report on March 13 warning of the perils of “income inequality,” and suggesting tax increases and wealth redistribution as ways by which Uncle Sam might address the problem.

So what’s the bottom line?

If the IMF really wanted to improve the economic prospects of the world’s people, it would recommend reductions in government spending and taxation. Indeed, the overwhelming evidence is that vigorous economic growth is highly correlated with a country’s government shrinking as a share of GDP. What are the chances that the IMF will ever advocate such policies? Not very, as we realize that the IMF’s very existence depends on government taxes. …In a better world, there wouldn’t be an IMF. For the present, though, the best we can hope for is for enough members of Congress to understand that the IMF’s interests are opposed to those of the American people and to refuse any requests that the IMF makes for increased funding.

The Wall Street Journal is more measured in its rhetoric, but it basically comes to the same conclusion.

Republicans are reluctant to grant more leverage to European countries, which they blame for relaxing rules on Greece’s bailout in order to rescue the continent’s banks. …An internal audit last week also found that the fund’s growth forecasts were “optimistic” for countries like Greece and Ukraine that were granted larger loans under its “exceptional access” framework. Republicans fear the IMF is becoming a discount borrowing window for spendthrift governments trying to postpone reforms. IMF economic advice is often lousy—raise taxes and devalue… Congress ought to debate whether the IMF has outlived its usefulness as it evolves from a tool for Western interests into a global check-writing bureaucracy.

Amen. Which is why the United States should shut the Treasury door to the IMF. If other nations want to subsidize bad policy and promote bigger government, they can do it with their own money.

P.S. Here’s a list of other IMF transgressions against good public policy (all partially backed by American taxpayers).

Endorsing government cartels to boost tax and regulatory burdens.

Trying to undermine flat tax systems in Albania and Latvia.

Encouraging a “collective response” to over-spending in welfare states.

Pushing for higher tax burdens in Greece.

Seeking the same destructive policy in Cyprus.

Advocating for more centralization and bureaucratic rule in Europe.

Urging higher taxes in El Salvador.

Supporting “eurobonds” so that taxpayers from other nations can subsidize the profligacy of welfare states such as Greece, Italy, and Spain.

Pushing an energy tax that would mean $5,500 of added expense for the average American household.

Reflexively endorsing every possible tax increase.

Aiding and abetting Obama’s “inequality” agenda with disingenuous research.

And remember, these pampered bureaucrats get lavishly compensated and don’t have to pay tax on their bloated salaries.

P.P.S. But let’s be fair to the IMF. The bureaucrats have given us – albeit unintentionally – some very good evidence against the value-added tax.

Read Full Post »

It’s not easy being a libertarian, particularly if you follow public policy.

Thomas Jefferson almost certainly was right when he wrote that “The natural progress of things is for liberty to yield, and government to gain ground.”

Heck, just look at how small government used to be in the developed world compared to where it is now. Public sectors used to consume only about 10 percent of economic output during the 1800s when nations became rich, but now the burden of government spending averages more than 40 percent of GDP.

And if you really want to get depressed, then look at the long-run fiscal forecasts for the United States and other industrialized countries. Things are going to get worse. Much worse.

Most nations are heading toward a Greek-style fiscal crisis. And while the United States is in better shape than many European welfare states today, our long-run outlook is actually worse according to the International Monetary Fund.

Even the Bank for International Settlements and Organization for Economic Cooperation and Development agree with the IMF’s grim prognosis.

Speaking of the IMF, let’s discuss some very bad news. It’s about Albania, so it may not seem very important, but it’s quite symbolic of the destructive impact of international bureaucracies.

As you can see from this Reuters report, the IMF basically bribed Albania to get rid of its flat tax.

“The IMF staff and the authorities reached an agreement on the IMF supporting their economic programme with financial assistance which could be delivered over a period of three years under an extended fund facility with access of about 300 million euros,” the IMF’s mission chief, Nadeem Ilahi, told reporters. …The three-month-old Socialist government will scrap a flat tax of 10 percent in the next fiscal year in January and raise the corporate tax to 15 percent from 10 percent. Also, the income tax for high-earners will rise to rates of 13 percent and 23 percent from 10 percent currently. …”The package of economic policies … supported by the IMF programme should make Albania an economy that is reforming, is open to foreign investors. … A lot of the reforms the authorities are planning are consistent with what the European Union has been asking for,” Ilahi said.

So think about what this means. The IMF is hurting global growth by distorting the allocation of capital. It’s hurting Albanian growth by enabling more government spending. And it’s hurting Albanian growth by forcing higher tax rates.

And then the IMF bureaucrat in charge, Mr. Ilahi, actually has the nerve to assert that all this bad policy will make Albania “open to foreign investors.” Yeah, sure. Investors are always flocking to nations that are actively increasing the burden of government. I guess that’s why France is such an economic dynamo and Hong Kong is suffering from stagnation…at least according to the IMF model anyway.

Keep in mind, by the way, that Mr. Ilahi (like all international bureaucrats) gets a tax-free salary! So I guess we shouldn’t be too surprised that he is completely clueless about the real-world impact on the destructive policies he has foisted upon Albania.

By the way, Albanian politicians are not exactly blameless. They doubled government spending over the past 10 years, with outlays climbing from less than 200 million leks in 2003 to more than 400 million leks this year.

And then these profligate politicians decided to throw their taxpayers under the bus in exchange for a pile of additional loot from the IMF.

The real victims are the people of Albania. They suffered decades of communist enslavement. But even after the collapse of the Soviet Empire, they’ve never enjoyed a free-market, small-government economy. But with the flat tax, they had at least one pro-growth policy.

Now they don’t even have that.

P.S. The IMF is an equal-opportunity proponent of bad policy. The tax-free bureaucrats have advocated lots of tax hikes on Americans, including a value-added tax, a financial transactions tax, and class-warfare tax rate increases. Oh, and let’s not forget they urged a giant energy tax on American consumers. IMF KevorkianIt’s nice to know that the bureaucrats are so industrious at developing policies to hurt the United States when American taxpayers underwrite the biggest share of the IMF budget.

P.P.S. But I don’t want to be unfair. The IMF did provide – albeit by accident – very powerful evidence showing why the United States should not have a value-added tax. So I guess that was one useful thing the bureaucrats did, even if it wasn’t their intention. And the bureaucracy has published some good studies about the economic benefits of reducing government spending and others warning that tax increases can be self defeating.

P.P.P.S. Since this has been a depressing post, let’s close by noting that the IMF doesn’t always succeed. The bureaucrats unsuccessfully tried to pressure Latvia into abandoning the flat tax.

Read Full Post »

If there was a special award for chutzpah, the easy winner would be the bureaucrats at the International Monetary Fund. These pampered bureaucrats get lavishly compensated and don’t have to pay tax on their bloated salaries.

IMF Compensation

The gold-plated fringe benefits include “your spouse/partner may join you on official travel at Fund expense.”

You would think this would make them a bit sensitive to the notion that it’s hugely hypocritical of them to propose big tax hikes when they have a special exemption.

But they have no shame. The international bureaucracy is making a renewed push for higher taxes all over the world.

You can read the actual IMF report, but the UK-based Guardian does a very good job of summarizing the important details.

The key takeaway is that the bureaucrats are telling governments to make the VAT more onerous (a standard IMF recommendation) and to raise other taxes as well.

…the current fiscal monitor…suggests there are ways of raising extra tax revenue, beyond the fund’s long-term support for broadening the tax base through the wider application of VAT.

And what are those other taxes? Well, the IMF is very promiscuous when urging the confiscation of other people’s money.

First, it supports the idea of a financial activities tax, which would be levied on the wages and profits of financial institutions. This would be the equivalent of levying VAT on financial services, which are currently exempt. …Second, the IMF thinks it is time to do something about an international tax system… Instead of a race to the bottom where countries compete with each other to offer the lowest rate of corporate tax, it urges co-operation.

Yes, you read correctly. The IMF wants a big tax hike on the financial services sector. I guess we’re supposed to believe that will strengthen banks or something like that.

And it wants to end tax competition so that greedy governments can more easily increase the tax burden on businesses.

Cartels are supposed to be a bad thing, but they suddenly become acceptable when governments get together and conspire on ways to rig the system in favor of higher taxes. That’s been an ongoing project for the OECD (another statist international organization filled with untaxed bureaucrats), and I guess the IMF wants to get in on the action.

But the most remarkable part of the IMF report is the endorsement of punitive class-warfare taxes.

Finally, the fund comes out in favour of having a long hard look at whether those on the highest incomes should pay more. In some countries, the US in particular, the IMF research suggests the rich are substantially under-taxed. …It compared the current tax rate paid by highest earners with the tax rate that would maximise revenue…the fund concluded the top rate of tax that maximised income was 60%, it was careful to set a range for each country studied.

For all intents and purposes, the IMF wants to turn back the clock and return to 1970s-style confiscatory tax levels. Top tax rates of 60 percent, no problem. Payroll tax rates of 30 percent, sounds great! Value-added tax burdens of 25 percent, peachy keen!!

“The IMF is right! It’s time to raise taxes”

The IMF’s message seems to be that the entire world should become France.

To be fair, however, at least the IMF acknowledges that the revenue-maximizing tax rate is less than 100 percent. Mon Dieu, they’re acknowledging the Laffer Curve! This means they’re not as far to the left as the bureaucrats at the Joint Committee on Taxation. I guess this is what people mean when they talk about damning with faint praise.

P.S. Just in case this isn’t enough evidence against the IMF, here are some more examples of the bureaucracy’s statist work.

So while I’m normally critical of Republicans for being timid, they deserve some praise for recently blocking even more subsidies for the IMF.

Read Full Post »

According to the Bank for International Settlements, the United States has a terrible long-run fiscal outlook. Assuming we don’t implement genuine entitlement reform, the only countries in worse shape are the United Kingdom and Japan.

The Organization for Economic Cooperation and Development, meanwhile, also has a grim fiscal outlook for America. According to their numbers, the only nations in worse shape are New Zealand and Japan.

But I’ve never been happy with these BIS and OECD numbers because they focus on deficits, debt, and fiscal balance. Those are important indicators, of course, but they’re best viewed as symptoms.

The underlying problem is that the burden of government spending is too high. And what the BIS and OECD numbers are really showing is that the public sector is going to get even bigger in coming decades, largely because of aging populations. Unfortunately, you have to read between the lines to understand what’s really happening.

But now I’ve stumbled across some IMF data that presents the long-run fiscal outlook in a more logical fashion. As you can see from this graph (taken from this publication), they show the expected rise in age-related spending on the vertical axis and the amount of needed fiscal adjustment on the horizontal axis.

In other words, you don’t want your nation to be in the upper-right quadrant, but that’s exactly where you can find the United States.

IMF Future Spending-Adjustment Needs

Yes, Japan needs more fiscal adjustment. Yes, the burden of government spending will expand by a larger amount in Belgium. But America combines the worst of both worlds in a depressingly impressive fashion.

So thanks to FDR, LBJ, Nixon, Bush, Obama and others for helping to create and expand the welfare state. They’ve managed to put the United States in a worse long-run position than Greece, Italy, Spain, Portugal, France, and other failing welfare states.

Read Full Post »

I’ve repeatedly explained that Keynesian economics doesn’t work because any money the government spends must first be diverted from the productive sector of the economy, which means either higher taxes or more red ink.

So unless one actually thinks that politicians spend money with high levels of effectiveness and efficiency, this certainly suggests that growth will be stronger when the burden of government spending is modest (and if spending is concentrated on “public goods,” which do have a positive “rate of return” for the economy).

I’ve also complained (to the point of being a nuisance!) that there are too many government bureaucrats and they cost too much.

But I never would have thought that there were people at the IMF who would be publicly willing to express the same beliefs. Yet that’s exactly what two economists found in a new study.

Here are some key passages from the abstract.

We quantify the extent to which public-sector employment crowds out private-sector employment using specially assembled datasets for a large cross-section of developing and advanced countries… Regressions of either private-sector employment rates or unemployment rates on two measures of public-sector employment point to full crowding out. This means that high rates of public employment, which incur substantial fiscal costs, have a large negative impact on private employment rates and do not reduce overall unemployment rates.

So even an international bureaucracy now acknowledges that bureaucrats “incur substantial fiscal costs” and “have a large negative impact on private employment.”

Well knock me over with a feather.

Next thing you know, one of these bureaucracies will tell us that government spending, in general, undermines prosperity. Hold on, the European Central Bank and World Bank already have produced such research. And the Organization for Economic Cooperation and Development has even explained how welfare spending hurts growth by reducing work incentives.

To be sure, these are the results of research by staff economists, which the political appointees at these bureaucracies routinely ignore.

Nonetheless, it’s good to know that there’s powerful evidence for smaller government, just in case we ever find some politicians who actually want to do the right thing.

Read Full Post »

It is reported that Henry Kissinger, commenting on the Iran-Iraq war, said something to the effect that, “Too bad both sides can’t lose.” I imagine lots of people felt the same way when two of the world’s worst murderers, Hitler and Stalin, went to war in 1941.

I have the same attitude about the fiscal fight in Europe. On one side, you have “austerity” proponents of higher taxes. On the other side, you have Keynesians who think a higher burden of government spending will produce growth.

Since I want lower spending and lower taxes, I have a hard time cheering for either group. As I say in this John Stossel interview, “there’s nobody in Europe who’s actually advancing that position that…the transfer of resources from the private sector to the government…is what hurts your economy.”*

But at least the fight is entertaining, especially since former allies at the International Monetary Fund and European Commission are now in a public spat.

Here are some blurbs from a New York Times report.

…tensions…have now burst into the open with an unusual bout of finger-pointing over policies that have pushed parts of Europe into an economic slump more severe than the Great Depression and left the Continent as a whole far short of even Japan’s anemic recovery. The blame game [was] initiated by a highly critical internal I.M.F. report released this week in Washington… Speaking Friday at an economic conference in his home country of Finland, Mr. Rehn, the usually phlegmatic commissioner of economic and monetary affairs, sounded like a put-upon spouse in a messy breakup. “I don’t think it’s fair and just for the I.M.F. to wash its hands and throw dirty water on the Europeans,” he said. He was responding to assertions by the I.M.F. that the European Commission, the union’s executive arm, had blocked proposals back in 2010 to make investors share more of the pain by writing down Greece’s debt and, more generally, had neglected the importance of structural reforms to lift Europe’s sluggish economy. Simon O’Connor, Mr. Rehn’s spokesman, said the report had made some valid points, but he derided as “plainly wrong and unfounded” a claim that the commission had not done enough to promote growth through reform.

The most accurate assessment is that neither the IMF nor the European Commission have done much to promote growth. But that’s not changing now that the IMF is migrating more toward the Keynesian camp (jumping out of the higher-tax frying pan into the higher-spending fire).

A “hands-off” approach would have been the right way for the IMF and European Commission to deal with the fiscal crisis in Greece and other nations. Without access to bailout funds and having lost access to credit markets, profligate governments would have been forced to immediately balance their budgets.

This wouldn’t necessarily have produced good policy since many of the governments would have raised taxes (which they did anyhow!), but a few nations in Southern Europe may have done the right thing by copying the Baltic nations and implementing genuine spending cuts.

Let’s finish up this post by speculating on what will happen next. I’m actually vaguely hopeful in the short run, largely because governments have exhausted all the bad policy options. It’s hard to imagine additional tax hikes at this stage. Heck, even the IMF has admitted that nations such as Greece are at the point on the Laffer Curve where revenues go down.

Moreover, many of these governments have slowed the growth of spending in the past couple of years, and if they can maintain even a modest bit of fiscal discipline over the next few years, that should boost growth by shrinking government spending as a share of economic output.

But continued spending restraint is vital. The burden of government spending is still far too high in the PIIGS nations, even when merely compared to pre-crisis spending levels.

P.S. Paul Krugman has been the main cheerleader for the spend-more Keynesian crowd, but he has an unfortunate habit of screwing up numbers, as you can see from his work on Estonia, the United KingdomFrance, and the PIIGS.

P.P.S. I’m not a fan of the euro, but Europe’s common currency shouldn’t be blamed for the mess in Europe.

P.P.P.S. You can read my thoughts here on the Rogoff-Reinhart kerfuffle, which deals with many of the same issues as this post.

*To be fair, there are a few policy experts who understand that Europe’s problem is excessive government spending. Even European voters seem to recognize that spending needs to be cut. The challenge is getting a corrupt political class to make good choices.

Read Full Post »

I don’t like giving international bureaucrats tax-free salaries. And it really galls me when they use their privileged positions to promote statism.

So you can understand why I’m not a big fan of the International Monetary Fund.

Dr. Kevorkian: “My assisted suicide campaign would have been much more efficient if I worked at the IMF”

Whether we’re talking more spending, more taxes, more bailouts, or more centralization and harmonization, it seems that the IMF is the Dr. Kevorkian of the global economy.

Or, since Doctor Kevorkian faded from the headlines more than 10 years ago, perhaps it would be better to say that the International Monetary Fund is the Doctor Gosnell of global economic policy.

But I don’t want to get into issues of assisted suicide or post-birth abortions, so let’s just say that the IMF has a very disturbing habit of recommending bad policy. Here are just a few of the items I’ve flagged over the past couple of years.

But you need to give the bureaucrats credit for sticking to their guns.

We have more and more evidence with each passing day that Keynesian economics doesn’t work. President Bush imposed a so-called stimulus plan in 2008 and President Obama imposed an even  bigger “stimulus” in 2009. Based upon the economy’s performance over the past five-plus years, those plans didn’t work.

Japan has spent the past 20-plus years imposing one Keynesian scheme after another, and the net effect is economic stagnation and record debt. Going back further in time, Presidents Hoover and Roosevelt dramatically increased the burden of government spending, mostly financed with borrowing, and a recession became a Great Depression.

That’s not exactly a successful track record

Yet the IMF is undaunted. The bureaucrats are pushing Keynesian snake oil and bigger government all across Europe.

Here are some details from a Wall Street Journal report. about the IMF’s promotion of assisted suicide in Central Europe.

The International Monetary Fund is recommending short-term stimulus for much of Central Europe, where economies are going through their roughest patch in years and the recession in the euro zone has dampened hopes for a quick recovery. …Increased government spending to stimulate economic activity and create jobs is therefore warranted, he said. “Short-term economic policies should be geared toward supporting the economy and not creating an additional drag.” …Amid spending cuts, the countries’ fortunes reversed recently.  …the Czech Republic should ease up on fiscal austerity and embark on pro-growth spending, the leader of the IMF’s Czech mission said. …The IMF also has been encouraging looser monetary policy in both Poland and the Czech Republic.

Gee, not just more Keynesianism, but easy money as well!

The IMF also is pushing bad policy on the Brits (though I’m not sure why they’re bothering since the statist government of David Cameron hardly needs any help in that regard).

Here are some details from the EU Observer.

The UK should delay plans to push through further austerity measures worth £10 billion (€12 billion), the International Monetary Fund (IMF) warned on Wednesday. …The extra cuts would “pose headwinds to growth…..at a time when resources in the economy are under-utilised,” said the Washington-based institution. Instead, the IMF urged London to bring forward plans to invest in infrastructure projects… The government “could undertake a reform of property taxes and consider broadening the VAT base” to pay for the measures.

What’s remarkable is that the IMF isn’t even intellectually honest about its Keynesian proclivities. They’re happy to advocate for more spending, but honest Keynesians also should be against tax hikes. Yet the bureaucrats proposed a couple of tax hikes to “pay for the measures.”

In other words, the IMF agenda is bigger government – with more taxes and more spending.

Which raises the question of why all of us are paying for a bloated bureaucracy that simply tells politicians to implement bad policies? Particularly since politicians have demonstrated over and over again that they’re immensely qualified at concocting their own bad policies?

P.S. To be fair, I should admit that there are rare bits of sanity from the economists at the IMF. They’ve acknowledged, for instance, that the Laffer Curve is real and warned that it makes no sense to push taxes too high. And some of the bureaucrats have even admitted that it sometimes makes sense to reduce the burden of government spending. And even though it wasn’t their intention, IMF bureaucrats provided very strong evidence showing why the value-added tax is a destructive money machine for big government.

Read Full Post »

If asked to name my least-favorite international bureaucracy, the easy answer would be the Organization for Economic Cooperation and Development.

After all, it was only a few days ago that I outlined different ways that the Paris-based bureaucracy is seeking to expand statism and reduce freedom around the world.

Our tax money at the OECD, UN, and IMF

I’m particularly nauseated by the OECD’s support for value-added taxes and their ridiculous assertion that poverty is higher in America than Greece or Turkey.

But we can’t forget the United Nations, which pushes a plethora of bad policies, including a push for regulatory control over the Internet, support for global taxation, supranational gun control schemes, attacks on sovereignty of American states, and support for a “right” to taxpayer-financed birth control (though at least they had the good sense to invite me to speak at last year’s “High Level Thematic Debate on the State of the World Economy”).

For today, though, my least favorite bureaucracy is the International Monetary Fund. I recently listed many of the ways that this gold-plated institution of over-paid and un-taxed paper pushers supports bigger government, but this story from today’s Washington Post is the icing on the cake of statism.

The report on a new IMF study started on a very positive note.

Government subsidies of gasoline, electricity and other energy sources amount to about $1.9 trillion a year and should be ended.

I’m against subsidies, so what’s not to like about a proposal to end handouts?

Well, it turns out that the IMF has a very strange way of defining subsidies. For logical people, a subsidy occurs when the government takes money from Person A and gives it to Person B.

In the la-la land of the IMF, however, a “subsidy” occurs if the government doesn’t tax as much from Person A as the bureaucrats would like. I’m not joking.

In the developed world, the IMF says the subsidies are even larger but less overt, reflecting that government tax policies do not capture the costs of pollution and other externalities. Using economic models and other studies performed as part of the larger global warming debate, the IMF puts those indirect subsidies at $1.4 trillion — $25 for each ton of carbon dioxide produced — and suggests they be offset through an “efficient” tax that makes energy users pay the full cost of the product.

To be fair, private behavior can impose costs on other people (“externalities”), so there’s nothing automatically wrong with looking at these indirect costs.

The problem is that the IMF used discredited global warming ideology to concoct an absurd $1.4 trillion estimate of “subsidies.”

IMF Stick UpAnd guess what that means?

For the United States, the IMF estimated that would require a $1.40 levy per gallon of gas and other fees totaling more than $1,400 per person each year — around $500 billion in total.

Wow, that’s more than $5,500 for a family of four.

Remember that these bureaucrats get extremely generous tax-free salaries, yet they apparently don’t see any hypocrisy in recommending huge tax increases for the peasantry.

“It is time for subsidies to end and carbon taxation to be put in place,” IMF First Deputy Managing Director David Lipton said in an interview Tuesday.

Amazing. I’m sure this leech is driven around in a private limousine, flies around the world in first class, and enjoys the services of the private chefs in the IMF’s elite dining room – all at our expense. Yet he wants the rest of us to pay higher tax.

P.S. You’ll be happy to know that the IMF study deliberately “did not look at government support for the alternative energy industry.” So Obama’s corrupt “green energy” programs got a free pass. Gee, how convenient.

P.P.S. I realize that I forgot the mention the World Bank, the folks who put together a fiscal report card giving nations higher grades if they imposed harsher tax burdens.

Read Full Post »

I’m not a fan of the International Monetary Fund. It galls me that a bunch of bureaucrats enjoy opulent lifestyles at our expense, and don’t even have to pay on their lavish incomes.

But I might be willing to overlook all that if it wasn’t for the fact that IMF routinely and reflexively pushes for bad policy.

And the icing on the cake is that the IMF was created for the purpose of helping the manage the system of fixed exchange rates that was imposed after World War II. That system no longer exists, yet the IMF is still plaguing us.

I’ll be happy if they simply take their hands out of my pockets

I remember reading someplace that cockroaches were the only animals that would survive a nuclear war. I have no idea if that’s true, but it appears that international bureaucracies have similar survival skills.

But I’m digressing. Notwithstanding all the bad news listed above, we’re celebrating some good news today.

Here’s the situation. The IMF has been so busy subsidizing bad policy around the world with lots of bailouts that the gold-plated bureaucracy wants American approval to permanently misallocate more of the world’s capital.

I’ve explained over and over again why it’s not a good idea to give more matches to a pyromaniac. But I never expected that lawmakers would do the right thing.

Yet they have, so let’s enjoy this fleeting experience. Here are some excerpts from a Reuters report.

…lawmakers…rebuffed a request by the Obama administration to approve a permanent increase in U.S. funding to the International Monetary Fund in a setback for IMF reforms to boost the voting power of emerging economies. The reforms need congressional approval because they involve shifting and making permanent a $65 billion U.S. contribution to an IMF crisis fund. …the U.S. Treasury sought to tuck the provision into pending legislation in Congress that aims to avoid a U.S. government shutdown at the end of March. The Republican-controlled House of Representatives rejected the IMF funding request last week, but the administration hoped the Democratic-led Senate would include it in its version of the funding bill. After days of negotiations, authors of the bill in the Senate Appropriations Committee rejected the request as too politically sensitive in the tense budget environment in Washington, where the sweeping government spending cuts triggered on March 1 are starting to be felt.

Wow. I wrote previously that rejecting additional IMF handouts was a minimum test of GOP seriousness in the battle against statism.

And they actually cleared that hurdle. Miracles do happen!

But there’s no such thing as a permanent victory in the battle against statism.

The Obama administration will have another shot at winning approval for increased IMF voting power when Congress starts work on a new set of spending bills later this spring for the 2014 fiscal year, which starts on October 1. But failure by President Barack Obama to reach a deal with Republicans to shrink the U.S. budget deficit could complicate any new requests for IMF funding, aides cautioned.

Not only is there no such thing as a permanent victory, even this bit of short-run success probably doesn’t mean much. If I understand correctly, the IMF already received the authority to squander the additional $65 billion. All that’s really happening now is a fight over whether to grant the bureaucrats permanent approval to misuse the funds.

But I’ll take any victory. Fighting for freedom in Washington is a rather grim task. Yet in the past month, we got the sequester and now we’ve stiff-armed the IMF.

I’m almost delirious with joy.

P.S. While the IMF almost always pushes bad policy, there are occasional glimmers of sanity from the economists on staff who write reports. Researchers at the international bureaucracy, for instance, have acknowledged the Laffer Curve and warned that it makes no sense to push taxes too high. And some of the bureaucrats have even admitted that it sometimes make sense to reduce the burden of government spending.

And even though it wasn’t their intention, IMF bureaucrats even provided very strong evidence showing why the value-added tax is a destructive money machine for big government.

Read Full Post »

Here are three common-sense principles.

  1. Higher taxes are misguided. They undermine prosperity and finance bigger government.
  2. Bailouts also are misguided. They facilitate corruption and encourage moral hazard.
  3. And international bureaucracies are misguided. They promote statism and squander money.

So what’s the “perfect storm” of bad policy?

How about when international bureaucracies offers a bailout in exchange for higher taxes?

Here are some very unpleasant details from Reuters about how the International Monetary Fund is working with other international bureaucracies to coerce Cyprus into raising taxes in order to provide a bailout.

International lenders would like Cyprus to raise its corporate tax and introduce a levy on capital gains and a financial transaction tax to ensure it can repay a euro zone bailout it asked for last year, euro zone officials said on Thursday. …One official, briefed on the talks between the International Monetary Fund, the European Central Bank and the European Commission – known as the Troika – and the new government in Nicosia, said no decisions had yet been taken on any of the taxes.

I’ve already explained that Cyprus got in trouble because government spending rose faster than the ability of the private sector to finance it.

So if the problem is that the burden of government spending is excessive, then how does it make sense to increase the corporate tax burden? To impose a capital gains tax? Or to levy a tax on financial transactions?

The answer, of course, is that it doesn’t make sense.

This is a very perverse example of Mitchell’s Law, with the pinhead bureaucrats at the IMF and elsewhere misallocating global capital on the condition that Cyprus increase an already onerous tax burden.

One bad policy leading to another bad policy. And it’s happening with our money. Something to think about the next time the fiscal pyromaniacs at the International Monetary Fund ask for additional bailout authority.

Read Full Post »

I’m not a big fan of the International Monetary Fund, largely because the folks in charge oftentimes advocate toxic policies such as bailouts, higher taxes, and currency devaluation.

But there are some top-rate economists working at the IMF, and the bureaucracy has published some good studies about the economic benefits of reducing government spending and others warning that tax increases can be self defeating (by the way, too bad we can’t get the Joint Committee on Taxation to also acknowledge the Laffer Curve).

Now the IMF has a new study about the relationship between economic growth and different types of taxes. Those finding are interesting, and I may even write about them in the next few days, but I want to focus on some amazing data from this research that shows exactly why proponents of limited government should resist the value-added tax.

These charts are taken from page 10 of the IMF study and they depict changes, over the past several decades, for both personal income tax (PIT) revenues and consumption tax revenues, both measured as a share of economic output. The charts are divided to show trends in low-income countries, middle-income countries, and high-income countries.

These are remarkable numbers. They basically show that politicians have been unable to squeeze more money out of the income tax. We don’t know if that’s because of the Laffer Curve, tax competition, electoral resistance, or all of the above. But we can say with considerable confidence that the income tax has not been a money machine over the past 40 years.

I’m not saying it’s a good tax. Far from it. The income tax is unfair. It’s punitive. It’s discriminatory. It’s corrupt. And, when it was first adopted, it did generate a big new pile of revenue for the politicians.

But that was 100 years ago. In recent decades, by contrast, it hasn’t been a piggy bank for statists seeking to expand the burden of government spending.

The data for the VAT and other consumption taxes, by contrast, shows just the opposite. With each passing decade, the VAT burden climbs, and that’s true for nations at all stages of development.

This is one of the reasons why a VAT would be a disaster for the United States. Politicians might make promises about repealing or reducing other taxes in exchange for a VAT, but it is a 99-percent certainty that politicians would pull a bait-and-switch. We’d still be stuck with the awful income tax system and the IRS, but the crooks and clowns in Washington would have a new source of revenue to feed their spending addiction.

Isn’t that wonderful? We’d be taxed when we earn our income (often more than one time), and then taxed again when we spend our income. Just like Europe.

Here’s my video explaining why a value-added tax would be a fiscal disaster.

One final point. I don’t care if you like Mitt Romney or dislike Mitt Romney. But, given his less-than-sound views on the VAT, I want everybody to be prepared to hold his feet to the fire if he happens to prevail on November 6.

P.S. You’ll be delighted to learn that the pampered bureaucrats at the IMF get tax-free salaries, just like their cousins at the OECD and the rest of the international bureaucracies.

P.P.S. I just shared these a few days ago, but if you didn’t get a chance to see them, you can enjoy some good anti-VAT cartoons herehere, and here.

Read Full Post »

Every day brings more and more evidence that Obamanomics is failing in Europe.  I wrote some “Observations on the European Farce” last week, but the news this morning is even more surreal.

Compared to his foolishness on tax policy, Hollande is a genius when it comes to determining what time it is.

Let’s start with France, where I endorsed the explicit socialist over the implicit socialist precisely because of a morbid desire to see a nation commit faster economic suicide. Well, Monsieur Hollande isn’t disappointing me. Let’s look at some of his new initiatives, as reported by Tax-News.com.

The French Minister responsible for Parliamentary Relations Alain Vidalies has recently conceded that EUR10bn (USD12.7bn) is needed to balance the country’s budget this year, to be achieved notably by means of implementing a number of emergency tax measures. …The government plans to abolish the exemption from social contributions applicable to overtime hours, expected to yield a gain for the state of around EUR3.2bn, and to subject overtime hours to taxation, predicted to realize approximately EUR1.4bn in additional revenues. Other proposed measures include plans to reform the country’s solidarity tax on wealth (ISF), to cap tax breaks at EUR10,000, to impose a 3% tax on dividends and to increase inheritance tax as well as the tax on donations. …French President Hollande announced plans during his election campaign to reform ISF. Holland intends to restore the wealth tax scale of between 0.55% and 1.8%, in place before the former government’s 2011 reform, to be applied on wealth in excess of EUR1.3m. Currently a 0.25% rate is imposed on net taxable wealth in excess of EUR1.3m and 0.5% on net taxable assets above EUR3m.

France already has the highest tax burden of any non-Scandinavian nation, so why not further squeeze the productive sector. That’s bound to boost jobs and competitiveness, right? And more revenue as well!

In reality, the Laffer Curve will kick in because France’s dwindling productive class isn’t going to passively submit as the political jackals start looking for a new meal.

But while France is driving into a fiscal cul-de-sac, Italian politicians have constructed a very impressive maze of red tape, intervention, and regulation. From the Wall Street Journal, here is just a sampling of the idiotic rules that paralyze job creators and entrepreneurs.

Once you hire employee 11, you must submit an annual self-assessment to the national authorities outlining every possible health and safety hazard to which your employees might be subject. These include work-related stress and stress caused by age, gender and racial differences. …Once you hire your 16th employee, national unions can set up shop, and workers may elect their own separate representatives. As your company grows, so does the number of required employee representatives, each of whom is entitled to eight hours of paid leave monthly to fulfill union or works-council duties. …Hire No. 16 also means that your next recruit must qualify as disabled. By the time your firm hires its 51st worker, 7% of the payroll must be handicapped in some way, or else your company owes fees in kind. …Once you hire your 101st employee, you must submit a report every two years on the gender-dynamics within the company. This must include a tabulation of the men and women employed in each production unit, their functions and level within the company, details of their compensation and benefits, and dates and reasons for recruitments, promotions and transfers, as well as the estimated revenue impact. …All of these protections and assurances, along with the bureaucracies that oversee them, subtract 47.6% from the average Italian wage, according to the OECD. …which may explain the temptation to stay small and keep as much of your business as possible off the books. This gray- and black-market accounts for more than a quarter of the Italian economy. It also helps account for unemployment at a 12-year high of 10%, and GDP forecast to contract 1.3% this year.

You won’t be surprised to learn that the unelected Prime Minister of Italy, Mr. Monti, isn’t really trying to fix any of this nonsense and instead is agitating for more bailouts from taxpayers in countries that aren’t quite as corrupt and strangled by red tape.

Monti also is a big supporter of eurobonds, which make a lot of sense if you’re the type of person who likes co-signing loans for your unemployed alcoholic cousin with a gambling addiction.

But let’s not forget our Greek friends, the one from the country that subsidizes pedophiles and requires stool samples from entrepreneurs applying to set up online companies.

The recent elections resulted in a victory for the supposedly conservative party, so what did the new government announce? A flat tax to boost growth? Sweeping deregulation to get rid of the absurd rules that strangle entrepreneurship?

You must be smoking crack to even ask such questions. In addition to whining for further handouts from taxpayers in other nations, the Wall Street Journal reports that the new government has announced that it won’t be pruning any bureaucrats from the country’s bloated government workforce.

Greece’s new three-party coalition government on Thursday ruled out massive public-sector layoffs, a move that could help pacify restive trade unions… The new government’s refusal to slash public payrolls and its demands to renegotiate its loan deal comes just as euro-zone finance ministers meet in Luxembourg to discuss Greece’s troubled overhauls—and possibly weigh a two-year extension the new government is seeking in a bid to ease the terms of the austerity program that has accompanied the bailout. …Cutting the size of the public sector has been a top demand by Greece’s creditors—the European Union, European Central Bank and International Monetary Fund—to reduce costs and help Greece meet its budget-deficit targets needed for the country to get more financing. So far, Greece has laid off just a few hundred workers and failed to implement a so-called labor reserve last year, which foresaw slashing the public sector by 30,000 workers.

Gee, isn’t this just peachy. Best of all, thank to the International Monetary Fund, the rest of us are helping to subsidize these Greek moochers.

And speaking of the IMF, I never realized those overpaid bureaucrats (and they’re also exempt from tax!) are closet comedians. They must be a bunch of jokers, I’ve concluded, because they just released a report on problems in the eurozone without once mentioning excessive government spending or high tax burdens.

The tax-free IMF bureaucrats do claim that “Important actions have been taken,” but they’re talking about bailouts and easy money.

The ECB has lowered policy rates and conducted special liquidity interventions to address immediate bank funding pressures and avert an even more rapid escalation of the crisis.

And even though the problems in Europe are solely the result of bad policies by nations governments, the economic pyromaniacs at the IMF also say that “the crisis now calls for a stronger and more collective effort.”

Absent collective mechanisms to break these adverse feedback loops, the crisis has spilled across euro area countries. Contagion from further intensification of the crisis—including acute stress in funding markets and tensions involving systemically-important banks—would be sizeable globally. And spillovers to neighboring EU economies would be particularly large. A more determined and forceful collective response is needed.

Let’s translate this into plain English: The IMF wants more money from American taxpayers (and other victimized producers elsewhere in the world) to subsidize the types of statist policies that are described above in places such as France, Italy, and Greece.

I’ve previously explained why conspiracy theories are silly, but we’ve gotten to the point where I can forgive people for thinking that politicians and bureaucrats are deliberately trying to turn Europe into some sort of statist Dystopia.

Read Full Post »

I’m not a big fan of international bureaucracies, mostly because they always seem to promote bad policy such as higher tax rates.

To add insult to injury, the bureaucrats who work at these organizations have created very comfortable lives for themselves while the rest of us pick up the tab, as documented here and here.

But the ultimate insult is that the overpaid and pampered bureaucrats receive tax-free salaries while they jet-set around the world pushing for higher taxes.

Yes, you read correctly. They demand higher taxes for everyone else, but their bloated salaries are exempt!

Here’s some of what the UK-based Guardian just reported about the head of the IMF.

“Taxes for thee, but not for me”

Christine Lagarde, the IMF boss who caused international outrage after she suggested in an interview with the Guardian on Friday that beleaguered Greeks might do well to pay their taxes, pays no taxes, it has emerged. As an official of an international institution, her salary of $467,940 (£298,675) a year plus $83,760 additional allowance a year is not subject to any taxes. …Lagarde, 56, receives a pay and benefits package worth more than American president Barack Obama earns from the United States government, and he pays taxes on it. The same applies to nearly all United Nations employees.

To make matters worse, these globe-trotting bureaucrats have figured out all sorts of ways of padding their pay.

Base salaries range from $46,000 to $80,521. Senior salaries range between $95,394 and $123,033 but these are topped up with adjustments for the cost of living in different countries. A UN worker based in Geneva, for example, will see their base salary increased by 106%, in Bonn by 50.6%, Paris 62% and Peshawar 38.6%. Even in Juba, the capital of South Sudan, one of the poorest areas of the world, a UN employee’s salary will be increased by 53.2%. Other benefits include rent subsidies, dependency allowances for spouses and children, education grants for school-age children and travel and shipping expenses, as well as subsidised medical insurance. For many years critics have complained that IMF, World Bank, and United Nations employees are able to live large at international taxpayers’ expense.

So how do these bureaucrats justify their lavish salaries and gold-plated benefits?

Officials from the various organisations have long maintained that the high salaries are a way of attracting talent from the private sector. In fact, most senior employees are recruited from government posts.

Kudos to the Guardian for exposing this nonsense, particularly the fraudulent claim that lavish compensation packages are need to attract and retain these incompetent bureaucrats.

But let me add to the Guardian’s analysis. In a recent email exchange with several people, I addressed this issue, specifically commenting on whether the head of the IMF, Ms. Lagarde, should get a giant salary because she could earn more money in the private sector. I wrote that there were two responses to this assertion.

1. She has genuine skills as a wealth creator. In which case, we should force her out of the IMF as soon as possible so her talents can be used productively rather than destructively.

2. She can get big bucks by trading on her connections and entering the world of corporatism. Work for KPMG, or the Carlyle Group, or some other entity that specializes in getting favorable deals for the elite. That’s not the private sector.

In either case, her salary in her current position should be zero. Unless we think she should be paid the value of her marginal product, in which case she probably owes the world’s taxpayers several hundred billion dollars.

In other words, it doesn’t matter whether Ms. Largarde’s ability to earn lots of money is the result of genuine ability or cronyism. Since the IMF is pursuing bad policy, her value in that position is below zero.

My Cato colleague Richard Rahn was correct when he wrote that it is the ultimate hypocrisy for tax-free bureaucrats to lobby for higher taxes on the rest of us.

And that’s why defunding these parasitic international bureaucracies is not just good fiscal policy and good economic policy, it’s also the morally just policy.

Read Full Post »

I don’t like the international bureaucrats at the IMF, and I don’t like the corrupt politicians of Greece, so for whom do I cheer if there’s a fight between those two groups?

Ideally, both sides will lose (which is also my view of the European fight between Keynesians and tax increasers).

You’ll understand when you read about the recent remarks by Christine Lagarde, the head of the International Monetary Fund. Here’s what the UK-based Guardian reported.

IMF chief Christine Lagarde’s uncompromising description of Greeks as rampant tax-dodgers has provoked a furious reaction in Athens less than a month before the crisis-hit country heads to the polls. With Greece mired in ever-worsening recession, with cutbacks and tax rises, the IMF managing director was rounded on by almost the entire political establishment. In an interview with the Guardian, Lagarde said she had more sympathy for victims of poverty in sub-Saharan Africa than Greeks hit by the economic crisis. “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax.” Evangelos Venizelos, the Greek socialist leader, who met Lagarde several times as finance minister, accused her of “insulting” Greeks. “Nobody has the right to humiliate the Greek people during the crisis, and I say this today specifically addressing Ms Lagarde … who with her stance insulted the Greek people.”

So what should we think of this fight?

Well, I agree with Lagarde that the people of sub-Saharan Africa are more deserving of sympathy. After all, the Greek people repeatedly voted to steal money from their fellow citizens by using the coercive power of government, so it’s hard to feel much sympathy for people who thought that scam could continue indefinitely.

Though, to be fair, the people in sub-Saharan Africa would probably make the same venal choices if they had democracy.

Top IMF Moocher

On the other hand, I am nauseated by Lagarde’s comments about tax evasion. She is one of the world’s biggest leeches, with annual compensation of more than $550,000 that is diverted from the productive sector of the economy. And, adding insult to injury, her bloated salary is tax free. So we have the grotesque spectacle of a pampered international bureaucrat whining and moaning that ordinary people aren’t paying enough tax.

Keep in mind, by the way, that the tax burden in Greece is more than 40 percent of economic output (see annex table 26), which (at least to normal people) shows that the problems is that the Greek government is spending far too much.

Leading Greek Kleptocrat

Then we have the sniveling comments of Greece’s former socialist finance minister, who says the Greek people have been “insulted.” Well, they should be insulted. And mocked. And berated. After all, these are the people who voted for one kleptocrat government after another.

These are the people who thought it was a good idea to elect governments that made insane decisions such as choosing to subsidize pedophiles and imposing a regulatory requirement to collect stool samples from entrepreneurs setting up online companies.

I think “a pox on both your houses” was a line in one of Shakespeare’s plays. But wherever it comes from, it sums up my view of this spat between the IMF and Greece. The only good decision for the United States would be to back away and not be involved. Unfortunately, the Obama Administration wants American taxpayers on the hook for the reckless overspending of foreign politicians.

Read Full Post »

In a grand Washington tradition, I periodically make imperious demands. In the past year or two, I’ve issued the following ultimatums to the GOP.

o No tax increases, since more money for Washington will encourage a bigger burden of government and undermine prosperity.

o Reform the biased number-crunching methodology at the Congressional Budget Office and Joint Committee on Taxation.

o No more money from American taxpayers to subsidize the left-wing bureaucrats at the Paris-based Organization for Economic Cooperation and Development.

I don’t actually expect any politicians to pay attention when I make these demands, of course, but I am highlighting issues that send a signal about whether Republicans actually learned any lessons after getting shellacked in 2006 and 2008.

So far, they’re holding reasonably firm on the tax issue. They don’t have control over the CBO and JCT thanks to Harry Reid, so we’ll give them a pass on that topic. And we’ll see later this year whether they agree to squander another $100 million on the OECD.

Well, here’s another test to see whether the GOP is on the side of taxpayers or the establishment. The Obama Administration has agreed that the fiscal pyromaniacs at the International Monetary Fun should have more money and power to provide more and bigger bailouts.

Here are some relevant parts of a Washington Post story.

…a brewing election year fight with congressional Republicans…could restrict the IMF’s finances at a time when agency officials say they need a substantial boost to protect the world economy. The dispute centers on Republican opposition to increasing the United States’ financial contributions to the agency, reflecting anger over IMF rescue programs in Europe that some GOP lawmakers argue have become too expensive and have put U.S. taxpayers at risk. …opposition is growing to a permanent increase in U.S. government support for the IMF, as well as to a $100 billion credit line the United States provided in 2009 as part of an international move to help the IMF respond to the global financial crisis. The IMF has been dipping into that credit line for emergency loans to Portugal and elsewhere… Planned changes at the IMF, which would shift seats on the fund’s governing board from Europe to the developing world, cannot proceed without congressional approval. For practical purposes, neither can a related doubling, from $370 billion to $740 billion, in the total permanent contribution that IMF members make to support the agency.

As you can see from the excerpt, Republicans in the House of Representatives have the ability to stop this global boondoggle. The interesting question, though, is whether they defend the interests of ordinary people or whether they cater to the whims of the political elite.

By the way, I’m irked by the Post’s biased presentation. They refer to IMF “rescue programs,” yet all the evidence seems to suggest that the international bureaucracy is simply making the debt bubble bigger. We certainly don’t see any evidence that problems are getting solved. Greece is still in trouble, as are the other nations that stuck their hands in Uncle Sam’s pocket.

But that could be excused as a bit of sloppy reporting. Here’s a part of the story that is hopelessly biased.

The potential for a stalemate over the issue in the United States has the IMF and other international officials worried that it could put broader agency reform efforts at risk. IMF officials say that to backstop the global economy they need about $500 billion in addition to the increase in permanent contributions.

Since when is it appropriate to use the term “reform efforts” to describe policies that subsidize moral hazard and reward profligacy? And how is it accurate to say that IMF actions “backstop the global economy” when the bureaucrats don’t seem to achieve anything other than encouraging more debt?

Congresswoman Rodgers, Defending Taxpayers

But this isn’t a post about media bias, even though I sometimes can’t resist pointing out sloppy or dishonest journalism. Let’s get back to the main point. Giving the IMF more resources would be like giving the keys to a liquor store to a bunch of alcoholics.

Republicans have the ability to stop this raid on the Treasury by saying no. What they decide will reveal a lot about whether they’re still part of the problem.

Some GOPers in the House, such as Cathy McMorris Rodgers of Washington, already are fighting against expanded bailout money for the IMF. The real key, though, will be whether the Republican leadership does the right thing.

Read Full Post »

I speculated last year that the political elite finally might be realizing that higher tax rates are not the solution to Greece’s fiscal situation.

Simply stated, you can only squeeze so much blood out of a stone, and pushing tax rates higher cripples growth and drives more people into the underground economy.

Well, it turns out that even the International Monetary Fund agrees with me. Here’s what the IMF said in its latest analysis about the Greek fiscal situation.

…further progress in reducing the deficit is going to be hard without underlying structural fiscal reforms. The fiscal deficit is now expected to be 9 percent this year, against the program target of 7½ percent. “One of the things we have seen in 2011 is that we have reached the limit of what can be achieved through increasing taxes,” Thomsen said. “Any further measures, if needed, should be on the expenditure side.

This is a remarkable admission. The IMF, for all intents and purposes, is acknowledging the Laffer Curve. At some point, tax rates become so punitive that the government collects less revenue.

This is a simple and common-sense observation, as explained in this video.

Unfortunately, even though the IMF now recognizes reality, the same can’t be said about the Obama Administration.

The President has proposed higher tax rates in his recent budget and it seems he can’t make a speech without making a class-warfare argument for penalizing producers, investors, entrepreneurs, and small business owners.

Yet if you compare American tax rates and Greek tax rates, it seems that the IMF’s lesson also applies in the United States.

The top tax in Greece is 45 percent, which is higher than the 35 percent top rate in America. But this doesn’t count the impact of state income taxes, which add an average of about five percentage points to the burden. Or the Medicare payroll tax, which boosts the rate by another 2.9 percentage points.

So Obama’s proposed 4.6 percentage point hike in the top tax rate almost certainly would mean a higher tax burden in the United States.

Even more worrisome, the U.S. tax rates on dividends and capital gains already are higher than the equivalent rates in Greece. Yet Obama wants to boost double taxation on these forms of retained earnings and distributed earnings.

But there are important cultural differences between the United States and Greece, so there’s no reason to think that the revenue-maximizing tax rates in both nations are the same (by the way, policy makers should strive for growth-maximizing tax rates, not the rates that generate the most money).

That’s why I wrote about the U.S.-specific evidence from the 1980s, which shows that rich people paid much more to the IRS when tax rates were slashed from 70 percent to 28 percent.

But all this analysis may miss the point. Why is the President willing to raise tax rates even if the economy suffers enough damage that the Treasury doesn’t collect any revenue? And if you’re wondering why I might ask such a crazy question, watch this video – especially beginning about the 4:30 mark.

Read Full Post »

I realize the title of this post sounds like the beginning of a joke, along the lines of “A priest, a minister, and a rabbi walk into a bar…”, but this is a serious topic.

A big problem in fiscal debates is that people can’t even agree on what they mean by certain words. For instance, what’s the definition of austerity? Is it budget cuts, higher taxes, or both? Why are people saying the United Kingdom is practicing austerity, when the burden of government spending is going up?

Or how do we define responsible fiscal policy? Should politicians try to balance budgets, or should they shrink the burden of government? Is it reasonable for some people to call Obama a conservative because he wants higher taxes and claims the money would be used to reduce red ink?

I grapple with some of these questions in this appearance on Fox Business News.

But I’m not happy with my performance, largely because there needs to be a simple way of categorizing the various approaches to fiscal policy. So that’s what I’ve done in this Table. This is a first draft, so I welcome suggestions.

I’m serious about looking for input, For instance, I would like to come up with some way to describe Bushonomics without sullying the name of supply-side economics.

But perhaps I am just sensitive to that issue because supply-side economists tend to be serious and sober people who favor smaller government, but some of the politicians associated with supply-side economics – such as Jack Kemp – have been unapologetic big spenders.

I’m also unhappy with the division between IMFers and Keynesians, which is strange because it seems like half of my time is devoted to battling statists who argue for more government spending and the other half is consumed by fights against proponents of higher taxes.

What makes this so frustrating, though, is that Keynesians and IMFers are usually the same people, even though the philosophies are supposedly inconsistent.

I suspect that all they really want is bigger government, and they use any sign of weakness to argue for more spending, and then they quickly pivot and ask for higher taxes because of red ink. The biased analysis of the Congressional Budget Office is a good example.

The right approach, needless to say, is libertarianism. Small government and low tax rates are the pro-growth, pro-freedom recipe. That’s the one part of the Table that’s right on the mark.

Read Full Post »

Perhaps the title of this post is a bit unfair since the International Monetary Fund is good on some issues, such as reducing subsidies. And some of the economists at the IMF even produce good research.

But I can’t help but get agitated that this behemoth global bureaucracy wants more money when it has a dismal track record of promoting, enabling, and subsidizing bigger government.

Here’s a brief blurb from the Wall Street Journal, which shares my skepticism.

The IMF’s Christine Lagarde delivered a speech in Berlin Monday warning that, without dramatic action, the world risked another Great Depression. …”We estimate a global potential financing need of $1 trillion,” she said. “To play its part, the IMF would aim to raise up to $500 billion in additional lending resources.” …Perhaps an IMF managing director with sound ideas about what makes an economy grow might deserve a raise. The first thing such a director would demand would be to cut the Fund’s size in half, not double it.

The WSJ’s editors are right to criticize the IMF. The folks in charge at the international bureaucracy, depending on the circumstances, have a nasty habit of supporting Keynesian spending and class-warfare tax hikes.

Let’s look at two very recent news reports to prove this point.

Our first example is from Europe, where there’s a discussion of how to address the fiscal crisis. Remarkably, the IMF has staked out a position to the left of Germany, arguing that more government spending will boost growth in Europe. Consider these excerpts from a Washington Post article.

Germany, the economic engine of Europe, is afraid it could get stuck paying much of the cost to bail out its weaker European neighbors. It is pushing instead for budget cuts, which the IMF says could weaken growth further and undermine market confidence. The IMF is already lending to the region’s bailout fund and has a lead role in monitoring the progress that nations such as Greece make in reducing their government deficits. Germany, meanwhile, is also a large contributor to the bailout fund. …If Europe doesn’t take several steps recommended by the IMF, such as reducing its emphasis on budget cuts, the 17 nations that share the euro could contract at a much faster pace, the fund said. That could possibly plunge the rest of the world into recession.

This is remarkable. One would think that the past three years have proven, once and for all, that Keynesian spending is a sedative rather than a stimulus. Yet the IMF thinks recessions are caused by smaller government.

We have another story that is equally upsetting. IMF bureaucrats get tax-free salaries, yet they frequently urge governments to impose higher taxes. And they have a very troubling habit of undermining tax reform.

Here’s a blurb from a Bloomberg report.

The International Monetary Fund may require Hungary to change its flat personal income tax as part of a bailout agreement, according to a person familiar with the Washington-based lender’s preparations for the talks. The flat tax will be an important part in any program discussion, said the person, who declined to be identified because official talks haven’t started. The IMF is in general opposed to flat-tax systems.

I’ll confess that I’m not overly sympathetic to Hungary’s plight. The government is in a mess because it keeps overspending.

But if the IMF is going to foolishly provide a bailout, wouldn’t it be better if the bureaucrats made the money contingent on implementing good policy rather than bad policy?

Unfortunately, the IMF has a bad track record on tax reform, as I’m constantly reminded when talking to officials in Eastern Europe. Indeed, one of my early posts on this blog was about the IMF’s attempt to sabotage the Latvian flat tax.

People have a right to be statist, but the question we have to decide is whether American taxpayers should subsidize that destructive mindset. Not surprisingly, I say no. Indeed, the IMF may even be worse than the OECD, another international bureaucracy that promotes a statist agenda.

Read Full Post »

« Newer Posts - Older Posts »

%d bloggers like this: