Tag Archives: political economy

They’re Missing the Point

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The editorialists of Spiegel International Online are complaining about the evils of international tax havens.  They say, for instance,

no one knows how much money is on deposit in anonymous bank accounts in countries that are euphemistically referred to as tax havens.  Estimates by the non-governmental organization Tax Justice Network put the figure at about €16 to €25 trillion ($21 to $33 trillion).  In this manner, the native countries of these individuals and companies are deprived of hundreds of millions in taxes, sometimes legally but often illegally.

And

The debt-ridden countries of the Western world can no longer afford to be deprived of such massive revenues.  In addition, the public is sharply critical of the fact that some wealthy people can escape their responsibility for their countries through tax flight….

They misunderstand the underlying problem, though.  Those countries don’t actually need the tax revenue that’s heading overseas—their governments are spending far too much of their people’s money, and spending it on things that rightfully belong to those people to spend on, or not, according to their own imperatives.  The governments are deprived of nothing.  The governments should think, instead, of the benefits of those trillions staying at home, in the countries’ private—nongovernmental—economies, because without the present usurious and special interest oriented tax plans, no one would have need to hide his money from the tax man.

As for the public’s disgruntlement over the wealthy being able to hide their money when they cannot, they should be upset.  With properly low taxes, though, there is, again, no need to hide.

The editorialists do raise a legitimate beef, though.

Drugs and other criminal funds are hidden and laundered there [in the tax havens], shady deals are arranged, and hedge funds whose speculative activities could shake the financial system once again use them as a base.

You bet.  All together, now: if the domestic tax policies were more intelligent and honest—that is to say, set to low rates—the tax havens would be hard put to stay in business—and there would be fewer resources for hiding and laundering criminal funds and fewer bases for Evil Hedge Funds.

There’s a pattern here.

March Jobs

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The Bureau of Labor Statistics’ jobs report for March was released last Friday.

On the good news side:

  • 88,000 new jobs were created
  • the unemployment rate fell to 7.6%

On the bad news side:

  • 88,000 new jobs were created against a monthly average of 169,000 new jobs per month over the prior 12 months and against an expectation of 192,000 new jobs for March
    • the unemployment rate fell to 7.6% because the civilian labor force declined by 496,000 Americans
    • that’s 5 times as many Americans giving up and leaving the work force as found new jobs
    • the labor force participation rate decreased by 0.2 percentage point to 63.3%
    • the 63.3% labor force participation rate is the lowest since 1978
    • the long-term unemployed (jobless for 27+ weeks) numbered 4.6 million, 39.6% of the unemployed
    • 11.7 million workers who wanted a job remained out of work in March

This graph illustrates the failed recovery in which we remain mired; it’s an oft-repeated one, but the story it tells just keeps getting worse.  

As the graph shows, the decrease began about the time of the dot-com bubble burst, but the incipient recovery at the end of the Bush the Younger administration has been utterly cancelled, and the rate of decrease in participation has only accelerated since the Panic of 2008 and throughout the present failure.

The Consequences of Unintended Consequences

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It used to be that when Jeroen Dijsselbloem, President of the Euro Group, would talk to reporters, he’d open with

Maybe it’s good, if I say something.

And then recently he did say something.  He said that the Cyprus model of raiding depositor accounts to bail out failing banks—in addition to holding the failing banks’ investors and creditors responsible—should be the model for all of the eurozone.

In future aid packages, one must look into whether bank shareholders, bond holders and large depositors could participate so as to spare taxpayers from having to foot the bill.

Now we get the hue and cry from the left—Spiegel International Online included.  Because, you see, it’s somehow wrong to spare those taxpayers—folks who had no investment, no control, no relationship at all with those failing banks—from their Left-manufactured responsibility to indemnify private investors and creditors from the failures of their investments.  After all, it was Very Important People who were benefitting from having their hands in the taxpayers’ pockets.

The advantages were enjoyed not only by actors on the global financial markets, but also by major banking centers, such as those in Luxembourg and London, which could count on seeing governments prop up teetering financial institutions.

And so we see a consequence of unintended consequences made manifest: the naked greed of politicians and their accomplices.

And another, more favorable, consequence of these unintended consequences is being forced to the front:

A growing number of politicians and experts are demanding an end to this arrangement.  In the future, German Chancellor Angela Merkel said, “banks must save themselves.”  And German central bank board member Andreas Dombret is convinced that the financial sector can only regain health once there are no longer “implicit state guarantees for banks.”

Even the Luxembourg Finance Minister, Luc Frieden, his financial constituency notwithstanding, is figuring out a larger result of raiding depositor accounts to pay for businessmen’s and politicians’ failure to perform.

This will lead to a situation in which investors invest their money outside the euro zone.  In this difficult situation, we need to avoid anything that will lead to instability and destroy the trust of savers.

After all, the political futures of these foxhole-converting politicians depend on it.  Because in yet another consequence of these unintended consequences, the voting public—those taxpayers—are noticing the grubby political fists in their pockets.

And there’s the potential for another consequence of these unintended consequences.  The IMF has released their latest report on the currency reserves held by the various nations of the world.

Third World economies unloaded $45 billion worth of euros in 2012 in an accelerating trend.  Some of that, certainly, is related to the failed global recovery from the Panic of 2008.  However, Europe’s decision to raid Cyprus depositors’ funds to bail out failing banks, together with the Euro Group’s view that such raids are appropriate solutions for other eurozone bank failures, won’t encourage folks from outside the EU to place their money with eurozone—or EU—banks.  Which will contribute to continued dumping of euro holdings.  Which will continue the EU’s de facto dependence on the $US as the reserve currency, rather than elevating the euro in importance and from that, elevating the EU.

Unless Merkel, Frieden, et al., can prove themselves serious.

Progressives, Tax Scoring, and Economic Growth

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In a related post, I wrote about dynamic scoring being preferred to static scoring and about the “wisdom” of revenue neutrality for tax reform.  In the same cited Wall Street Journal op-ed, Senate Budget Committee Chairwoman Patty Murray (D, WA) is quoted as decrying dynamic scoring on the grounds that it

relies on judgment calls.

She’s right, of course.  What she carefully ignores, though, is that static scoring relies on its own judgment call: that humans don’t respond to the taxing, or spending, or borrowing moves of government.

We’ve seen the “accuracy” of the government’s calls based on those static analyses.  Static analyses completely blew those 2006-2007 cap gains predictions.  Static analysis completely blew the cost predictions of Obamacare.  Static analysis is completely blowing the cost predictions of Dodd-Frank.  And that’s just from the present and immediately prior administrations.

It’s time for Murray and her…cronies…to get out of the way.

Tax Reform, CBO Scoring, and Revenue Neutrality

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The Senate passed a non-binding (more’s the pity on the “non” part) resolution to have the CBO score tax proposals dynamically in addition to its traditional—and utterly misleading—static scoring methodology.

Static scoring assumes the idiocy of, as The Wall Street Journal put it, that

people work nearly as much at a 60% income tax rate as they do with a 30% rate, and investors don’t care all that much if the tax on capital gains is 15% or 30%.

“This often leads to crazy results.”  You betcha [emphasis in the original].

In January 2003, for example, the modelers predicted that capital gains revenues would be $68 billion in 2006 and $73 billion in 2007.  In May 2003 Congress cut the capital gains tax rate to 15% from 20%, and in its revised budget forecast in August 2003 CBO estimated that the rate cut would reduce revenues to $65 billion in 2006 and $69 billion in 2007.

CBO wasn’t even close.  Actual capital gains revenue rose despite the lower tax rate to $109 billion in 2006 and $126 billion in 2007, thanks to faster economic growth and a greater incentive for investors to cash in their gains at the lower rate.

But here’s a larger problem.  The opinion piece then goes on to say

Tax reform done right should be revenue neutral using standard CBO static analysis, but a dynamic model would predict a large revenue windfall from the overall increase in investment and economic efficiency.  As part of a budget deal, those extra tax dollars that Democrats crave could be earmarked for deficit reduction.

That’s certainly a fine use of the windfall, but why, exactly, must tax reform be revenue neutral—statically or dynamically scored—in order to be “done right?”

The political imperatives involved for neutrality are painfully obvious, so that can’t be what the WSJ was talking about; let’s leave that aside.

Why, indeed, must tax reform be revenue neutral?