Wednesday, February 28, 2007


It's sometimes amazing how politically paid scientists raise voice against global warming and thus telling how Kyoto accord needs to be fully implemented. Aside from the ideological point of view, there is a question if current Kyoto efforts mimic the environmental experiment of Karl Marx.

Kyoto accord would have had a damaging on the economy. In a matter of decades, the average income would be 30 percent less than today. On the other side, Kyoto accord ignores the potentials of job growth and its creators don't actually quite understand the economics and other cost-benefit methods of how to cure global warming. In the last year, environmental crusaders have offered very poor track on global warming. If we take a closer look at the nature of the Kyoto, then we quickly see that it was based on contradictory and selective scientific evidence, underpinning one side of global warming and tentatively neglecting the other side of climate trends. If you were in Sweden a month ago, then you'd see that there were hardly any signs of global warming as the temperature got below -20°C.

Global climate changes all the time due to natural causes and the human impact still remains impossible to distinguish from this natural cause. A decade ago, if we knew what we know about global climate then Kyoto would be completely unnecessary. Activists, Marxists, socialists of all parties and anti-globalists fanatically tell public that humanity driving on the path towards destruction as the catastrophe is looming. Neither of these arguments of fear is justified which means that they're based on a purely ideological level.

In the global field, the EU has pledged to cut the emissions of greenhouse gases and has failed to do so. Canada pledged to cut the emissions by 6 percent from 1990 to 2012. According to the statistics, the emissions are currently 35 percent above the forward target. Luckily without Kyoto accord, in the U.S. has emissions per capita have been reduced and there's a forward trend of a diminishing curve. The index value of greenhouse gas emissions per dollar in 2003 was less than 80, taking into account that the index emission level in 1990 was 100. There is, however, empirical evidence, that no nation can achieve or sustain the economic growth without the growth of emissions. According to the figures of the UN, the loss of the U.S. GDP would be as high as 1,96 percent which means that today's 1,3 trillion economy were hit by 260 billion USD every year, totaling more than 11 trillion by 2050.

What is then the passion for such features as environmental alarmists propose?

Nothing else but the redistribution of wealth and income which is equal to the re-invigoration of Karl Marx's Communist manifesto.

The Kyoto accord is similar to LOST (Law of the Sea Treaty) which would establish an international UN-corrupted agency regulating 70 percent of the earth's surface, placing seabed mining, fishing rights and deep-sea oil exploration under the control of a global bureaucracy such UN. Thanks to his wisdom, President Reagan was smart enough not to sign the treaty which would inevitably streamline the redistribution of wealth and income, the main goal of Karl Marx.

One of the greatest politicians of all time - Vaclav Klaus - recently perfectly told the truth of UN global warming report when he said that "it was the result of a group of "politicized scientists" who decided the results of the report before they began their investigation."

Global warming is an inclined full-blown myth and every serious scientist knows that very well. The leftists have popularized the question of environmentalism and blinded the scientific evidence and research about the question. Environmental change is due to naturally given causes of change. Saying that human impact has devastated the environmental diversity is either a politically supported question or the quotation marred by ideology. In fact, the greatest polluters of all times were communist plans and actions thanks to the ideas of Karl Marx.

As abovementioned, Kyoto accord would punish the advanced economies that foster innovation and growth with all various sorts of taxes and regulations. Would poor countries, mostly socialist (Marxist) dictatorships, really benefit from Kyoto? The answer is no. Kyoto accord would let them soak-up the foreign aid in the name of "development incentives". Such foolish UN efforts would inevitably lead to more corruption in those countries and would make them even poorer and structurally less reformed as their economies remained closed. What's actually the aim of foreign aid? It's the re-introduction of planning as the resources received from foreign aid are not determined on the basis of market capacity but rather on the basis of political preference.

Karl Marx once wrote that the goal of communism is to enforce a system that extracted from each according to his ability to each according to his need. Today, the nations in transit are still paying the price of Karl Marx and Communist manifesto. Now think about it. Kyoto accord says the same thing and it is thus a modern version of Marx's Communist manifesto.


Mises Institute offers a brief test examination after which are identified as an economist of certain economic school (Chicago, Austrian, Keynesian/Neoclassical, Socialist). If you want you can go through 25 question regarding economics and basic aspects of private property, economic growth, interest rates, international trade etc.

The result depends on the number of points in response to each answer chosen. Here is the link to the test.

Monday, February 26, 2007

TAX CUT APPROACH PRINCIPLED FOR 2007 CANADIAN BUDGET reports that in this year's budget Canada's conservative administration under the leadership of Stephen Harper intends to take a fair and principled approach to fiscal balance as proposed in a discussion document called 'Restoring fiscal balance in Canada'. In 2006, Canadian government claimed to have reduced taxes by almost $20 billion over the next two years. Key reduction measures include a very long promised 1 percent cut in Goods and Services tax to 6 percent and a 2 percent cut on all corporation companies by 2010. In addition, corporation surtax on all corporations is said to be eliminated by 2008. There are some changes in the structure of taxation for small businesses. By 2009, the bottom corporate tax rate for small business is intended to be slashed by 1 percent to 11 percent.

Fiscal balance has improved significantly over the last decade. Prior to the late 1990s, both orders of government went through a sustained period of running fiscal deficits, resulting in rising debt-to-GDP ratios. The deficits were clearly unsustainable, and both orders of government significantly reduced program spending in order to bring their respective finances under control.

Tax Cuts Slated for 2007 Canadian Budget, Tax News
Budget 2006; Focusing on Priorities; Restoring Fiscal Balance in Canada, Department of Finance, Canada

Sunday, February 25, 2007


In Slovenia, the myths about Scandinavia are widespread and largely exist in various fields of academics, politics and social life. The essence of the myths is carefully hidden behind the rethorics of politicians who repeatedly try to adjust the economic and structural policy to the course of the features of Scandinavian countries; Sweden, Denmark and Finland are the most frequently cited countries in this particular case.

What Slovenian politicians imagine under the term of Scandinavia is an exploding full-fledged welfare spending and high tax rates on corporate and individual income. There upon, Scandinavia is used to be given as an example of "social justice" exercised through the vast redistribution of wealth and income.

In our high school textbook on economics, Sweden's image is described in the following way:
"In our country the social security is high. That gives people a good sense of safety. As well as child-care, education and health care are free of charge. Scholars, pupils and students get scholarship and free textbooks. Unemployed receive unemployment support and the government integrates them into public work. On the other side, salaries and wages are relatively low and luxury goods are very expensive."

What works in Scandinavia may not actually work somewhere else. Scandinavian societies are largely homogenous while in Slovenia homogeneous society is non-existable respectively. Trying to copy the Swedish model in a way that copying imposes the most turbulent and economically illogical features, may result in the loss of economic growth and in the increase of spending. In supply-side approach, there're seven killers of economic growth and job creation; excessive government spending and high tax rates are the foremost dangerous features which undermine the economic performance and especially growth potentials of the economy itself.

Slovenian politicians, poisoned with the socialistic influx, have oriented their policy proposal in exactly the same way that involves copying Nordic problems instead of solutions. In the field of labor market, Slovenian dominantly left-leaning politicians have instituted rigid rules that hamper the growth of employment. Tax rates on individual income is still strongly progressive despite being recently reduced from top 50 percent tax rate on individual income to 41 percent. Unemployment benefits schemes have been copied from Sweden. Thus, trade unions and collective bargaining coupled with commonly high tax rates present a major obstacle for a dynamic labor market. Therefore, additional unemployment benefits further instituted a preference of not looking for a job and rather remain unemployed meanwhile receiving a substantial unemployment support and similar benefits.

As trade unions limit the supply of labor, employers are forced to adjust the employment dynamics to an evenly lower level. Consequently, this means that the accumulation of human capital becomes less attractive as high tax rates prevent employers from employing the most productive and prosperous individuals who can rapidly improve the level of competitiveness, innovation and productivity in the business sector as well as they in every way largely contribute to the improvement of welfare standards. It is said that minimum wage is a kind of necessary subsidy for the individuals with low incomes. As empirical evidence and some applied research show, minimum wage means that there is an instituted wage below which employers are not allowed to hire workers.

If there is a perspective field of work where wages usually start at a lower level and where the growth potentials are skyrocketing, then a minimum wage causes quite the opposite effect from its intention. It prevents employers from hiring workers and destimulates individuals from looking for a job they want and thus being unemployed and receiving unemployment subsidy again become more attractive. Minimum wage is thus a gateway to unemployment as it makes hiring and firing very costly. Sweden has no minimum wage but collective bargaining is so strong that the effect of its impact is nearly similar to minimum wage laws. In comparision with Denmark, Slovenian labor market is marred by unflexible employment regulation and government involvement. In Slovenia, the rate of employers' contribution for the financing of the insurance and health care system is very high. Non-salary costs of employment are among the highest in Europe.

The question that matters is how Nordic countries became rich and what kind of sets of solutions the policies of Nordic policymakers include.

Transparency International reports that cases of corruption in Scandinavia are hardly ever seen. In Slovenia, corruption is widespread among the judiciary and in the legal system while in business sector where the government ownership of bigger companies is substantial, the level of corruption is lower than in the legal system, despite still being high. In every Nordic country, freedom of doing business and the business framework are of the high quality. According to Index of Economic Freedom, the level of business freedom in Scandinavia varies between 90 and 95 percent. In Slovenia, the level of business freedom is 74,2 percent.

Financial markets in Scandinavia are highly liquid and flexible as they offer numerous incentives and high quality products to growth companies. Icelandic stock exchange is due to the size quite similar to Slovenian stock market but contrary to Slovenian stock market, ICEX is highly active and dynamic and greatly supported by an international participation which boosts growth potential and substantially contributes to the growth of returns on investment. The result of liquid and dynamic financial market, the creation of Icelandic multinationals such as Actavis, grew significantly. In Slovenia, the financial market is highly concentrated and pillared as the government owns a majority share in Slovenia's three largest banks. According to the abovementioned index, Slovenia's rate of financial freedom is only 50 percent, slightly beyond the world average.

When Swedish economy was recovering from economic depression in the very late 80s and in the beginning of early 90s, the government successfully deregulated several sector of economy. Private health-care scheme were allowed and tax rates on individual and corporate income dropped. Swedish policymakers successfully reformed the pension system as well, reducing ageing risk and supporting the creation of private retirement funds completely independent from public schemes of government-supported retirement funds. In the business sector, Swedish business environment is known for a high quality management of big companies with good strategic grounding, flexibly adjusted models of decision making, not least with global strategies and innovation product market.

Denmark enjoys a worldwide reputation for a flexible labor market. Employment regulations do not hamper the productivity growth and index of difficult of hiring and firing is relatively easy with a minimal tax burden compared to labor markets in other countries. Finland opened itself to globalization and its students are ranked 1st on the scale of PISA. Iceland is known for an incredible entrepreneurial miracle since the economy achieved tremendous economic growth rates in the world. Three largest Icelandic banks are among 15 largest Nordic banks. Actavis, Iceland's biggest pharmaceutical company succeeded in Southern Europe with an innovative product and marketing strategy despite not being chosen to acquire Croatia's largest pharmaceutical company Pliva.

If Slovenian policymakers really want to copy the Nordic model then they should focus on finding the right set of solutions and features that made Nordic countries rich. In concrete terms, the Ministry of Education could abolish the licencing of textbooks and thus enable parents and students greater choice. Current system is vastly favorable to bureaucrats who seek rents away from the market. Denmark is known for a great degree of tolerance and personal liberty.

In Slovenia, sexual freedom is legally codified far away from having a respect for an individual self-ownership. Marihuana is still criminalized as well as euthanasia is prohibited. Slovenian policymakers have still not legalized the prostitution. Therefore, they prevent individuals from being free to choose the occupation they desire. Higher degree of economic freedom, the pursuit of privazitation and labor market liberalization, deregulation, healthy public finances, opening to globalization and foreign investment, the fundamental reform of the judiciary, elimination of corruption in various fields, greater personal liberty, highly respectful approach to private property rights are just a few among numerous required features that will help Slovenian economy achieve higher economic growth rates and structural advancement.

Thus, without free choice in every aspect, Slovenian society will hardly ever be able to compete with Nordic counterparts.

Tuesday, February 20, 2007


EU's deteriorated view on tax competition has already been deeply rooted in the minds of the EU policymakers in Brussels. But there is an exception - a commissioner that is being aware of high tax jurisdiction and its negative impact on economic growth, productive behavior, job creation and international competitiveness. Most of his colleagues prefer higher tax rates to low tax jurisdiction. Recent agressive attack on Swiss cantons and some companies headquartered there, is an example how the EU attempts to enforce seriously damaging features through which the doing business, competitive business frameworks and open international markets would suffer from lower market capital formation which is, essentially, one of the foremost indicators of investors' confidence, dynamic markets and growth potentials. Higher taxes boost government spending while it has been empirically proven that greater spending leads to lower growth as the curve, depicting the ratio relationship between spending and economic growth, yields downward. When it does so, it leads to incentive traps, demotivation of households and enterprises, increasing inefficiency and significantly higher corruption rate.

Charlie McGreevy, Internal Market Commissioner, outlined his position on taxation within the European Union at the Irish Institute of Taxation, suggesting that higher taxes feed fatter government:

"Some see taxation as a means of making society more equal. Of levelling down. Of limiting the upside rewards that go with taking risk or working hard. I don’t. I see it as necessary to help those who can’t help themselves and to provide services or infrastructure that is necessary for economic development but that the market alone can’t economically provide. I don’t see taxation as meritorious in its own right. I believe taxes – of all kinds - should be kept as low as possible and that the pressure to get them down should be relentless. I believe also, where there is a choice on how to levy taxes, preference should be given to levying them on spending. Taxes on income are taxes on effort, work and entrepreneurship. Taxes on capital are taxes on investment and risk taking. But it is effort, work, entrepreneurship, investment and risk taking that we need to continue to grow our economic base."

Link: Charlie McGreevy: Higher Taxes Feed Fatter Government, Irish Institute of Taxation, 2007

Saturday, February 17, 2007


In his Budget Statement for the Financial Year (FY) 2007, Second Minister for Finance, Tharman Shanmugaratnam announced a two percentage point reduction in the corporate income tax rate to 18% to sharpen Singapore’s competitive edge.

Corporate tax rate will be balanced against a number of revenue raising provisions such as 1,4 percent increase in employer contribution to Central Provident Fund, to 14,5 percent and a GST rate increase from 5 percent to 7 percent. Economic prospects for Singapore in the next 10 years seem to be excellent. The economic growth is solid, job creation rate is growing, venture capital funds are rising as well. Inflation targeting policy has been successful as inflation rate has been kept steadily below the critical rate. The financial sector is flourishing as Singapore has become a global financial oasis. When taxes on profits were slashed, the foreign direct investment has poured in. Singapore still remains an attractive location for foreign investors.
Tax news reports that;

"...the injection of an additional S$500 million into the R&D Trust Fund administered by the National Research Foundation (NRF), and a significant increase in the partial tax exemption threshold from S$100,000 to S$300,000, which would be especially helpful to SMEs. As a result of the latter measure, almost 80% of SMEs will pay tax at effective rates of less than 10%, making Singapore one of the most competitive locations internationally for SMEs."

The budget has provided numerous incentives for the growth of service sector. The government aims to make Singapore a hub for global philantropic organizations and says it will remove a rule that currently required charities to spend at least 80% of their annual receipts in Singapore within two years to qualify for income tax exemption.

Employment regulation has been reduced. In order to help low-wage workers, the government did thankfully not rely on minimum wage increase but on cutting contribution rates in order to make employment growth faster and employment easier;

"The principal target group of the WIS Scheme are full-time workers above the age of 45 and who earn S$1,000 or less. A worker earning S$1,000 a month will get S$100 of WIS, which is a 10% supplement. The WIS will also be extended to those above the age of 35 who earn S$1,500 or less, but at a lower rate."

It is expected to see the Singaporean economic growing extending from 4,5 percent in 2006 to 6,5 percent in 2007. Fiscal deficits has been reduced from S$2,9 billion to S$1,3 billion. The Finance Minister expects a S$1,1 billion budget surplus in 2007. excluding Special Transfers and tax changes. After taking these into account, the Budget is expected to be in deficit by S$0.7 billion. Shanmugaratnam, the Finance Minister assured Members of Parliament that the deficit could be fully financed by funds accumulated within the current term of government.


Switzerland has rejected criticism from the European Commission of corporate tax rates in some cantons, saying it will not yield its sovereignty over this issue. EU's fanatical opposition to tax competition seems unlimited. Instead, the EU is calling for tax harmonization via the savings tax directive. It is quite strange that a collectivist political body tries to enforce its own rules on competition by saying that tax competition framework is a kind of state aid. Switzerland is not a part of the interiror market of the EU while it's somehow unacceptable to claim that low corporate tax rates in cantons such as Zug, Obwalden and Schwyz violate the 1972 Free Trade Agreement. What the EU is trying to impose, applies only to certain goods as codified in 1972 Free Trade Agreement. Procedures for taxing management companies, mixed companies and holding companies do not fall within the scope of 1972 Free Trade Agreement.

The European Commission claims that there are unfair advantages for companies operating in Switzerland. Further, it argues that low corporate tax rates are a state subsidy. It is somehow easy to understand why bureaucrats in Brussels are exposing a fierce anger against Switzerland. Low corporate tax rates have attracted numerous international holding companies. In the EU, this effect has been seen as "capital-flight" which has been caused by harmfully high corporate tax rates, causing large cost burdens to companies operating in high tax jursidictions in the EU. EU claims seem to be focused on companies leaving the union for Switzerland's far more friendly tax and business environment. If the bureaucrats in Brussels aim to stop companies that leave the EU, then imposing restrictions and penalizing them will result in the worst possible scenario. Cutting harmful corporate tax rates, deregulation and labor market liberalization are far more appropriate measures to boost competitiveness and create a friendly business environment.

Anykind of government intervention against tax competition and low tax jurisdiction is a serious threat to the stability and growth of business sector. It is the EU that seriously violates the free trade rules by giving the commission more discretionary authority to penalize countries with low tax jurisdiction, not Switzerland.

Competitive tax federalism is a fact. As many countries aim to do so, Switzerland endeavours to be an attractive global business destination. Company taxation is decisively crucial factor in setting the business framework. Laffer's New Curve rule coherently explains the parameters of tax-investment relationship - invest only in low tax countries.

On 13 February 2007 the European Commission informed Switzerland that it considers certain tax schemes applied by the cantons to certain types of company (holding companies, management companies and joint enterprises) on the basis of parameters set under federal law (Tax Harmonisation Act), to be state aid. In the view of the Commission, these tax schemes at the cantonal and communal level distort competition and impair trade in a manner not compatible with the 1972 Free Trade Agreement.

What impairs trade in the EU are massive government subsidies set under the common agricultural policy. The pursuit of protectionism harms the competition and there have rarely been more serious violations of free trade and competition rules as common agricultural policy. First, there is a price effect. High quotas, tariffs and import restrictions harms the consumers by setting restrictions not to choose imported agricultural goods on the market. If you set an equilibrium as an engine of price determination via the forces of supply and demand, import quoats move the supply curve left from the point of equilibrium and thus an implicit grant is given to existing enterprises. They respond to import quotas by raising prices as the quantity supplied on the market is reduced. In addition, the government intervention in the EU is widespread and so is the tax burden in high-tax welfare countries such as Germany, Italy and France.

EU attacks on Swiss tax sovereignity is likely to be political rather than economic. When you go through options and economic analysis, you see that it is hardly justified on any particular basis that tax schemes are an appropriate instrument. Saying that competitive corporate tax system violates the free trade is a little bit overreacting. From this particular aspect, the European Commission acts like a socialist enterprise and a tax cop. It should reconsider its legal arguments whereas the claims for the interference into Swiss internal affairs and corporate tax structure. In fact, Switzerland is the most competitive economy in the world according to World Economic Forum, the degree of economic freedom is far above the European average, tax burden is one of the lowest among OECD countries and the business environment is far more flexible, more opened, less restrictive and far more friendly than in the majority of the EU countries. Free trade agreement does not require the harmonization of tax policies. Imposing tax schemes on certain type of companies, which are equally treated under cantonal corporate tax laws, could be a sign of having special preferences for taxing those companies. This would violate the principle of fair and transparent corporate tax code. If Switzerland said "yes" to EU claims, it would have a damaging impact on economic growth and company stock index.

Thursday, February 15, 2007


by Johnny Munkhammar

Several European countries have great problems with unemployment. This is especially severe for young and immigrants. And the real unemployment rate in the EU is most likely twice as high as the official rate. Millions of unemployed are called something else, like “early retired”, on sick leave or on temporary government programs. This is a powder can ready to explode; it is a social tragedy.

Jobs is thus largely in the focus of the public debate. Quite a few populist politicians try to blame unemployment on external forces like globalisation. But the more serious debate is about what changes in economic policy that are necessary to solve the problems. One could argue that there is a substantial amount of evidence that can be found in comparisons between countries.

A comparison of labour markets between the more free-market US, and the EU, is quite revealing. The share of the working-age population employed in EU countries is only 64 per cent; in the US, it is 72 per cent. In 2004, only 13 percent of unemployed workers in the US were unable to find a new job within 12 months; in the EU, the figure was 44 percent. In the US, youth unemployment is 10 per cent, in the EU, it is 17 per cent.

But the best comparisons can be made within Europe itself. Denmark has an employment rate of 76 percent, but Poland is far lower at 53 percent. Youth unemployment is above 20 percent in Greece, Italy, Sweden, France, Belgium, and Finland and below 8 percent in Ireland, the Netherlands, and Denmark. In the EU:s 15 member states, between 1995 and 2004, the development of employment was also very different. In Ireland, the Netherlands, and Spain, the increase in employment was the highest; in Germany and Austria, it was almost zero.

What the successful countries have in common is a high degree of economic freedom, not least in the labour market. That is, less government intervention the economy will lead to a better development in the labour market. There are large amounts of academic studies, and indeed studies from OECD and others, which confirm this. It is a rather well known and established fact.

Still, radical free-market reform is not what is taking place in Germany, Italy or France. And in several countries in Eastern and Central Europe that successfully did de-regulate, this development has stalled and in some countries gone slightly into reverse. Many politicians in countries with substantial government intervention in the economy feel that reforms for a government retreat are hard to do. Thus, they try to find an easy way out – and look at the Nordic countries.

They should not do that. The labour markets of the Nordic countries are extremely different from each other – also in terms of results. Whereas Denmark has actually a very free labour market and many new jobs, Sweden has a highly regulated labour market and has had a very poor development. Those who copy the government interventions of Sweden are likely to share its fate of a severe youth unemployment and vast social exclusion. And, as it happens, the new Swedish government is actually reforming to solve the problem – with lower taxes, lower unemployment benefits, de-regulations for smaller businesses, etc.

The opposite possible scenario for the future can be noted in France, where Ségolène Royal, the Socialist candidate for President, has presented her Election Manifesto with 100 proposals. Many of the proposals have stirred the debate about Europe’s future already. The Manifesto includes an increase in the minimum wage, higher taxes, more regulations in the labour market, expanded public welfare contributions, subsidised jobs for the young and nationalisation of companies. She promises to fight globalisation and any free-market reform.

Sweden and France have similar problems in the labour market. But whereas hardly anyone would like to copy France, many have desired to copy Sweden. Both would be just as ill-avised. And now, Sweden is doing free-market reforms to solve the problems, which should inspire. But if France were to turn in the opposite direction, from a similar starting-point, they would be in serious problems. Both of these countries, in the context of labour freedom or state intervention, currently offer lessons for others about shat to copy and what to avoid.

Johnny Munkhammar is Program Director, Timbro, a Free-Market Institute in Sweden. He works for personal liberty, a free economy and society, open borders and limited government. Information, analysis and comments about national and international economic and political issues can be found on his website.

Tuesday, February 13, 2007


Mr. Martti Nyberg has proposed a simple and efficient flat tax system that is favorable to economic growth and doing business.


In an outstanding article, Mr. Kevin Hassett of the American Enterprise Institute sets a question challenged by many company CEOs:

"Imagine you are the CEO of a major U.S. manu­facturing company. You are looking to locate a new domestic plant. All other factors being equal, would you locate the plant in the state with the highest taxes? Now, make that question international. Would you locate a plant in a country with high taxes or low? ... Total lobby­ing spending in 2005 was about $2.3 billion, but almost none went toward per­suading Congress to lower the corporate tax rate. Businesses instead prefer to push for their own narrow breaks"

High corporate tax rates have signficant effect on economic activity in the business environment. As the most important thing, when companies are required to pay a very high fraction of their income, their strategies, performance and business models adjust to cautious features as productivity, investment and other productive behavior are attached to more external uncertainty and risk. As high corporate tax rate reflects a tight rigidness of the business environment. This is commonly associated with several difficulties in doing business.

As countries compete global, tax competition among high-tax and low-tax countries reflects the attractiveness of business environment. Multinational headquarters and holdings are moving their facilities to countries where the aggregate tax burden is low and where low tax penalties on productive behavior coexist with favorable market indicators and business environment parameters. The most recent examples are Google and Kraft Foods. Google chose Switzerland to be its top European destination, while Kraft Foods has moved their European facilities from Vienna and London to Switzerland as well. Low corporate tax rates and favorable business conditions have forced companies to retreat from harmful business environment as high corporate tax rates causes significant costs of doing business.

There are several reasons why high corporate tax rates harms the economy:

(1) Low-tax countries have sighted a significant growth of net foreign direct investment. If a U.S. company, for example, sets a subsidiary in Ireland rather than in France or Italy, then its income created in Ireland will not be taxed under the U.S. legislation. It will be done so only if the money is mailed back to the U.S. The taxation of corporate income will be significantly lower in Ireland (12,5%) than it would be in the U.S (39,2%). Residual income from productive activites in Ireland will boost the company to invest further as well as to increase its stock market penetration while in the U.S. there would be only 60,8 percent of income left compared to 87,5 percent of residual income in Ireland. The elimination of double taxation of savings and investment can rapidly stimulate businesses and companies to move their headquarters to low tax countries in order to increase the residual income from risk, saving and investment (returns) and thus the level of capital gains.

(2) Multinational headquarters locate themselves in international business environments where corporate tax rate is charged only on domestic operations. It means that escaping oppressive high tax jurisdiction enables companies to improve their performance, rapidly lower corporate costs and operate free from high tax wedge. In a high-tax country, investment insourcing can easily decline completely unexpectedly as global counterpart countries reduce the corporate tax burden and thus lower the corporate tax rate.

(3) High productivity rate and the size of consumer market may largely determine the growth of output but high corporate tax rates can be a significant problem. Periodically adjusted observations and recent economic trends have shown that capital inflows largely increased as the corporate tax burden dropped. Swiss cantons, where the corporate tax rates are among the lowest in the world, are the most recent example. When small cantons in the heart of Switzerland, namely Zug and Obwalden, signficantly cut the corporate tax rates, the inflow of international capital investment skyrocketed. When Ireland set one of the lowest corporate tax rates in Europe, the capital inflow rate reached high double-digit levels. Low level of the corporate tax burden coupled with low tax wedge reflects an amazing 10 percent annual economic growth rate.

(4) Low corporate tax rates has a very positive effect on the manufacturing sector. Significantly lower proportion of income paid to the government may importantly ease the burden of the labor cost. Low taxes stimulate the ability of the firm to sustain or achieve high rates of productivity. In recent years, low level of productivity has been the main reason why many companies in the manufacturing sector left the U.S. and headed towards China and Asia. Wedging corporate taxes at such a rate could prolong the agony of low productivity. Further, taxing capital gains reduces the ability of the company to obtain much needed funding on the capital market to engage in risk, saving, innovative entrepreneurship and, of course, investment.

(5) Fifth, high corporate tax rates significantly affect the competitiveness of the economy. Deep corporate tax cuts may dramatically change the favorability of the tax environment. Lower tax rate will attract numerous international investors to setup their holdings and headquarters there. Ireland is an example of the company that went from rags to riches. In the early 90s, the economy grew by 80 percent a year. Low corporate tax rate seemed favorable to investors from abroad and they decided to set their facilities in Ireland. The growth of foreign investment in Ireland generally reflects favorable business conditions and propitious tax climate that drastically galvanized the Irish economy at its turmoil when it became a Celtic tiger.

The status quo is the most unfriendly form of tax policy toward the real business sector. The effect is twin-tracked. Capital flight is often the result of oppresive and almost confiscatory corporate taxation. Trade surplus correlates with investment deficit, but trade deficit is actually a sign of the vitality of the economy. It means that favorable business environment and conditions have attracted foreign-based companies to invest in that country. Trade surplus means that it's impossible to have a foreign direct investment surplus at the same time. Trade deficit means that economic conditions and indicators are marvelous. Tax policy of the status quo may cause the diminishing insource capital flows. It may, as well, negatively affect the competitiveness of the economy in the long-run when economic growth rates are usually anemic as a consequence of high corporate tax burden which results in a lack of productive behavior, capital and job creation and entrepreneurship while there is a conventional wisdom that there is no output growth without risk-taking and investment and the engine of human capital creation.

Sunday, February 11, 2007


Ericsson AB, the world's biggest maker of wireless networks, said it may set up a global support center in Romania to take advantage of lower taxes.

Low tax rates on corporate and individual income are shifting companies to move their operations to Romania which set one of the lowest flat tax rates in Europe (16 percent). Tax-friendly business environment in Romania attracted Microsoft Corp. Bill Gates opened a $16 million center to offer technical support to customers throughout Europe. Oracle, the world third-largest software maker, offered a similar support to their clients by opening a client support center in Romania.

Source: Budapest Business Journal


Budapest Business Journal (BBJ) reports that Romania's state budget deficit widened to 1.7% of GDP last year from 0.8% in 2005 as spending increased before the country joined the European Union. In 2006, the country was forced, by the EU, to launch an expansionairy fiscal and budget policy, closely related to Keynesian economic doctrine based on consumption and spending (instead of incentives) stimulations. Tight EU regulations forced the country to widen the budget gap as the policymakers in Brussels set several requirements which Romania probably had to adjust. Among them, spending on pensions several other areas, including infrastructure, was introduced. The government plans to raise spending more this year, widening the budget deficit to 2.8 percent of the GDP. As late as November, Romania posted a budget surplus of 1.2% of GDP. Budget balance should be narrowed in order to avoid long-term accelerating inflation from a 16-year low of 4,7 percent. It is highly recommendable for the Central Bank to follow the rules instead of discretion. It could set the inflation targeting framework and thus make a commitment and minimize the inflation risk which is a first-degree priority for further price stability. Transparent and non-complex tax code, instituted by a 16 percent flat tax, did not cause the instability of public finance as policymakers in Paris and Brussels have predicted. Instead, the flat tax generated more revenue, from 30,3 percent in the previous year to 31,8 percent in the last year.

EU Monetary Affairs Commissioner Joaquin Almunia said last year that "budget revenue as a proportion of GDP was lower than in any EU nation and recommended the country increase it." Following the empirical evidence, raising tax rates and penalties on productive behavior will not result in higher revenue. High taxes, instead of revenue-neutral tax rate, cause high administration costs. Numerous loopholes, deductions and exemptions stimulate individuals to search devices of how to avoid paying taxes. Tax collection thus becomes very costly while at the same time, tax revenue can hardly reach higher levels.

Laffer Curve shows this particular aggregate relationship between tax rates and the height of tax revenue. Laffer Curve in the case of Romania goes following:
"Romania has said income tax revenue has consistently increased since January 1, 2005, when it introduced a flat tax of 16% on corporate and personal income, the lowest in eastern Europe. It replaced a corporate tax rate of 25% and a personal income tax rate of as high as 40%. The Finance Ministry said revenue from the 19% value added tax increased 23% last year and totaled 8.3% of GDP and customs tax collection rose 19%."

The surest way to increase the revenue is to lower tax rates on corporate and individual income and set them flat. Another very important way to raise the revenue is to work on monetary stabilization and price stability. Cutting penalities on productive behavior is of the utmost importance as well. There is no such thing as a static feedback between productive behavior and tax system. Expansionairy spending could strongly boost the public consumption in the long-run when the stability of the public finance could pose serious risk if policymakers pursued a spiral of spending mechanism with high public debt and structural weakness.

Saturday, February 10, 2007


"Privatisation, strong fiscal management and responsible leadership on the part of labour unions and employers have played a major part in the successful restructuring of the Icelandic economy."

David Oddsson, former Prime Minister of Iceland

Daniel Mitchell reports that Iceland has finally joined the flat tax club. In the process of rapid economic success, the corporate tax rate was cut from 45 percent to 18 percent. The cut enabled companies to reduce their tax burden as well as to set a solid grounding for strategic growth in the market, domestically and internationally. In fact, in the period of economic stagnation and "status quo" era, the financial sector was dominated by the government which effectively controlled all major ownership stakes that firmed its dominant position in the banking and insurance sector. When the stakes were sold to private investors, the financial sector achieved tremendous success. Today, the three largest Icelandic banks are among 15 largest Nordic banks.

Keith Miles, a financial adviser to the government of Slovenia, gave Slovenian policymakers a sign of orientation where to seek examples and reform models that embody the success story of long-term economic growth and structural advancement. Iceland and Slovenia are very similar countries. They both have quite homogenous societies whose advantage is dynamic adaptability and adjustment to real competitive advantage faster than their European counterparts. Both countries have a similar (percentage) trade volume. 60 percent of all trade, in average, is flowed to the EU. In going for growth, Iceland never granted massive subsidies from the EU as Ireland did.

With the expiration of the surtax, individuals now pay 22,75 percent flat tax on the personal income. Marginal tax rates were cut from 32,80 percent in 1991 to 22,75 in 2007. A reformed tax system is not purely the verison the flat tax which was authored by Robert Hall and Alvin Rabushka. The tax rate is high, double taxation of savings and investments remains while certain tax preferences still persist. However, compared to regional and global competitors, Iceland has dramatically moved forward in a way that collects the total revenue at a minimal cost of economic distorstions without progressive tax code.

New Icelandic tax system dramatically reduced the cost burden on the productive activities. 10 years, the marginal income tax rate was set at 30,41 percent with a 5 percent surtax on higher incomes. Tax revenue was additionally collected from a local tax so that the most productive individuals paid half of their income to the government. Until recent tax reforms were implemented, the general income tax was reduced by 7 percentage points. With the combination of the local tax, which increased slightly, the total tax rate is now 36 percent. Icelandic tax system has a high tax-free threshold. Taxpayers get a credit of about $5,000 per adult and $2,000 per child. There are also additional tax preferences for housing and seaman. Employers technically pay a quite modest payroll tax of 6 percent. Icelanders also have an employer-based pension system which is based on private savings. Iceland also has a value-added tax whose rates vary between 14 and 24,5 percent.

In the area of corporate taxation, Iceland can be a model to the rest of the world. The corporate tax rate of 18 percent is one of the lowest in the industrial world. Countries such as Cyprus (11 percent), Hong Kong (17,5 percent) and Ireland (12,5 percent) have a lower rate. In Iceland, the rate was lowered dramatically throughout the last decade. It's been cut permanently from 50 percent at the end of 80s to 33 percent in the mid-90s to 18 percent by 2002. The reduction in corporate tax burden has created incredible investment incentives and boosted economic growth. The principal effect of the Laffer Curve worked once more. Corporate tax reductions did not result in a loss of government revenue but they have coincided with a rapid growth of corporate revenue.

Tax reforms, reflected in the introduction of the flat tax for businesses and individuals, presented an important part of Iceland's global economic success. Other features stimulated the economic miracle as well. Real estate tax was dropped to 5 percent, 10 percent capital income tax was made flat, turnover tax on businesses was repealed and the wealth tax was abolished.

Reforms that made Iceland the Nordic growth miracle and a roaring tiger were introduced when the economy and society were in a severe slump of economic depression. Private property is well protected in Iceland. Private property rights were created for fisheries as well. Regardless of the methodology, Iceland is now one of the wealthiest countries in the world. Unemployment, currently standing at 2 percent, almost doesn't exist. Numerous businesses and state enterprises were immediately privatized. Mr. David Oddsson, former Prime Minister and the European reform champion, addressed the American Enterprise Institute, where he underpinned the importance of privatization in Iceland's economic transformation. Impressive economic growth, averaging 4 percent in 2006, has made it one of the foremost prosperous nations in the world, and the fifth wealthiest in the OECD.

Successful tax system were created when the flat tax revolution spread throughout the globe. It began in 1994 when Estonia implemented a flat tax on individual and corporate income. In continued in the rest of Eastern Europe and reached even Kyrgyzstan and, recently, Macedonia and, of course, Iceland. It has a high rate compared to other countries which joined the flat tax, but its implementation is a remarkable success. Iceland is the very first Western country which decided not to prolong progressive and highly discriminatory tax system. As a country, Iceland incredibly prospered from radical tax reform, economic freedom and several other features, including liberalization, privatization and deregulation. We hope that policymakers in other countries will also pursue the implementation of the flat tax. Everyone would benefit.

Thursday, February 08, 2007


"Though it is not as true now as it used to be with the influx of immigration, the Scandinavian countries have a very small, homogeneous population. That enables them to get away with a good deal they couldn’t otherwise get away with. What works for Sweden wouldn’t work for France or Germany or Italy. In a small state, you can reach outside for many of your activities. In a homogeneous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But “common goals” are much harder to come by in larger, more heterogeneous populations. The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences."

Milton Friedman

In an ultraleftist pamphlet, Mr. Dusan Keber, former Minister of Health of Slovenia, repeatedly tries to confirm the rightness of theories concerning welfare economics as Mr. Jeffery Sachs tries as well.

In the article, there is no empirical evidence on the truth about Sachs's arguments of the welfare state. Beyond the edge, the propaganda concerning the influence of Keynesian welfare economics is boosted by the manners of the ideology rather than empirical investigation. Mr. Keber has defined himself as a leftist when he pinned the ultraleftist, anti-growth, pro-poverty and anti-progress political program entitled "People over profit" (Za ljudi pred profitom) which would ruthlessly lead Slovenia to further loss of global competitiveness and domestic stability. The program says nothing about the enormous size of public consumption which would presumably increase if the program were put into effect. Further, the program rampantly calls for raising tax rates on individual and corporate income. It aims to protect trade unions against market competition as well as it denies any possibility of radical labor market reform which still remains one of the foremost obstacles to the competitiveness of the Slovenian economy in a global sphere.

In the article, Mr. Keber says:

"In the late 40s of the 20th century, Friedrich August von Hayek wrote that high taxes are the road to serfdom and a huge threat to the freedom itself. Jeffery Sachs says that this statement is boosted by the interests of the capital and ideology and that there is enough evidence that goes in the opposite direction."

It simply cannot be justified that higher taxes lead to more prosperity. Recent and historical evidence shows quite the opposite examples of what Jeffery Sachs says. Higher taxes are usually the magnitute of progressive tax rates which do not stimulate "cross-section" economic activity. Numerous empirical studies have verified the negative impact of high taxes. Saying that tax system is designed in a static behavior, is actually a sign of deep misunderstanding of how economic processes work in the equilibria behavior. Hence, saying that the fact that high taxes mean lower prosperity, is boosted by the interests of the capital and ideology, is pretty much a sign of weakness in giving arguments. Economic growth is created through the productive behavior, generated by human capital. And there is an empirical evidence that the reason for lower tax rates is not "making the rich richer and making the poor poorer". The real reason for lower tax rates is the to increase the level of welfare and prosperity for all. The way to achieve this, is not to increase tax rates and boost consumption and spending; the real way to move further towards prosperity is to cut both; taxes and spending.

Mr. Keber, further, claims:

"Jeffery Sachs compares two groups of countries; one with low taxes and comparably small social expenditures and another one, mostly welfare countries with high taxes and large welfare expenditures. The first groups consists of Anglo-Saxon countries with historical grounds of laissez-faire economic policy of the 19th century, while the other group presents Nordic countries - Denmark, Norway, Finland and Sweden. In the first groups, there are comparably small welfare expenditures, averaging 17 percent of the GDP while there is increasingly larger social welfare expenditure rate at the average of 27 percent of the GDP. Nordic countries outperform the Anglo-Saxon countries on the majority of economic indicators. There is less poverty, income per capita is bigger, unemployment is similar, budgets are more stable. Nordic countries contribute budget outlays to education, science, research and development. They used the ICT (information communication technology) revolution faster than any other country in the world in order to raise the level of global competitiveness. According to World Economic Forum's Global Competitiveness Index three Nordic countries outperformed the United States."

Jeffery Sachs neglects one of the basic scientific facts - keeping other factors relevantly constant when working on periodic and time-adjusted observations. Welfare expenditure rate cannot explain the level of prosperity. Prosperity is measured through the economic growth and the increase of income and wealth per capita. Prosperity itself, does not emerge from government spending. It emerges from the ability of entrepreneurial sector to achieve high rates of market growth. Prosperity includes the free trade as well. Many unsophisticated "self proclaimed" experts still believe that the reduction in tax rates will result in lower tax revenue. Laffer Curve offers pretty much different results than static predictions. Lower tax rates on personal and corporate income channge the behavior of the dynamics of the productive behavior. Decreased tax burden means that increased incentives to work, save and invest accelerates the desirability of enterprises and households to increase wealth and their income level. Huge government spending leads to small economic growth. Hence, high public consumption rates (Sweden, Denmark) coupled with massive welfare expenditures mean that there is something seriously wrong with government policy. On one side, high government spending is exercised through high tax rates on individual and corporate income. This implies that the productive behavior avoids higher levels of productivity by tax sheltering and tax deductions. Progressive tax code rapidly increases compliance costs while flat tax codes make tax avoidance less probable and very costly. In effect, lower tax rates accelerate the economic growth and they also mean higher wage rates.

Ad.1: Economic indicators of the Anglo-Saxon countries outperform the economic performance of Nordic countries

In Sweden, not a single job in the private sector has been created since 1950. Unemployment rates remains high despite being shown as relatively small averaging 5,5 percent. The real Swedish jobless rate is 15 percent. The country has had a long tradition of labor training and unemployment support programs. Those individuals are, according to methodological details, not statistically included in the group of the unemployed. After years of exploding welfare statism, Denmark dropped from the 3rd to 7th place on the scale of world GDP per capita. Finland, faces a severe economic slumps in the beginning of the 90s after being pushed by the reduction of export propensity when the Soviet Union collapsed. On the way ahead, Finnish policymakers relied on privatization, liberalization and the deregulation. Iceland, once the sickest Nordic economic patient, achieved high rates of economic growth through laissez-faire economic policy under the leadership of David Oddsson who was inspired by Milton Friedman, Friderich August von Hayek and James Buchanan. Economic growth rates in Anglo-Saxon countries are exceeding the compound average growth rates of Nordic countries. Swedish 5-year compounded annual economic growth rate is 2,6 percent. In Denmark, the average 5-year economic growth is 1,4 percent, in Finland 2,8 percent, in Norway 2,2 percent and on 3,6 percent on Iceland. The average compounded rate of economic growth in Ireland is 6,4 percent, strongly outperforming the average rate of Nordic countries. In Australia, the average growth rate in recent 5 years equals 3,3 percent. In the United States and United Kingdom, job creation rates in private sector have skyrocketed since Ronald Reagan and Margaret Thatcher implemented free-market economic and structural reforms in order to boost competitiveness and achieve higher level of the GDP per capita. Contrary to what Mr. Sachs says, Sweden dropped from5th place in its welfare ranking to 112th in 2004. In previous periods, productivity has grown very slowly while the performance of the public sector has been awful. It has also been shown that employment statistics in Sweden and Finland has been modified by tricky methodolgical details when public sector employment and total unemployment rates have been slightly hidden and have, thus, covered the real unemployment and public sector employment rates. According to the stated indicators, it seems that Mr. Jeffery Sachs does not know what he's actually speaking, neglecting the whole panel of data and parameters required for a coherent economic analysis. What appears to be suitable for socialist policymakers, in reality reflects the story of Swedish myth. It cannot be understand why people like Jeffery Sachs interpret Swedish economic policy on the basis of high taxes while they avoid to tell that during the period between 1870 - 1950, the policy of positive free market non-intervention, the country created much of today's wealth.

Ad.2: Competitiveness is measured according to business models and private sector entrepreneurial strategies.

The resource of Information-Communication Technologies that, potentially, boosted the competitiveness levels of Nordic countries have been misunderstood. It has not been the government that created Nokia. Only one out of ten big size enterprises has been establish since 1970 in Sweden. Ericsson and Nokia have reached success because their business models suited the missing gaps in a global competition that enabled rapid stategic expansion as well as a boost in global sales which coexisted together the emergence of the new economy. The majority of successfully managed Swedish enterprises has been created in the years of Swedish road from rags to riches (1870-1950), on the path to free economy.

Ad.3: Expansionairy fiscal policy, increased government spending and high public consumption rate lead to economic stagnation and the loss of competitive position in the global economy

In his article, Mr. Keber continues followingly:

"Nordic countries can adjust social differences with open market economy. The outcome at the bottom of the social scale is sufficient, especially when we compare it with the U.S. case where the poverty flourishes and prisons are becoming overdrawn... American health-care sector is burdened and severe because it's private. Sachs says that Hayek was wrong. In strong and vibrant democracies, expansionairy welfare state does not lead to serfdom but into a just society, economic equality and international competitiveness."

The business environment in Nordic countries is singnificantly freer than in the rest of the world. In Denmark, for example, it takes 5 days in average to start a business, obtaining a business license is easy and closing down a business presents no major difficulties at all. Reliable business freedom coexists with sufficient investment and financial freedoms. It is empirically proven that generous welfare state, on the other hand, leads to smaller growth rates as shown by Armey Curve and Rahn Curve. Professor Robert J. Barro has demonstrated that the reduction in public sector size by 10 percent reflects higher economic growth rate by 1,8-2,8 percent. The health-care sector in the U.S. is burden very much by Medicare which is boosted throug government intervention and high public spending rates. It is an empirical evidence that private sector allocates resources much more efficiently than public sector can. Is health-care sector an exemption? The answer is no. Government health-care programs produce cost-inefficiency at the expense of taxpayers while greater supply of service leads to price reduction and greater quality.

The relative success story of the Nordic countries is very much the result of laissez-faire economic policy back at the beginning of the 90s when Nordic countries faced a severe economic stagnation. In Sweden, private health-care saving schemes were allowed, vouchers boosted the performance of the education system, telecommunication sector was liberalized and the deregulation vastly helped to stimulate the entrepreneurial performance. Free-market institutions obtained a greater role in economic progress while the size of the government started to diminish. It has also been empirically shown that regulation strongly influences economic performance. The proponents of the Swedish model have claimed that the model itself is a reason for evenly greater Swedish economic performance. The truth is very far from this statement. Swedish companies have been breaking export rates and the quarterly economic growth rate have sparked due to deregulation programs that stressed the potentials of the Swedish economy and helped to stimulate the performance of the private sector at a low inflation rate controlled by Riksbank.

If Nordic countries continued to follow the economic doctrine of Keynesianism, its performance would end-up in a severe economic depression when it would take a long time to recover from the policy of "generous welfare state" based on expansionairy spending and high public consumption rate. In Sweden, despite the welfare state, Foreign Direct Investment (FDI) fell to zero. Facts, figure and data on international competitivness show that parameters of low spending, the economic policy of liberalization and deregulation, the rule of law, free trade and competition lead to higher economic growth rates, more economic freedom, and higher levels of prosperity and wealth creation.

Literature and further Reading:

Christopher S. Allen: Forming Left Wing Coalition Governments? Sweden and Germany in the early 21st Century, Annual Meeting of American Political Science Association, Philadelphia, 2006

Kathleen Bawn, Frances Rosenbluth: Short versus Long Coalitions: Electoral Accountability and the Size of the Public Sector

Die nordeuropäischen Wohlfahrtsstaaten, Zusammengestellt von Norbert Götz, Lehrstuhl für Nordische Geschichte an der Universität Greifswald, Stand: Dezember 2000

Index of Economic Freedom 2007, Heritage Foundation

Per Bylund: How Welfare State Corrupted Sweden, Mises, 5/31/2006

Daniel Drezner: Would the Scandinavian Model for the United States?

Free Markets and the End of History, Interview with Milton Friedman, New Perspectives Quarterly, Vol. 23, Winter 2006

David Ibison: Real Swedish jobless rate is 15 percent, Financial Times, June 15, 2006

Stefan Karlsson: Swedish FDI falls to zero "despite" the welfare state, Mises, August 26, 2005

Stefan Karlsson: The Sweden Myth, Mises, 8/7/2006

Mikko Matilla: Economic Changes and Government Popularity in Scandinavian Countries, British Journal of Political Science, Vol. 26, No. 4 (Oct., 1996), pp. 583-595

Johnny Munkhammar: Swedish Failure and Slovakian Success, Reply to Vladimir Manka

Johnny Munkhammar: A Coup d'Etat in Sweden, Wall Street Journal, September 13, 2006

Johnny Munkhammar: Beyond the European Social Model, Open Europe, 2006

Bertil Ohlin: Tendencies in Swedish Economics, The Journal of Political Economy, Vol. 35, No. 3 (Jun., 1927), pp. 343-363

Terence Roth: Sweden's Hidden Jobless, Wall Street Journal, June 1, 2005,,SB111714741454244517,00.html

Nima Sanandaji, Tino Sanandaji: How do you say "Economics" in Swedish? Unemployment, entrepreneurship and working ethics in the Swedish welfare state, The New Libertarian, 2006

Rok Spruk: Sweden, Success and Failure, Capitalism & Freedom, January 17, 2007

Monday, February 05, 2007


In January 2007, the government of Macedonia instituted a tax code with a single flat tax on both personal and corporate income. Further signs of attracting Foreign Direct Investment are moving along as well. A new portal Invest in Macedonia offers a bulk of information and guidelines to investors and entrepreneurs looking foreward to set a joint venture or pursue greenfield investment in Macedonia.

Estimates show that until 2009, the average economic growth rate will reach 6,5 percent reflecting strong investment growth and the growth of export. Tax cuts could substantially boost productive behavior towards creating more revenue on the market as well as better investment decisions in the entrepreneurial sector.

Macedonia's economy is 60,8 percent free with the highest degree of economic freedom in the Balkans. Trade freedom, fiscal freedom and monetary freedom are high while property rights protection and freedom from government are insufficient. Business sector still faces tremendous difficulties in operations and capital transactions. For example, the minimal capital basis (measured as the percentage of income per capita) required for starting a business is equal to 112 percent, reflecting a significant administrative burden faced by the businesses as a consequence of hard-hand regulation. Trade unionism is widespread in the form of labor monopolies. The trap captured by the influence of trade unions in labor policies is figured out when we take a closer look at wage-cost ratio dynamics. Non-wage costs of the employment in the business sector represent 33 percent of the salary. Labor regulations under restrictive government regulation strongly hinder the growth of productivity and openness in the labor market. Extensive government restrictions in various area lead to corruption which punitively undermines the potential of the economy as a whole. Widespread corruption is basically a sign of weak and indefinite protection of property rights by judiciairy. In such circumstances, the rule of law as a structural requirement, cannot exists in relation to liberty and property.

As an improved structural and economic performance is needed to sustain high levels of global competitiveness, low tax burden, smaller size of government and high openness to globalization are definitely needed for an economy such as Macedonian to move toward the per capita GDP convergence through economic growth which includes flat tax, dynamic education competition, a full degree of openness to globalization, sound macroeconomic and monetary policy as well in order to avoid high public debt, powerful spending and the expansionairy fiscal policy that undermine the competitive performance of the economy in the long run.


Jacques Chirac has demanded that the U.S. sign the Kyoto protocol or else a carbon tax on imports from countries that have not signed the Kyoto accord (the U.S. included) will be imposed. Such an absurd carbon taxation would seriously violate the international trade rules while a unified carbon tax would have a damaging impact on the competitiveness of the EU which is strongly hampered by high levels of tax burden. France is no exception. Jacques Chirac's acts concerning environmental protection are very far from being equal to his words. In fact, Jacques Chirac has publicly supported farmers whose emissions present an enormous amount of pollution. Common Agricultural Policy (CAP) is a statist experiment which protects European farmers against global competition while recent studies have shown that a great proportion of pollution in Europe is caused by dusty disposable farm emissions in the environment which affects clean water and other sources of life as well. It is very odd that Jacques Chirac is voicing so loudly against the countries that did not signed the Kyoto protocol while on the other side, he rampantly stands tall with French agricultural lobby that aims to work on rent seeking through political support. He also conducted nuclear tests in a Pacific atoll back in 1995. Jacques Chirac has aggressively stood against free-market reforms proposed in Europe. He supported harmful protectionist policies and demanded that tax competition is a crime. From this perspective, an enormous amount of budget outlays is contributed to farmers in the form of farm subsidies while on the other side, the story of the most competitive economy until 2010 is becoming more like a turnpike, waiting to be blown away as well as France's poor economy is loosing its cliff on the level of global competitiveness.

Saturday, February 03, 2007


Nearly a year ago, the first posting on my blog was publish. It was about professor dr. Cyril Zebot's heroic life. In Slovenia, the country where I was born, professors dr. Cyril Zebot, dr. Ljubo Sirc and dr. Alexander Bilimovich had left a tremendous legacy of academic and professional economics that had been ripped off and banished when the WW2 and the arise of communism devastated Slovenia's economic potential. Professor Zebot had a vision according to which Slovenia would immediately become an independent, democratic and a sovereign country after the WW2. Historical circumstances had turned differently. Socialism's mismanagement left behind uncompetitive and strongly state-controlled enterpreneurial sector in which joint-ventures, risk-taking and productive behavior had no common place. The economic development under socialism devastated the potentials of Slovenian economy to become one of those small loudly roaring tigers that have had created an economic miracle. In the late 80s, hyperinflation leaded to a negative interest rate through which extensive borrowing and loaning had been made possible while the public debt has been growing largely. One fifth of the Slovenian public debt has been inherited from the tragic legacy of communist Yugoslavia. Professor dr. Ljubo Sirc has emphasized, for example, that in 1939, income per capita level in Slovenia, amounted up to 80 percent of the Austrian income per capita. Today, the average income per capita level is improving comparably, while according to basic dynamic calculations and estimates, Slovenian economy will need more than 30 years to catch the Austrian level of income per capita. Dr. Alexander Bilimovich emigrated to Ljubljana when the communist revolution seized power. At that time, professor Bilimovich was placed among top economic scientists in the world. Professor Sirc has emphasized that professor Bilimovich had been, as an Austrian economist, telling that the theory of value cannot be objective but only subjective on a permanent basis. His book "Introduction to Economics" is an excellent masterpiece and preserved legacy that truly deserves to be examined further.

What does this has to do with my blog? Referring to the content, February 2006, was the beginning of my blogging venture. The amount of ideas connected with free market economics, macroeconomic policy, microeconomic spots, tax reforms, management and business, globalization, free trade, international economy, monetary trends and libertarian challenge, simply needed a place where all those freshly breathing ideas would be posted, written and well seen. When I opened my blog I could not imagine that one year after the opening, the blog would have so many visitors on a daily, weekly and as well as monthly basis. 459 000 visitors since February 2006 is a success I haven't dared to think about actually. January Rankings of the Honor View showed that Capitalism & Freedom had been the second most oftenly rated progressive blog in Europe. In February, the blog has been ranked 5th. There are significant names on the ranking such as Mises Institute and Stefan Karlsson. In the field of free-market economics, Capitalism & Freedom is ranked 14th among top 100 blogs in this industry. The blog suddenly shifted up to 10th place on the rank of top blog sites. I couldn't believe this is real in less than one year.

Success demands challenge and challenge demands productive behavior. This is tightly gripped to developing blog marketing strategies through which high rates of visiting are exercised. In essence, the question wheather blog establishment works or fails can be compared to the question that is usually common among marketers and strategic managers. Marketers ask wheather how product development strategy will reach target customers while strategic managers ask wheather strategic capital business models will suit the long-term sustainability of the firm in an ever-changing business environment while bloggers ask what kind of particular strategy shall be used in order to meet success and hot-shooted inflow of frequent and incoming blog visitors. A good blog neccesarily includes the value of quality which is only one tool of an efficient mapping strategy. The value of quality is basically referring to the content of the blog while design and graphical sophistication play a crucial role as well. The analytical effects can be seen through instrumentalism especially in the field of free-market economics blogs. Strategic approach to suffcient writing is no longer applied to the demand for extensive writing. It is applied to excellence, elegance and innovation respectively. In the field of doing blogging in free-market economics, direct mailing of the posts is no longer efficient as well. Target marketing demands spontaneous fractions of the content to develop. Direct mailing is inefficent in its intention because it is, by empirical notice, a typical signal of massive advertisement. Instead, innovating blogging could be reached through interactive content upon which each blogs gets a profiled value. Think about hotmail's success. There were no heavy and massive advertisement on the internet and TV about hotmail. Its success is largely a part of the new approach to consumer behavior of the 21st centuty. Hotmail has been a triumph of innovation. It satisfied the need of web visitors for having a free email account. No propaganda was used, because Hotmail's venture grew significantly as it emerged innovatively. The same applies to blogging. Basic blogging when extensive writings are posted will hardly find its grail of growth in the future. Actuality is the first pillar of the blogging venture success. Marketing strategy is of a vital importance in this particular case because it largely determines the outlay of the blog and the frequency of visiting as well. Actual headings are factually the fundamental basis to which blog popularity is attached. Excellence is the second pillar of the blogging venture success. Of course, the basic question is how the excellence can be achieved. A reasonble length of posts and clear post messaging are perhaps the most needed requirements. Productive writing is the third pillar of blogging venture success. It simply means that content should be made attractive, courious, interesting and research based. For example, when you post how the strategy of the Celtic Tiger galvanized Irish economic transformation, you cannot expect the post to become popular if there're no additional sources referring to the title of the posts. By them, I mean mostly movies, newspaper articles, citations and every-day life events. It's different when you post something a little bit more research supported and scientific while it is harshly illusionairy to expect visitors' boom and blog popularity when research supported writing and popular methods are blended. Both can create a value of quality when in a separate order. I learned that very much during the first period of blogging. The fourth pillar of successful blogging venture is innovation measured through blog market awareness about the product - about your blog. In a global economy, Zipf's law (the winner takes it all) has become a part of our rational expectations through which we adjust our decisions to external shocks. Thus, innovation-based blogging is most likely to become the future of successful blog. Innovation usually waves chain reactions where the followers are running for the idea of its founder. That's a simple case study of Zipf's law. Innovation is based on ideas while ideas spread around like viruses. Ideas are the key to unleashing the epidemics of the innovation. Being innovative and putting innovation into blogging comes out as an output of successfully established blogging venture. Blogging creates power as trading with ideas yields high marginal returns and powerful revenues that reflect a successful blogging venture case.

Winston Churchill once said:
"We shall defend our island, whatever the cost may be, we shall fight on the beaches, we shall fight on the landing grounds, we shall fight in the fields and in the streets, we shall fight in the hills; we shall never surrender."

Pursuing greatness always demands responsibility on the first place. Without free market, it could hardly be possible for blogging to reach such a tremendous success. An important contribution to my personal inspiration (writings, articles...) for blogging present professors Milton Friedman, Gary S. Becker, Robert J. Barro, Greg Mankiw, Friedrich August von Hayek, Gordon Tullock, James Buchanan and Mart Laar, Daniel J. Mitchell, Johnny Munkhammar, Seth Godin, Joe Girard, Malcolm Gladwell, Donald Trump, Michael Sexton and others who gave me a very much needed boost to start posting my ideas, views and observations on the blog. I hope that in the future, you, the visitors from all around the globe will feel comfortable on my blog as you're the one who rate the quality of the venture in which I enjoy very much.

Thank you.

Rok SPRUK, Capitalism & Freedom