THE QUALITY OF BUSINESS LOCATION: THE CASE OF SWISS CANTONS

Credit Suisse recently published a research paper (link) where it's been shown that Swiss cantons with lower tax burden and improved regulatory environment are therefore more attractive as locations for doing business (link). Cantons Zug, Zurich and Obwalden got the highest score. Although tax rate structure in Zurich is not among the lowest in entire Switzerland, Zurich's high score can be explained by the fact that there's a high-quality access to demand linkages that certainly boosts the quality of Zurich as business location despite relatively high personal and corporate tax rates. In more distant cantons, tax competition certainly plays a bigger role since creating a business environment friendly oriented towards incentives to work, save and invest is a primary tool that boosts the locational quality of the region regarding economic outlook and the quality of the particular environment for doing business.

KENNEDY TAX CUTS IN 1960s

Here is how JFK explained the benefits of tax reductions that he implemented in 1960s.

TAX RATE REDUCTION IN GIBRALTAR

Tax-news.com recently reported that Gibraltar's government eventually decided to slash the corporate tax rate from 33 percent to 12 percent by the beginning of 2010 (link).

ARGENTINA'S PUBLIC DEBT SHOT UP TO 56 PERCENT OF THE GDP

From FT:

"Argentina’s debt levels are now higher than they were when it crashed into the biggest sovereign debt default in history in 2001, and a worsening crisis of confidence in the government has brought the spectre of a new default closer, a report to be published next week says. Despite a radical restructuring just three years ago, public debt has reached $114.7bn (€74.4bn, £59bn), or 56 per cent of gross domestic product, compared with $144.2bn, or 54 per cent of GDP, in 2001 – at a time when Argentina’s economy was much larger – according to the paper. Martín Krause and Aldo Abram, directors of the Argentine Institutions and Markets Research Centre at Eseade business school and the report’s authors, also found that if the amount owed to bondholders who did not accept the 2005 restructuring and are suing to recover their money is included, Argentina’s overall debt rises to $170bn, or 67 per cent of GDP. “We’re not teetering on the brink of default but if we continue down this path, with this level of [social] conflict, we could get there,” Mr Abram told the FT. Many developed countries, including Italy and Japan, have higher ratios of debt to GDP but Argentina’s higher borrowing costs and rocky institutional record make it harder to secure credit. “The worry is not the amount, it’s that we won’t have access to credit,” Mr Abram said. The six-month-old government of Cristina Fernández, the president, has been struggling to resolve a conflict with farmers after it imposed a sliding scale of export tariffs on key agricultural exports in March. The unrest has spread to truck drivers, who have mounted roadblocks to demand an end to the farm dispute, which has disrupted grains transportation. Their action has caused fuel shortages and will put further pressure on inflation, which the government is widely accused of trying to conceal with doctored data. Meanwhile, the government must this year find $14.6bn for debt servicing, plus $11.8bn next year and $10.5bn in 2010. However, the threat of legal action by bond holdouts bars Argentina from international capital markets whilst it remains in default with the Paris Club of creditor nations, to which it owes $6.6bn. Argentina has increasingly turned to Hugo Chávez, the Venezuelan president, who has bought $6.4bn in bonds in the past three years. But its international financial isolation is costly – Buenos Aires has had to pay Venezuela interest rates of up to 13 per cent, yet it cancelled its low-cost International Monetary Fund debt and the Paris Club debt only costs 5.3 per cent, Mr Krause said. By contrast Brazil, which had a far worse debt profile than Argentina in 2001, recently achieved investment grade and sold a 10-year bond at 5.3 per cent."

PRICE CONTROLS DON'T SOLVE RELATIVE SCARCITY: THE CASE OF MEXICO

Financial Times reports that Mexican government decided to impose food price controls in response to an increase in food prices. It will be interesting to see the situation when the laws of supply and demand take place.

INFLATION IN ASIAN ECONOMIES

Financial Times has a brilliant analysis regarding inflationary pressures and the surgence of macroeconomic instability in Asian export-driven economies (here).

REGULATION AND ENTREPRENEURSHIP

Kevin Hassett of the American Enterprise Institute recently published in article (link) in which he explained why there is a negative correlation between high regulation of entry and entrepreneurship. Two economists, Silvia Ardagna and Annamaria Lusardi examined survey data collected from 150,000 individuals in 37 different countries and showed that the amount of opportunity entrepreneurs is the highest in countries where there is less regulation of entry. For example, the United States has the highest share (8 percent) of opportunity enterpreneurs and the fewest regulatory entry barriers, after Canada and Denmark. On the other side, Spain, France, Belgium and Slovenia have the lowest share of opportunity enterpreneurs and unsurprisingly many regulatory barriers of entry.

CHILE'S ECONOMIC MIRACLE

OECD - ECONOMIC OUTLOOK 2008

AUSTRALIA'S ECONOMY GROWS FAST

In the latest quarter, Australia's economy grew 0,6 percent - twice as fast as the economists forecasted - continuing 17 years of rapid economic expansion. Economy's growth records may force the central bank to raise interest rate to curb inflationary pressures (link).

HOW WOULD EMERGING MARKETS SURVIVE MACROECONOMIC CRISIS

Bloomberg discusses how emerging markets would survive an economic crisis (link).

AGEING POPULATION IN JAPAN

From WSJ's Real Time Economics (link):

"Japan’s finance minister, Fukushiro Nukaga, suggested a way to alleviate the country’s strained finances as its population ages rapidly: Work till you’re 70. Japan is already the world’s oldest big nation, and between 2005 and 2020, the number of Japanese aged over 65 is forecast to rise to about 36 million from 26 million. Meanwhile, the number of working age Japanese will shrink to 74 million from 84 million. That is already hurting economic growth, and is expected to have an even greater effect in the future. Japan’s productivity — a measure of how much each worker produces — will rise a healthy 2.2% a year between 2009 and 2013, according to a forecast by the Organization for Economic Cooperation and Development. But the shrinking workforce will strip 0.7 percentage point from that, leaving the country with just 1.5% annual growth. “We are at a historic turning point,” Mr. Nukaga told a news conference Wednesday. While output growth is slowed, more people are living off pensions. Japan over recent years has already introduced some changes designed to make its pension system workable. Between 2000 and 2025, the age at which men can receive their full pension is being raised from 60 to 65. (The changes affect women five years later.) Pension premiums paid by workers are rising. This still isn’t enough however. Other ways to alleviate the problem, he said, could include allowing a greater number of foreign workers in Japan, which has traditionally not allowed large-scale immigration."

CUTTING THE CORPORATE TAX BURDEN

Greg Mankiw (link) recently wrote an article (link) published in The New York Times (link) discussing the possibility of a cut in the corporate tax rate as recently proposed by the economic advisers of John McCain. While John McCain has some doubtful and economically questionable proposals, such as the extension of gas-tax holidays, his economic advisers recently proposed a cut in the federal corporate tax rate from 35 percent to 25 percent. While the suggested proposal has been harshly criticized by economists such as Brad DeLong (link), the proposal deserves an open discussion about the consequences of the corporate tax rate.

The most frequent mistake that has been grasped repeatedly by the mainstream media and intellectual elites is that corporate tax is actually paid by the corporation itself. Despite the soundness of the argument, it is false. Corporations are likely to be tax-collectors than taxpayers. Why? For example, if you own equities and securities, than corporations shift the burden to consumers, hired labor and stockholders. An increase in the corporate tax rate potentially reduces capital investment. In turn, a corporation levies the burden by cutting total costs of labor and services. Consequentially, corporate equities and stocks are hampered by a higher relative weight on potential returns. Also, a significant amount of empirical research, including Randolph's 2006 study (Congressional Budget Office), has confirmed that the major share (70 percent) of the corporate tax burden is beared by the labor force. Researchers at Oxford University (Arulampalan, Devereux, Maffini) examined the effect of the corporate tax in 50,000 European companies in nine European countries. They found that, in the long run, a $1 increase in the tax bill reduces the real wage at the median by 92 cents.

The opposition to the cut in corporate tax rate often includes arguments such as the loss of tax revenue and the reduction of real wages. However, none of these arguments is based on empirical observations. In the short run, there are numerous static assumptions claiming that the revenue may fall precisely. However, the reduction in corporate tax burden would result in a stronger and less volatile stock market. In turn, that would boost capital investment respectively which would lead to higher productivity growth. A basic consequence of productivity increase is the increase in real wages and a drop in consumer prices. True, part of rhe revenue loss may be covered by an increase in other taxes such as gasoline taxes. But have there been any confident estimates showing that the revenue may really decline?

An additional and truly important measure to decrease the corporate tax burden is lowering government expenditure, both in absolute in relative terms. According to experience, the net effect of lower government spending is an increase in the growth of real productivity as well as stronger stock market that would boost investment and reduce volatility of the stock market itself. Also, lower government spending would result in higher output growth as well as it would have significantly positive welfare effects on prices, wages and employment.