SETTING THE STAGE TO SOAR FUTURE ECONOMIC GROWTH

It seems that U.S. Congress is captured by an unwillingness when it comes to shift from social security programs to ownership-based retirement programs. U.S. Congress actually made a huge failure due to permanently maintain tax reforms that would eliminate the death tax and cut marginal tax rates on capital gains and dividends. In the U.S., the economic growth has been higher for most of the decades than it was overseas. But also editorial pages have been enriched with the words from Milton Friedman and other Chicago guys. They firmly set the intelectual foundation for an economic policy based on low taxation, market competition and individual ownership. However, today you won't find those words written in English. Instead they are printed in Estonian, Hindi and Spanish as well as in other languages where policy-makers decided to shift the wheel of economic policy towards the implementation of free-market ideas. They have been, of course, successfully implemented. It was amazing to see how the idea of Private Retirment Accounts (PRA's) exploded in South America. Chilean labor minister Jose Pinera boldly ran the Chicago vision back in 1981 and the results of this encouragement are still seen in Santiago today. Chile's current national saving rate accounts 21 percent of the GDP. Following the Chilean example, at least 30 other nations followed that way, having replaced benefit pension systems with individual ownership and personal control, including countries such as Denmark and Sweden. Former communist nations in Eastern Europe also enacted pro-growth and free-market economic reforms, wathcing their economies setting the path for future economic growth. Simple, dynamic and low-cost flat tax codes encourage people to work more as well as to expand economic activity more rapidly. Recently, Estonia has reached the edge of economic growth soaring over an amazing 10 percent. In the past six and seven years, the rates of economic growth in Baltic countries, including Latvia and Lithuania, averaged 8 percents consistently. Seeing the situation today, more than 9 countries have adopted the flat tax code, including Russia and Romania. Conversely, the U.S. Congress consumes its days. Instead of debating how to cut public consumption rate and improve macroeconomic situation, Congressmen are rather busy with intensive debates on how to impose taxes on energy profits. While America is still the greatest pillar of newly-born ideas, it is not the leader in tax competition anymore. The U.S. federal tax code is grasply written on 66 498 pages, adding $265 billion compliance costs. Currently, the U.S. Government is facing a long-term problem of how to cut unfunded liabilities in retirement systems such as Social Security and Medicare. Those programs amount to $80 trillion. Therefore, work force is facing a shrinking benefits and higher tax rates while Congress still remains unwilling to impose serious reforms to cut those benefits and provide a decent and sustainable way of living to thousands of Americans in the future. Giving workers the right to choose ownership-contribution retirement system would helpfully replace current massive debt, giving individuals real ownership and control would ensure and secure better financial future for each member of the big hub, namely "taxpayers". Continually prolonged retirement systems based upon massive outlays for Social Security and Medicate programs would, on the long term, result in higher tax rates on income and capital gains, higher public debt while economic growth would start to push the economy towards falling off the cliff. The consequences of this way of spending and economic policy-making would be painful for everyone. Rising taxes on labor and capital formation would cause capital flight, economic contraction and high unemployment. As an output of "socialized results of production" there would be no means to boost productivity and create more value-added goods and services in order to create a society based on soaring productivity through hard-work and anticipated innovative behavior. Other nations have prospered from economic policy based on economic freedom. Global financial markets are about to judge the efficiency of economic policy, not flashing cameras around the enemies of progress and development. If policy-makers in countries such as the U.S., Slovenia, Italy, Germany, France and Spain will not undertake serious structural reforms capital and investment will quickly fly to other nations where the ideas of Chicago economists work and where economic freedom coupled with low rates on capital and income taxation soundly works as future prosperity peaks and opportunities flourish.

SINGAPORE - THE FINANCIAL OASIS

Singapore has made significant economic progress based upon favorable conditions for incoming financial institutions that set-up their assets in small Asian city state such as Singapore. In fact, the economic and financial policy coupled with low corporate tax rates and comparatively modest fiscal burden has created very stable financial environment for incoming capital flows and foreign investors as well. However, Singapore went ahead of other global competitors. Its recent measures were done in order to revitalize the financial marketplace. Policy-makers in a small and highly competitive Asian city decided to furtherly adapt banking secrecy laws, much of its tax and trust policy in a recent drive to reinvest itself. Nowdays, investors in banking industry usually take a closer look at country's secrecy laws, taxation on interest bearing and capital gains and taxation in terms of residency and trust policy. But this is generally speaking not the entire framework of sets of decisions. Investors also pay attention to other general banking measures such as set-ups and set-up speed of banking operation and of course regulation as such. One of the very first measures was to boost banking confidentiality laws by imposing a sentence of $78,000 USD for disclosing information. Singapore has also amended its trust laws to allow incoming foreigners to move away from European state interference which dicatates how inheritance is being carved up. Singapore also completely slashed taxes on profits from foreign investment earned abroad and finally reduced corporate tax burden to attract more dynamic businesses. Singapore has therefore followed the example of many Swiss cantons which also adapted similar measure to foster competitive markets. Unlike in European countries, tax evasion is not a criminal act unless proof of sharp practice is found. Singapore managed to foster more growth by bringing more foreign investors into a small cherry-flavoured Asian tiger. These parts of measures have been very favourable and along with other attractive features, those parts are about to fit the competitiveness of Asian financial markets. Unlike in European countries, in fostering growth and developmental progress, Singapore relied on global financial integration by taking various examples in financial capitals such as London, Tokyo, Sydney, Hong Kong and Zurich. The combinations of measures in each of these examples will result in a higher and more rapid growth of Singapore's and Asian financial markets because businesses itself will be able to rely on sustainable options of crediting and other alternatives to continue an amazing move-up of Singapore's growth of entrepreneurial activity particulary in areas which require strong support from the financial industry. But this is not the end of the story at all. One of the Singapore's main strengths is highly sophisticated infrastructure modelled specifically on creating the ambience in order to invigorate and recreate this small and hopefully Asian peer. One of the foremost infrastructural achievements of Singapore has been converting salt water marina into a fresh water lake. One regulation did not transfer ti Singapore - European saving-tax directive imposed on Switzerland by the European Union. This particulary tax law is levied on Swiss accounts of foreign nationals on behalf of their resident countries to counter tax evasion. However it would be a little bit too soon to expect rapid capital flight from Switzerland to Singapore, emptying from Swiss accounts into Singapore's. Turning the issue to Switzerland, there're definitely some investors who have problems with withholding tax. Will this lead to a major capital flow? Perhaps only a little bit. To make this happen, there should be a big thing that moves the needle. Switzerland will definitely not capture future growth market to the extent that once used to. Swiss banks are still setting-up in Switzerland so the government still benefits through greater revenues as a result of low taxation of corporate income and capital gains.

*The indicators describe three dimensions of investor protection: transparency of transactions (Extent of Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection.

Source: World Bank, Doing Business 2006

DYNAMIC CAPITALISM

Edmund PHELPS, this year's Nobel Laureate has publish perfectly pin-pointed opinion on the superiority of modern dynamic "laissez faire" capitalism over the so-called social market economy which has primarily taken origins from archaic German and French corporativist models. Institutional protection of interest groups and rent-seekers is now paying the price. Economic growth rates are sluggish, job-creation rarely finds itself productive while international competitiveness of those welfare-based economies (Germany, France, Italy, Slovenia) is falling off the cliff. I recommend you to read the opinion of Edmund Phelps.

"The issues swirling around capitalism today concern the consequences of its dynamism. The main benefit of an innovative economy is commonly said to be a higher level of productivity--and thus higher hourly wages and a higher quality of life. There is a huge element of truth in this belief, no matter how many tens of qualifications might be in order."

- Edmund Phelps

HONG KONG'S LAISSEZ FAIRE POLICY - TOO GOOD TO LAST?

The story of Hong Kong had been the tale of roaring tiger as a shining example of economic freedom. At the end of World War II, Hong Kong was a dirt-poor island with a per-capita income about one-quarter that of Britain's. When laissez-faire economic policy of positive non-interventionism was adopted, Hong Kong’s territory started to wheel the new era of prosperity and business freedom. Hong Kong began to boom. That was a striking demonstration of the productivity of freedom, of what people can do when they are left free to pursue their own interests. In fact, Hong Kong's remarkable achievement, seen in a rapidly growing economy, benefited its neighboring countries as well. It boosted them to move away from central-planning and move towards the reliance on private enterprise and free-market. As a result, both, Hong Kong and China benefited from rapid economic growth. But Hong Kong's current leader Donald Tsang has recently declared the death of the policy on which the prosperity of small and up-beating tiger had been built.

Milton Friedman, the 1976 Nobel laureate in Economics and the most influential economist of the 20th century bemoans the latest Hong Kong's political shift toward governmental interventionism and statist approach that is forgetting the lessons of the policy that lead Hong Kong toward the miracle of free market. You can read it here.

MASTERING LIBERTARIAN WISDOM

Tomaz has published a great post that gives youthful population very helpful advice about the way of how the youth should look forward to the future. Don't miss that and read the post as quickly as you can.

"Slovenia is a land of contradictions, an Alpine paradise for pensioners with extremely hostile environment to the youth. They are enchained to be forced to pay high progressive taxes that don't take assets into account as well as they're compelled to high prices of real estate. They will sweat longer than current pensioners ever did, they will pay higher social security contributions and at the end they will receive lower pensions. Those who're thrown into the wheel of life without backup basis are only able to create wealth and welfare on their own account respectively. Closer they reach the point of their objectives, more they are pushed to the ground with progressive taxes. The outcome of "socially egalitarian" order is that people spend more time on the workplace and rarely decide to start taking care of themselves as well as they rarely decide to start creating their own families ... And remember, if you're a liberally minded individual living in Slovenia, don't get despaired. Instead, keep on finding the way of how to be liberal within the current system.

ITALY'S TAX HIKE

It seems Italy's going to plunge into another serious economic downturn by increasing income tax rates. The country is captured by a fairly unstable macroeconomic situation. Public debt (measured as a percentage of GDP) is the highest in the Union. Italian leftist policymakers chose to cut country's 4,2% budget deficit by increasing tax rates instead of cutting spending habits. Although the budget reduces payroll taxes by EUR6bn in 2007 and EUR9bn in 2008, income taxes are raised immediately by EUR33.4bn, mostly through an increase in the top rate of tax from 41% to 43%, and lowering the floor for the top rate from EUR100,000 to EUR75,000. Lower bands are adjusted to favour the less well-off. This amounts to a savage attack on the middle classes, and is presumably exactly the opposite of what needs to be done if Italians' notorious under-declaration of tax is to be brought under control. Prodi announced measures to punish professionals who don't declare all their income; but successive governments have totally failed in this endeavour and there's no reason to think that the new one will be any more successful. It is completely impossible to create economic growth by increasing taxes and uncutting government spending. Italian general economic picture is everything else but favorable. IMD ranked Italy's Competitveness even below its neighbour Slovenia. Foreign investors face enormous restrictions on operations and ownership as well. Economic freedom of Italy is miserable. Together with France, the country's economic freedom has been kicked-off far below the level of the most competitive economies. Fiscal deficit is huge. Labor market amount indispensable rigidies that produce difficult practices of hiring and firing workers. It takes more than 500 hundred days to enforce contracts while venture capital funds are rarely availible. New tax increases proposed by Prodi's government will make this problematic situation even worse off.

REVOLTING HUNGARY

But this was before Europe's deficit fetish spread to Budapest. This past June, concerns over Hungary's public finances came to head given Euro currency adoption requirements, which stipulate a budget deficit of no greater than 3% of GDP. Hungary's deficit is expected to be 10% of GDP this year. As a result, an austerity package aimed to please Brussels at the expense of Hungary's growth outlook was pushed through parliament. The package, which raised taxes and cut spending, was passed in July and Gyurcsany's popularity has been on the decline ever since. The tax increases included an introduction of a 20 percent capital gains tax, the introduction of a bank tax, along with hikes to the VAT, personal income tax and corporate tax rates. Meanwhile, the administration cut social welfare spending and ended free public education. The policy combination was a political double whammy for Gyurcsany.

THUMBS UP: NETHERLANDS TO CUT CORPORATE TAX RATES IN 2007

The Dutch government has pledged to increase the amount of budget budget surplus next year through continually evaluated reductions in corporate tax rates. The rate of corporate income tax will be put down 25,50% in 2007 from 29,1%. This will put Dutch corporate tax rate below the European Union average.

WORLD ECONOMIC FORUM: GLOBAL COMPETITIVENESS INDEX 2006

This year's Global Competitiveness Index surprised many economists, managers, researchers, scholars and other people as well. Two years ago nobody could think of Swiss economic tiger on top of the Global Competitiveness Index issued by World Economic Forum.

Switzerland is truly the embodiment of the success story. The country has preserved its political neutrality for a long time. Aided by peace and neutrality Switzerland had almost no problems in facing challenges in the global economy. The country's institutional order is very sufficient in terms of protecting everyone's wealth and income when he enters the market. Milton Friedman, Gary Becker and Douglass North have defined solid protection of private property rights as a key element of the economic freedom. Heritage Foundation's Index of Economic Freedom firmly placed Switzerland among the freest economies in the world. Long years of stable politics and stable currency, relatively low taxes, secure financial system and many incentives for incoming investors have made Switzerland an attractive investment destination especially for small manufacturing firms. Larger businesses are internationally highly competitive while agricultural businesses are small and economic policy has insisted on largely protecting them from foriegn competition.




Despite of brilliant innovation performance, Swiss consensus-driven business and political system retard further economic growth. Similar distorsions could be seen in Germany, Italy, Austria and Slovenia. Several years ago, Switzerland has announced its intention to pursue free trade agreement with the United States. We hope that this comes true. Switzerland favors a moderate trade policy, far from being a protectionalist economy. Only restrictive agricultural trade policy is varying aside from this. Nearly all agricultural products are subject to strict import duties and variable quotas. Protectionist agricultural trade policy lowers the level of Swiss economic globalization. Relatively low taxes are an important aspect of producing incentives to acelerate more productive behavior and efforts in order to work, save and invest. Current top cantonal income tax rates is 35% while top cantonal corporate tax rate is equal to 23%.



A little bit worrying is unusually high public expediture rate (36% of the GDP) setup by the government. Bernanke, Mishkin, Laubach and Posen (1999) report that Switzerland adopted inflation targeting in December 1974. The desire of the monetary policy was to coordinate the inflation expectations of the public with policy objectives of the central banks. Monetary targeting has been quite flexible in practice. Switzerland announced a point target which arguably doesn't give the public the false impression that money is controllable over a narrow range. At the beginning og 1975 Switzerland was about to enter the worst recession in postwar history. The oil shock had triggered a downturn that must already have been under way. Although the Swiss franc helped to absorb the inflationary impact of the shock, that impact posed a serious threat to the Swiss export sector, which constituted about a third of GNP at the time. During 1975 exports of merchandise fell by 8% in real terms. Moreover, though subdued growth in real wages supported the Bank's fight against acelerated inflation, it also contributed to a sharp decline in real consumption which was worsened by a significant outflow of foreign workers. The money-targeting initiative did nothing to ease the high costs of Switzerland's disinflatio, nor did the Bank suggest that the targeting would provide a coordinating function for wage- and price-setters that would lower that cost. The adoption of a target was intended to cap inflation expectations by indicating a policy commitment and nothing else. Today Switzerland's annual rate of inflation from 1995-2004 is 0,77 percent.


Institutionally, Switzerland may be one of the best protectors of private property rights due to secure contratual agreements and high quality judiciary. According to World Bank, it takes 22 procedures, 215 days to enforce contracts on the whole. The cost of enforcing contracts is 11 percent of the debt which ranks Switzerland on the 9th place according to the flexibility of enforcing contracts. Switzerland is very open to foreign investment with some restrictions on ownership participation in certain sectors as well. Banking system is secure and offers a wide variety of financial products. Approving credits and loans is allocated on market terms. Aside from extensive regulation practices, informal business sector participation rate is among the lowest in the world according to Transparency International.

Components that led Switzerland to the top of Global Competitiveness Index were performed successfully. Infrastructure is one of the most sophisticated in the world. It presents one of the foremost requirements for good conditions in order to pursue economic growth and long-term economic development. Macroeconomic picture is a little bit off the anchor but macroeconomic forecasts for the future predict improvement in that way. Higher Education and training institutions offer excellent education opportunities while the cooperation between universities and economy returns profitably and produces excellent output in terms of knowledgeable achivements. Market efficiency and efficiency enhancers successfully derive the problem of business sophistication, as well as of technological readiness.



Other countries showed randomly mixed performance. Traditionally competitive Nordic economies scored very well. Sweden and Finland topped right behind Switzerland. The main drivers of Nordic formula for success are a very sound financial system, strong protection of private property rights, quickly enforced contracts, high R&D expeditures, excellent education system, technological readiness and above-averaged rate of market efficiency and other efficiency enhancers.

Read more:

WEF, Global Competitiveness Index 2006,
Forbes, Global Competitiveness Rankings,
Forbes, The World's Most Competitive Countries 2006,
International Investing Guide

IT'S TRUE

Read Trump's recent post discussing the issue of cheating on college. Here.

SWEDEN: MAKING ROOM FOR IMPROVEMENT IN ECONOMIC PERFORMANCE

The victory by Sweden's Conservative coalition in the September 17 general election was its first since 1991, and as the outcome became clear on a crisp fall night, it triggered ecstatic celebrations. Young people even stripped off their clothes and cavorted in the fountain at Sergels Torg, the gritty center of Stockholm.

Radical economic reforms are inevitable for Sweden. Free-market policies based on the continually-adjusted improvement for pro-business incentives will likely be the main platform for chargining up already strong economic growth (4,2% of GDP). Business sector needs to be free of rigid regulation in order to be more flexible in terms of faster hiring and firing of productive workers. If new promises are kept then small and medium-sized enterprises will be in for a better and freer ride in the future. Long-term prospects of economic growth should also get boost but it's quite impossible to say how much.

One of the most paramount concerns of current Swedish economic picture is very high unemployment. Officially its rate is equal to 5% but other resources are saything that actual Swedish unemployment is about 7,5% of the capable working force. Other sources are counting Swedish unemployment above 10%. By cutting taxes, employers pay wages to employees and trimming high incomes employers face difficulties in hiring the most productive participants in the labor market since employers are facing heavy burden with gradually imposed income tax rates on those labor force whose contribution to progress and change in dynamic environment is essential to dynamic business and growing economy as well.

Sweden should immediately cut some of very irrelevant elements of welfare state. Taxes on luxury should be immediately dismissed in order to encourge dynamic and productive entrepreneurship that will evaluate agendas for strong global growth. Swedish tax system is definitely one of the foremost disincentives to save, work and invest. Current Swedish system is geared toward stopping wealth instead of stopping poverty. In the 20th century Sweden succeeded in terms of strong economic growth and remarkable level of economic freedom. This enabled strong growth upon creating wealth. After Sweden was getting richer, it was more capable for spreading strong welfare-spending habits. On the opposite, marignal tax rates grew as well. Punitive taxes are now a serious threat to country's overall competitiveness. Sweden enjoys many benefits from sections such as excellent education system. If Mr.Reinfeldt's promises are kept country should progress faster towards massive privatization of state hospitals to private companies. It's essential to improve the efficiency of health-care system. Large public spending habits in health care invariably result in less efficiency compared to invested resources. Welfare state means a warfare state. Private welfare is what creates prosperity and wealth. In order to have welfare policy-makers need to adopt pro-growth and pro-business reforms outputting in people who are able to save, work, invest and take part actively in entrepreneurship and business.

Mr. Reinfeldt should avoid gradualist approach to economic policies and immediately remove government intervention completely. Costs of adopting free-market reforms are not lower than costs of gradual advancement in careful and slow-moving imposition of economic policies aiming to increase stimulative incentives to let free entrepreneurship grow.

In fact, the Scandinavian or Nordic countries are admired across Europe for their ability to combine respectable economic growth with generous welfare programs. A fine-tuning of the model will likely make their approach even more appealing.

The best way to fund tax cuts is to launch hefty, fast and efficient privatization program, floating government stakes in a portfolio of companies including Nordea, a major bank; TeliaSonera, the largest phone company; OMX, the stock exchange operator; and SAS, the airline. The value of these shares is about $30 billion. All of these issues rose briskly on Sept. 18, with the broad Stockholm market up nearly 1%.

It is true that Social Democrats left Swedish budget in surplus but economic performance and overall competitiveness declined. But their policies toward low employment growth and massive outlays for public sector produced disincentives in gearing productive pariticipation. According to Fraser Institute's "Economic Freedom of the World" Sweden, beside Slovenia, has the most extensive public sector spending compared to the portion of GDP contributed to financing public sector. The Swedish krona has already strengthened to $7.24 to the dollar on the morning after the election as investors anticipate higher growth and spending.

Sweden can gain many benefits from flat-rated tax system. Swedish decision-makers should accelerate stopping and cutting public consumption, the growth of which must not exceed the growth of GDP. Lower taxes will encourage people to work on more productive things than seeking loopholes. Investments and entrpreneurial project are not the matter of taxation. They are the object of growth and productivity.

Low taxes, minimal regulation and more flexible labor market are a key to creating wealth and long-term prosperity. Sweden has a great chance to show others how this simple formula works in practice.

INDIA: MORE MARKET, LESS GOVERNMENT

Today's India is one of the most rapidly growing economies in the world, right after China. FDI rules for investors are becoming more and more liberal while real estate investment is booming as well. A stronger financial system would ensure India faster economic growth and higher revenues without high tax rates. Tight government control over almost every part of the financial system is undermining Indian economic growth. To sustain rapid growth of GDP and spread its benefits India needs a financial system that is comprehensively market-oriented. The shortcomings of Indian financial system fall largely on three major areas:



1. Formal institutions attract only half of Indian household savings.

2. These institutions allocate more than half of the capital they do attract to economy's least productive sectors such as state-owned enterprises, agriculture and unorganized sectors. The most productive corporations in India receive only 43 percent of all commercial credit.

3. Since the financial system is weak in both aspects - mobilizing savings and allocating capital - borrowers in India pay more and depositors receive less than in comparable economies.

This huge failures place heavy burden on India's economy; just fixing them would give it an immense boost. Research by McKinsey Global Institute predicted that a coherent program of reforms for the financial system and its institutional framework would add 47 billion to India's GDP growth. This would increase current economic growth from 7 percent to 9,4 percent. This would place India upon current Chinese economic boom. The resulted growth of GDP would be slightly below shy be 30 percent above current projections by 2014. This would lift unexpected number of people out of poverty. Financial reforms are one of the key transformation areas in the process of Indian convergence. Without dynamic and purely market-driven financial institutions India will hardly rely on competitive and innovative entrepreneurship since investors and entrepreneurs would not be able to find proper financial support to their projects. Governmental control and regulation over financial system remains unusually high. Many forecasted reforms suddenly ran out of steam. Change and progress will require strong rethinking of goverment's role in financial markets.

However, without serious reforms of the financial system India will never be able to complete the transition from a poor economy, dominated by agriculture, to a prosperous economic oasis dominated by services and manufacturing. Financial reforms offer a lot of opportunities. In a larger sense, financial reforms are greatly-fueled challenge to put contemporary academic research results and professional recommendations soundly into practice.

PUBLIC SCHOOLS? MAKE THEM PRIVATE, COMPETITION NOW!

It is amazing what competition does for consumers. Those entire businesses scramble to offer us good products at low prices. The power to say "no" to one business and "yes" to another one is awesome.

Unfortunately we can't apply the idea competition to current public schools.

Teacher Unions and bureaucrats are against it. They want to dictate where our kids go to school. The idea of public school as a system of social justice where everyone is harmonized in utopia and where equal opportunities are transferred to every child is actually a big lie that leaves heavy emotional consequences on people's feelings. We're all consumers. We all demand after certain products. If we flow into two stores where retailers offer us Nokia and Ericsson cell phones we analyze the information and let retailers compete and struggle for our attention. The one who offers sound products after low prices the one will win. We're the one who decide which cell-phone we will buy. So do we also demand after good and efficient education for our children? But according to current fiasco of public education we're not so free to choose. If we're not satisfied with courses, lectures and topics our children receive we don't have a choice to send out children into alternative school where we could get better education and better improvement of knowledge our children gain.

However teacher unions and bureaucrats dislike competition in education. Then they are having a monopoly. Subsequently they offer shoddy products at very high prices and the costs are booming as well. It's disgraceful to talk about cost-free education because there's no such thing as free lunch as well as there's no such thing as cost-free education. Taxpayers are paying a big fraction of their incomes to finance government-supported schools. They finance governmental service. They don't finance their children. After each € that is cash-out of their income and transferred to education budget, parents must divide paid euros into thousands of fractions and then they're able to see how little their child gets from their fractional income transfer to the government. There's no such thing as universally cost-free education. You have to pay it either through taxes or directly to educational institution. In fact we all want our money contributed to education to be spent efficiently. And what do we get for this? Public schools with dismal and relatively poor performance is what makes our children uncompetitive with the most productive individuals in countries such as South Korea where the rate of educational enrollment on all levels is the highest in the world and where 65% of all schools are placed in private sector.

Public schools are government monopolies. They are virtual monopolies of the state. They are run pretty much like Cuban or North Korean schools. Public system education operates like planned economy in which everyone's role is spelled out in advance and there are few incentives for innovation and productivity. It is surprise to see how our school system doesn't improve despite an enormous amount of taxpayers' money that is spent in public education. When a government monopoly limits competition, we can't know what ideas would bloom if competition were allowed.

Friedrich August von Hayek, Nobel-Prize winning economist wrote: "Competition is valuable only because and so far as its results are unpredictable and on the whole different from those which everyone has, or could have, deliberately aimed at."

This means that no human being can imagine what improvements a competitive market will bring.

I'll try anyway. I bet we'd see cheap and efficient virtual schools where you learn at home on your computer, music schools and sports schools and who knows what?

Every economics textbook tells you that monopolies are bad because they charge high prices and offer shoddy products. It is government who gives monopolies so why do we entrust something as valuable as children to government monopolies. If parents were not taxed to pay for lousy government schools, more might teach their kids at home.

A vast majority of teachers teaching in public schools have never worked in private sector so many of them don't know how to learn kids the hottest productive and global issues and topics in order to equip children for business, growth, challenge and progress. The outcomes of public schools are functionally illiterate children. That's because bureaucrats delegate how schools must teach children. And they teach them unproductively. They teach them by force and nearly everybody finds schools disgusting. Instead of pouring more money into the failed government monopoly let us free parents to control their own education money. Competition is that small but mighty seed of progress. It is a powerful wheel which bureaucrats can't resist on the long-run. Competition is the solution to save our school from governmentally and bureaucratically wasteful tyranny.

There's no need to prolong public schools. The simplest and most efficient plan is to privatize them completely and let them grow in order to impose some heavily needed innovations and productive reforms. Public education is a failure that needs to be removed by being radically privatized. Planned economy and monopolies have caused a lot of harm, burden and waste. Let's not allow the same to be done with children.

SAVING IRAQ

Steve Forbes writes about monetary reconstruction of Iraq. Read his comment here.

ESTONIA - THE MIRACLE OF FREE MARKET

Click here and see how Estonian economy is skyrocketing.

Estonian GDP growth has risen increasingly fueled with strong domestic consumption and strong growth in export sector. Growth was increasingly reliant on strong expansion in the construction and service sector. Analysits predict continually rising economic growth extending from 9,4 percent to around 10 percent for this year.

FROM COMMUNISM TO KEYNESIANISM

How effective is deficit spending in reviving economic growth? A recent test case of applying Keynesian-style cyclical cures to resolve structural problems can be seen in Japan. Since the end of its "bubble economy", most of Japan's additional public-sector expenditures were financed by deficits. With government spending exceeding 800 trillion yen it was fives times greater than U.S. public spending in the eighties. Despite massive expeditures combined with expansionary credit policies and zero interest rate Japanese economic growth in the nineties was reached at 1,1,%. Tokyo's outstanding public debt arose from 56% of GDP to an amazing 130%. Many credit rating agencies announced much higher figure. Some similarities between China and Japan inevitably exist. Both countires small and medium enterprises are starved out of capital while industrial behemonts are kept alive. Rising incomes and redcing unemployment in both coutries could induce policy changes so a new class of entrepreneurs can be a new sustainable basis of future growth. Even despite high level of saving in both countries, the allocation of these funds is largely inefficient. Japan and China suffer from a lack of a well-functioning domestic capital markets. An obvious problem with bank-lending is the vulnerability to political pressures. Indeed, the politicization of decisions on capital formation is at the core of the serious financial sector problems in China and Japan. Both countries need domestic stock and bond markets that are wider and deeper. Since capital markets require greater transparency and accountability, massive failures are less likely. Restructuring needs to be aimed in Japan and China as well. Proper and dynamic restructuring certainly requires very deep reform of management practices and government involvement in the economy.

Read Christopher Lingel's column here.

FREE MARKETS ARE THE MAIN DRIVERS OF GROWTH, NOT TECHNOLOGY

Many unsophisticated economists believe that technology is the main engine of economic growth but in larger terms this confuses cause and effect of economic growth itself. Technology is a reflection of growth and growth is a function of free markets.

Donald Boudreaux explains this coherently. Read his column here.

ON THE NATURE OF THE CORPORATE TAX

Rado wrote an excellent column on the truest nature of corporate tax and its irrelevance which makes an oasis of rent-seeking for interest groups and political parties. Rado has done excellent work and I therefore recommend you to read the column:

"Let's stop at corporate tax and ask ourselves why we have it. The answer is very simple - to full the budget so that political parties can later finance their support with subsidies and exhaust the budget as well. If this wouldn't happen then we had an efficient health care, pension system would not be similar to the "pyramid game" while education system would not be as bad as it is today when there is no Slovenian university among top 500 in the world. Let us ask ourselves why businesses make profits? To pay their workers for the participation of productive behavior and to finance their development or do businesses make profits in order to finance the voters output and what interest groups count as an advantage..." (http://www.finance-on.net/?MOD=show&id=162395 - only membership subscription required)

POWERFUL

"I enjoy competition. Competition is the essence of business and the essence of life, to a certain extent. In life, you have winners and losers, and often it's a small group of people that seem to be the winners. Some people don't think they're going to win—and they usually don't.

People who win have a certain level of intelligence, but more important, they never, ever give up. I went to the Wharton School and I know a lot of really smart guys. I also know people who weren't as smart but did better. Some of the smart guys just weren't able to handle pressure and sustain the competitive spirit. They gave up.

Failure is a great benchmark. It's something that keeps people successful, because they don't want to fail. I've never failed. I never went bankrupt or out of business. I had bad moments. I hit bad markets. I hit bad times. I also blame myself for certain things. I wasn't as focused as I could be. But the word "failure" is a great thing to think of, because you fight hard not to be there.

I think very positively. The Apprentice became the No.1 show on television. We just finished shooting season six. I said to myself, "It's going to be successful." I do that with deals, too. It doesn't always work out that way, but that's the thought process. You want to stay positive. You've got to back that up with preparation and work. But you have to have the ability to never, ever give up.

I've competed against a lot of very tough people. If I talk about them, they'll come at me to give it a second shot. And I've done very well. There are some very smart, very devious, very sick, very evil people out there in business. And there are some very smart, very competitive and very nice people. I think of myself as being in the good camp.

If you're competitive, you're not competitive in one thing and then you turn into a marshmallow everywhere else. You're competitive in everything. I compete with myself, and in fact I think of myself as my biggest competitor. When will I relax? Maybe when I kick the bucket."

Donald TRUMP on Competition

ECONOMIC GROWTH AND INVESTMENT IN THE ARAB WORLD

Xavier Sala-i-Martin, Elsa V. Artadi: Economic Growth and Investment in the Arab World

FRANCE'S POOR ECONOMY

TCS Daily Column, Au Revoir, Les Entrepreneurs, explores some of the data and experience on weak and collectivist France's economy:

"In 2002 the French lost more than twice as many weeks per worker due to sick leave compared to the US and a recent study by US and European researchers found that the wage and benefits returns to long-term employees in France has since 1976 been consistently lower than in the US. According to the "Global Entrepreneurship Report 2000" the percentage of those who were starting new businesses was five times higher in the US compared to France.
The problem is not only that the French economy punishes the very rich, discouraging them from working and creating businesses - but that it does the same for those with low incomes. The French welfare state creates a high "unemployment trap" for low-wage earners.
An unemployment trap is a measure of the percentage of gross earnings which is "taxed away", through social security contributions, higher tax and withdrawal of government benefits, when a person returns to employment. The calculations are based on a single person without child who earns 67 percent of the average earning of a full-time productions worker in the manufacturing industry. In France the unemployment trap corresponds to around 82 percent - creating a very small economic incentive for low income workers to actually go to work."

HUNGARY IS CAPTURED INTO THE EU PRESSURE, REFRAINING FROM TAX COMPETITION

Hungary's quite successful transformation form Soviet-styled command and controlled economy into largely free market economy has been a great leap forward. One of the key components of advocating liberal economic agenda has also been quite reasonable tax policy with low personal and corporate taxation as well. In fact, Hungary is having second lowest corporate tax rate (16%) in EU, after Ireland (12%). However, the situation is rapidly changing and the country is heading in the wrong way to meet the criteria to enter the EMU. Hungarian Government has decided to get in touch with EU-styled tax harmonization. The proposed plan excludes the possibility of cutting corporate and personal tax rate in the next five years. This clearly misguided economic policy will not improve conditions to attract more foreign direct investment and the flow of skilled workers as well. There is little hope for Hungary to attract more offshore companies. In order to cut the deficit, Hungarian lawmakers imposed higher VAT and higher taxes on business profits. Such a backward economics will have unimaginable consequences. The middle tier of VAT has therefore been increased from 15% to 20% while the plan has also introduced 4% solidarity tax on business profits and personal incomes exceeding HUF 6 million (US$ 27,500). Hungarian officials say that government is considering a shift to more consumption-based taxes instead of taxing incomes. But the thing is not over yet. The agenda included the introduction of 20% tax rate on earned interest and foreign exchange gains as well. The main objective of the Hungarian government is to ensure macroeconomic stability which is now below the Maastricht criteria. Budget deficit equals 8% of GDP and public debt (58,9%) is one of the highest in the EU. But increasing taxes on dividends, business profits, corporate and personal income will not efficiently result in the fulfillment of Maastricht targets. The effective step forward would be to ignore the EU and continually reduce tax rates on both personal and corporate income as well. As companies would be willing to engage in market behavior, wages would go up and as the result of lower tax rates, tax revenues would go up. The government should continually reduce public consumption and budget deficit by paying off the public debt. The currency has lost 9% this year, the third-worst performance by a European currency behind the Icelandic krona and the Turkish lira. As the result of a little bit higher inflation, the interest rate went up for a little bit as well. Next, Hungarian Central Bank should announce the policy of inflation targeting and stop increasing the quantity of money more than the annual output growth (GDP growth) lifts-up. If enacted, the best way for Hungary to meet Maastricht criteria is to cut its spending habits a little bit and to start paying-off the public debt very quickly. The continuation of lowering tax rates would result in more tax revenue, not less. High labor taxes caused Hungary to lose investment opportunities. The state’s role in controlling prices is still very strong demonstrated by the government’s price limitation on privately owned firms. Red-tape regulation is still one of the most paramount concerns. Business licenses are hardly obtainable. Retail businesses still counter a web of burdensome government regulation that makes it difficult to open-up the store. However, there is still a lot to in Hungary to finally reach the macroeconomic stability. But raising various taxes is certainly not the soundest way to pursue fine and reliable macroeconomic situation of the country.

Suggested Reading:

Hungary to refrain from tax cuts through 2011, Budapest Business Journal
Hungary’s businesses and consumers braced for tax hikes, Tax News
Hungary caves in to EU pressure, The Market Center Blog
Hungary's foolish tax increase, The Market Center Blog

A ROARING BALKAN TIGER

Macedonian government, under the leadership headed by youthful Nikola Gurevski, emphasized radical economic reform in its campaign. In fact, Macedonia is the very first country in Balkans to stress the gradual approach to economic reforms and step onto a different path of quick, flexible, rapid and radical structural reforming. Gurevski's plan is to let Macedonia to become "Estonia of Balkans" inspired by youthful and courageous reformers in Eastern Europe, namely Mart Laar and Ivan Miklos. The Macedonia government headed by Gurevski has promised to cut public expediture by 2% of the GDP by 2010. It has promised to cut the red-tape as well. The party plans to implement a flat personal tax rate of 10 percent by 2008 - a turnaround from the current progressive income tax rates of 15, 18 and 24 percent. The tax rate on corporate profits will be reduced from 15 percent to 10 percent and, following the example of Estonia, the tax on reinvested profits will be scrapped altogether:

"In the early 1990s the collapse of the Soviet Union and Yugoslavia meant uncertainty for both Estonia and Macedonia. Both were new and unknown countries on the periphery of Europe. Many Westerners confused the Baltics with the Balkans. Estonia had a sizeable Russian-speaking minority that made up 35 percent of the population. Macedonia had an Albanian minority which was 20 percent of population in 1990 and has now increased to 25 percent. The confusion was not simply due to sheer ignorance. There were as many experts predicting doom for Estonia as there were "sovietologists" failing to predict the collapse of the USSR in the 1980s. A possible ethnic conflict or even a war with Russia was seen as likely. Despite the disadvantaged starting position and ethnic mix, combined with post-socialist politicking, Estonia emerged as a phoenix.

The reasons for Estonia's success remained invisible to the casual observer for years. While Macedonia chose a gradual, stop-and-go economic reform path, Estonia chose a radical and rapid approach by relying on the invisible hand of the market instead of on government intervention. The rapid economic development of Estonia is not just economic achievement: having benefited the Russian-speaking population in Estonia - it has contributed to social peace, as well. Good economic circumstances are less likely to feed social unrest. Indeed, Estonia has not had any large-scale ethnic conflicts, even if relations between the various ethnic groups are far from perfect.

The fact that thinking along those lines has reached the Balkans is a major improvement. Economic reforms do not offer absolute guarantees against potential ethnic conflicts but they will certainly reduce the likelihood of such conflicts. If the new Macedonian leaders run out of ideas and options for the rebirth of the Macedonian economy, they need not look far for inspiration: According to Bangs,- the fountain of youth is located in Macedonia's capital, Skopje - a mere 23 kilometers away (http://www.tcsdaily.com/article.aspx?id=082406A - no subscription required). "

TAX CUT REVENUE REWARDS

Many in the Washington establishment were surprised when CBO (Congressional Budget Office) reported a surge of anticipated tax receipts that will sharply reduce this year's deficit. Of course, those who had been proclaiming the Bush tax cuts would result in big reduction of tax revenues tried to hide their disappointment. In fact, every member of the Congress can clearly understand the pure structure of tax reduction with by lowering impediments to work, save and invest which leads to more explosive economic growth. Bigger economic pie inevitably leads to an increase of tax revenue. Read Richard W. Rahn's Commentary to see the whole explanation of this:

The latest major tax rate reductions were enacted in 2003, and the first three-year results are now in. The increase in tax revenues, as in the previous two experiments, has far outstripped inflation, and the economy is close to full employment. The economy was already falling into recession when George W. Bush took office, and he made the mistake then of giving small tax rebates (which had no positive economic effects) rather than cutting marginal tax rates on labor and capital as he did in the bigger tax cut of 2003. The question is always asked, did the "tax cuts pay for themselves?" If, by "paying for themselves," one means more tax revenue was produced for the government after several years than otherwise would have occurred, we can provide a reasonably certain answer. As noted above, the Kennedy tax cuts led to a very high rate of economic growth and no reduction in tax revenue as a percent of gross domestic product (GDP) over the period (average of 17.6 percent). Therefore, with a very high degree of confidence, we can say the Kennedy rate cuts paid for themselves in three years.

INSIDE CHINA: LEASING INDUSTRY SET UP FOR RAPID GROWTH

China's leasing industry, which has total fixed assets of 51.4 billion yuan (US$6.4 billion) at present, is likely to enter a relatively rapid growth period, as 12 new leasing companies have been approved for operation this year, and a considerable number of foreign-funded leasing companies have also entered the China market. China's leasing industry offers bright prospects for the future since infrastructure required for its development, such as accounting and taxations are already availible in the country. The penetration rate of China's leasing market is only 2% lower than the world average of 17%. The rate has reached as high as 33% in the US and also exceeded 20% in Japan and Europe. Experts hold that the rate should go up to 20% in China. Such a big gap also means a huge development potential.

Read the whole story here.

WINNING WITH THE MARKET'S LOOSERS

If you're a stockholder and would like to the stock company to generate excess returns, how to make investment decisions then?. University of Chicago professor Joseph Piotroski introduced a simple method analysis. He back-tested his research by applying his strategy to stocks using data from 1976 to 1996, and he found that by focusing on the bottom dwellers, he could earn outsized returns. His research showed that during the 20-year period he was studying, his approach would have earned an annualized rate of return of 23%:

Some companies whose stocks have been beaten down by the market are destined to turn from pumpkins to princesses. How does one earn such lofty returns when focusing on stocks that the market doesn’t like? It’s quite simple: focus on companies that are basically solid, and filter out those that stink. You have to separate the wheat from the chaff, as they say, which is, not surprisingly, easier said than done. Further, cash from operations for the current fiscal year must be greater than net income for the current fiscal year, and the long-term debt (LTD) to assets ratio for the current fiscal year must be less than or equal to the previous fiscal year’s ratio. As an additional test of solvency, the current ratio for the most recent fiscal year must be greater than the current ratio for the previous fiscal year (http://www.forbes.com/finance/2006/08/24/piotroski-brunswick-wyndham-in_jr_0825guruscreen_inl.html) No subscription required.

ENGLAND IS HEADING IN THE WRONG DIRECTION

There's actually no wonder why England is falling off the cliff. According to an advisor of Tony Blair, high taxes are necessary to make a nation happy. One can only hope – for Britain's sake – that he is wrong in his assumption that hate-and-envy are compelling emotions for the people of the United Kingdom:

David Halpern, who advises the Prime Minister on social issues, said the redistribution of wealth is the key to a nation's contentment. …Mr Halpern, who works in the Prime Minister's strategy unit, said that people are unhappy if they see others earning more than them. He argues if we want a happier society the Government should reduce the gap between rich and poor. http://www.thisismoney.co.uk/tax-advice/income-tax/article.html?in_article_i d=409205&in_page_id=77

LOWER TAX RATES ENCOURAGE GROWTH IN WESTERN CANADA

A column by Fraser Institute expert in WSJ explains how the provinces in Western Canada are implementing supply-side tax reductions and enjoy a fascinating economic growth and more prosperity:

"Ontario and Quebec once reigned supreme as the economic hub of Canada, but no more. The western provinces of British Columbia, Alberta and Saskatchewan are quickly taking their place. …Western Canadian governments of all political stripes -- from Progressive Conservatives in Alberta to Liberals in British Columbia to New Democrats (socialists) in Saskatchewan -- have reduced marginal personal income tax rates and overall business taxes. The tax policies pursued by western Canada over the past few years are quintessentially supply-side. That is, the tax relief is largely focused on improving incentives for work, savings, investment and entrepreneurship. Alberta led the way in 2000 by creating Canada's only single-rate personal income tax -- 10%. British Columbia and Saskatchewan soon followed by substantially reducing their personal income tax rates. Top marginal rates in these two provinces were reduced to 14.7% and 15%. Compare that to Ontario's top marginal rate of 17.4% or Quebec's 19.2%. Canada's three western provinces now have the lowest top marginal rates in the country. The changes to personal income taxes were matched, perhaps more importantly, by reductions in business taxes. All three governments pursued two broad measures: reductions in corporate income tax rates and the elimination of corporate capital taxes, a uniquely Canadian tax that severely punishes investment and development. …The economic results of tax reform based on improved incentives have been stunning. Over the past three years British Columbia has grown 3.4% a year on average; Alberta 4%; and Saskatchewan 3.5%, all easily outperforming the Canadian average of 2.6% a year over the same period. Growth in the three provinces also outpaced the U.S. national average for the past two years. Among Canadian provinces and the 50 American states, Alberta ranked seventh in growth, British Columbia ninth, and Saskatchewan 17th." http://online.wsj.com/article/SB115586018780838930.html?mod=opinion& ojcontent=otep (subscription required)

YOUR LIBERTARIAN PURITY TEST (Test Libertarne Čistosti)

Have you ever asked yourself how much libertarian are you and never came to the effective conclusion? Now you have a chance to test your purity of being a libertarian. The test is not very complicated indeed. After every »short" question there are only two answers offered, "yes" and "no"

Your Libertarian Purity Test

Ste se že kdaj vprašali v kolikšni meri vaš nazor ustreza definiciji libertarca in obenem niste nikoli prišli do učinkovitih zaključkov? Sedaj imate priložnost, da svojo libertarno čistost tudi testirate. Na navedeni povezavi obstaja zelo preprost test. Po vsakem zelo kratek vprašanju imate na voljo dva različna odgovora, bodisi "da" ali pa "ne"

THE QUALITY OF THE BUSINESS ENVIRONMENT: THE BEST STATES FOR BUSINESS 2006

Economist's paramount concern is always to offer the most productive options in order to maximize the efficiency of economic agents. Macroeconomist is usually finding ways to maximize the efficiency of public finance. From this respect macroeconomic analysis entails constant monetary analysis as well as the issues of corporate and personal taxation. In turn, microeconomist’s general aim is to offer productive options to economic agents on the market (households, individuals) to spent and utilize their resources in the most efficient and productive way. Microeconomist is considering many samples in order to analyze agents’ behavior properly.

Each story of the economic success began at two different and separate levels. The first level is the level of government. Many nations are now adopting pro-growth and free-market policies of low taxation, minimal regulations and flexible labor markets. Estonia is a recent example of a little country that could. Instead of active fiscal policies many governments relied on the monetary issues. The results were impressive. Post-war German economic miracle is a perfect example of pro-growth economic policies. Hong Kong is still a champion in economic freedom. The tiny tiger opened its economy and with the principle of low and fair taxation and non-government intervention embodied an economic story of success. Another level where the story of economic success is measured is the level of firms. In turn, macroeconomic policies largely determine microeconomic decisions of firms and individuals. Where macroeconomic policy is stable and productive, microeconomic results are rocketing up. By and large, incomplete financial markets and the failure of government to commit policy enable government to use active fiscal policy in order to consolidate its power. The outcome of an unstable macroeconomic policy was usually a catastrophic failure seen as (1) a large fiscal deficit or public debt, like in Croatia nowdays, or as (2) a high inflation which occurred because government had to print more and more money in order to finance its budget activities.

However, if firms want to increase their competition on a large market they deserve the highest quality of business environment without setting governmental myths. One of such myths is a myth of trade balance. Accordingly, governments are hardly willing to understand trade as a market. They rather use it as a political weapon. Their soundest and the most emotional appeal to the public is to underpinning “trade deficit” with other countries, striving on every way to come into surplus. But trade balance is largely a result of a market. How do we gain from exports as consumers in the country where export has taken place? In turn, we gain a lot from imports. We wear Italian shoes, drive German automobiles, eat Chocolate made in Belgium, buy large Japanese LCDs, talk to our friends with Finnish mobile phones, hike around with bikes made in Taiwan and prepare a dinner with first-class wine from California. In fact, free market gives us a choice to choose whatever we prefer. Consider a perfect example. You own a company and sell computers. Suddenly, there’s a signal on the market when your customers demand for the latest laptops. You find out that this laptops are produced in China and that it is only possible to import directly from China. So you order the latest 100 laptops and introduce them on the market. According to government officials you accounted a deficit in foreign trade with China. But where is the added value created? Here, in your company. The wholesale company got a cut and after you sold those laptops to your customers, you got a cut.

There is another question. Why some companies can’t compete? Business analysts may tell you reasons. One reason may be an inefficient management, unknowledgeable misinformed and inexperienced executive which could be the major source of uncompetitive company. Another, more actual reason why some companies can’t compete very well is the presence of government in certain areas. Strong and powerful presence of government in businesses usually serves as an instrument of price controls and political allocation in several areas of businesses makes them sister companies of the government. As an economist, I believe that government should be used for something more useful and practical.

Governmental function should take place in reforming business environments in terms of promoting and adopting free-market and pro-growth policies with the privatization of health and social security system on top. The governmental function in the reform process must therefore be applied to improve the quality of business environments. Another extremely important area urgently undertaken to be reformed is the tax policy. Progressive taxes are used to punish the most productive people and to allocate tax revenue according to the political measures in terms of large welfare programs. Charity is a lot better than social security. Social security is a way of keeping those on the bottom in poverty while charity is a way to help those people getting out of bottom in a decent and more productive way. Thus social security is a way of prolonging poverty and there is no more direct way to increase poverty and material decrease of well-being as putting social security programs into practice. Instead of promoting active fiscal policy, government should rather focus itself on monetary issues with inflation targeting policies as a basis of monetary policy including the control of the quantity of money and of the money supply.

Over the past ten years, the United States has seen corporations move job after job overseas in search of cheaper labor. An equally large problem has been the corporate tax rate. Five years ago, the U.S. corporate tax rate of 39% was the sixth highest among Organization for Economic Co-operation and Development countries, according to the Tax Foundation. While other countries have lowered taxes, the U.S. rate hasn't budged, and today it has the highest rate among OECD countries, eclipsing former tax gougers such as Germany and Canada.
And when you start factoring in litigation costs, $250 billion per year or 2% of gross domestic product, it's amazing that any companies stay in the U.S. So, what is a company to do in this high-cost, antibusiness environment? Maybe minimize the damage by moving to a more business-friendly state.
In the latest research conducted by Forbes 50 states were ranked from the bottom to the top according to their performance in six major categories:

Business costs
Economic climate
Growth prospects
The quality of life
Labor
Regulatory Environment



Business costs are essential to the firm. Economic climate often contributes its portion to the business costs. If banking system is inefficient, investors can hardly find a decent source of financial support for future joint-ventures. High and progressive income tax codes could do the unprecedented damage as well. Why should an investor build high-tech facilities in Slovenia where corporate tax rate equals 25% while he can choose Hungary with 16% corporate tax rate? Growth prospects can be decreased if the overwhelming regulation and tax system keep businesses away from putting their potential of growth into practice. If there is no productive labor supply that could ensure future growth of a company, companies will come and go. And if certain business environment is forecasted to grow, more and more fresh graduates will come there and try to give the best of their potential in an environment that grows. The quality of life is a very stimulating area which together with labor determines the mobility, capability and flexibility of workers in their performance. Rigid labor markets and state protection of the labor are the most damaging impacts that reduce the opportunity, choice and mobility as well. Good education score among students ensures companies a good supply of future labor force with highly sophisticated knowledge. Regulatory environment is a considerable area as well. Rigid regulatory codes could force investors to find the opportunities somewhere else. Extensive product market regulation decreases the ability of firms to focus on its market supply and innovation strategy. Instead, investors are often forced to go through thousands of pages of different rules, codes and acts. Inefficient, entrepreneurially hostile and enormously large state or local administration could additionally force investors to move into another place in order to find another place to invest. There would be no new jobs that would bring prosperity, choice and the opportunity for everyone for new graduates and consumers as well.

The outcome of the Forbes research “The Best States for Business” is a useful tool for investors, a sort of a guidebook that concerns where is the best location to do business, reflecting six main categories through which economists and analysts can find new and productive ways of specifying methodology that examines the question of measuring the quality of business environment.

So if you are an investor facing strongly rigid hindrances in the environment where you work I recommend you to come to Virginia where you can find the business environment of the first quality.

I remember how Allan H. Meltzer once perfectly captured the essence of difference between productive and unproductive people when he set the following statement: “The least productive people are those who are in favor of holding meetings.” I think he hit center of the target by telling this very vibrant truth.

LA VIE IMPOSSIBLE

France's government wants the world to know something. According to official figures, French citizens created a record 322,000 companies in 2005 -- and they're setting a similar pace this year. Is France, which invented the word "entrepreneur" but has been famously hostile to the breed, finally helping small-business people thrive?

Read the whole story here.

BERNANKE HAS IT EASY

Emerging markets and interest rates, Economist, Aug 3rd 2006

As investors become pickier, keen to distinguish one emerging market from another, they may begin to see Hungary in the same light as Turkey and South Africa. It too runs a big current-account deficit, which the IMF thinks will exceed 9% of GDP this year. Indeed, on fiscal matters, the comparison is rather to Hungary's disadvantage. Turkey may labour under heavy public debts, but it is at least running a heroic budget surplus, before interest payments, estimated at 6.4% of GDP. South Africa now runs a modest fiscal deficit, but its stock of debt is quite manageable. Hungary, on the other hand, has both high debts (almost 60% of GDP in 2005) and a wide budget deficit. Nouriel Roubini, of Roubini Global Economics, calls it an “accident waiting to happen”.

Read the whole story here.

REAGANOMICS, THE ECONOMICS OF SUCCESS

The economic policy pursued by Ronald Reagan is often called “Reaganomics” or “supply-side” economics. Fortunately, this policy meant a radical cut of Keynesianism where consumption was stimulated with massive government spending. Keynes put the emphasis of economic policy on the demand-side (consumption). Reagan, by contrast, put the emphasis on the supply-side (production). Keynes believed that demand would create supply, but Reaganomics started from the opposite idea, namely that supply would create demand. In this way of thinking, the supply side of the economy (economic activity, production etc…) had to be stimulated in order to create wealth. The best way to do this was to cut the marginal tax rates on personal income. Such a tax cut would create a strong incentive to increase economic activity and would have spectacular effects on growth, investment, risk-taking and saving.

President Ronald Reagan’s stature will grow as his achievements come to be more widely recognized. It was Reagan’s confidence in capitalism, not his defense buildup that caused Soviet leaders to lose their confidence in further pursuit of destructively devastating state-controlled economy. Ronald Reagan took away the Soviets’ comfort factor when he said that the “Phillips curve” and falling US productivity were the results of the wrong policy mix, not inherent features of a market economy. The U.S. economy, in other words, could be easily fixed, but the Soviet economy could not. Later I will speak about Reagan’s slashing of tax rates from 70 to 28 percent. After imposing genius liberal economic reforms, Margaret Thatcher achieved similar results in reforming Keynesian legacy of British economy. Surprisingly, even French followed and pursued fueled privatization of their socialized economy. Reagan revitalized the U.S. economy. He abandoned the Keynesian policy mix of monetary expansion to stimulate demand and high tax rates to restrain inflation--which was obviously not being restrained by Keynesian demand management. Reagan got the supply-side message that high tax rates were restraining real output while money growth pumped up demand, thus causing inflation.

Reagan’s policy was a success. But at the time it was misunderstood. Accustomed to thinking of tax cuts as a demand-side measure to stimulate consumer spending, the entire economics profession, along with the Federal Reserve, the Republican Senate, and most of Reagan’s own government, predicted accelerating inflation. Reaganomics is probably the only economic doctrine that made its way into a pop song. In 1985, the British group Simply Red criticized the 'antisocial' policy of Reagan in their song “Money’s Too Tight To Mention” (actually, a cover version of an original American song by the Valentine Brothers from 1982).

The popular perception of Reaganomics is clear: an antisocial policy with a curtailment of social expenses. But criticizing Reaganomics is not the monopoly of the left. Even classical (i.e. pro free market) liberals and libertarians are convinced that although Reagan stimulated the economy, it came at the cost of an enormous budget deficit. Even George Herbert Walker Bush was initially very sceptical of the economic ideas of Reagan. In 1980 he spoke about “voodoo economics”. He changed course when Reagan chose him as running mate for the presidency.

In the sixties and seventies, Keynes' economic theory was applied on a large scale. Keynes developed his ideas in the deep economic recession of the thirties, with its high unemployment. Keynes argued that governments should stimulate aggregate demand by massive spending and infrastructure works in order to invigorate the economy. Through the “multiplier” effect every dollar spent by the government would create a multiple in income. Unemployment would vanish, the tax base would broaden, and the budget deficit would disappear, Keynes argued. But during the oil crisis of the seventies, it became clear that Keynesianism did not work. Higher public spending did not resolve unemployment. On the contrary, unemployment increased in line with the increase of government spending. Moreover, unemployment and inflation appeared simultaneously, a fact which could not be explained by the dogmas of Keynesian thinking. The only thing they were able to do, was to give it a name: “stagflation”, which meant that we had a combination of creeping inflation, recession and unemployment. During the Carter years, inflation was at a staggering 13%. Huge interest rates were necessary to fight it. The interest rate on credit facilities reached the unbelievable level of 21%. The drama was complete when taxes were increased to fight both inflation and government deficits. During the Carter years, the top marginal tax rate on personal income rose to the insane record level of 70%. Experts in Economic & Tax Policy did not know how to agree on any economic policy. They simply had no solution!

Many of the recent studies have indicated that high public spending as Keynes had advocated does not stimulate the economy. The main reason is that money that could otherwise be spent by private sectors, shags off with public jobs which offer very little or even zero return. Money to pay the deficit must come from somewhere else to paid-off and usually it is the taxpayer who must pay it. The fundamental basis of Keynesian logic is that it hardly makes sense to tax money away from productive people, thereby reducing their rewards, so as to spend it on unproductive goals. The United Kingdom which is the home of Keynesianism experienced it long years after the war. Keynesian economic policy was sticking and sticking and everybody seemed that there’s no way to stop it. Finally, Margaret Thatcher stopped putting continued Keynesian economic policy into practice. Another, more recently observed example is Japan. This country has provided one of history’s best demonstrations that the Keynesian demand stimulus is a deeply flawed economic philosophy. Despite huge government outlays, the Japanese economy is still wallowing in the slump that has afflicted it for more than ten years. According to the analysis of the relationship between and the size of governments in 16 European countries, the two main causes leading to poor growth performance are excessive government spending and a demotivating tax structure, which put a heavy burden on work, income and profit. This study has recently been confirmed and underpinned by multiple regression analysis, using econometrics tools to show the results.

There were four young economists who convinced Reagan to completely reserve the economic policy of that time. Those four economists were: Paul Craig Roberts, Robert Mundell, Norman Ture and Steve Entin. And there was another Journalist Jude Wanninski who contributed a great portion to the turnover of economic policy when Ronald Reagan started running his first mandate. The very basic point of view was that tax rates very extreme, too high and worked like a barrier, embodying a strong disincentive to work, risk and save. In a very popular point of view, “Economics of Discouragement” had to be translated into “Economics of Encouragement”. People are producing because it pays to do so. Consumption will not result in increased production when there are no incentives to do so. The logic is simple. When tax rates are becoming higher, people are loosing their interest in taxed working activities such as risk-taking, work and entrepreneurship. When tax rates fall down, people are starting to increase their participation in those activities since they see more incentives to participate in productive behavior and raise their incomes on a permanent basis. Only few people knew that Reagan had a major in Economics from Eureka College (Illinois) in 1932 The economic theory he was taught was untouched by Keynesian thinking and, as a consequence, very appropriate to the problems of the eighties. Reagan immediately took action. He lowered marginal tax rates from 70% in two phases: to 50% (Economic Recovery Tax Act of 1981) and in a later phase to 28% (The Tax Act of 1986).

These tax cuts created 18 million new jobs in 8 years, lowered inflation to 4.3% and cut unemployment from 9.7% to 5.4%. One of the longest and strongest economic expansions since World War II had begun, with an average annual growth rate of 3.5%. But the first two years (1981 and 1982) were lost for Reagan. Fed chairman Paul Volcker fought inflation with a tight monetary policy and high interest rates. The Reagan administration urged Volcker to decrease monetary growth by a maximum of 50%, in order not to kill the tax cut program. But as the Federal Reserve is totally independent, Volcker cut money growth by 75% in 1981. The recession became even worse, and unemployment rose further. But after inflation had been defeated, money growth resumed and the Reagan expansion took shape.

Many leftist critics claim that Reagan gave money away to the rich at the expense of poor. Under Reagan’s leadership the so called rich people paid-out comparatively more through income and corporate taxes than ever before. The economic position for the poor was suitable and enabled them to move-up because tax revenues paid by the poor went down. But the reason for that is very simple. Lowering tax rates enabled instant participation in productive behavior. If the rich worked more, they saved more and logically they paid more. Reagan’s tax policy was followed by a principle in which increasing tax rates will not result in an increase of tax revenue. If you want to increase tax revenue you must expand the tax base and consequently lower marginal rates in order to let the economy grow.

It is often claimed that the budget deficit had risen to enormous proportions during the Reagan years. But between 1981 and 1989 the budget deficit increased only slightly, from 2.6% to 2.9% of GDP. The deficit peaked in 1983 to 6.1% of GDP (the Volcker recession with tight money). During the same years the Belgian budget deficit varied between 7% and 13% of GDP. The average budget deficit for the G-7 countries was only slightly lower than that of the US. The public debt of the US as a percentage of GDP, remained below that of the G-7 countries, i.e. below 32% of GDP. But Belgian public debt, the result of years of Keynesian policy, was higher than 100% of GDP and remains around 100% at this moment.

Increasing social outlays doesn’t make sense when you have previously created poverty and unemployment with wrong and possibly destructive economic policy. Redistribution of wealth through high marginal tax rates has no clue. It distributes poverty.

Keynesian thinking explained the economic achievement in terms of the level of spending. Deficit spending will keep employment high and will stimulate the economy. Cutting the deficit (for the Keynesians) would reduce spending and throw people out of work, raising the unemployment rate, reduce national income and hence produce less tax revenues. Reagan on the contrary brought a totally new perspective to economic policy. Instead of putting the emphasis on spending, supply-side economists showed that tax rates directly affect the supply of goods and services. Lowering tax rates mean better incentives to produce, to save, to invest and to take risks. In other words lower tax rates stimulate supply and not demand. The broader tax base will compensate at least partially for the lost revenue caused by the tax cut. Higher savings will result in increased investment and unemployment will disappear. Instead of pumping up demand to stimulate the economy, reliance would be placed on improving incentives on the supply side.

Entire population couldn’t believe that former movie actor could enable the most explosive expansion of the growth of income with revolutionary economic policy that stepped with new supply-side approach.
But Ronald Reagan was not the only one leading a strong, productive and impressive economic policy considering supply-side mechanism. Ludwig Erhard put in practice supply-side economics in Western Germany in 1948. At that time he was in charge of economic policy. He introduced an economic shock therapy completely in line with Reaganomics. He abolished rationing and price-controls, although he restricted his own power with this measure. Erhard believed in the self regulation of the market.

Not only the Social Democrats were vehement opponents of the abolishment of price-control, but also Lucius D. Clay, the US. military governor, was furious. Erhard had pushed through the economic deregulation without ever asking the general. Clay called Erhard to account, thundering that the professor had infringed upon the Allies’ privileges by changing the rationing regulations. Erhard coolly responded : “you are mistaken, sir, I have not changed them, I have abolished them.” Later on Erhard, as secretary for the economy, cut the high marginal tax rate in two steps: first from 95% to 63% and afterwards to 53%. The first 8000 DM earned became tax free. The decisions taken by Ludwig Erhard allowed West-Germany to rebuild itself at a pace never seen. No surprise that he was called the “father of the wirtschaftswunder”. The German economic miracle cannot be explained by the Marshall Plan. Britain and France received Marshall money too, but they wasted their chances. Britain voted Labour, which brought rationing and price controls. France opted for economic protectionism, which prevented Marshal help to be used in an efficient way. After Reagan, the theory of supply-side economics was applied in numerous countries. In Iceland, David Oddson became prime minister in 1991. He inherited a poorly performing economy burdened by heavy income taxes. He lowered the corporate tax rate from 50% to 30%. During the next five years the economy grew by 5% per year. Government income did not fall and social outlays could be maintained. Ireland is another example. In 1987 this country was the “sick man” of Europe, with a public debt of 135 % of GDP. After the elections of 1987 a new economic policy was introduced. Corporate tax rate was reduced from 32% to 12.5% and capital gains tax was lowered from 40% to 20%. Ireland is now the fastest growing country of the EU. Japan, to the contrary, is a classic example of the failure of a Keynesian demand-side policy. The economy has been in shambles for many years and public debt has risen to a gigantic 170% of GDP. The following graph compares government spending and GDP per capita in Ireland and Belgium between 1960 and 2003. The Irish 'turning point' came with the adoption of supply-side economics.

A Reaganomics Plan for Slovenia

1. A considerable tax cut down to 20% on personal income.

2. The complete abolition of corporate tax rates repealing all public subsidies transferred to public enterprises where government owns major or partial stake

3. The abolition of taxes on dividends. Investment and risk taking has to be encouraged, not punished. A reduction (or abolition) of tax rates can make investment opportunities profitable that formerly were not

4. The abolition of all agricultural subsidies. At this moment 45% of the total EU budget goes to agricultural subsidies, respresenting the huge amount of 45 billion euro per year. This is not only dramatic for the tax payers, but it is also very harmful for the developing world, mainly for the poor countries in Africa. As a consequence of the subsidies, European agricultural products are dumped (at prices far below the cost) on the markets of these countries, preventing them from competing on the world markets with their own products.

5. A radical cut in the size of Government. After Sweden, Slovenia has the second largest part of public expenditures according to Fraser Institute. The government has received more than 2% of total revenues from public enterprises and other forms of government ownership.

Supply-Side and the Laffer curve

Supply-Side economics is widely misinterpreted as the Laffer curve. Arthur Laffer, an economics Professor at University of Southern California claimed that an important feature of supply-side economics is that tax cuts will pay for themselves. Laffer became famous after he illustrated this idea on a napkin in a restaurant in Washington in 1974. But the question is not whether tax cuts pay for themselves, but whether they are more effective in creating economic growth and welfare, compared to a Keynesian policy of increasing government spending. The difference between Keynesianism and the supply side school centers on fiscal policy. Does a successful fiscal policy work by incentives (tax cuts) or by increasing demand (spending)? The important question is not whether such a fiscal policy will pay for itself. The Keynesians stress demand, supply-siders stress incentives. Changing fiscal policy by creating incentives will change the behaviour of people. If tax rates rise, people will reduce their participation in taxed economic activities, such as working, risk-taking, investment and saving. When tax rates go down, people are motivated to increase their economic activity. The economic expansion that will follow a tax cut is far more important than the fact that tax cuts should pay for themselves. Most politicians in Western Europe have not yet understood this very important distinction. Even worse: the media in Europe have killed Reaganomics because they do not understand this difference.


Flat Tax: A Gate to the Future

Flat tax is even better solution to the problem than 5 points program above. If flat tax was introduced it would apply to both personal and corporate income. All relieves, deductions, allowances and subsidies will be eliminated. Loopholes would be impossible. The system would be so simple that it will perhaps take no more than five minutes to file a tax return. In 2004, 85% of Estonians filled their tax returns electronically. In the last ten years flat tax rates have been introduced in several economies. The first among them was Estonia in 1994 after having ignored painful advice from IMF aiming to introduce progressively applied tax rates and increase administrative costs what would push the economy even deeper of the cliff. Luckily, Mart Laar has been smart enough to follow Milton Friedman’s sophisticated solutions from “Free to Choose” in order to let Estonia become the pioneer of classical liberal free market policies shifting its economy ever upward.

A low level of a flat tax is important. The well-known Richard K. Armey, previous Majority Leader of the House of Representatives advocates a tariff for the US of maximum 17%. But this rate could even be lower. An analysis by the French economist Philippe Manière indicates that a flat tax rate of 10% in France would maintain the government revenues at the present level.

For Slovenia, an introduction of maximum 20% flat tax rate applied on both personal and corporate income would have enormous advantages:

1. Economic Growth would explode, leading Slovenia to become one of the fastest growing economies in Europe. Simple, fair and non-discriminatory Flat tax would create beneficial incentives to encourage people to expand their productive behavior with more risk, work, entrepreneurship, investment and saving habits. To find loopholes would be impossible and thus people would find very little reason to hide or offshore their money away from the government

2. Unemployment would be likely to almost disappear.

3. Since it makes almost impossible to avoid paying taxes, people would not evade them since they are willing to pay minimal tax burden when tax rates are less off. Flat tax won’t punish people for their contribution for “working too much” or perhaps “saving too much” since there’s a principle of territorial taxation put into context so you don’t have to pay taxes on your properties if you own one abroad. Tax return can be done in less than 15 minutes on a postcard-sized filling form.

4. At last, an important part of bureaucrats would be ripped off and perhaps they could transform their activity towards more productive tasks.

5. Remember what “Der Vater den Deutschen Wirtschaftswunder” Ludwig Erhard once wisely told: “A compromise is the art of dividing a cake in such a way that everyone believes he has the biggest piece.”

Will Reaganomics or supply-side economics ever be applied in Slovenia? In the UK, Ireland, Iceland and Eastern Europe current economic policy has strong supply-side influences. Currently Germany is in a worse socio-economic situation than Slovenia. Who knows, perhaps some day Slovenia might return to the successful formula of Ludwig Erhard and create a new Wirtschaftswunder, by applying supply-side economics. Such an example could show the way for Germany and other countries too.

Reference:

Paul Craig Roberts: Reagan Changed the World, Townhall, 7 June 2004

William A. Niskanen: Reaganomics, The Concise Encyclopedia of Economics

Larry Kudlow and Stephen Moore: Reaganomics. Then, Now and Forever, The Growth Club, 12th of June 2004

Murray Rothbard: The Myths of Reaganomics, Mises

William A. Niskanen, Stephen Moore: Supply Tax Cuts and the Truth Aboutthe Reagan Economic Record, CATO

Robert Bartley, Seven Fat Years and How to do it Again, Free Press, 1995

Luc van Braekel, Reaganomics, A Success Story, Brussels Journal
Daniel J. Mitchell: Taxes, Deficits and Economic Growth, Heritage Lecture

INITIATIVE ON CHICAGO PRICE THEORY

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Suggested Reading:
Milton Friedman, Price Theory, Aldine Transaction, 1976

TO ISRAEL WITH LOVE

Just a few minutes ago I eyed an interesting observation in The Economist that points out several findings why there's such a strong tight between the United States and Israel in terms of financial, cultural and political cooperation. As an Economist, I rated that observation somewhere in the middle of the scale. Interestingly I think books written by Friedrich August von Hayek and Milton Friedman would be an appropriate reading to analyze the conflict situation that has separated the Middle East splittedly into two parts.

There's no doubt that Israel's child of hope and truly the home of brave. Why? To be honest it's the only democratic country in the Middle East. Its broad political, economic and cultural system generally entails elements that strongly underpin economic and political freedom. According to Heritage Index of Economic Freedom, "Israel has developed a modern economy with a thriving technology sector." The overall score on Economic Freedom is not that bad at all but taking the Middle East area into account, Israel is somehow "The Hong Kong of Middle East" in broad terms. Sitting on your couch and watch how media tries to brainwash their consumers by trying to blame Israel for everything is actually pretty emotional from viewer's point of view but thinking more broadly, blaming Israel means giving an unconditional support to terrorist organizations in the Middle East.

The most important factor of observation in the Middle East crisis is to ask ourselves what kind of economic and political program do organizations like Hezbollah offer if they come up and gain political authority. First of all, the vast majority of countries in the Middle East with Arabian cultural flow offer destructive policies mostly denying personal and economic freedom. Libertarec has served us pictures displaying how cultural difference in the champion of terrorist leadership, namely Iran, actually looks like in the real life. Fanatical Islamic approach to hampering the economy devastates the seed of economic progress - pioneering property rights through privatization and opening to the world via free trade. According to Heritage Index of Economic Freedom, there's no Middle East country with Islamic tradition to be placed among free or at least mostly free economies. Protectionist trade policy, extreme fiscal pressures, cosmetically held low inflation, hostile foreign investment legislation, centralized and undeveloped banking system, strict price controls, and weak protection of property rights, harmful regulation and highly spread informal business activities.

Culturally, the legal code entails strongly favored torture of women and other criminal acts denying basic ethical rules that our civilization has been devoted to. Quietly favored additional and unconditional support to Hezbollah and other terrorist organizations means expressing silent support to their kind of policies that repressively deny personal and economic freedom and instead their totalitarian leaders prefer to govern upon religious oppression and additionally favored punishment of those who really want to live freely and independently create their fuller and happier tomorrow.

NEW LINKS ADDED

The Independent Institute

The Levy Economics Institute, Bard College

The Heartland Institute