Confederation of Swedish Enterprise (Svenskt Näringsliv) issued a "Focus on Enterprise in Advantage Sweden". As we can see, Advantage Sweden includes the list of proposals to raise the competitive mentality and business conditions in Sweden in the age of new global economy.
First, globalisation empirically benefits trade sector as well as non-trade sector as it enables the latter to gear-up the speed of price convergence which is an important factor in controlling inflation shocks in the long run. Likely, there is no long-run trade-off between inflation and unemployment as Keynesian aggregate demand management mistakenly assumed. Also, together with sufficient and responsible monetary policy management, globalisation benefits consumers through lower prices in the retail sector as there is no greater welfare service to the poor than retail price competition and liberalized labor market. After facing a falling GDP for two years back in early 1990s, Swedish economy sufficiently climbed back on track in line with responsible monetary policy of controlling inflation in search of a nominal anchor guided by Riskbank, the Swedish central bank.
Second, Swedish economy currently generates an internationally low level of investment into domestic economy, probably the outcome of risky and rigid business environment hampered by staunch compliance costs (the price of administrative barriers) and high tax burden. Capital formation is huge but most of its stock is headlined abroad where a majority of capital formation of Swedish multinationals is placed. Swedish example is also a nice case study of capital flight behavior which aggregates the key-note from New Laffer Curve - invest only in low-tax countries.
Third, disability pay, sickness leave and generous job-absence schemes present a huge barrier to investment dynamics and capital formation respectively. Generous, womb-to-tomb or cradle-to-grave welfare schemes, of course, need to be financed to cover-up the amount of expenditure spent by public sector. Welfare dependency is of course an external shock levied on private sector through higher taxes and welfare contribution rate. In other case, there is a possibility of getting deeper into public debt and higher fiscal expenditure which, again, penalizes and deteriorates investment, entrepreneurship and labor supply.
Fourth, the age pyramid in Sweden is lopside which means that age dependency will rapidly increase relative to the growth of labor supply. In real terms, higher welfare contribution rates could rampantly hamper the productive behavior as a source of growth. In 2000, Swedish policymakers successfully reformed and partly privatized the pension system, allowing personal retirement accounts and thus helping to cut the fiscal burden caused by the exponentially growing age dependency rate.
Fifth, according to Global Entrepreneurship Monitor, Sweden faces a severely low entrepreneurial formation, resulted from a lack of trust and external risk caused by deteriorating administrative compliance and high tax wedge which means the lack of incentives to produce entrepreneurial dynamism. Swedish policymakers should know that international competitiveness depends on competitive strategies and performance endorsed by the entrepreneurial sector and thus its performance also depends on macroeconomic conditions for doing business.
Recently I read the publication The Globalisation of Swedish Economy written by Ulf Jakobsson, shedding the light over the main features of structural global change in Swedish economy. Without dynamic entrepreneurship and competitive mentality neither Sweden nor Slovenia or any other country's economy and society can't survive the global economic turmoil.
Monday, July 09, 2007
Sunday, July 08, 2007
LIBERTARIANS
There is a new-coming political party in Slovenia called Liberals (Liberal Party) with a very ambitious and ground-breaking program created on the very principles of classical liberalism. Here we can check further details about the party itself, including support.
As we can see, the program's emphasis is the absence of government intervention, the pursuit of lower taxes to stress the competitive potentials and the economic growth soar in a small and open economy such as Slovenia. It's glad to read and hear that there is a party which has not created its agenda on the basis of fiscal pressures, rent seeking or expansionary fiscal spiral such as the favorization of particular interest groups, which is the foremost threat to the sustainability of public finance and individual liberty nevertheless.
The program also includes the aim to pursue free choice in mostly government-funded education sector. Above all, the real party whose program agenda is based on the very principles of free market, individual liberty and economic freedom, has finally took place also in Slovenia which remains the most socialist of ex-socialist countries in Europe. Free-market ideas such as proposed in the program of Liberals are strongly welcome and needed as well, to create a sufficient public management based on government non-intervention to let Slovenia become a global success story.
As we can see, the program's emphasis is the absence of government intervention, the pursuit of lower taxes to stress the competitive potentials and the economic growth soar in a small and open economy such as Slovenia. It's glad to read and hear that there is a party which has not created its agenda on the basis of fiscal pressures, rent seeking or expansionary fiscal spiral such as the favorization of particular interest groups, which is the foremost threat to the sustainability of public finance and individual liberty nevertheless.
The program also includes the aim to pursue free choice in mostly government-funded education sector. Above all, the real party whose program agenda is based on the very principles of free market, individual liberty and economic freedom, has finally took place also in Slovenia which remains the most socialist of ex-socialist countries in Europe. Free-market ideas such as proposed in the program of Liberals are strongly welcome and needed as well, to create a sufficient public management based on government non-intervention to let Slovenia become a global success story.
Friday, July 06, 2007
SLOVENIAN HEALTH CARE SECTOR NEEDS A FUNDAMENTAL STRUCTURAL REFORM
Yesterday, my colleagues Mićo Mrkaić and Rado Pezdir, on behalf of INERHC (Institute for Economic Reforms in Health Care), organized a 'roundtable' discussion on the problem of general inefficiency of public spending in Slovenian health care sector. The given arguments have been thoroughly supported by the examination of the entire health care system in a publication called Health Economics, including the proposals to escape the financial and structural collapse of the currently highly inefficient sector of health care services in Slovenia which is based mainly on public funding.
Slovenian health care sector inherited a bulk of post-communist organizational and structural symptoms varying from a several lack of market mechanisms to failures of supply determination on nearly all levels of decision making and corporate governance. In 1973, Mark Pauly and Michael Redisched showed that non-profit public hospitals whose service and supply is determined out of the market mechanism framework, function, act and perform as socialist cooperatives.
In Slovenia, health care expenditures are not small-scaled, accounting for 6,4 percent of the GDP. Netherlands contributes 4 percent of the GDP expenditure to health care sector, Finland's expenditure rate is 6 percent, but the numbers turn differently when we rank the (in)efficiency of the allocation of resources and spending indicators and parameters in a multimple outcome health sector efficiency model. Using the estimates conducted by the IMF, Slovenia is ranked 18th (among 22 countries) in terms of efficiency score despite having a relatively high health care expenditure rate. Where is then the hidden trap which produces such low and uncompetitive efficiency rate? A part of the answer to this particular question lies in the cost structure of Slovenian health care sector. Mrkaić (2007) shows that labor costs present 57 percent of total sectoral costs which is a recording-breaking indicator in an international perspective.
On the other side, the indicators of capacity and productivity in Slovenian health care sector vary significantly among hospitals and physicians. The real deficiency of the incentive system in Slovenian health care sector is that annual salaries of physicians are determined through fixed collective agreements which do not reward the most productive physicians but fix their salary on the basis of collective bargaining compared to other employees in public sector which is (in Slovenia) the second biggest in the world (Fraser, 2006). It is thus quite unreasonable why the government and trade unions in the public sector preferably exclude the market mechanism of productivity measures of wage determination among public sector employees such as physicians.
According to European Observatory on Health Care Systems (2002), nearly 90 percent of the financial resources in health care sector are contributed from public funds, which is far more than in other transition countries such as Estonia and Hungary. Besides, in Slovenian system, we can find many annoying faults such as subsidies to generic industry, emerging from the absence of cost-benefit analysis in prescribing drugs to patients. In this case, generic industry receives a hidden rent at the expense of patients who pay the rent through a 22 percent employee contribution rate under the system designed by Bismarck which still remains rooted in many national health care systems around the globe.
One of the significant threats endangering the sustainability of mostly public funded Slovenian health care system is a demographic threat. As already known, Slovenia recently imposed one of the most generous retirement schemes in the world. The largest consumers of health care services are thus elderly whose treatment costs 4-5 times more than the treatment of youth and middle-aged population.
In addition, the growth of monthly pensions of Slovenian retirees is moving along the line of productivity growth twice a year and has been made permanent without the possible undertaking of the effects of long run pressures and volatility of public finance which remains the only source of financing the basic health insurance scheme.
The long-run effect of such a generous scheme is a severe outlift of the employer-employee contribution rate to cover the amount of expenditure flows into health care sector.
In addition, new and emerging technologies in health sector present a strong cost-push shock which spreads further possibility of unsustainable public finances in the middle run.
Above all, the proposals and solutions to avoid the breakdown of the health care system in Slovenia presented in INERHC's publication Health Economics go in the right direction suggesting a fundamental reform of the entire corporate and internal structure of the public-funded health care sector in Slovenia.
Slovenian health care sector inherited a bulk of post-communist organizational and structural symptoms varying from a several lack of market mechanisms to failures of supply determination on nearly all levels of decision making and corporate governance. In 1973, Mark Pauly and Michael Redisched showed that non-profit public hospitals whose service and supply is determined out of the market mechanism framework, function, act and perform as socialist cooperatives.
In Slovenia, health care expenditures are not small-scaled, accounting for 6,4 percent of the GDP. Netherlands contributes 4 percent of the GDP expenditure to health care sector, Finland's expenditure rate is 6 percent, but the numbers turn differently when we rank the (in)efficiency of the allocation of resources and spending indicators and parameters in a multimple outcome health sector efficiency model. Using the estimates conducted by the IMF, Slovenia is ranked 18th (among 22 countries) in terms of efficiency score despite having a relatively high health care expenditure rate. Where is then the hidden trap which produces such low and uncompetitive efficiency rate? A part of the answer to this particular question lies in the cost structure of Slovenian health care sector. Mrkaić (2007) shows that labor costs present 57 percent of total sectoral costs which is a recording-breaking indicator in an international perspective.
On the other side, the indicators of capacity and productivity in Slovenian health care sector vary significantly among hospitals and physicians. The real deficiency of the incentive system in Slovenian health care sector is that annual salaries of physicians are determined through fixed collective agreements which do not reward the most productive physicians but fix their salary on the basis of collective bargaining compared to other employees in public sector which is (in Slovenia) the second biggest in the world (Fraser, 2006). It is thus quite unreasonable why the government and trade unions in the public sector preferably exclude the market mechanism of productivity measures of wage determination among public sector employees such as physicians.
According to European Observatory on Health Care Systems (2002), nearly 90 percent of the financial resources in health care sector are contributed from public funds, which is far more than in other transition countries such as Estonia and Hungary. Besides, in Slovenian system, we can find many annoying faults such as subsidies to generic industry, emerging from the absence of cost-benefit analysis in prescribing drugs to patients. In this case, generic industry receives a hidden rent at the expense of patients who pay the rent through a 22 percent employee contribution rate under the system designed by Bismarck which still remains rooted in many national health care systems around the globe.
One of the significant threats endangering the sustainability of mostly public funded Slovenian health care system is a demographic threat. As already known, Slovenia recently imposed one of the most generous retirement schemes in the world. The largest consumers of health care services are thus elderly whose treatment costs 4-5 times more than the treatment of youth and middle-aged population.
In addition, the growth of monthly pensions of Slovenian retirees is moving along the line of productivity growth twice a year and has been made permanent without the possible undertaking of the effects of long run pressures and volatility of public finance which remains the only source of financing the basic health insurance scheme.
The long-run effect of such a generous scheme is a severe outlift of the employer-employee contribution rate to cover the amount of expenditure flows into health care sector.
In addition, new and emerging technologies in health sector present a strong cost-push shock which spreads further possibility of unsustainable public finances in the middle run.
Above all, the proposals and solutions to avoid the breakdown of the health care system in Slovenia presented in INERHC's publication Health Economics go in the right direction suggesting a fundamental reform of the entire corporate and internal structure of the public-funded health care sector in Slovenia.
Thursday, July 05, 2007
ON THE IRRELEVANCE OF BILATERAL TRADE DEFICITS
Professor Greg Mankiw soundly describes why bilateral trade deficits between trading partners are irrelevant. The overall balance of trade links nation's saving and investment but bilaterally, this is not true. For example, Slovenia can have huge deficits with some of its trading partners, say Austria, despite possibly having a balanced trade overall, which is the one that matters. Bilateral deficits between trading partners frequently occur in foreign policy issues as much of the attention is drawn to statistics when economic transactions between two trading partners are calculated on the permanent basis.
From an everyday point of you, we have many deficits. For instance, my own trade balance is the difference between my income and my spending, but why should I be concerned if I'm in a huge trade deficit with a particular firm? If I buy a laptop worth $950 from Dell, the transaction is made voluntarily as both sides benefited. I got a laptop I paid for, and Dell increased the market sales.
For example, I can go to H&M where I buy clothes and I'm a deep and chronic deficit with the firm, since H&M does not buy a darned thing from me. But I live with my own means and I get casual clothes I paid for.
From an everyday point of you, we have many deficits. For instance, my own trade balance is the difference between my income and my spending, but why should I be concerned if I'm in a huge trade deficit with a particular firm? If I buy a laptop worth $950 from Dell, the transaction is made voluntarily as both sides benefited. I got a laptop I paid for, and Dell increased the market sales.
For example, I can go to H&M where I buy clothes and I'm a deep and chronic deficit with the firm, since H&M does not buy a darned thing from me. But I live with my own means and I get casual clothes I paid for.
IRELAND IS A TOP TAX HAVEN FOR U.S. MULTINATIONALS
Ireland is the world's most profitable country for US corporations. In 2002, US companies reported $149 billion of profits in 18 tax-haven countries, up 68 percent from $88 billion in 1999. This compares with a 23 percent increase in total offshore profits earned by US multinationals during the same period-total profits of US multinationals’ foreign subsidiaries around the world stood at $255 billion in 2002.
Source: Ireland top location for US Multinational Profits, FinFacts
Source: Ireland top location for US Multinational Profits, FinFacts
Wednesday, July 04, 2007
4TH OF JULY, THE DECLARATION OF INDEPENDENCE - THE GREATEST DOCUMENT EVER WRITTEN
4th of July
IN CONGRESS, JULY 4, 1776
The unanimous Declaration of the thirteen united States of America
hen in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. — Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.
He has refused his Assent to Laws, the most wholesome and necessary for the public good.
He has forbidden his Governors to pass Laws of immediate and pressing importance, unless suspended in their operation till his Assent should be obtained; and when so suspended, he has utterly neglected to attend to them.
He has refused to pass other Laws for the accommodation of large districts of people, unless those people would relinquish the right of Representation in the Legislature, a right inestimable to them and formidable to tyrants only.
He has called together legislative bodies at places unusual, uncomfortable, and distant from the depository of their Public Records, for the sole purpose of fatiguing them into compliance with his measures.
He has dissolved Representative Houses repeatedly, for opposing with manly firmness his invasions on the rights of the people.
He has refused for a long time, after such dissolutions, to cause others to be elected, whereby the Legislative Powers, incapable of Annihilation, have returned to the People at large for their exercise; the State remaining in the mean time exposed to all the dangers of invasion from without, and convulsions within.
He has endeavoured to prevent the population of these States; for that purpose obstructing the Laws for Naturalization of Foreigners; refusing to pass others to encourage their migrations hither, and raising the conditions of new Appropriations of Lands.
He has obstructed the Administration of Justice by refusing his Assent to Laws for establishing Judiciary Powers.
He has made Judges dependent on his Will alone for the tenure of their offices, and the amount and payment of their salaries.
He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.
He has kept among us, in times of peace, Standing Armies without the Consent of our legislatures.
He has affected to render the Military independent of and superior to the Civil Power.
He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:
For quartering large bodies of armed troops among us:
For protecting them, by a mock Trial from punishment for any Murders which they should commit on the Inhabitants of these States:
For cutting off our Trade with all parts of the world:
For imposing Taxes on us without our Consent:
For depriving us in many cases, of the benefit of Trial by Jury:
For transporting us beyond Seas to be tried for pretended offences:
For abolishing the free System of English Laws in a neighbouring Province, establishing therein an Arbitrary government, and enlarging its Boundaries so as to render it at once an example and fit instrument for introducing the same absolute rule into these Colonies
For taking away our Charters, abolishing our most valuable Laws and altering fundamentally the Forms of our Governments:
For suspending our own Legislatures, and declaring themselves invested with power to legislate for us in all cases whatsoever.
He has abdicated Government here, by declaring us out of his Protection and waging War against us.
He has plundered our seas, ravaged our coasts, burnt our towns, and destroyed the lives of our people.
He is at this time transporting large Armies of foreign Mercenaries to compleat the works of death, desolation, and tyranny, already begun with circumstances of Cruelty & Perfidy scarcely paralleled in the most barbarous ages, and totally unworthy the Head of a civilized nation.
He has constrained our fellow Citizens taken Captive on the high Seas to bear Arms against their Country, to become the executioners of their friends and Brethren, or to fall themselves by their Hands.
He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions.
In every stage of these Oppressions We have Petitioned for Redress in the most humble terms: Our repeated Petitions have been answered only by repeated injury. A Prince, whose character is thus marked by every act which may define a Tyrant, is unfit to be the ruler of a free people.
Nor have We been wanting in attentions to our British brethren. We have warned them from time to time of attempts by their legislature to extend an unwarrantable jurisdiction over us. We have reminded them of the circumstances of our emigration and settlement here. We have appealed to their native justice and magnanimity, and we have conjured them by the ties of our common kindred to disavow these usurpations, which would inevitably interrupt our connections and correspondence. They too have been deaf to the voice of justice and of consanguinity. We must, therefore, acquiesce in the necessity, which denounces our Separation, and hold them, as we hold the rest of mankind, Enemies in War, in Peace Friends.
We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these united Colonies are, and of Right ought to be Free and Independent States, that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. — And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.
New Hampshire
JOSIAH BARTLETT,
WM. WHIPPLE,
MATTHEW THORNTON
Massachusetts Bay
SAML. ADAMS,
JOHN ADAMS,
ROBT. TREAT PAINE,
ELBRIDGE GERRY
Rhode Island
STEP. HOPKINS,
WILLIAM ELLERY
Connecticut
ROGER SHERMAN,
SAM'EL HUNTINGTON,
WM. WILLIAMS,
OLIVER WOLCOTT
New York
WM. FLOYD,
PHIL. LIVINGSTON,
FRANS. LEWIS,
LEWIS MORRIS
New Jersey
RICHD. STOCKTON,
JNO. WITHERSPOON,
FRAS. HOPKINSON,
JOHN HART,
ABRA. CLARK
Pennsylvania
ROBT. MORRIS
BENJAMIN RUSH,
BENJA. FRANKLIN,
JOHN MORTON,
GEO. CLYMER,
JAS. SMITH,
GEO. TAYLOR,
JAMES WILSON,
GEO. ROSS
Delaware
CAESAR RODNEY,
GEO. READ,
THO. M'KEAN
Maryland
SAMUEL CHASE,
WM. PACA,
THOS. STONE,
CHARLES CARROLL of Carrollton
Virginia
EORGE WYTHE,
RICHARD HENRY LEE,
TH. JEFFERSON,
BENJA. HARRISON,
THS. NELSON, JR.,
FRANCIS LIGHTFOOT LEE,
CARTER BRAXTON
North Carolina
WM. HOOPER,
JOSEPH HEWES,
JOHN PENN
South Carolina
EDWARD RUTLEDGE,
THOS. HAYWARD, JUNR.,
THOMAS LYNCH, JUNR.,
ARTHUR MIDDLETON
Georgia
BUTTON GWINNETT,
LYMAN HALL,
GEO. WALTON.
Link: here
FLAT TAX IN ALBERTA
In Alberta, Canada, following the provincial flat rate on personal income, the overall budgetary contributions from top 15 percent of earners increased from 62 percent in 2000 to 67 percent in 2004. Importantly, low-income workers enjoyed a significant relief. in 2000 the bottom 50 percent of wage earners paid 3 percent of the provincial tax burden while by 2004 this figure fell to 1.5 percent accountably.
Source: Alberta Finance
Source: Alberta Finance
WHY IRELAND SHOULD ADOPT THE FLAT TAX
Writing for Business & Finance Magazine, Constantin Gurdgiev of Trinity College makes a strong point why Ireland should move from current two-fold progressive income tax code toward a single, zero-tax deduction flat rate on personal income. Ireland already has a single 12,5 percent tax rate on corporate income. Consequently, supply-side tax reduction enormously enhanced the inflow of foreign direct investment into Ireland and benefited the overall Irish economy respectively.
One of the essential standpoints in adopting the flat rate on productive behavior such as labor supply in this particular case, is the point of compliance costs which occur as a consequence of complicated tax code which penalizes the productive engine of the firm by forcing it to accept cost-push drifts to comply and pass annual tax liabilities. In almost all case of adopting the flat rate on labor income, compliance costs were reduced by 75-95 percent. And since these costs run on average between 5-10 percent of the payroll costs, these savings amount to € 1390-2780 per working Irish person per annum.
Since a single and supposedly low rate on labor income no longer produces cost-push shock such as increasing incentives to favor tax evasion but, instead, broadly strenghtens the tax base and tax liabilities no longer end in adding burden to productive behavior such as investment, risk-taking, labor supply and entrepreneurship. Supply-side reductions of tax burden are based on the correct assumption extracting from the Laffer Curve which states that, the higher the tax rate, the lower the amount of taxable income as tax basis is tightly decreased accordingly and there is also a common empirical evidence that high tax burden levied by taxpayers, ends in the spiral of disincentives to work, save and invest. In the age of global economy, competitive fiscal stance is a crucial issue, since revenue-neutral taxation of labor income no longer wedges addition unit of earned income.
Also by removing the negative side-off of the progressive tax creeps, flat tax stimulates productivity-adjusted increases in market labor supply as well as the single rate removes the incentives to shift the labor supply to informal economy. Ventura (1999) showed that, in the U.S case, due to highly positive effects on individual incentives to supply and invest, in human capital and labor supply productivity, a revenue-neutral system of the flat rate adds a 9 percent increase to aggregate efficiency of labor force.
However, there remains much opposition to revenue-neutral flat rate on individual income, emerging from egalitarian myths among which Slovenian socialists are the staunchest supporters of the progressive income tax. It is not difficult to disapprove these myths. Zero-tax deduction significantly benefits the poor by leaving them into the space of zero-tax liabilities in accordance with the size of personal deduction. Disregarding the ratio between zero-tax deduction and the flat rate on individual income, the higher the income the individual earns, the higher the income tax liability which an individual has to bear and the same effect is achieved without negative side-effects, such as disincentives to labor supply, complex tax code, loopholes, preferred deductions, exemptions, and tax evasion, all of which generate the enormous size of compliance costs.
There are estimated three possible scenarios in Irish case for tax reform:
- 25 percent flat rate and € 20 000 standard personal deduction
- 25 percent flat rate and € 25 000 standard personal deduction
- 20 percent flat rate and € 20 000 standard personal deduction
Irish 'status quo' currently stands at two different progressive rates on personal income; 20 and 42 percent where the standard deduction is € 2870.
It is important to note that even before factoring the effects of growth, saving and greater investment in knowledge-intensive areas, the poor would significantly benefit and gain respectively under the expectations of the flat tax reform. Every economist admits that capital formation is a key to economic growth. Existent tax codes pose severe risk to invest in human capital, to save and take risk and to boost the engine of productive behavior. Progressive taxation, which was originally proposed by Karl Marx, penalizes additional units of value-added and thus implicitly create disincentives to invest in human capital and assets to further spread the entrepreneurship and social mobility.
Small and open economies vastly depend on innovation and investment in knowledge-intensive source of supply and that's why the question of tax burden is evenly crucial as it situates them whether competitively or uncompetitively on the global competitiveness map. Thus, flat tax is not a pundit of luxury but a neccessity which Irish economy deserves to stay in line with greater international competitiveness and competitive fiscal management.
Further reading:
David Madden: An analysis of indirect tax reform in Ireland in the 1980s, Fiscal Studies (1995) vol. 16, no. 2, pp. 18-37;
Ken Griffin: British tax reform plans could affect Ireland, Sunday Tribune;
Luc Van Braekel: Analyzing the Irish tax model. Celtic Tiger ready to meet the Challenges of Globalization and Ageing, Work for All;
EU: Causes of Growth differentials in EuropeTowards a Tax Policy for Growth and Jobs;
Benjamin Powell: Markets created a pot of gold in Ireland, Cato Institute/Fox News Online;
Low-tax policies created the tiger, Sunday Independent;
Sean Dorgan: How Ireland Became the Celtic Tiger, Heritage Foundation;
Proinnsias Breathnach: Dublin Calling, Globalisation of a Metropolis on the European Periphery;
The National debt and the Irish Economy, Business 2000, National Management Treasury Agency
One of the essential standpoints in adopting the flat rate on productive behavior such as labor supply in this particular case, is the point of compliance costs which occur as a consequence of complicated tax code which penalizes the productive engine of the firm by forcing it to accept cost-push drifts to comply and pass annual tax liabilities. In almost all case of adopting the flat rate on labor income, compliance costs were reduced by 75-95 percent. And since these costs run on average between 5-10 percent of the payroll costs, these savings amount to € 1390-2780 per working Irish person per annum.
Since a single and supposedly low rate on labor income no longer produces cost-push shock such as increasing incentives to favor tax evasion but, instead, broadly strenghtens the tax base and tax liabilities no longer end in adding burden to productive behavior such as investment, risk-taking, labor supply and entrepreneurship. Supply-side reductions of tax burden are based on the correct assumption extracting from the Laffer Curve which states that, the higher the tax rate, the lower the amount of taxable income as tax basis is tightly decreased accordingly and there is also a common empirical evidence that high tax burden levied by taxpayers, ends in the spiral of disincentives to work, save and invest. In the age of global economy, competitive fiscal stance is a crucial issue, since revenue-neutral taxation of labor income no longer wedges addition unit of earned income.
Also by removing the negative side-off of the progressive tax creeps, flat tax stimulates productivity-adjusted increases in market labor supply as well as the single rate removes the incentives to shift the labor supply to informal economy. Ventura (1999) showed that, in the U.S case, due to highly positive effects on individual incentives to supply and invest, in human capital and labor supply productivity, a revenue-neutral system of the flat rate adds a 9 percent increase to aggregate efficiency of labor force.
However, there remains much opposition to revenue-neutral flat rate on individual income, emerging from egalitarian myths among which Slovenian socialists are the staunchest supporters of the progressive income tax. It is not difficult to disapprove these myths. Zero-tax deduction significantly benefits the poor by leaving them into the space of zero-tax liabilities in accordance with the size of personal deduction. Disregarding the ratio between zero-tax deduction and the flat rate on individual income, the higher the income the individual earns, the higher the income tax liability which an individual has to bear and the same effect is achieved without negative side-effects, such as disincentives to labor supply, complex tax code, loopholes, preferred deductions, exemptions, and tax evasion, all of which generate the enormous size of compliance costs.
There are estimated three possible scenarios in Irish case for tax reform:
- 25 percent flat rate and € 20 000 standard personal deduction
- 25 percent flat rate and € 25 000 standard personal deduction
- 20 percent flat rate and € 20 000 standard personal deduction
Irish 'status quo' currently stands at two different progressive rates on personal income; 20 and 42 percent where the standard deduction is € 2870.
It is important to note that even before factoring the effects of growth, saving and greater investment in knowledge-intensive areas, the poor would significantly benefit and gain respectively under the expectations of the flat tax reform. Every economist admits that capital formation is a key to economic growth. Existent tax codes pose severe risk to invest in human capital, to save and take risk and to boost the engine of productive behavior. Progressive taxation, which was originally proposed by Karl Marx, penalizes additional units of value-added and thus implicitly create disincentives to invest in human capital and assets to further spread the entrepreneurship and social mobility.
Small and open economies vastly depend on innovation and investment in knowledge-intensive source of supply and that's why the question of tax burden is evenly crucial as it situates them whether competitively or uncompetitively on the global competitiveness map. Thus, flat tax is not a pundit of luxury but a neccessity which Irish economy deserves to stay in line with greater international competitiveness and competitive fiscal management.
Further reading:
David Madden: An analysis of indirect tax reform in Ireland in the 1980s, Fiscal Studies (1995) vol. 16, no. 2, pp. 18-37;
Ken Griffin: British tax reform plans could affect Ireland, Sunday Tribune;
Luc Van Braekel: Analyzing the Irish tax model. Celtic Tiger ready to meet the Challenges of Globalization and Ageing, Work for All;
EU: Causes of Growth differentials in EuropeTowards a Tax Policy for Growth and Jobs;
Benjamin Powell: Markets created a pot of gold in Ireland, Cato Institute/Fox News Online;
Low-tax policies created the tiger, Sunday Independent;
Sean Dorgan: How Ireland Became the Celtic Tiger, Heritage Foundation;
Proinnsias Breathnach: Dublin Calling, Globalisation of a Metropolis on the European Periphery;
The National debt and the Irish Economy, Business 2000, National Management Treasury Agency
RANKING OF ECONOMICS DEPARTMENTS
Based on the jobs, following the graduation, Amir and Knauff (2005) composed the global ranking of economics departments. The central core of the methodology which authors apply to the research experiment, is that the sum of the value of PhD graduates reflects the value of their current employing departments. The authors derive solutions (scores) from linear system of values from simultaneous equations. Further, the authors adapt Liebowitz-Palmer method in the context of academic ranking which is essential for measuring the competitive ranking of economics departments. According to rankings based on full sample, undiscounted normalized score and 98 percent discounted normalized score, Harvard University Economics Department scored the best. In terms of truncated-sample normalized score, based on the data of PhD graduates from 1990 onwards, MIT Department of Economics came on top of the scale.
Sources:
Rabah AMIR, Malgorzata KNAUFF: Ranking Economics Departments Worldwide on the Basis of PhD placement, Univesite de Louvain
Prof. Greg Mankiw: Ranking Econ Departments, Saturday, June 30, 2007
Sources:
Rabah AMIR, Malgorzata KNAUFF: Ranking Economics Departments Worldwide on the Basis of PhD placement, Univesite de Louvain
Prof. Greg Mankiw: Ranking Econ Departments, Saturday, June 30, 2007
Monday, July 02, 2007
NORWEGIAN ATTACK ON LOW-TAX OFFSHORE JURISDICTIONS
Norwegian socialist government has recently linked tax havens with features of corruption, and money laundering to further promote tax justice, whatever that is.
The premises and ideas released by the Norwegian socialist government are absurd and here, I analyze this particular initiative.
“Corruption is theft. People in poor parts of the world are being robbed of millions every day. This has enormous consequences, not only for individuals, but also for the economic and social development opportunities of poor countries.”
The premises and ideas released by the Norwegian socialist government are absurd and here, I analyze this particular initiative.
“Corruption is theft. People in poor parts of the world are being robbed of millions every day. This has enormous consequences, not only for individuals, but also for the economic and social development opportunities of poor countries.”
Erik Solheim, the Minister of International Development
Corruption is a theft and the most efficient way to fight it is to rely on institutional governance the rule-of-law which is one of the most burdensome obstacles in downwarding the economic peformance of the countries in transit.
Regarding opportunites and incentives, Western welfare cradles, including Norway, restrict the export performance of industrial and agricultural sector in third-world countries by setting-up high quotas and tariffs on imports from the third world and by protecting domestic producers (by agricultural subsidies) at the expense of higher product price level beared by consumers.
In this respect, the economies with a low portion of the GDP per capita, suffer from a denied access to international product markets resulted from the lack of institutional credibility and from exercising the experiment of protectionism.
“We are fighting the use of so-called tax havens to evade tax through international cooperation on tax matters. Other forums and types of cooperation are needed in the fight against money laundering, corruption, embezzlement and fraud. These types of misuse of funds have clear common factors. They involve the hiding of money and ownership. With a common ‘enemy’ of this type, is important that we support each other’s efforts to combat the so-called tax havens”
Kristin Halvorsen, the Minister of Finance
Low-tax jurisdictions emerged from a completely legal opportunity to compete for venture investment on the rock-bottom incentives to deliver a dynamic and globally competitive tax system which helps creating a business environment in which the economic growth is generated faster relative to global competitors. Money laudering is a serious problem but the legal actions should target individuals, not jurisdictions who obey the principles of the international law in accordance with territorial sovereignity.
It is not the responsibility of the Minister of Finance to judge the use of investment funds. Investment funds in offshore places such a Netherlands Antilles, Jersey, Bermuda and Cayman Islands operate under legally disciplined rules which do not violate international law. Regarding the use of fund, many enterprises in the private sector have spurred their performance on regional, global and domestic market and consolidated its competitive financial position after investing in particular funds and taking-out a certain amount of yield at a certain time.
It would be insane to fight against tax havens as they offer enviable secrecy laws and a shelter to escape tax jurisdictions with a punitive tax regime and unparalleled tax burden - the consequence of high government spending and expansionary fiscal 'outlay' pressure. It is not difficult to realize that the main reason behind which the attack on tax havens is hidden, is simply that politicians want to protect their interests such as high public spending which empirically implies that tax rates must be lifted up and capital formation thus punished.
In a relationship between government spending incentives and the tax system, higher spending boosts the incentive to increase compliance costs to minimize the burden which is paid to the government. An upward trend in gearing the speed and size of fiscal burden (spending), each company with assets abroad has more reason to evade taxes and move their headquarters to jurisdictions with lower tax burden and much more favorable regulatory scheme.
Punishing tax havens with discriminatory measures, such as accusing them of corruption and money laundering, with violate personal liberties as well as economic freedom to move labor and capital resources anywhere investors want.
In fact, tax havens should dynamize policymakers to further cut tax rates on corporate and personal income to boost capital formation and lure the level of investment which benefits the growth and competitiveness of any economy.
Countries with a low GDP per capita (PPP) do not benefit from higher tax rates on productive behavior because such a misconducted approach results in tax evasion and decreasing tax revenues.
Ideological course of fighting against tax havens is a way to dismantle the effect of economic analysis which is a credible instrument in dismissing the falsified propaganda such as the one fostered by the Norwegian government against jurisdictions which fostered dynamic economic performance and created an enviable business environment.
OFFSHORE TAX BREAKS AND SOUND REGULATORY ENVIRONMENT LURE HEDGE FUND INVESTMENT
Here is an article published in New York Times about the relation between investment behavior and regulatory intensity regarding the location of hedge funds especially on offshore destinations such as Cayman Islands. In Europe, hedge funds as an alternative form of investment, distinguished from bonds and security investment, are subject to restrictive regulation and excessive taxation.
However, Ireland, United Kingdom and Switzerland have entailed sounder regulation as well as less restrictive tax hikes on hedge fund industry, establishing places, like Zurich and London, hedge fund capitals of Europe.
Since the fall of 2001, as the number of hedge fund registrations on Caymans began rising sharply, reflecting a good regulatory environment, financial secrecy laws and tax breaks which, working as an "investment magnet", soured hedge fund investment.
Some 8,500 investment funds are registered in the Cayman Islands, a near-tripling since 2001. In fact, nearly 75 percent of hedge funds are registered in the Cayman Islands. The territory’s tax advantages have turned it into one of the linchpins of the estimated $1.5 trillion global hedge fund business. The main advantage of the competitive financial law is that creating incentives to boost investment of particular funds, say hedge funds, reflects the investment behavior escaping high tax wedge and restrictive regulation rules which consider hedge funds as a regulation experiment and not as a business tool.
Taking risk into account, if you are a hedge fund manager, information awareness is the first tool in conducting the investment operations offered by a diversified financial products hedge fund industry which contains traditionally higher yield rates as well as higher perception of risk.
Consequently, hedge funds are garnering attention from tax policy. A major shift in the financial landscape of the majority of financial industry is a sign of a growing volume of red-tape and tax hampers hiking the performance and global competitive edge of hedge fund industry as well. Instead, sound regulatory environment and easing taxation is what, besides rapid proliferation, hefty assets and big returns, makes offshore jurisdictions attractive as fund management location.
In fact, running away from the IRS which imposed a corporate tax at 35 percent, is a pretty good reason to switch the investment location southward. All tax jurisdictions are competing against each other in offering the most hospitable regulatory location combined with tax incentives, further setting offshore destinations on top of the most favorable locations to invest, adding a big portion to the territorial economic performance.
However, Ireland, United Kingdom and Switzerland have entailed sounder regulation as well as less restrictive tax hikes on hedge fund industry, establishing places, like Zurich and London, hedge fund capitals of Europe.
Since the fall of 2001, as the number of hedge fund registrations on Caymans began rising sharply, reflecting a good regulatory environment, financial secrecy laws and tax breaks which, working as an "investment magnet", soured hedge fund investment.
Some 8,500 investment funds are registered in the Cayman Islands, a near-tripling since 2001. In fact, nearly 75 percent of hedge funds are registered in the Cayman Islands. The territory’s tax advantages have turned it into one of the linchpins of the estimated $1.5 trillion global hedge fund business. The main advantage of the competitive financial law is that creating incentives to boost investment of particular funds, say hedge funds, reflects the investment behavior escaping high tax wedge and restrictive regulation rules which consider hedge funds as a regulation experiment and not as a business tool.
Taking risk into account, if you are a hedge fund manager, information awareness is the first tool in conducting the investment operations offered by a diversified financial products hedge fund industry which contains traditionally higher yield rates as well as higher perception of risk.
Consequently, hedge funds are garnering attention from tax policy. A major shift in the financial landscape of the majority of financial industry is a sign of a growing volume of red-tape and tax hampers hiking the performance and global competitive edge of hedge fund industry as well. Instead, sound regulatory environment and easing taxation is what, besides rapid proliferation, hefty assets and big returns, makes offshore jurisdictions attractive as fund management location.
In fact, running away from the IRS which imposed a corporate tax at 35 percent, is a pretty good reason to switch the investment location southward. All tax jurisdictions are competing against each other in offering the most hospitable regulatory location combined with tax incentives, further setting offshore destinations on top of the most favorable locations to invest, adding a big portion to the territorial economic performance.
Sunday, July 01, 2007
INVESTOR TARGETING IN EUROPE
The US remained the biggest originator of inward direct investment in Europe while the UK market consolidated its position as the prime investor target. The European Investment Monitor shows that the level of inward investment flopping into Europe rose up by 15 percent, peaking the record high. France and UK remained top investor targets in 2007 followed by Germany.
Supply-side economic reforms in Romania, boosted the level of inward investment, currently facing a rapid 62,8 percent growth in real terms. France's market share dropped relative to its regional competitors such as UK, after reaching a benign 5 percent growth of inward investment while the UK experience a 22,7 percent growth rate respectively. Interestingly, there is a growing parallel between the growth of FDI and attractiveness of the environment for doing business. The latter includes relative tax burden emerging from high/low/modest corporate tax rate as well the sophistication of business environment in terms of access to global/local supply chains.
The higher the rate of quality of both poles affecting the attractiveness of inward investment location, the higher the probability of increased inflows of foreign direct investment in particular sectors, reflecting comparative advantages. There has been an empirical evidence, saying that, especially in emerging markets as well as elsewhere, foreign direct investment is an important player which promotes economic growth. An interesting aspect of direct inward investment is the rate of job creation.
The numbers show an increasing trend of boosted job creation in sectors where the value-added plays a crucial role in determining the quality of services. In 2006, the number of jobs grew beyond the forecast scenario, especially in software (13,4 percent) and business services (12,6 percent) - two strongly cooperative sectors in the new, digital age of new economy. As the largest recepient of inward software investment, the UK gained a 35 percent market share. The intensity of software inward investment reflects the latest trends and demand behavior in European economies where many sectors are facing crucial restructuring to accelerate the productivity growth and gain competitive edge against globally competitive economies such as India, China and the U.S.
Slovenia, the place where I live, sadly did not attract a single perspective inward investment project despite the competitive prospects of Slovenian market as well as regional potentials. Small size of the economy does not mean lower competitive advantages. If the small size of the economy determined the course of economic growth, then Iceland would probably never sustain high growth during 1990s and emerged as one of the wealthiest western industrialized economy and Switzerland wouldn't probably be the international economic hub with an enviable GDP per capita, ranked 6th on the European investment scale.
Last time, Harrah's Entertainment and HIT Gorica introduced the biggest joint-venture in Slovenia yet, worth 750 million EUR, which shall take place in 2008. Otherwise, investor friendly business, entrepreneurial and corporate legislation is not a title which could be given to Slovenia which, according to the lack of competitiveness and economic freedom, still remains the most socialist country of ex-socialist ones. Sadly but truly, I hope that Slovenians will realize that.
Recommended reading:
Lee Branstetter: Is Foreign Direct Investment a Channel of Knowledge Spillovers? Evidence from Japan’s FDI in the United States (link)
France falters as investor target, Financial Times (link)
European Investment Monitor, Ernst&Young (link)
Supply-side economic reforms in Romania, boosted the level of inward investment, currently facing a rapid 62,8 percent growth in real terms. France's market share dropped relative to its regional competitors such as UK, after reaching a benign 5 percent growth of inward investment while the UK experience a 22,7 percent growth rate respectively. Interestingly, there is a growing parallel between the growth of FDI and attractiveness of the environment for doing business. The latter includes relative tax burden emerging from high/low/modest corporate tax rate as well the sophistication of business environment in terms of access to global/local supply chains.
The higher the rate of quality of both poles affecting the attractiveness of inward investment location, the higher the probability of increased inflows of foreign direct investment in particular sectors, reflecting comparative advantages. There has been an empirical evidence, saying that, especially in emerging markets as well as elsewhere, foreign direct investment is an important player which promotes economic growth. An interesting aspect of direct inward investment is the rate of job creation.
The numbers show an increasing trend of boosted job creation in sectors where the value-added plays a crucial role in determining the quality of services. In 2006, the number of jobs grew beyond the forecast scenario, especially in software (13,4 percent) and business services (12,6 percent) - two strongly cooperative sectors in the new, digital age of new economy. As the largest recepient of inward software investment, the UK gained a 35 percent market share. The intensity of software inward investment reflects the latest trends and demand behavior in European economies where many sectors are facing crucial restructuring to accelerate the productivity growth and gain competitive edge against globally competitive economies such as India, China and the U.S.
Slovenia, the place where I live, sadly did not attract a single perspective inward investment project despite the competitive prospects of Slovenian market as well as regional potentials. Small size of the economy does not mean lower competitive advantages. If the small size of the economy determined the course of economic growth, then Iceland would probably never sustain high growth during 1990s and emerged as one of the wealthiest western industrialized economy and Switzerland wouldn't probably be the international economic hub with an enviable GDP per capita, ranked 6th on the European investment scale.
Last time, Harrah's Entertainment and HIT Gorica introduced the biggest joint-venture in Slovenia yet, worth 750 million EUR, which shall take place in 2008. Otherwise, investor friendly business, entrepreneurial and corporate legislation is not a title which could be given to Slovenia which, according to the lack of competitiveness and economic freedom, still remains the most socialist country of ex-socialist ones. Sadly but truly, I hope that Slovenians will realize that.
Recommended reading:
Lee Branstetter: Is Foreign Direct Investment a Channel of Knowledge Spillovers? Evidence from Japan’s FDI in the United States (link)
France falters as investor target, Financial Times (link)
European Investment Monitor, Ernst&Young (link)
Thursday, June 28, 2007
LABOR MARKET, WELFARE STATE AND FRANCE: AGEING POPULATION AND UNSUSTAINABILITY OF PUBLIC FINANCE
OECD correctly recommended France to accelerate the reform of tight and rigid labor market structure to ensure competitive growth conditions and long-term sustainability of public finance as ageing population and PAYG pension system trigger the volatility and increase in public spending, particularly for healthcare and pensions. Consequently, net unfunded financial liabilities would grow into the spiral of unsustainability of public finance, putting public debt at risk and making structural crisis unavoidable.
Recent policy action concerning French labor market was replacing the plethora of job contracts with a unified contract where the protection of workers increase as the timeline goes ahead. The action, however, seems to generate generous conditions for existing labor force and increase entry barriers to future job seekers, further breaking-down the flexibility of labor market itself.
When in the course of labor market status, protectionism enters the structure, the power to negotiate about minimum wages gains while "faster-than-productivity" centralized wage growth creates a strong cost-push pressures, heating-up inflation pressure. Recently, extensive labor cost pressures forced Swedish central bank, Riksbank, to lift the interest (repo) rate above the expected level. It announced the increase in the repo rate continually in order to fight labor cost pressures.
The real problem in this particular case is the size of employment in public sector whereas wage expenditures (labor costs) are an important part of public spending as well as a tool for abuse emerging from discretionary increases in minimum wage which decreases the probability of higher employment growth since productivity is emptied by the increase in minimum wages.
Quite similar effect is resulted from health and dependency care where market agents react in accordance with satisfying the utility, comparing the overall alternative costs. In Sweden, for instance, welfare cheating is the most frequent when there are events such as World soccer championship. Leaving work when satisfying the utility is always a cost at the expense of productivity and creating value-added. As Sweden, France is no exception to generous welfare arrangements such as sick, work abuse, maternity leave and disability pay.
Structural crisis of the economy and society in French is far more probable than actually estimated. The size of public sector in France is huge, one of the biggest in OECD. France is also no exception to ageing population. In fact, public sector employees are permitted to retire before the age of 60 on a full pension under special pension regime.
”While young people suffer from especially difficult entry paths into employment, a striking characteristic of the French labour market is how quickly older people withdraw from it”
OECD, Economic Survey of France 2007 (link)
Recent policy action concerning French labor market was replacing the plethora of job contracts with a unified contract where the protection of workers increase as the timeline goes ahead. The action, however, seems to generate generous conditions for existing labor force and increase entry barriers to future job seekers, further breaking-down the flexibility of labor market itself.
When in the course of labor market status, protectionism enters the structure, the power to negotiate about minimum wages gains while "faster-than-productivity" centralized wage growth creates a strong cost-push pressures, heating-up inflation pressure. Recently, extensive labor cost pressures forced Swedish central bank, Riksbank, to lift the interest (repo) rate above the expected level. It announced the increase in the repo rate continually in order to fight labor cost pressures.
The real problem in this particular case is the size of employment in public sector whereas wage expenditures (labor costs) are an important part of public spending as well as a tool for abuse emerging from discretionary increases in minimum wage which decreases the probability of higher employment growth since productivity is emptied by the increase in minimum wages.
Quite similar effect is resulted from health and dependency care where market agents react in accordance with satisfying the utility, comparing the overall alternative costs. In Sweden, for instance, welfare cheating is the most frequent when there are events such as World soccer championship. Leaving work when satisfying the utility is always a cost at the expense of productivity and creating value-added. As Sweden, France is no exception to generous welfare arrangements such as sick, work abuse, maternity leave and disability pay.
Structural crisis of the economy and society in French is far more probable than actually estimated. The size of public sector in France is huge, one of the biggest in OECD. France is also no exception to ageing population. In fact, public sector employees are permitted to retire before the age of 60 on a full pension under special pension regime.
”While young people suffer from especially difficult entry paths into employment, a striking characteristic of the French labour market is how quickly older people withdraw from it”
OECD, Economic Survey of France 2007 (link)
Wednesday, June 27, 2007
HONG KONG GDP UP 5,6 PERCENT IN Q1
Hong Kong's Gross Domestic Product rose 5.6% in real terms in the first quarter of 2007 over a year earlier, compared with the 7.3% growth in the previous quarter.
Here is a detailed analysis of quarterly GDP growth by economic activity
Source: Census and Statistics Department
Here is a detailed analysis of quarterly GDP growth by economic activity
Source: Census and Statistics Department
MAURITIUS MOVES TOWARDS FLAT TAX
Here's an example of Mauritius where there are real aims to create conditions for robust, sustained and inclusive growth. The government of Mauritius eventually decided to impose the reduction of corporate tax rate to 15 percent. The flat rate will also apply to personal income tax by 2009. Pro-growth tax system is the one with a low proportion of tax burden, a system that is geared towards rewarding effort and entrepreneurship.
TAX HAVENS: THE WAY TO HIGHER GROWTH AND PROSPERITY
Published in Business & Finance, Dan Mitchell wrote an article on how international bureaucracies create anti-tax haven policies to penalize low-tax jurisdictions and why tax havens are the best conceptual tool to tackle the broader opportunities brought by globalisation.
TAX COMPETITION, ECONOMIC GROWTH AND ECONOMIC PERFORMANCE
Recent data on GDP growth in the EU show sluggish periodical growth rates, far below the average growth rate in globally high-growing economies, particularly in Asia and the U.S. After years of weak growth, the EU and eurozone now face a significant barrier in letting the GDP growth soar.
In the EU, tax burden on labor increased from 35,1 percent to 35,2 percent while in the eurozone the increase in tax burden levied by workers extended from 36,2 percent to 36,8 percent. Nevertheless in the EU, tax burden penalizing work as an ingredient of productive behavior is globally one of the highest, outperforming the competitors of the EU economy.
EU governments have been steadily persuading Europeans that work is essential in remaining on competitive level together with the U.S. and high-growing economies in Asia. But how can work be promoted if tax regimes in nearly every European jurisdiction heavily penalizes saving, investment, entrepreneurship and work. Labor tax burden levied on taxpayers remained pretty much higher in the EU than in other industralized economies, accelerating GDP growth rapidly faster than European jurisdictions. In fact, not every European tax jurisdiction is showing sluggish economic performance. Ireland, for instance, eased tax burden on productive behavior by slashing corporate tax rate to "rock-bottom" 12,5 percent, eventually the lowest rate on corporate income in the entire EU. In Ireland, top marginal tax rate on individual income was slashed from 65 percent to 42 percent. The taxation of individual income still remained somehow progressive but the rate was decreased dramatically. Further, the economies in Eastern Europe are booming. Recently, flat tax revolution quickly splashed over the entire horizon of Eastern Europe. Estonia, a Baltic beacon which pioneered flat tax revolution, enjoys a rapid GDP growth, outreaching 10 percent. Seven-year compunded annual average GDP growth between 1997 and 2004 equaled 7,2 percent. In 2004, Estonian economy boomed once again after annual GDP growth rate topped 7,8 percent.
Investment is a key to economic growth. In the EU, taxes on capital (personal savings and asset income) increased dramatically from 25,3 percent to 27,3 percent. In the eurozone, where the majority of high-tax jurisdictions is situated, real tax burden on capital rose to 30,4 percent from 28,4 percent. However, tax competition between tax jurisdictions is pushing tax rates on work, saving, entrepreneurship and investment down. If two jurisdictions compete on letting in foreign investment and if the first jurisdiction slashes the corporate tax rate, the result is an increase in direct investment as investors do not prefer to operate in an environment where doing business is hampered by the outburst of tax burden. This action, however, essentially forces another jurisdictions to challenge the competition and slash the corporate tax rate down as well. As taxes on capital fall, disposable income grows.
Policymakers in older EU members seem to feel relentless about the size of public spending as a source of increasing tax burden and the EU authorities want to penalize them by harmonising tax rates on corporate income across the entire EU. This would have tragic consequences, ending the stories of economic success of Slovakia, Lithuania, Latvia and Estonia - countries that suffered for 50 years under communist regimes and, after the collapse of communism, sustained precious economic performance and emerged as global stars, whom history shall never forget.
In the EU, tax burden on labor increased from 35,1 percent to 35,2 percent while in the eurozone the increase in tax burden levied by workers extended from 36,2 percent to 36,8 percent. Nevertheless in the EU, tax burden penalizing work as an ingredient of productive behavior is globally one of the highest, outperforming the competitors of the EU economy.
EU governments have been steadily persuading Europeans that work is essential in remaining on competitive level together with the U.S. and high-growing economies in Asia. But how can work be promoted if tax regimes in nearly every European jurisdiction heavily penalizes saving, investment, entrepreneurship and work. Labor tax burden levied on taxpayers remained pretty much higher in the EU than in other industralized economies, accelerating GDP growth rapidly faster than European jurisdictions. In fact, not every European tax jurisdiction is showing sluggish economic performance. Ireland, for instance, eased tax burden on productive behavior by slashing corporate tax rate to "rock-bottom" 12,5 percent, eventually the lowest rate on corporate income in the entire EU. In Ireland, top marginal tax rate on individual income was slashed from 65 percent to 42 percent. The taxation of individual income still remained somehow progressive but the rate was decreased dramatically. Further, the economies in Eastern Europe are booming. Recently, flat tax revolution quickly splashed over the entire horizon of Eastern Europe. Estonia, a Baltic beacon which pioneered flat tax revolution, enjoys a rapid GDP growth, outreaching 10 percent. Seven-year compunded annual average GDP growth between 1997 and 2004 equaled 7,2 percent. In 2004, Estonian economy boomed once again after annual GDP growth rate topped 7,8 percent.
Investment is a key to economic growth. In the EU, taxes on capital (personal savings and asset income) increased dramatically from 25,3 percent to 27,3 percent. In the eurozone, where the majority of high-tax jurisdictions is situated, real tax burden on capital rose to 30,4 percent from 28,4 percent. However, tax competition between tax jurisdictions is pushing tax rates on work, saving, entrepreneurship and investment down. If two jurisdictions compete on letting in foreign investment and if the first jurisdiction slashes the corporate tax rate, the result is an increase in direct investment as investors do not prefer to operate in an environment where doing business is hampered by the outburst of tax burden. This action, however, essentially forces another jurisdictions to challenge the competition and slash the corporate tax rate down as well. As taxes on capital fall, disposable income grows.
Policymakers in older EU members seem to feel relentless about the size of public spending as a source of increasing tax burden and the EU authorities want to penalize them by harmonising tax rates on corporate income across the entire EU. This would have tragic consequences, ending the stories of economic success of Slovakia, Lithuania, Latvia and Estonia - countries that suffered for 50 years under communist regimes and, after the collapse of communism, sustained precious economic performance and emerged as global stars, whom history shall never forget.
TRADE UNIONS THREATEN THE PROSPERITY AND COMPETITIVENESS IN CZECH REPUBLIC
International Herald Tribune reports that the members of labor unions in Czech Republic are protesting against proposed tax and expenditure reforms. Nevertheless, the GDP growth in Czech Republic accelerated rapidly in recent years. For instance, in 2006, GDP growth rate hit 6,1 percent annually. However, the size as well as the inefficiency of public spending in various sectors present a huge structural problem, putting the competitive position of Czech economy at risk. As in many other transition countries, Czecg trade unions possess a strong role in the course of economic policy and fiscal (un)sustainability, demanding high unemployment benefits, maternity leave payments and health care spending. Nevertheless, high unemployment benefits create a loophole which leads into a spiral of highly regulated labor markets by creating persisting barriers to productivity. By the matter of empirical content, a huge size of public spending is tightly correlated with an increasing inefficiency of the spending itself. Trade unions seem not to realize that the only way to fund all kinds of unemployment and health benefits is to raise tax rates, thus shaping tax basis and penalizing investment and saving which are essential to economic growth.
Economic policymakers in Czech Republic correctly decided to impose a tax reform that would reduce barriers to productive behavior. If approved, a 15-percent flat tax on personal income would be introduced in 2008. Currently, the personal tax rate ranges from 12 percent to 32 percent, depending on income. The corporate tax rate would be cut from 24 percent to 19 percent by 2010.
Economic policymakers in Czech Republic correctly decided to impose a tax reform that would reduce barriers to productive behavior. If approved, a 15-percent flat tax on personal income would be introduced in 2008. Currently, the personal tax rate ranges from 12 percent to 32 percent, depending on income. The corporate tax rate would be cut from 24 percent to 19 percent by 2010.
Saturday, June 23, 2007
ROARING ECONOMIC TIGER FROM THE EAST
In a WSJ column, Dan Mitchell writes about how a simple, low burden and non-complex flat tax system boosted the competitiveness and performance of Estonian economy.
SWEDISH CENTRAL BANK RAISES KEY INTEREST RATE
"Inflation is the Riksbank’s particular responsibility. The Riksbank’s objective is to maintain inflation at around 2 per cent a year."
The Swedish Riksbank raised a key interest rate by 0.25% on Wednesday, to 3.5%, and promised even further hikes by the end of the year. Recent economic overview on Swedish economy showed a strong slowdown of productivity growth and strongly growing wage costs resulted in a tight cost pressure which inevitably urged the increase in repo rate to keep the economy on competitive edge to ease the possible inflation volatility. The repo rate is expected to be around 4 percent at the end of the year. Over the coming years it is probable that the interest rate will need to be raised further. This action is about to be taken soon and could suit Sweden's inflation targeting strategy performed by Riksbank, the oldest central bank in the world. Over time, the repo rate could be further increases, depending on wage, cost and productivity dynamics. To ease the inflation pressures as well as the volatility, the labor market bargaining pressures are ought to be eased and wage settlement should be completely separated from central agreements which are the heaviest threat to the economy in the course of long-term growth and reversing inflation pressures and the overheating of the economy.
The Swedish Riksbank raised a key interest rate by 0.25% on Wednesday, to 3.5%, and promised even further hikes by the end of the year. Recent economic overview on Swedish economy showed a strong slowdown of productivity growth and strongly growing wage costs resulted in a tight cost pressure which inevitably urged the increase in repo rate to keep the economy on competitive edge to ease the possible inflation volatility. The repo rate is expected to be around 4 percent at the end of the year. Over the coming years it is probable that the interest rate will need to be raised further. This action is about to be taken soon and could suit Sweden's inflation targeting strategy performed by Riksbank, the oldest central bank in the world. Over time, the repo rate could be further increases, depending on wage, cost and productivity dynamics. To ease the inflation pressures as well as the volatility, the labor market bargaining pressures are ought to be eased and wage settlement should be completely separated from central agreements which are the heaviest threat to the economy in the course of long-term growth and reversing inflation pressures and the overheating of the economy.
Thursday, June 21, 2007
FLAT TAX IN ONE LESSON
Madsen Pirie of Adam Smith Institute demonstrates the effects and implications of instituting a flat tax in the case of Iceland.
Wednesday, June 20, 2007
PUBLIC HEALTH: INEFFICIENCY, FISCAL TRAP AND THE LACK OF FREEDOM
The article in Washington Post states that Japan's new public health problem is obesity which has supposedly grown with the apetite for Western food.
There is a question, however, whether obesity and smoking are the problem referring to the issue of public health? The answer is no.
The term "public health" is similary coined as "national interest" and has grown in quite a similar way as government intervention did. Previously, governments from all around the world embraced falsified Keynesian economic concept of aggregate demand as the short-run determinator of economic growth. A dummie idea turned into the mainstream of economic policy which collapsed when the agony of high inflation and unemployment spiralled the course of stagnation starting back in 1970s.
Obesity and smoking are widespread problems. But they are not public health problems. For example, if someone eats a huge Big Mac, then he/she doesn poison or threaten your health since each and everyone is credible enough to make his/her own decisions about food consumption and eating habits. Nobody accidentially ingests Big Mac and it thus doesn't make your health worse-off.
If someone decides to eat donuts several times a day, he/she should do so while your health is not put at risk in this case. Years ago, the issue of public health focused on preventing epidemics and securing health benefits such as clean water and improved sanitation.
Mr. David Boaz of Cato Institute captured the essence of taking care of public health as the security package confirmed by the so called "neighborhood effects";
There is a question, however, whether obesity and smoking are the problem referring to the issue of public health? The answer is no.
The term "public health" is similary coined as "national interest" and has grown in quite a similar way as government intervention did. Previously, governments from all around the world embraced falsified Keynesian economic concept of aggregate demand as the short-run determinator of economic growth. A dummie idea turned into the mainstream of economic policy which collapsed when the agony of high inflation and unemployment spiralled the course of stagnation starting back in 1970s.
Obesity and smoking are widespread problems. But they are not public health problems. For example, if someone eats a huge Big Mac, then he/she doesn poison or threaten your health since each and everyone is credible enough to make his/her own decisions about food consumption and eating habits. Nobody accidentially ingests Big Mac and it thus doesn't make your health worse-off.
If someone decides to eat donuts several times a day, he/she should do so while your health is not put at risk in this case. Years ago, the issue of public health focused on preventing epidemics and securing health benefits such as clean water and improved sanitation.
Mr. David Boaz of Cato Institute captured the essence of taking care of public health as the security package confirmed by the so called "neighborhood effects";
"Public health officials worked to drain swamps that might breed mosquitoes and thus spread malaria. They strove to ensure that water supplies were not contaminated with cholera, typhoid, or other diseases. The U.S. Public Health Service began as the Marine Hospital Service, and one of its primary functions was ensuring that sailors didn’t expose domestic populations to new and virulent illnesses from overseas."
A widespread propaganda infused that countries need public health bureaucracies to cure habits such as smoking. But despite all the fear intangled, government intervention again proved itself as inefficient and costly. Public health bureaucrats are a typical case of the monopolist who avoid the market behavior by setting-up discretionary supply, telling others what to do and how to adjust their lifestyle to the preferences of the minority government officials.
Economically, health care service is a tradeable good, which means that its price is determined by supply and demand. However, the monopolization of health care services once again demonstrated how costly to growth rent-seeking really is.
In public health care, prices are usually administered and controlled, and an important source of cost-push inflation. All kinds of anti-smoking campaigns, anti-obesity roundtables is funded by public spending and could easily be reached in everyday free-market. Neighborhood effects of increased spending on public health care programs have never been firmly proven and thus, over time, the outlays for public health care sector grew respectively and became a rigid fiscal obstacles in breaking-down the public spending.
If I want to quit smoking, I can do it on my own without the intervention of public health bureaucracy. If I want to anchor the eating habits, I can also do it on my own. I do not need the assistance of anyone unless I'm willing to ask and pay for it. Public health care "problems" are ridiculously expressed in a way that bureaucratic services can solve them immediately, demanding collective action and pushing for greater fiscal outlays while the quality of services ends-up in the spiral of dissatisfaction.
Economically, there could hardly be a health care crisis as well as public health schemes roughly overlook the aspect of its own supply on the basis of cost/benefit decision-making so it cannot be analyzed by tools from welfare economics. The outcome of mistakenly designed public health schemes is a high degree of expressed dissatisfaction with the services conducted in a public health care system.
There is also a huge cost shock wrecking the output efficiency of spending on health care. Not surprisingly, some health-care problems are widespread but that doesn't mean that they're public. To tackle these problems, government intervention can solve them but only an individual action as the latter rationally estimates its preferences as nobody else can.
GLOBALISATION IS THE PURSUIT OF LIBERTY
OECD correctly reports that fears and threats on globalization are fully overblown. Overestimated threats emerge from concerns over wage inequality and the loss of jobs as labor-cost incentives in emerging markets push many existing enterprises abroad. However, moving production facilities and low-skilled jobs abroad does not mean that wages neccessarily decline. Job flight is compensated by infusing high-skilled jobs such as IT, consulting and services broadly based on new economy.
Overblown rosy fears about the danger brought by the liberalization of international trade nearly turned into the commedy. Empirically, the liberalization of international trade flows encourages labor and capital mobility giving incentives to accelerate the investment in human capital. Another questions that raises woes against the pursuit of free trade is whether offshoring worsenes the unemployment agony or not? The answer is No.
Despite the increased amount of offshoring investment, the unemployment rate among OECD countries steadily declined from 33,6m in 2006 to 32m in 2007. The explanation can be based on the correct empirical assumption that offshoring investment is an incentive for domestic economy where new jobs are added particularly in high value-added areas where knowledge is transferred at an intensive pace. Regarding offshoring, both sides benefit since this is a pure behavior of market equilibrium and free exchange.
Domestic economy (where offshore investment takes place) is fueled by intensive job creation in sectors where high value-added plays a sharing role. The other side benefits from job creation. Since offshoring is primarily focused on locations where labor cost proportions are low relative to the rest of the world, say Chinese, Vietnamese or Indian workers benefit from higher job creation which lifted millions out of poverty into the middle-class wealth.
There is also concern about wages. Wage inequality is actually a good sign reflecting the difference in skills, education and productive behavior between labor market agents. The wage inequality over the last period is actually the result of technological change and increased productivity in several areas compared to another.
Overblown rosy fears about the danger brought by the liberalization of international trade nearly turned into the commedy. Empirically, the liberalization of international trade flows encourages labor and capital mobility giving incentives to accelerate the investment in human capital. Another questions that raises woes against the pursuit of free trade is whether offshoring worsenes the unemployment agony or not? The answer is No.
Despite the increased amount of offshoring investment, the unemployment rate among OECD countries steadily declined from 33,6m in 2006 to 32m in 2007. The explanation can be based on the correct empirical assumption that offshoring investment is an incentive for domestic economy where new jobs are added particularly in high value-added areas where knowledge is transferred at an intensive pace. Regarding offshoring, both sides benefit since this is a pure behavior of market equilibrium and free exchange.
Domestic economy (where offshore investment takes place) is fueled by intensive job creation in sectors where high value-added plays a sharing role. The other side benefits from job creation. Since offshoring is primarily focused on locations where labor cost proportions are low relative to the rest of the world, say Chinese, Vietnamese or Indian workers benefit from higher job creation which lifted millions out of poverty into the middle-class wealth.
There is also concern about wages. Wage inequality is actually a good sign reflecting the difference in skills, education and productive behavior between labor market agents. The wage inequality over the last period is actually the result of technological change and increased productivity in several areas compared to another.
Tuesday, June 19, 2007
THE CRISIS OF WELFARE STATE IN EUROPE IS THE SEED OF ANTI-AMERICANISM
Writing for TCS Daily, Richard Rahn explains dangerous effects of European anti-americanism and its origins as well. Contrary to popular beliefs, I believe that the phenomena of European anti-americanism is not rooted in political reasons but in a broader economic highlight reflecting the crisis of welfare state in Europe, leading to low economic growth while supply-side (tax reductions) measures on the other side of Atlantic strenghened the U.S. competitiveness and contributed a substantial part to the record levels of GDP growth in the U.S. in the past year.
Anti-americanism is dangerous for both sides. The EU now accounts for 21 percent of U.S. merchandise exports and 19 percent of U.S. merchandise imports, and about 34 percent of U.S. services exports and 37 percent of U.S. services imports. In the past year, nearly 1,1 trillion (more than half of total U.S. foreign direct investment) was invested in Europe. U.S. and the EU are thus the largest trade and investment partners in the world. Even more. The total population of the EU and the U.S. presents nearly 57 percent of total world population.
The economic climate in the U.S. is far more prosperous than the one in the EU, except for the emerging markets in Eastern Europe, currently standing at skyrocketing economic atmopshere equipped with rapid GDP growth rates. Supply-side economic reforms in Estonia, Slovakia and Latvia are now paying big dividends.
In fact, growth projections of Estonia, Latvia and Slovakia rapidly exceed the European average, further stepping-up after the acceleration of GDP growth. The latest release has shown that Estonian and Latvian economies are growing at a rapid pace. In Slovenia, the GDP grew 7,2% quarterly. But in Slovenia, there is much misunderstanding concerning GDP growth.
In Slovenia, construction reached 28,9 percent rate of the value-added. But the offspring of investment emerged from the government debt grants to DARS (Highway builder and a monopolist) what enabled an intensive pace of borrowing which will once have to be repayed together with interest. You don't have to be an economic genious to find out that building highways stimulates construction investment, especially in a country in transition such as Slovenia.
Another relevant reason for a sharply widening gap between the U.S. and Europe is the crisis of welfare state in the EU back in early 1990s and still today. Many European countries suffered from a severe economic backlash in early 1990s.
After Germany was reunified, the economic performance started to flow sluggishly. The reunification could hardly be blamed for poor GDP growth track, but rather measures determining economic atmosphere such as benevolently high tax rates on labor and capital and rigid labor market. The agony of labor market deadlock has indeed forced many Germans to fly away from the welfare state onto nearby locations such as Switzerland, Denmark and Austria. Many Germans have indeed become "Neue Gastarbeiter" (new guest workers).
France equally suffers from rigid labor market and publicly declared protectionism and economic nationalism. In previous year, France clearly demonstrated what is the output of generous welfare expenditures coupled with unflexible labor market and lazy immigrants. Italy is the next sick man of Europe. After hitting the historically lowest GDP growth rates, the economy is hampered by significant tax burden and heavy regulation which slashes the potential absorbtion of output gains.
Another "pain-in-the-ass" is an ageing population which triggers the welfare expenditure rate in an unchanged pension scheme where net financial pension liabilities rise twice compared to GDP sum. Sweden, once the cradle of welfare filth, was hit by a recession and continually falling GDP for two years. Riksbank, the oldest central bank in the world, had to pass the devaluation of Swedish krona several times as the public debt and fiscal pressure on expenditure growth became uncontrollable. The economic recovery, of course, was slow, sluggish and hit by a growing taxation pressure as the retirement rent in "Bismarck-designed" pension schemes skyrocketed,
(A few days ago, I noted an interesting insight from Milton Friedman's trip to Stockholm (Sweden) where he received Nobel prize back in 1976)
On the other side, the U.S. economy flourished further after tax cuts were implemented back in 2003. Generally speaking, the U.S. has created an economic and business environment that is an envy to the world. Europe's best and brightest escape the welfare at a record pace, seeking to find better opportunities in the U.S where regulation and excessive fiscal pressure are far lower than in nearly every European welfare 'cradle-to-grave' welfare state.
True, the U.S. maintains one of the most onerous corporate tax rates in the world. Even in Germany and France, there is much less corporate taxation pressure on companies. The economic course diverging the measures (productivity) between the U.S. and Europe is eventually one of the main reasons why the majority of Europeans envies the U.S. so much. The cure for "European stagnation warming" is quite simple:
1. Privatize social security
2. Eliminate as much welfare state services as actually possible,
3. Maintain the rule of law,
4. Enforce tax competition,
5. Liberalize/deregulate product markets,
6. Abolish trade quotas,
7. Abolish the collective union bargaining, and
8. Cut tax burden by reducing tax rates on productive behavior.
Anti-americanism is dangerous for both sides. The EU now accounts for 21 percent of U.S. merchandise exports and 19 percent of U.S. merchandise imports, and about 34 percent of U.S. services exports and 37 percent of U.S. services imports. In the past year, nearly 1,1 trillion (more than half of total U.S. foreign direct investment) was invested in Europe. U.S. and the EU are thus the largest trade and investment partners in the world. Even more. The total population of the EU and the U.S. presents nearly 57 percent of total world population.
The economic climate in the U.S. is far more prosperous than the one in the EU, except for the emerging markets in Eastern Europe, currently standing at skyrocketing economic atmopshere equipped with rapid GDP growth rates. Supply-side economic reforms in Estonia, Slovakia and Latvia are now paying big dividends.
In fact, growth projections of Estonia, Latvia and Slovakia rapidly exceed the European average, further stepping-up after the acceleration of GDP growth. The latest release has shown that Estonian and Latvian economies are growing at a rapid pace. In Slovenia, the GDP grew 7,2% quarterly. But in Slovenia, there is much misunderstanding concerning GDP growth.
In Slovenia, construction reached 28,9 percent rate of the value-added. But the offspring of investment emerged from the government debt grants to DARS (Highway builder and a monopolist) what enabled an intensive pace of borrowing which will once have to be repayed together with interest. You don't have to be an economic genious to find out that building highways stimulates construction investment, especially in a country in transition such as Slovenia.
Another relevant reason for a sharply widening gap between the U.S. and Europe is the crisis of welfare state in the EU back in early 1990s and still today. Many European countries suffered from a severe economic backlash in early 1990s.
After Germany was reunified, the economic performance started to flow sluggishly. The reunification could hardly be blamed for poor GDP growth track, but rather measures determining economic atmosphere such as benevolently high tax rates on labor and capital and rigid labor market. The agony of labor market deadlock has indeed forced many Germans to fly away from the welfare state onto nearby locations such as Switzerland, Denmark and Austria. Many Germans have indeed become "Neue Gastarbeiter" (new guest workers).
France equally suffers from rigid labor market and publicly declared protectionism and economic nationalism. In previous year, France clearly demonstrated what is the output of generous welfare expenditures coupled with unflexible labor market and lazy immigrants. Italy is the next sick man of Europe. After hitting the historically lowest GDP growth rates, the economy is hampered by significant tax burden and heavy regulation which slashes the potential absorbtion of output gains.
Another "pain-in-the-ass" is an ageing population which triggers the welfare expenditure rate in an unchanged pension scheme where net financial pension liabilities rise twice compared to GDP sum. Sweden, once the cradle of welfare filth, was hit by a recession and continually falling GDP for two years. Riksbank, the oldest central bank in the world, had to pass the devaluation of Swedish krona several times as the public debt and fiscal pressure on expenditure growth became uncontrollable. The economic recovery, of course, was slow, sluggish and hit by a growing taxation pressure as the retirement rent in "Bismarck-designed" pension schemes skyrocketed,
(A few days ago, I noted an interesting insight from Milton Friedman's trip to Stockholm (Sweden) where he received Nobel prize back in 1976)
On the other side, the U.S. economy flourished further after tax cuts were implemented back in 2003. Generally speaking, the U.S. has created an economic and business environment that is an envy to the world. Europe's best and brightest escape the welfare at a record pace, seeking to find better opportunities in the U.S where regulation and excessive fiscal pressure are far lower than in nearly every European welfare 'cradle-to-grave' welfare state.
True, the U.S. maintains one of the most onerous corporate tax rates in the world. Even in Germany and France, there is much less corporate taxation pressure on companies. The economic course diverging the measures (productivity) between the U.S. and Europe is eventually one of the main reasons why the majority of Europeans envies the U.S. so much. The cure for "European stagnation warming" is quite simple:
1. Privatize social security
2. Eliminate as much welfare state services as actually possible,
3. Maintain the rule of law,
4. Enforce tax competition,
5. Liberalize/deregulate product markets,
6. Abolish trade quotas,
7. Abolish the collective union bargaining, and
8. Cut tax burden by reducing tax rates on productive behavior.
IT'S ABOUT SPENDING, NOT DEFICITS
Investor's Business Daily has noted that the real problem in public finance is not budget deficit but the size of government spending. Whether it is financed by taxes and borrowing, high goverment spending causes the distorsions in dynamic economic behavior. If tax rates are high and widespread, market agents tend to absorb the money and hide it away from the taxation base. Inevitably, high tax rates, as Laffer Curve correctly explains, cause the loss of tax revenue which becomes the heaviest weapon in the hands of economic policymakers as well as the worsening of economic conditions in doing business and creating wealth emerging from productive behavior such as risk-taking, entrepreneurship, saving and work.
The most obvious agony of public spending is an empirical fact, that an obscure size of spending correlates with intensive inefficiency of public sector. Robert J. Barro, for instance, showed that growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures, but subsequently decline. With an income tax, the decentralized choices of growth and saving are too low, but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency (link). The explanation is simple: higher the spending rate, greater the inefficiency of government spending in a sample economy with endogenous growth.
In the long run, of course, high budget deficits are unsustainable as the size of the deficit is possibly fueled by raising public debt and tax rates as it is expected that individuals pursue adaptive expectations statically so that increasing tax rate on labor and capital will return higher tax revenue, but Nobel-winning economist Edward Prescott has shown that labor supply as a market agent is highly sensitive to taxes, as compliance costs per unit of output increase as a single taxation unit adds relative burden to agent's income earned in the market. As the tax rate rises, GDP per capita falls. For example, compliance costs is when you hire lawyers and accountants to help you overcome the burden of annual tax returns such as finding the right exemption for capital gains, income earned abroad etc... in a heavily complicated tax system marred by loopholes, exemptions and deductions pushing compliance costs ever upward.
Nowdays, it is silly to listen how deficits soared and how facts on high rate of public spending are left ignored.
The most obvious agony of public spending is an empirical fact, that an obscure size of spending correlates with intensive inefficiency of public sector. Robert J. Barro, for instance, showed that growth and saving rates fall with an increase in utility-type expenditures; the two rates rise initially with productive government expenditures, but subsequently decline. With an income tax, the decentralized choices of growth and saving are too low, but if the production function is Cobb-Douglas, the optimizing government still satisfies a natural condition for productive efficiency (link). The explanation is simple: higher the spending rate, greater the inefficiency of government spending in a sample economy with endogenous growth.
In the long run, of course, high budget deficits are unsustainable as the size of the deficit is possibly fueled by raising public debt and tax rates as it is expected that individuals pursue adaptive expectations statically so that increasing tax rate on labor and capital will return higher tax revenue, but Nobel-winning economist Edward Prescott has shown that labor supply as a market agent is highly sensitive to taxes, as compliance costs per unit of output increase as a single taxation unit adds relative burden to agent's income earned in the market. As the tax rate rises, GDP per capita falls. For example, compliance costs is when you hire lawyers and accountants to help you overcome the burden of annual tax returns such as finding the right exemption for capital gains, income earned abroad etc... in a heavily complicated tax system marred by loopholes, exemptions and deductions pushing compliance costs ever upward.
Nowdays, it is silly to listen how deficits soared and how facts on high rate of public spending are left ignored.
Monday, June 18, 2007
GLOBAL MUTUAL FUNDS OVERVIEW
Here's some data sheet on top funds' average periodical yield rates which I came across today. As you can see from the sheet, the effect of solid economic conditions in emerging markets reflects the boom in the growth of returns from mutual funds. Despite speculative motives oftenly dribbling the dynamics of mutual fund performance, the growth outlook has remained shiny.
Sunday, June 17, 2007
MUCH TALK, WRONG SOLUTIONS AND OPPOSITE RESULTS: THE CASE OF WAR ON GLOBAL WARMING
by Martin Rojko
When the EU officials, hardcore environmentalists and other global warming alarmists (similar to Nobel price nominee Al Gore) talk about „doing something“ about global warming, two ways are discussed. One is trading permits to emit carbon dioxide and other greenhouse gases. Second is taxing on carbon emissions from gasoline or electricity use. Both approaches are different in tools considered, but common in final result. If they cut something, it´s not for sure emissions but economic growth.
Some economists believe the best way to deter people from using carbon products is to tax them. Beside writting a treatment on detrimental effects of taxing for any „great and noble“purpose, one result is more than clear. High (Pigou) tax would burden the poor and hamper economic growth. Low tax would lead to probably zero emissions reductions.
The Kyoto protocol was signed in 1997. Participating countries (including EU) have made a serious commitment to cut emissions. Since this time they have in reality increased in every one of the EU-15. In fact, EU-15 emissions have been rising faster in percentage terms than in the USA (which is not bounded by Kyoto), where emissions have been going up about one point for every three points of economic growth. The U.S. Energy Information Agency estimates U.S. carbon-dioxide emissions dropped 1.3 percent in 2006. At the same time overall European emissions went up by more than 1 percent. This doesn´t bother politicians for just a minute as they continue in rhetoric exhibitionism of decreasing.
Emissions trading is not working. Evidence can be found not just in increasing emissions, but also in collapse of carbon price. Because of surplus of allocated permits the price fell from 30 eur in start of 2006 to 0,30 eur in these days. Post-communist countries has nowadays a large surplus of trading permits, which could be turn into cash by selling them to West European companies. This reality is well known in both West and East part of continent. And Belarus government know it also. Lukasenko´s regime had been refusing Kyoto for a long time untill the last year when emissions („hot air“) trading started.
The Newsweek magazine published the article on global earth cooling in 1975. It cited a few scientists warning against possible catastrophic results. It has taken more than 30 years till the Newsweek has admitted that it „has been considerably wrong in a short-time forecast.“ Stern´s sensational conclusions are condemned to the same act. But probably without his excuse.
Society functioning depends mostly on carbon nowadays. This substance can´t and won´t be substituted by swinging of magical stick in hands of politics which desire to handle a reality. If we need to do something about global warming, it is to shift from talking about forcibly reducing emissions and search for solutions compatible with market capitalism. A rich world will be better than one made poorer through overpriced carbon constraints. Only capitalism and freedom can help get us from carbon dependence.
When the EU officials, hardcore environmentalists and other global warming alarmists (similar to Nobel price nominee Al Gore) talk about „doing something“ about global warming, two ways are discussed. One is trading permits to emit carbon dioxide and other greenhouse gases. Second is taxing on carbon emissions from gasoline or electricity use. Both approaches are different in tools considered, but common in final result. If they cut something, it´s not for sure emissions but economic growth.
Some economists believe the best way to deter people from using carbon products is to tax them. Beside writting a treatment on detrimental effects of taxing for any „great and noble“purpose, one result is more than clear. High (Pigou) tax would burden the poor and hamper economic growth. Low tax would lead to probably zero emissions reductions.
The Kyoto protocol was signed in 1997. Participating countries (including EU) have made a serious commitment to cut emissions. Since this time they have in reality increased in every one of the EU-15. In fact, EU-15 emissions have been rising faster in percentage terms than in the USA (which is not bounded by Kyoto), where emissions have been going up about one point for every three points of economic growth. The U.S. Energy Information Agency estimates U.S. carbon-dioxide emissions dropped 1.3 percent in 2006. At the same time overall European emissions went up by more than 1 percent. This doesn´t bother politicians for just a minute as they continue in rhetoric exhibitionism of decreasing.
Emissions trading is not working. Evidence can be found not just in increasing emissions, but also in collapse of carbon price. Because of surplus of allocated permits the price fell from 30 eur in start of 2006 to 0,30 eur in these days. Post-communist countries has nowadays a large surplus of trading permits, which could be turn into cash by selling them to West European companies. This reality is well known in both West and East part of continent. And Belarus government know it also. Lukasenko´s regime had been refusing Kyoto for a long time untill the last year when emissions („hot air“) trading started.
The Newsweek magazine published the article on global earth cooling in 1975. It cited a few scientists warning against possible catastrophic results. It has taken more than 30 years till the Newsweek has admitted that it „has been considerably wrong in a short-time forecast.“ Stern´s sensational conclusions are condemned to the same act. But probably without his excuse.
Society functioning depends mostly on carbon nowadays. This substance can´t and won´t be substituted by swinging of magical stick in hands of politics which desire to handle a reality. If we need to do something about global warming, it is to shift from talking about forcibly reducing emissions and search for solutions compatible with market capitalism. A rich world will be better than one made poorer through overpriced carbon constraints. Only capitalism and freedom can help get us from carbon dependence.
JOINT-VENTURE IN A SMALL AND OPEN ECONOMY
After months of negotiations, gamling companies Harrah's Entertainment (USA) and Hit (Slovenia) have finally come closer to launch the biggest joint-venture Slovenian economy has ever had.
Thursday, June 14, 2007
TRAVEL AND TOURISM COMPETITIVENESS INDEX
In many countries, travel and tourism is a critical sector impacting national prosperity and economic growth. In fact, tourism is gaining evenly greater share in the GDP and playing a vibrant role in promoting the attractiveness of global business and living environments. Here's the first WEF report on Travel and Tourism Competitiveness. The index of course, does not measure the competitiveness of travel and tourism in each country according to its natural fascinations and beauty of the landscape but it measures the factors that setup the conditions which help to build-up a competitive tourist and travel industry.
PUTTING GLOBAL WARMING OUTRAGE ON ICE
Early this morning, I came across the article in Financial Times written by Vaclav Klaus entitled Freedom, not climate, is at risk.
One of the major concerns in debating the future of global warming is that the supporters of heavy regulation seem to instinctly ignore the economic fundamentals. In the last decade, there have been numerous panel groups deciding how to orient to cure global warming. Nearly every proposal and recommended solution fetched the regulation of industries to cut the emissions as much as possible.
The suggestions of the environmentalists offered poor track in understanding how economic behavior really works. In recent years, world markets boomed from the emergence of new technology containing efficient, innovative and environmentally-friendly methods determining the course of production. Consumers always want new products and the only way to deliver them is to use the rock-bottom incentives to provide the best product at the best price. Old and rugged technologies were once the symbol in centrally-planned economies, causing high costs and truly poor quality. However, greater incentives to produce and supply over the course of time and supply-side economic measures such as deregulation, the liberalization of product markets and the enforcement of competitive law contributed to the diffussion of efficient technologies with an aim to control cost shocks and provide the betterment of product quality.
New economy and the "so-called" dot-com boom revolutionized the market by providing new technologies at far more efficient level. Consequently, the economy's transformation from manufacturing to services brought the greatest industrial restructuring we have ever seen. New economy is actually the reason the the share of industry in the GDP fell and consequently the amount of gas emissions as well. All kinds of "scientific consesus" are nothing else but a huge political infusion into scientific work.
Professor Richard S. Lindzen from the Massachusetts Institute of Technology brilliantly captured the essence of global warming histeria:
"Future generations will wonder in bemused amazement that the early 21st century’s developed world went into hysterical panic over a globally averaged temperature increase of a few tenths of a degree, and, on the basis of gross exaggerations of highly uncertain computer projections combined into implausible chains of inference, proceeded to contemplate a roll-back of the industrial age".
The supporters of "black"future environmental scenario suggest that we should dramatically change our lives by cutting the energy consumption expenditure and change it with new energy resources. Have they provided the positive impacts of alternative energy resources infecting the pollution?
The implications of environmental intervention stretch beyond the edge of our imagination. If such measures were introduced, our living standards would probably fell dramatically and so would GDP growth decline as well. Assume that you're an entrepreneur with a certain kind of technology. You know that this particular technology is the most efficient in the market giving you high yields of return. And then imagine that government said that "you must use another kind of technology" by which you cannot sufficiently generate the returns you get back from the technological combinations you carefully chose. Understanding consumer behavior is essential for the entreprise to boost the supply with the best quality and the lowest possible price yielding competitive margin. So in the long run, you'd forced to adapt a new kind of technology which completely distorts the stock of your products which consumer deny to buy. Your income, value added and profits would fall and how would then your enterprise be competitive and socially responsible if it didn't generate profit?
Following the pursuit of global competitiveness, we will enjoy far better technological conditions in the future, bringing new cutting-edge concepts into our lives and sharply improving our life conditions. Taken reasonably, it's quite pathetic to claim that gas emissions endlessly change weather and climate behavior. In fact, the empirical evidence and computer projections displaying the course of intensity of global warming over time is very poor, putting politicised scientific consesus on ice.
One of the major concerns in debating the future of global warming is that the supporters of heavy regulation seem to instinctly ignore the economic fundamentals. In the last decade, there have been numerous panel groups deciding how to orient to cure global warming. Nearly every proposal and recommended solution fetched the regulation of industries to cut the emissions as much as possible.
The suggestions of the environmentalists offered poor track in understanding how economic behavior really works. In recent years, world markets boomed from the emergence of new technology containing efficient, innovative and environmentally-friendly methods determining the course of production. Consumers always want new products and the only way to deliver them is to use the rock-bottom incentives to provide the best product at the best price. Old and rugged technologies were once the symbol in centrally-planned economies, causing high costs and truly poor quality. However, greater incentives to produce and supply over the course of time and supply-side economic measures such as deregulation, the liberalization of product markets and the enforcement of competitive law contributed to the diffussion of efficient technologies with an aim to control cost shocks and provide the betterment of product quality.
New economy and the "so-called" dot-com boom revolutionized the market by providing new technologies at far more efficient level. Consequently, the economy's transformation from manufacturing to services brought the greatest industrial restructuring we have ever seen. New economy is actually the reason the the share of industry in the GDP fell and consequently the amount of gas emissions as well. All kinds of "scientific consesus" are nothing else but a huge political infusion into scientific work.
Professor Richard S. Lindzen from the Massachusetts Institute of Technology brilliantly captured the essence of global warming histeria:
"Future generations will wonder in bemused amazement that the early 21st century’s developed world went into hysterical panic over a globally averaged temperature increase of a few tenths of a degree, and, on the basis of gross exaggerations of highly uncertain computer projections combined into implausible chains of inference, proceeded to contemplate a roll-back of the industrial age".
The supporters of "black"future environmental scenario suggest that we should dramatically change our lives by cutting the energy consumption expenditure and change it with new energy resources. Have they provided the positive impacts of alternative energy resources infecting the pollution?
The implications of environmental intervention stretch beyond the edge of our imagination. If such measures were introduced, our living standards would probably fell dramatically and so would GDP growth decline as well. Assume that you're an entrepreneur with a certain kind of technology. You know that this particular technology is the most efficient in the market giving you high yields of return. And then imagine that government said that "you must use another kind of technology" by which you cannot sufficiently generate the returns you get back from the technological combinations you carefully chose. Understanding consumer behavior is essential for the entreprise to boost the supply with the best quality and the lowest possible price yielding competitive margin. So in the long run, you'd forced to adapt a new kind of technology which completely distorts the stock of your products which consumer deny to buy. Your income, value added and profits would fall and how would then your enterprise be competitive and socially responsible if it didn't generate profit?
Following the pursuit of global competitiveness, we will enjoy far better technological conditions in the future, bringing new cutting-edge concepts into our lives and sharply improving our life conditions. Taken reasonably, it's quite pathetic to claim that gas emissions endlessly change weather and climate behavior. In fact, the empirical evidence and computer projections displaying the course of intensity of global warming over time is very poor, putting politicised scientific consesus on ice.
Tuesday, June 12, 2007
HOW ECONOMIC CHAUVINISM DEMOLISHED THE COMPETITIVENESS OF BANKING SECTOR IN SLOVENIA
Here is an article which I wrote in May on low competitive position of banking sector in Slovenia which was derived from the latest survey conducted by International Service Check, testing the accountability and sophistication of banking sector in several Central and Eastern European countries, including Slovenia, the place where I live.
The article was published on Sukromne Vlastnictvo.
The article was published on Sukromne Vlastnictvo.
THE ECONOMICS OF TAX COMPETITION
As a guest writer, I recently wrote an article entitled "The Economics of Tax Competition" published on Sukromne Vlastnictvo.
Friday, June 08, 2007
FREE TRADE TO BOOST CANADIAN COMPETITIVENESS
Financial Post reports that Canadian Trade Ministry announced a new strategy containing free trade agreements at an accelerated pace to help boost access to the market which Canadian businesses penetrate. The strategy is welcome since commerical access is about to boost the competitiveness of Canadian companies to compete internationally and bind closer commercial ties with international partners, enabling to look-up for new markets through easier access to key markets. It is also essential to note that protectionism does not serve its meaning as the trade benefits and competitive advantage boost growth and performance of the economy, further adding value to the economy competing on international markets. Previously, numerous empirical studies have shown a positive impact of free trade on performance and several other areas such as environmental questions. In Is Free Trade Good for the Environment (2001), Walter Antweiler, Brian R. Copeland and R. Scott Taylor questioned the effect of economic openness and international trade flows on global pollution, based on the observation of 43 countries from 1971-1996. They concluded that if trade liberalization increases the GDP per capita 1 percent, the concentration of pollution decreases 1 percent (link). Nevertheless, free trade agreements entail a positive impact on environmental sustainability.
Thursday, June 07, 2007
RESTRICTING CAPITAL INFLOWS WON'T SOLVE THE LACK OF PROPERTY RIGHTS
Indian government is considering setting the restrictions on capital inflows.
The appreciation of the ruple has helpfully tamed the inflation in India, not further posing any inflationary pressures as long as the central bank responsibly follows the guideline monetary policy rules rather than discretion or impeding intervention. The rupee has strengthened over 9% against the greenback since the beginning of the year. Inflation, which peaked at 6.7% in January, is now at 5.06%. To bit the excess liquidity, Reserve Bank of India raised the lending rate from 6.75 to 7 percent following the increase cash reserves helping to tame the inflation. The objective to restrict the investment and separate it on "good" and "bad" is a little bit confusing if property rights are so weakly defined in India, then causing speculations in real estate sector for instance. Price pressures can be tamed by further practicing disinflationary measures and avoiding the protectionism which inevitably stimulates the demand side by disturbing the equlibria price behavior, causing huge excess demand pressures.
It's also good to hear that Indian government's policy remains favorable to attracting foreign direct investment. The Indian economy has risen at a compounded annual growth rate of over 8.5% in the last four years. The question is how to keep it up in the long-run to avoid robust bustling and overheating of the economy. To avoid this, inflationary measures are still needed to be in full preparation to be undertaken by the central bank in cooperation with fiscal authorities.
The appreciation of the ruple has helpfully tamed the inflation in India, not further posing any inflationary pressures as long as the central bank responsibly follows the guideline monetary policy rules rather than discretion or impeding intervention. The rupee has strengthened over 9% against the greenback since the beginning of the year. Inflation, which peaked at 6.7% in January, is now at 5.06%. To bit the excess liquidity, Reserve Bank of India raised the lending rate from 6.75 to 7 percent following the increase cash reserves helping to tame the inflation. The objective to restrict the investment and separate it on "good" and "bad" is a little bit confusing if property rights are so weakly defined in India, then causing speculations in real estate sector for instance. Price pressures can be tamed by further practicing disinflationary measures and avoiding the protectionism which inevitably stimulates the demand side by disturbing the equlibria price behavior, causing huge excess demand pressures.
It's also good to hear that Indian government's policy remains favorable to attracting foreign direct investment. The Indian economy has risen at a compounded annual growth rate of over 8.5% in the last four years. The question is how to keep it up in the long-run to avoid robust bustling and overheating of the economy. To avoid this, inflationary measures are still needed to be in full preparation to be undertaken by the central bank in cooperation with fiscal authorities.
ROARING EMERGING MARKETS
Trimtabs Weekly Liquidity Review notions the redeemed global equity ETFs further warming the optimism carried-over to emerging markets such as China and Latin America.
INVESTMENT "HONEY MOONS" BOOST RUSSIAN ECONOMIC BOOM
In early 2007, investment growth boomed in Russia, driving one of the largest economies on record-breaking economic growth. High margins and rising ruble contributed to the growth of fixed capital investment which rised 19,9 percent, slashing the 17,4 percent record set back in 2000. WB's much favorable forecast predicted continually strong economic growth. It seems that investors relied on the estimates as internal and external investments focused on domestic consumption and mostly resource sector. This year's growth forecast is estimated to exceed previous 8 percent rate while the officials forecast 7 percent growth rate. Six year's annual economic growth has averaged 6.2 percent. However, Russian economic performance is significantly backlashed by tight inflationary pressure which will probably hit 9-10 percent annually, partly resulted from the unflexible exchange rate of the local currency and from the structural aspect including price controls, widespread government-owned enterprises and heavy regulation. Consequently, the degree of the independence gained by the central bank is not pretty high as it remain weak in controlling the inflationary pressures.
NEW ZEALAND'S INFLATION COMBAT
Coming across the Market Scan in Forbes, it notes that New Zealand is facing rough temporary inflation turbulence resulted from an accelerated domestic demand, roaring property market and rising government spending. Consequently, the Reserve Bank of New Zealand send a silent shock to investor by raising the official cash rate from 7,75 percent to 8,00 percent. The feature sizzled the New Zealand dollar onto the record level, but it depressed local stock prices as NZW-50 index fell 1,2 percent. Since it was floated in 1985, the New Zealand dollar (kiwi) rose to 76 U.S. cents compared to last year's "below-60" level. The Reserve Bank aims to keep the inflation within 1%-3% medium range. However, official statistics shows an uncomfortably high spending, based on fiscal expansions as well as on the acceleration of public consumption, further braking-down the effectiveness of fiscal behavior in a long-term perspective and warming an already-bubbled asset market whose property prices almost doubled from a total value of 282 billion Australian dollars ($234.8 billion) in the last quarter of 2002, to 559 Australian dollars ($465.5 billion) at the end of 2006.
Wednesday, June 06, 2007
LUXEMBOURG: HOW A TINY TAX HAVEN ATTRACTS INVESTMENT FUNDS
Luxembourg is a tax haven. Bank interests, dividends and capital gains owned by non-residents are not taxed neither by Luxembourg's government nor any other foreign government relating to the origin of the non-resident. Favorable and non-discriminatory tax regime lured an astonishing growth in the financial sector accounting for 28 percent of the GDP. In a tiny grand duchy, there are officially 12 000 holding companies along with 1 300 investment funds from all around the world.
Eurostat's survey recently accorded that Luxembourg enjoys 223 percent of the average EU GDP per capita. The closest trailer is Ireland at 139 percent of the EU average. Luxembourg recently caught the eye of International Herald Tribune. In fact, financial privacy is what investors praise very much on a distant offshore location such as Luxembourg. Given the favorable conditions of tax advantage, Luxembourg's diversification of the economy followed by steel crisis in 1970s strongly relied on banking and internet services by welcoming the arrival of baby boomers such as AOL and Amazon.com.
Also, Luxembourg's financial industry is booming. Luxembourg's decision in July 2004 to allow the listing of offshore hedge funds has made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that has acted as a handicap to the growth of the hedge fund sector in the Duchy in the past. Economic performance indicated strong growth in the last couple of years, outperforming growth parameters in the rest of the EU economies. As one of the most attractive offshore locations, in 2000, the level of foreign investment per capita was 59 563 USD. Excluding banks, the number was still the highest in Europe. Luxembourg's favorable tax climate returned the arrival of rapidly growing mutual fund industry in the world with net assets getting close to $1,700 billion USD.
Also, Luxembourg is the second largest host of fund management industry in the world.
In a recent attack on Luxembourg's fiscal sovereignity, 26 EU countries have been forcing Luxembourg to slash tax advantages that soared a huge amount of FDI inflow. Here is some more evidence on Luxembourg's tax environment and here's a factsheet on doing business in Luxembourg.
Eurostat's survey recently accorded that Luxembourg enjoys 223 percent of the average EU GDP per capita. The closest trailer is Ireland at 139 percent of the EU average. Luxembourg recently caught the eye of International Herald Tribune. In fact, financial privacy is what investors praise very much on a distant offshore location such as Luxembourg. Given the favorable conditions of tax advantage, Luxembourg's diversification of the economy followed by steel crisis in 1970s strongly relied on banking and internet services by welcoming the arrival of baby boomers such as AOL and Amazon.com.
Also, Luxembourg's financial industry is booming. Luxembourg's decision in July 2004 to allow the listing of offshore hedge funds has made it possible for the jurisdiction to attract offshore funds and to compete on a level basis with Dublin, removing a barrier that has acted as a handicap to the growth of the hedge fund sector in the Duchy in the past. Economic performance indicated strong growth in the last couple of years, outperforming growth parameters in the rest of the EU economies. As one of the most attractive offshore locations, in 2000, the level of foreign investment per capita was 59 563 USD. Excluding banks, the number was still the highest in Europe. Luxembourg's favorable tax climate returned the arrival of rapidly growing mutual fund industry in the world with net assets getting close to $1,700 billion USD.
Also, Luxembourg is the second largest host of fund management industry in the world.
In a recent attack on Luxembourg's fiscal sovereignity, 26 EU countries have been forcing Luxembourg to slash tax advantages that soared a huge amount of FDI inflow. Here is some more evidence on Luxembourg's tax environment and here's a factsheet on doing business in Luxembourg.
High Growth boosts the performance of Luxembourg's mutual fund industry.
Monday, June 04, 2007
OBWALDEN: TAX COMPETITION IN ONE LESSON
Swiss Federal Court proclaimed Obwalden's degressive tax system on individual income as unconstitutional. Canton's degressive tax system is designed to reward the individual productive behavior by dropping the rate as the earnings of residents increase. Obwalden had adopted a degressive income tax system which meant that the more you earn, the less you pay. Those earning over SFr300,000 ($233,000) per year, for example, had a tax rate as low as one per cent. However, Obwalden's primary tax jursidiction was chosen by 86 percent of the votes in favor of degressive tax system. As one of the poorest cantons in Swiss mountianous center, Obwalden is ought to attract more direct investment which would inevitably boost job creation and income growth. In fact, fiscal decision-making based on the economics of tax competition is a basis for sound capital mobility. Previously, Obwalden's policymakers slashed its effective corporate income tax to 6,5 percent flat rate, one of the lowest and most competitive corporate tax rates in the world. In addition, property tax has dropped by at least 30 per cent. The figure below compares effective income tax rates between Swiss cantons.
Figure: The comparison of effective income tax rates between Swiss cantons in 2006
Figure: The comparison of effective income tax rates between Swiss cantons in 2006
Sunday, June 03, 2007
BRAIN-DRAIN AS GERMANY'S HOME-GROWING INDUSTRY
Here's a short article on how 'brain-drain' has hit the highest level since 1940s in Germany. The record level parallels with Germany's high fiscal burden causing disincentives to work, save and invest, pushing hundreds of highly-skilled workers into tax-friendlier destinations such as Switzerland, the United States and Austria. The most obvious consequence of intense brain-drain is the loss of the foundation which fuels long-term economic growth and global competitiveness. Previously, Germany faced a significant inflow of mostly unskilled foreign labor which transformed into structural crisis as generous welfare state hampered tax base by increasing marginal rates on individual income. Also, Germany has an onerous 39 percent corporate income tax.
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