Europe’s perennial recession is depriving the welfare state of revenue. This in turn is causing frustration, especially among those who still defend the welfare state and the big, redistributive government it represents. And the welfare statists are getting vocal, as shown by a contribution from Klaus Heeger, Secretary General of the European Confederation of Independent Trade Unions. Heeger does his best to blame the welfare state’s revenue starvation on corporate tax planning:
What the recent tax scandals in Luxembourg have shown is that governments are stripping back public services, while at the same time encouraging companies to engage in complex tax schemes. The promotion of tax evasion has deprived public services of crucial resources at a critical time.
No, it is not tax planning that “deprives” government of “crucial resources”. It is the recession. A government spending program is a promise, or a bundle of promises, to a designated segment of the population. Government defines that segment as “entitled” to a cash or in-kind government service, specifies the quality and quantity of that entitlement and then starts pouring out the money. There is almost never a funding source tied to the entitlement – funding comes out of general revenue – and on the rare occasions when there is a dedicated funding source, the entitlement is not conditioned on available tax revenue.
This is, in essence, like me promising my children a flat screen TV each for Christmas without first looking at my bank account. (And never mind the risk of spoiling them to the point where they won’t work for what they want…) But somehow this aspect of the welfare state is lost on its fervent proponents, Klaus Heeger being one of them.
He does, however, make one interesting point:
This public financing has been critical for the banking sector in the past 5 years and is now critical for citizens and workers. Lost revenue means less means of financing public services used by citizens and companies alike, and less redistribution towards a fairer and more sustainable society.
If we forget about the programmatic rhetoric about “fairer and more sustainable”, the argument about the banks is not without merit. But the problem, again, is that elected officials think that it is perfectly fine to use government – and thereby tax revenue – for everything and anything. But corporate welfare is not a government function in a free society.
Heeger’s little jab about businesses taking tax money is of course aimed at getting them to give back in the form of higher taxes:
Concrete measures need to be implemented now in order to put the spotlight on tax justice across Europe. The [recent] G20 summit shows that solutions exist; there is just a lack of political will in Europe to put them in place. While Europe is still hesitating on how to approach the sensitive issue of tax rulings, the G20 have underlined the need to fight these “harmful tax practices”.
There is a sense of desperation in calling tax planning “harmful”. Businesses that create jobs, provide people with products that improve their standard of living; businesses that produce medicine and high-quality food, that build safe and comfortable ways for us to travel; businesses that produce power to we can warm our homes; those businesses need to make sure they can make their ends meet and have enough money for future investments. They need to be able to compete, to improve their products, to pay their workers more.
When they take steps to reduce an already onerous tax burden, they are not engaging in “harmful” activities. They are trying to avoid harm to their own operations, their employees and their customers.
The harm is done by over-reaching governments extending their taxation beyond what is economically sustainable.
Unfortunately, union leader Klaus Heeger does not see this side of the issue. On the contrary, he wants the EU and its member states to further tighten the tax noose around the corporate neck. The goal, says Heeger, is “a common tax base”:
Starting with more transparency on tax ruling, Europe then needs to push ahead with legislation on a directive on a common tax base with binding harmonisation at the heart of the proposals. A single tax base will ensure profits are taxed once and redistributed amongst countries hosting the company.
Today, companies in Europe can choose a country of residence where they file their taxes. What Heeger and other proponents of a perpetually large government are pushing for is, simply, the elimination of that ability. Exactly how this would happen is not clear at this point, but there are two options: either the EU takes over the taxation of corporations, eliminating the member-state corporate income tax; or the EU dictates to member states what tax rate – or bracket of rates – they can tax at.
Either solution is frankly a bit brutal. Today the member states of the EU and the two remaining countries within the former EES system, Switzerland and Norway, compete for corporate headquarters with competitive taxes; in a future Europe where all tax competition is eliminated it will be the continent that competes against the rest of the world.
It is a safe bet to predict that a “tax harmonized” Europe will maximize its “common tax base”, thus making itself uncompetitive against a resilient United States, a steadily improving Canada, an increasingly industrialized Africa and, of course, the entire pack of Asian Tigers.
Heeger suggests a slew of other measures to squeeze more taxes out of corporations. While motivating his rhetoric with fairness and transparency, the real goal is to eliminate tax competition and to monopolize fiscal policy aimed at paying for the welfare state. That can only deprive Europe’s workers of yet more jobs and opportunities. It will most certainly drive yet another generation of Europeans into perennial dependency on government and destroy yet more of the prosperity generators in what was once a world-leading economy.
Europe is known for its high taxes, but there is one exception: corporate income taxes. Compared to American corporate income taxes – federal and state – the EU has relatively mild tax rates. While punitive personal income taxes, very high payroll taxes, confiscatory value-added taxes and other taxes contribute to holding Europe back economically, the comparative advantage of moderately reasonable corporate income taxes has helped, on the margin, to prevent the economic crisis from getting even deeper.
Now there is a push in the EU to squander this one little competitive advantage that they have on the global economic arena. The EU Observer reports:
Ireland will scrap a controversial tax instrument which allows companies to legally shift huge profits from Ireland to countries with low taxes, the country’s budget minister has announced. Speaking in the Irish parliament on Tuesday (14 October), Michael Noonan told deputies that the scheme, known as “double Irish” would be closed to new entrants in 2015 and gradually phased out between now and 2020. He added that in the future all companies registered in Ireland would have to pay tax there. The double Irish enables companies to make royalty payments to separate Irish-registered subsidiaries whose parent company is based in another country, allowing them to avoid paying corporate tax. Taken together with Ireland’s corporation tax rate of 12.5 percent, far lower than the EU average, it has prompted plenty of criticism from other EU countries in recent years.
One reason why Ireland was able to elevate itself from the bottom of the economic ranks in the 1980s to one of the wealthiest nations in the world in the early 2000s was that it promoted entrepreneurship, business investments and free markets. A package of reforms, including a drastic cut in the corporate income tax and rules such as the one mentioned here, attracted many multi-national corporations who decided to use Ireland as their springboard toward the European market.
Now Ireland is under pressure from the European Union, and the reason is deeper than just the “double Irish”. The EU Observer again:
The European Commission is currently investigating whether the tax deal between software giant Apple and the Irish government breaks the bloc’s rules on state aid, as well as similar cases in the Netherlands and Luxembourg.
The European Union has accused Ireland of swerving international tax rules by letting Apple shelter profits worth tens of billions of dollars from revenue collectors in return for maintaining jobs. European Competition Commissioner Joaquin Almunia told the Dublin government in a letter published on Tuesday that tax deals agreed in 1991 and 2007 amounted to state aid and may have broken EU laws. … The Commission said the tax rulings were “reverse engineered” to ensure that Apple had a minimal Irish bill, adding that minutes from meetings involving Irish officials showed that the Irish tax authority did not even attempt to apply international tax rules in its deals with Apple. Instead, the company’s tax treatment had been “motivated by employment considerations”, the Commission said, citing the minutes of meetings between Apple representatives and Irish tax officials.
I am not a legal expert, but I know enough about how taxes work to be certain about one thing: tax laws are very complicated and almost always written to benefit either the lawyers – who get more jobs by interpreting the laws for us plebeians – or to generate as much short-term government revenue as possible in a static economy. This fact alone is a reason for a conflict between the EU and the Irish government: one of them is obviously not happy with how the laws are interpreted.
However, there is another aspect on this. The commonly shared wisdom among government expansionists is that all private income belongs to government by default, and that government does the private sector a favor by not raising tax rates to 100 percent. This is why a tax cut is viewed as a “gift” to taxpayers and a “cost” to government. Therefore, when Ireland allows businesses to make money at a lower tax rate than the rest of the EU, other European government see this as Ireland is giving corporations government money – a corporate subsidy. But not only that: they see that gift as being not just from the Irish government, but from all European governments. The reason is simple: by having a low corporate tax rate Ireland puts competitive pressure on other EU governments who then have to lower, or at least refrain from raising, their corporate tax rates. By being forced to hold back taxation, Ireland’s competitors think that they are being forced to give up their own money.
As weird as it sounds, this is the reasoning underlying the debate over Ireland’s tax policy and its corporate tax rates.
I recently noted that the French government has resorted to desperate tax cuts. These cuts reflect a major change in economic thinking in Paris, but the decisiveness of this turnaround struck me as a bit odd. After all, there was no unpredictable economic news out there to explain why it happened now.
Or was there?
British newspaper Independent has the story:
The land of 400 cheeses, the birthplace of Molière and Coco Chanel, is facing an unprecedented exodus. Up to 2.5 million French people now live abroad, and more are bidding “au revoir” each year. A French parliamentary commission of inquiry is due to publish its report on emigration on Tuesday, but Le Figaro reported yesterday that because of a political dispute among its members over the reasons for the exodus, a “counter-report” by the opposition right-wing is to be released as an annex.
And why is this such a controversial topic? The Independent explains:
Centre-right deputies are convinced that the people who are the “lifeblood” of France are leaving because of “the impression that it’s impossible to succeed”, said Luc Chatel, secretary general of the UMP, who chaired the commission. There is “an anti-work mentality, absurd fiscal pressure, a lack of promotion prospects, and the burden of debt hanging over future generations,” he told Le Figaro.
That is France in a nutshell. No other country in Europe, not even Sweden, has been able to combine welfare-state entitlements with ideologically driven labor market regulations to the extent that the French have. (In Sweden, labor market law delegates the right to regulate the labor market to the unions instead, effectively elevating them to government power without government accountability.) But this is not the work of two years of socialism under President Hollande – it has been very long in the making. Alas, the Independent continues:
However, the report’s author Yann Galut, a Socialist deputy, said the UMP was unhappy because it had been unable to prove that a “massive exile” had taken place since the election of President François Hollande in 2012. What is certain is the steady rise in the number of emigrants across all sections of society, from young people looking for jobs to entrepreneurs to pensioners. According to a French Foreign Ministry report published at the end of last month, the top five destinations are the UK, Switzerland, the US, Belgium and Germany.
So here we have the explanation of why the French government is now scrambling to cut taxes. Their tax increases were the straw that broke the camel’s back. By raising the top income tax bracket to a confiscatory 75 percent they gave tens of thousands of entrepreneurs, medical doctors, computer engineers, finance experts, investors and business executives the final reason they needed to leave the country. As a result, tax revenue from the punitive taxes introduced under Hollande are nowhere near what the socialist government had planned for. As a result there is less money in government coffers to pay for the same socialist government’s entitlements.
The smaller-than-planned revenue stream in combination with larger-than-affordable entitlement spending opens up a budget deficit. The French government is already in breach of the EU balanced-budget law, often referred to as the Stability and Growth Pact. A self-inflicted escalation of the deficit puts Hollande in direct confrontation with the EU Commission, which is already loudly complaining that France seems perennially unable to bring its deficit down under the ceiling of three percent of GDP mandated by the aforementioned Pact.
Back now to the Independent for some more details on the French exodus:
Hélène Charveriat, the delegate-general of the Union of French Citizens Abroad … told The Independent that while the figure of 2.5 million expatriates is “not enormous”, what is more troubling is the increase of about 2 per cent each year. “Young people feel stuck, and they want interesting jobs. Businessmen say the labour code is complex and they’re taxed even before they start working. Pensioners can also pay less tax abroad,” she says.
Wait… what was that?
Businessmen say the labour code is complex and they’re taxed even before they start working.
Those evil capitalists. Two 20-year-old guys from working class homes have a passion for fixing people’s cars. They decide to open their own shop and start by working their way through the onerous French bureaucratic grinds to get their business permit. (I know someone who tried that. A story in and of itself. I’ll see if he wants to tell it in his own words.) Once they have the permit they scrape together whatever cash they can, buy some used tools and put down two months rent on a garage at a closed-down gas station. While they get the tools together, find the garage and get everything set up they obviously have no revenue. But that does not stop The People’s Friendly Government from showing up at their doorsteps to collect taxes on money they have not yet made.
These two young Frenchmen do not exist. And if they did, they would move to England and open their shop there instead, thus joining the growing outflow of driven, productive Frenchmen from all walks of life. But it is actually good that the Independent is less interested in reporting on the young French expatriates and instead puts focus on the country’s hate-the-rich taxes:
As for high-earners, almost 600 people subject to a wealth tax on assets of more than €800,000 (£630,000) left France in 2012, 20 per cent more than the previous year.
Governments in high-tax countries rarely pay any attention to the outflow of their young, productive and aspiring citizens. The argument is that those young people don’t pay much taxes anyway. Right now. Of course, if they are allowed to work and build careers and businesses instead of emigrating, they will become wealthy and create lots of jobs in the future. That, however, is a perspective that big-government proponents notoriously overlook. Therefore, there is really just one way to explain to them what harm their punitive tax policies do, and that is to shed light on the exodus of wealthy, productive people happening right now. Such news can actually work.
As indicated by my earlier article on the desperate French tax cuts, it may already be working. The French government cannot ignore forever how its combination of a wealth tax and a 75-percent tax on top incomes destroy existing jobs and, more importantly, solidly and decisively prevents the creation of new ones. They cannot forever dwell in the delusion that government somehow can raise GDP growth above the current level of zero percent, and they certainly cannot use government to create jobs for the more than ten percent of the work force that are currently unemployed.
It remains to be seen how sincere the French socialist government is about reversing course. It is by no means certain that the newly announced tax cuts mark a turning point. It could just as well be that they are mere token gestures, aimed at giving false hope of a better future to new prospective emigrants.
From a macroeconomic viewpoint Illinois is one of the worst-performing U.S. states. A big reason is the high taxes, by U.S. comparison, that drive jobs and businesses to other states. Illinois has raised its taxes more times than I care to count, with a “temporary” income-tax increase in 2011 that (huge surprise) has turned out to be permanent. States neighboring Illinois have been quick to capitalize on The Prairie State’s suicidal tax policy, with some crafty people in Indiana putting up this billboard at the state line:
The image is not mine. It was the thumbnail for a policy paper by the Illinois Policy Institute, a hard-working free-market think tank in Chicago. I chose to borrow it because it illustrates the campaign by Indiana to attract tax-weary Illinoisans. In doing so, Indiana participates in one of the most important economic activities of our time: tax competition. Since there is completely free movement of people and capital across state lines in the United States, the decisions by families and businesses where to reside and work is governed to a relatively large degree by factors such as the tax burden. High-tax states (count Illinois among them) lose jobs and investments to low-tax states.
Politicians who want to build big governments can then sell their welfare states to taxpayers as best they can – if taxpayers prefer to keep more of their own money, and pay for more of their own consumption directly out of their own pocket, then they can choose to do so.
Tax competition fulfills two major purposes. (For an excellent introduction to tax competition, please visit this site over at Center for Freedom and Prosperity.) The first purpose is to keep the free-market sector of the economy alive. When people make decisions to move, look for jobs or invest based in part on differences in taxation, it keeps us as economic agents on alert. We do not slouch on the job, we watch for better opportunities and thereby take responsibility for ourselves and those who depend on us.
The second purpose is to put a cap on the growth, and ideally size, of government. If people can vote with their feet – or money – then government will at some point have to reconsider its plans to expand with yet more tax hikes.
Which explains why there is such widespread contempt for tax competition among lawmakers, both in the United States and in Europe. The latest expression of that contempt comes from (another huge surprise) France, where socialist politicians want to do away with tax competition altogether, at least within the EU. Reports Euractiv:
Paris has long backed the idea of an across-the-board harmonisation of EU member states’ tax systems. According to French government advisors, this must begin by a common tax base for the European banking sector, EurActiv France reports. … Those in favour of harmonisation have a mountain to climb, but have not backed away from the challenge.
Fortunately, there is still a shred of common sense to be shared among some in Europe:
Experts across Europe oppose a common tax system on the basis that competition between tax systems is positive and forces governments to be more efficient.
This, however, has not prevented government expansionists from making the most absurd arguments for abolishing tax competition. Euractiv again:
France has one of the highest levels of income tax in Europe and the government argues that low tax rates prevent the smooth working of the European Common Market. Earlier this year French President François Hollande said he wanted “harmonisation with our largest neighbours by 2020.” In a report titled Tax Harmonisation in Europe: Moving Forward, the [French government’s economic advisory council] CAE proposed three ways to tackle the negative effects of fiscal competition.
The very idea that low tax rates prevent “the smooth working” of the free market in the EU is patently absurd. The argument is based on the notion that when tax rates are the same everywhere, businesses make decisions based not on taxes but on “real” business matters. But that notion disregards the fact that government is an active player in the economy, and that its services – while provided inefficiently under a coercion-based monopoly – are like most other services in the economy. I can choose to buy tax-paid services from the New York state government, or from the state of Wyoming, just as I can choose to bank with Warren Federal Credit Union or First Interstate Bank, or to buy my insurance products from Farmers, GEICO or any other insurance company.
Since government is an active player in our economy, it must be subjected to the same free-market conditions as the rest of us, as far as that is possible.
However, as we go back to the Euractiv piece we learn that this is not a concept that European statists are willing to entertain:
The first measure is to continue efforts for a common consolidated corporate tax base (CCCTB). Harmonising tax systems would make “fiscal competition more transparent and healthier,” says Agnès Bénassy-Quéré. According to Alain Trannoy, an economist who co-wrote the report, a CCCTB should be based on “reinforced cooperation or with some countries like Germany, France, the Benelux states and Italy, in order to create a snowball effect in different Eurozone countries.” Harmonising tax bases would also reduce the risks of optimisation, when multinationals transfer their revenues from one country to another in order to benefit from lower corporate tax. “Corporate tax is an important element, but there is no point if tax bases are not harmonised,” said Alain Trannoy.
And now for the three-dollar bill question: once these high-tax EU states succeed in creating a high-tax cartel, what is going to happen with the tax rates?
a) They will go up,
b) They will go up, or
c) They will go up.
You may choose whichever answer you want, so long as your choice is harmonized with the answers you do not choose.
According to the authors, the Banking Union, which was adopted in April, needs to go further in the area of taxation. This can be done with a Single Financial Activity Tax (FAT) in Europe. They also advocate a minimum corporate income tax for the banking sector, the receipts of which should be reinvested into infrastructure and long term investments and “form the first building block of a euro area budget.”
And there you have it. The real purpose behind this is to build yet another level of government spending. While it sounds noble to invest in “infrastructure” and the like, this is, after all Europe. Therefore, it is a safe bet to foresee that if this new level of government were ever to be created, its spending would go primarily toward yet more entitlement programs in an even more complex welfare state. Let’s keep in mind that there are already politicians on the left flank of European politics who are pushing hard for harmonized entitlement programs across the EU. What better venue for that harmonization than a full-fledged, EU-level welfare state?
And as we all immediately understand, the world’s largest welfare state, which has not solved all the alleged problems of inequality and poverty it was created to solve, must therefore obviously become a lot bigger.
Out there, on the outer left rim of unabridged statism, the question “when is government big enough?” simply does not have an answer. With the next EU Commissioner for Economic Affairs likely being a socialist, this unanswered question is going to have serious consequences for Europe. Its current journey into industrial poverty, paved by the world’s most sloth-inducing entitlement systems and fueled by the world’s highest taxes, apparently is not going fast enough.
Europe’s only way out of its crisis is to phase out the welfare state and gradually replace its entitlement systems with private solutions. This is a time-consuming process that requires relentless political commitment over a number of years, but it can be done, in Europe as well as here in the United States. However, the economically necessary is not always the politically realistic. Sometimes the economically necessary is not even politically desirable.
The latter scenario is the most problematic. When ideological preferences pull in an entirely different direction than the economy needs to go, the political rift between “ought to” and “must” happen makes necessary economic reforms close to impossible. The growth of nationalists, socialists and even fascists in today’s European political landscape is a clear sign of how big that political rift has become, but there is more bad news (if you can take it…). Recently I reported that the next head of the EU Commission – de facto the executive branch of the European Union – is going to be a statist, no matter who wins the May European parliamentary elections.
Today, Euractiv.com offers another example on how Europe’s ideological landscape is drifting to the left. They interview a former Belgian union activist and influential politician who is running for the European Parliament on a ticket for the center-right European People’s Party coalition. By their ideological label you would think they would be fighting hard for less government, lower taxes and more economic freedom. Well, sorry to disappoint you:
Mr. Rolin, you’ve decided to leave the trade union and enter into politics and run for MEP at the next European Parliament elections. What will be your priorities?
My first, second and third priorities will be employment, because that is the most important things right now. We see how the current crises affect us, how they deconstruct the European social system. Unemployment is devastating in social and economic terms but also in terms of democracy. We see it with the rise of Eurosceptic, populist and far-right groups.
“Deconstruct the European social system” is a code phrase for cutting entitlements in the welfare state.
We heard from the panelists at the European Trade Union Summit that austerity does not work. Do you share this opinion?
Entirely. Austerity policy does not work. And we see it. If it did work, it would have been verified, you know, like in mathematics. This has been verified by Greece, we’ve just heard it at the panel. It does not work. It creates more inequality, more unemployment, more misery in the population. Therefore it is high time to change our course. Even though we succeeded in saving the European currency, we need to have a policy focused on investments. I think that the ETUC’s programme aimed at boosting investments is very pertinent.
The first problem with austerity that he brings up is “inequality”. The very concept is alien to any concerted effort at promoting economic and individual freedom. By accepting the term “inequality” we immediately accept the false notion that it is somehow wrong that some people work harder than others and thus earn more money.
It is very telling of just how deeply the welfare state has been accepted in Europe that a parliamentary candidate for the large center-right party coalition regards “inequality” as the biggest problem with austerity. Unemployment comes second and general misery third. Never mind that austerity destroyed one quarter of the Greek economy; never mind that it has recalibrated the welfare state and made it an even heavier burden on the private sector. No, the biggest problem with austerity is that it has caused more “inequality”.
But wait – there is more:
Austerity does not work, you say. but you will nonetheless join the European Peoples’ Party (EPP) group in the European Parliament if you win, and the EPP has been the driver of austerity policies. Your party (Belgium’s Christian Democrat’s Centre démocrate humaniste, CDH) is a member of the EPP at the EU level. Isn’t there a contradiction between your trade unionist’s convictions and your political battle?
I see it as a challenge to bring a social dimension to the EPP, which is absolutely necessary. The CDH’s programme is very clear on that matter. We want to turn our back to austerity and put in place social policies, intelligent economic policies which will make it possible to have a real economic recovery through employment oriented investments, and sustainable employment.
Apparently, now it is part of the center-right path through Europe’s political landscape to believe that government can create “sustainable employment”. This is an outright socialist idea, no matter which way you twist and tweak it. If it was just a matter of “employment” you could let the EPP candidate and his party bosses off the hook with the assumption that they want to have fiscal policies that encourage more growth and more jobs. But the adjective “sustainable” gives an entirely new meaning to any policies for employment. It means, in short, either expanding government payrolls or making it even harder for employers to lay off employees. Both strategies are antithetical to economic freedom, growth and prosperity.
But Mr. Rolin is not just convinced that Europe needs more statism – he is also convinced that without it, the entire European Union is in peril. Euractiv again:
The 2009 EU elections had a record low participation from the voters, do you think this will change this time, that people need more Europe this time?
I am convinced that people need a more social Europe, they need to believe again in the European project. … As for the European Commission’s discourse on social affairs, it seems to me that it is not in phase with the reality. The workers are living a particularly difficult reality because of the crisis. It is therefore high time to go beyond the observation that something needs to be done. We have to be more radical in our policies and make them fit to the citizens’ aspirations. What is at stake is crucial. Either Europe succeeds in answering to European citizens’ aspirations and stop the growing social divide, or the European project will fail.
In other words, the only way for the European Union to survive is that it expands the welfare state at its level, in addition to what the member states are doing.
More welfare-state policies is precisely the wrong medicine for Europe. And just to drive home the statist point with particular fervor, Mr. Rolin tells Euractiv how important it is to raise taxes and reduce the scope of free-market policies:
What should be the priorities of the next Commission?
The tax on financial transactions is an indispensable element. It is time to put it in place, because it is economically intelligent; but also because it will bring equity and trust. Then, we need to stop the fiscal, social, environmental competition. We have to realise that we are Europe. Europe cannot be built on intra-European competition policies. We need to put in place cooperation policies. Together we can win. If we fight against each other in Europe, we will all be losers. That is for me the priority of all priorities: fighting against that logic. And the second thing of course is to boost growth throught sustainable investments. And finally, in terms of economic governance: yes, we need to control the state deficits, because the debts will have to be repaid one day but we need to stop confusing consumption debt or investment debt. When I invest in the future, it’s positive.
A tax on financial transactions will move those transactions to Seoul,Sydney or Sao Paulo. And it will happen fast. The financial industry is very fluid compared to other industries. There are other countries and cities in the world that offer likeable climates for the financial industry. If anyone is in doubt, look at what happened when Sweden tried a similar tax on the stock market back in the ’80s. I have lost track of all the people in that trade that I knew who moved to London or Luxembourg with their employers, as a direct result of the tax.
Alas, the tax is not going to produce any noticeable revenue. All it will do is drive high-end jobs out of the EU, and with them a whole lot of upscale spending that in turn will cause job losses in real estate, retail, manufacturing and transportation. Just look at what happened in New York in 2009-2010 (and look what is coming back there now thanks to a slow but sustained economic recovery). If that is the kind of “equality” that this new center-right European politician wants, then by all means, go ahead. We here in America will happily continue to out-compete you with cheap energy, lower taxes and stronger work incentives.
Mr. Rolin’s passage about ending intra-European competition is more frightening than it sounds like. What he is saying is, plainly, that there should not be jurisdictional competition between EU member states for jobs and investments. But that also means an end to policy competition: it means centralized tax and entitlement policies, centralized regulations, etc.
One of the reasons why the U.S. economy is doing comparatively well is that taxes below the federal level have been kept back during the recession. States have made concerted efforts at reining in spending, mostly with positive results. In addition to the Obama administration’s notable fiscal restraint this has eased somewhat the fiscal burden of government on the private sector. (If Obama showed equal restraint on the regulatory side, our economy would be roaring ahead right now.) When states hold back spending they can cancel tax hikes and even cut or eliminate some taxes. Kansas, Oklahoma, North Carolina and Nebraska are four good examples of states pursuing or implementing tax-cutting reforms. States that have pushed taxes higher lose jobs, while states with constant or lower taxes attract employers.
If Europe gives up on jurisdictional competition, it will lose one of its few remaining instruments for growth-and-prosperity promoting policies. Taxes will rise to pay for an expanding EU-level welfare state. Spending will grow in a misguided attempt to eradicate “inequality”.
And the entire continent will travel, Eurostar style, straight into the economic wasteland of perennial stagnation, eradicated opportunities – and industrial poverty.
Today we are taking a break from the European crisis to enjoy the amusing outcome of Tuesday’s elections and referendums in Colorado. Yahoo News reports:
A Colorado measure to impose sales and excise taxes of 25 percent on newly legalized recreational marijuana and earmark the first $40 million in revenue for public schools was approved by voters on Tuesday, Governor John Hickenlooper said. The move showed a willingness on the part of Colorado voters to tax marijuana for the public benefit even as they roundly defeated a broader tax measure that would have increased state income taxes to raise $1 billion for schools.
These two votes put on full display the amazing lack of logic that characterizes modern American liberalism. First of all, there is this prevailing notion that government needs more money in the first place. Has anyone ever heard a tax-hike proponent explain when government is big enough?
Secondly, even if we accept the false premise that government does need more money, should we not try to have a tax base that is as stable as possible to match the permanent nature of the spending program? You know, that same logic that lies behind a mortgage loan: if you take on a permanent expenditure you want to make sure you have a permanent income to pay for it.
In Colorado, the extra tax revenue is going toward public education, a rather permanent spending program. Would it not be a good idea to get the revenue from an activity that, even when taxed, will remain relatively intact?
Well, that may be what logic and economic common sense says. But Colorado voters are of a different opinion. Instead of paying for their children’s education out of their work – a socially and economically productive activity – they are going to pay for it when they do something that is neither socially not economically productive, namely smoke pot.
The message from the Colorado ballot boxes is crisp clear. If you want your children to get a good education, you should spend more time smoking marijuana and less time working.
In reality, it is hard to believe that Colorado voters really want to promote sloth and intoxication over workforce participation. More likely, the tax-vote outcomes exhibit the usual mindset among too many Americans: on the one hand they want government to provide them with a goodie – in this case public education – but on the other hand they want someone else to pay for it. Assuming that most Colorado parents work but do not consume cannabis, it seems like they have temporarily managed to get something for nothing.
The problems come when all the taxes that are now being put on marijuana makes the product unaffordable to many users. Yahoo News again:
In Denver, a local ballot measure that would tack an additional 3.5 percent city sales tax on pot shops also appeared headed for passage, by a margin of 69 to 31 percent with roughly a third of votes counted.
Other news reports indicate that in some parts of Colorado, local taxes could push the total pot tax burden up to 35 percent. At such high rates, taxes create strong consumer disincentives, resulting in less pot smoking than the tax advocates expected.
Which brings us back to the illogical tax loop that Colorado voters are currently caught up in: if they really want to have an ongoing source of tax revenue for their public schools, then why do they raise taxes to a level where the tax base is going to shrink in response to that very same tax?
We will know the answer toward the end of 2014. That will be the point in time when Colorado school districts close the books on the next fiscal year and discover that the pot tax did not produce the revenues they so eagerly expected.
Where will Colorado voters look then for more tax revenues? Will they raise income taxes? Will they legalize other drugs and tax them? Will they legalize brothels?
Or will they finally come to the point where they realize that the problem with government is not its insufficient revenues, but its excessive spending?
As those Europeans who still have a job return after their summer vacation, they find a news feed that increasingly looks like it did before the summer – and last fall, and the spring before that…
In short: the European crisis continues. Today we get an update from deeply troubled Portugal, courtesy of EUBusiness.com:
Portugal’s creditors arrived back in Lisbon Monday to assess the country’s progress under its 78-billion-euro bailout as Brussels signals it will not cede to a request for the country’s fiscal targets to be relaxed. Payments of the next tranche of bailout loans to Lisbon will depend on a successful review by Portugal’s “troika” of lenders — the International Monetary Fund, the European Commission and the European Central Bank — of its progress in implementing economic reforms agreed in exchange for the financial aid.
“Reforms” is a code word for draconian tax hikes and panic-driven spending cuts that are facing fierce legal challenges all the way up to the Portuguese Supreme Court. The higher taxes obviously won’t help the economy one iota – on the contrary, they add extra weight to the private sector and will very likely put the Portuguese GDP growth rate well below Eurostat’s predicted 0.9 percent, on average, for 2013 and 2014.
The efforts to cut spending are obviously failing under legal challenges. This tells us two things: they were ill designed and they were forced through under sheer fiscal panic. Cutting government spending is a very good idea, but it has to be done right. In addition to avoiding legal challenges, the cuts must be structural in kind and designed so that they easily and quickly let private entrepreneurs step in and replace terminated government programs. None of this has happened in Portugal, primarily because the Eurocrats pushing the Portuguese government into destructive austerity are not interested in structurally sound reforms. All they want to do is preserve the welfare state and make it fit a smaller, tighter tax base.
So long as the same motives are behind the same austerity measures, we should not expect any change in the outlook for the Portuguese economy. The big question is what happens next year when the current bailout program ends. It is very unlikely that Portugal has even come close to meeting the budgetary requirements under the current bailout program. As the EU Business article hints at, this may lead to a new bailout program in 2014:
The rescue programme is scheduled to expire in mid-2014. Portugal is struggling to meet its deficit target of 5.5 percent of gross domestic product for this year as government reforms aimed at streamlining the government repeatedly get bogged down by legal challenges. Portugal’s Constitutional Court last month struck down a reform allowing civil servants to be laid off if they fail to requalify for a new job. It was the third time that the court has restricted the scope of a government austerity measure. The ruling has helped push Portugal borrowing costs to levels near which it was forced to seek international aid two years ago. The yield on Portuguese government 10-year bonds stood at 7.4 percent on Monday.
This is the level that caused utter panic in Greece and Spain. And so for good reasons: if Portugal had to refinance its entire government debt at 7.4 percent interest, at the current debt level, then its annual payments on its debt would be equal to 9.1 percent of the country’s GDP!
This is not a road to serfdom. It is worse than that. This level of uncontrollable government paves the way to political chaos, economic instability, social turmoil and very likely the destruction of Portugal as a parliamentary democracy.
That point is closer in time than most people think. EU Business again:
Deputy Prime Minister Paulo Portas last week urged Portugal’s international lenders to ease its 2014 public deficit reduction target from 4.0 percent to 4.5 percent of GDP. The appeal got a cool response from Brussels, with the head of eurozone finance ministers, Dutch Finance Minister Jeroen Dijsselbloem, saying Lisbon should stick to the deficit reduction targets already agreed. … “Someone has to explain to us how we are going to be able to go from a deficit of 5.5 percent in 2013 to a deficit of 4.0 percent in 2014. We have never seen such a strong reduction in the deficit,” said Antonio Saraiva, the head of the Portuguese Industry Confederation, after meeting with Portas on Monday.
Since legal challenges successfully prohibit or reduce the amount of spending cuts, there is a growing risk that the Portuguese government will choose to rely on tax hikes instead. Tax increases earlier this year have already robbed Portugal’s taxpayers of a month’s salary, on average, in part through a rise in income taxes from 24.5 to 28.5 percent. More tax hikes would plunge the country’s economy into a full-blown depression.
Perhaps the current prime minister, Mr. Coelho, is aware of this. This would explain why he tries to push yet more austerity measures on the economy, including, EU Business reports…
an average 10 percent cut in the pensions of most government workers, which have been loudly opposed by unions.
Imagine the federal government slashing Social Security payments by ten percent across the board. That alone would be unthinkable in the United States, yet unless we start getting serious – very serious – about the federal debt, we are heading in that direction.
As for Portugal, the future is very uncertain except for one thing: we can surely expect the country’s tumultuous political climate to remain. Radical leftist parties hold a larger share of the parliamentary seats in Portugal than in most other European countries. Their strong presence in the legislature is a formidable hindrance to any effort at rolling back government, eliminating entitlements and massive tax cuts. As a result, political instability, economic decline and social stress will continue to escalate.
What will this lead to? I have said it before, and I will say it again – the one word that captures Europe’s fatal decline:
I never thought I would see this in the news, but… from The Telegraph:
France’s Socialist government has admitted that the country cannot cope with any further tax rises and promised no more hikes just days ahead of the country’s largest ever tax bill. In an unfortunate piece of timing, however, the pledge came just as the environment minister announced the creation of a new “carbon tax” and amid reports that the overall tax pressure on French households will rise even further next year.
A socialist who admits that “the country cannot cope with any further tax rises”! This is indeed a day to commemorate.
But don’t we always hear from the statist camp that taxes are in fact good for the economy? And to the extent they admit that taxes may not be the best things since sliced bread – or even before that – don’t we always hear from them that the benefits of having government spend people’s money vastly outweigh any problems that taxes may cause? So what is the problem, Mon Seigneur Hollande?
Well, it is always refreshing when socialists have to admit that taxes are not the blessing of the world. Usually, though, the admission is not as blatantly open as in this case. The more common way for socialists to admit that they hate taxes is to cheat on their own tax bill. As we know from the first few years of the Obama administration, the left is full of tax cheats. The French socialist government came into office with the same problem.
This only goes to show that tax-to-the-max preachers are themselves very unwilling to live by their own teachings. Thus far, the French socialists have gotten away with their double standards, but as The Telegraph reports, those happy days are coming to an end:
Returning from their summer break, the French are about to discover stinging rises in tax bills in their letter boxes – the result of a series of new levies enacted by President François Hollande as he seeks to plug the French deficit and bring down public debt – now riding at 92 per cent of GDP. But the extent of the hikes has apparently even shocked the very Socialist ministers who implemented them. The total tax pressure (taxes and social security contributions) will account for 46.3 per cent of GDP this year – a historic high – compared to 45 per cent in 2012.
I wonder how they calculate these numbers. The standard Eurostat measurement reports total French government revenue at 51.8 percent of GDP in 2012. But be that as it may – a rise in taxes from 45 percent or 52 percent makes little difference. It is the trend upward that matters, and that is where the problems are for the Frog government.
With all the new taxes in mind it is bizarre to imagine that the forecasts from earlier this year of 1.4 percent growth in the French economy this year, and 1.7 percent in 2014, will ever come true. It is far more likely that the French economy will return to 0.7-1.1 percent bracket where it was stuck during the first years of the current economic crisis.
The Telegraph again:
Some 16 million households will see an automatic 2 per cent rise in income tax as calculations are no longer mitigated by inflation. Family tax breaks will be cut. The rich will see the highest rises, following Mr Hollande’s decision to raise the rate to 45 per cent for those earning more than 150,000 euros – effectively 49 per cent due to an additional levy. Amid discontent at the forthcoming rises,
The top Swedish tax rate is still effectively 60 percent, but I doubt that makes French entrepreneurs and high-earning professionals any happier.
In a clear damage limitation exercise, a chorus of top Socialists spoke out against any more rises. Pierre Mosovici, the finance minister, told France Inter radio: “I’m very sensitive to the French getting fed up with taxes We are listening to them.” Laurent Fabius, the foreign minister followed suit, warning Mr Hollande to be “very, very careful” as “there’s a level above which we shouldn’t climb”.
In all honesty, though, the only reason why they are not raising taxes even higher is that they don’t want to have to fight an election campaign for the next four years to the 2017 elections. The real question that France’s tax-greedy socialists should answer is: when is government big enough? The answer is obviously not “when taxpayers get really mad”. The real answer is embedded in their ideology and will tell us what will happen should the socialists win the next election as well.
Here in America, at least we have a counter-balance against the socialist in the White House. The Republicans in the House of Representatives have effectively stopped the Democrat pursuit of higher taxes. This together with the rising influence of the Tea Party movement on the Republican party has, as Cato Institute senior fellow Dan Mitchell reports, brought the Obama spending binge to a halt.
The French gasp over the higher taxes won’t bring the French government’s spending to a halt. All it will do is pause it for a couple of years. But in the meantime, we should definitely take the opportunity and smile a see-I-told-you-so smile every time we run into a statist. The reaction among France’s leading socialists is an excellent opportunity to once again expose the leftist tax-to-the-max hypocrisy.
Or how about this one from the same article by The Telegraph:
One Socialist told Les Echos newspaper that the hand-wringing was totally hypocritical as “they are crying wolf, but the wolf is us.”
The wolf indeed:
Mr Hollande’s government introduced over 7 billion euros of fresh taxes after coming to power in May 2012 and another 20 billion euros in the 2013 budget. In next year’s budget, the government says spending cuts will account for more than two thirds of the total deficit-reduction effort. But there will still be around six billion euros in new taxes.
It is a safe bet that there won’t be any spending cuts. After these draw-blood-from-a-stone tax increases, Hollande and his socialist cohort will have to fight tooth and nail to win the next election. As in every other welfare state, the safest way to get re-elected is to spend more money on key voter groups just in time for the election. By the same token, you don’t take away money from key voter groups just in time for the election.
Again, let’s enjoy the day. It will be a while again before we see such a blatant admission from a socialist that taxes don’t pave the way to heaven.
There is nothing a politician loves more than free money. Often times they treat regular taxes as free money, but there is also a general realization among our elected officials that they cannot raise taxes infinitely – there is, in other words, a political cost associated with high taxes. The fact that taxes, especially high taxes, are costly to the economy is rarely part of their picture.
Even more interesting is how politicians respond to taxes from sources far away from the average voter’s/taxpayer’s life. Taxes on the extraction of natural resources is a good example. Everywhere a country has a wealth of resources in the ground, or under the sea, lawmakers want a share, often with the motivation that the tax does not hurt regular economic activity. In fact, here in Wyoming the argument for the so called severance tax (a tax on the act of severing natural resources from the ground) is that it allows the state to have a zero income tax. A similar argument is often made in Alaska, where oil production brought wealth to wilderness.
But taxes on natural resources are not free revenue. Mining (which by the definitions of national accounts includes oil and natural gas production) is an industry like any other. It requires labor, capital, investment, risk taking and interaction with the rest of the economy, just like any other industry. A tax on that industry is going to work just like a tax on any other industry: it is going to raise the production cost and thus drive down activity, jobs, profits and labor earnings.
This does not seem to get through to politicians. A good example of this is the minerals tax that went into effect in Australia last year, after having been announced as a political goal already in 2010. According to the BBC it was passed by the federal senate after dreamy-eyed politicians had been seduced by the usual prospect of padding government’s pockets:
The tax will raise A$10.6bn ($11.2bn, £7bn) over three years from major companies including BHP Billiton, Rio Tinto and Xtrata. Strong demand for raw materials from China and India has lead to a resource boom in Australia. The mining tax is aimed at distributing the benefits of that revenue to other segments of the economy.
This 30-percent tax, as absurd as it is, was a scaled-down version of an earlier, unsuccessful proposal for a 40-percent tax on mineral industrial activity. Equally unsuccessful was a lawsuit filed by a mining company and two states against the tax.
Aside the fact that taxes on natural resources burden the industry as such, there is always the problem with what politicians do with the tax revenue. In the case of Australia’s mining tax the original promise was to plug a hole in the federal budget, i.e., help pay for regular government spending. But minerals is a volatile industry that often goes into a recession earlier than other industries. Its swings in production are also larger, making tax revenue from minerals a great deal more volatile than taxes on other economic activities.
This is the main problem with the tax for the Australian government, though there are others. You cannot promise to pay for a steady stream of government spending with a volatile tax. As my home state Wyoming has proven, legislators will always end up demanding other revenue sources to make up for the minerals tax shortfall in bad years. Yet that seems to be what politicians always do when they find “free” money – or profitable mining companies – lying around.
I am going to elaborate on these points in a later article. Stay tuned!
The European crisis is economic in nature, and brought to its current levels by a fiscally unsustainable welfare state. However, behind the big, redistributive government is an ideology that paved the way for the welfare state. Often referred to as “socialism” or, more precisely, “social democracy”, this ideology claims that the free world is inherently unjust and needs vast “correction mechanisms” to function in what they would deem a “better” way.
The yardstick used by social democrats is “social justice”. This concept has made its way deeply into the vocabularies of every European language and shaped the mindset of three generations of post-World War 2 taxpayers into believing that they have to surrender half, sometimes more, of what they earn to government. The idea of social justice has also made the same taxpayers tolerate that large segments of the population receive various forms of entitlements – money and services from government – that they don’t have to work for.
By shaping the minds of generations of Europeans into accepting social justice as some kind of “natural” part of society, the social democrats have accomplished almost universal acceptance for the welfare state. You don’t make it in European politics without one way or the other pledging allegiance to the welfare state; so called “conservatives” such as Britain’s prime minister David Cameron, Germany’s chancellor Angela Merkel and France’s former president Nicolas Sarkozy all embraced the welfare state as a natural part of the social and economic order.
So long as the economies of Europe seemed to be doing well people in general saw little reason to question the welfare state. But since the crisis began voters have started expressing deep dissatisfaction with how it works. They are not ready to turn to libertarians to ask for alternative solutions, which in part is because there is practically no libertarian presence on the European political scene. Another explanation is that the idea of social justice still has exceptionally deep roots in the European mindset, so deep that this crisis has not yet made a notable dent in those roots. Therefore, when people see that the welfare state is beginning to crumble they look for alternative ways to save it, too often ending up voting for extremist parties like Greece’s Golden Dawn or radicals like Portugal’s communists or France’s Front National.
The deep roots of social justice are now about to bring down Europe as a first-world industrialized economy. It is questionable if even the macroeconomic equivalent of a nuclear disaster would wake up Europe’s voters enough to make them abandon social justice. A story from Der Spiegel illustrates just how cemented social justice has become in the European mindset. It starts with the story of a young German man in Munich trying to find a way to get his life started:
Who knows whether he will ever return to this office building. Who knows whether he will ever be allowed to set foot in such a building again — a place where employees sip their espressos on designer couches and gaze at the sky through a glass ceiling. Can, the 20-year-old son of Turkish immigrants, doesn’t know either, so he pulls out his smartphone and takes a few snapshots.
Let’s make one little observation here before we continue to listen to the Spiegel story. The set-up here is that Can is a first-generation German, and that he comes from a poor, “disadvantaged” background and therefore somehow is locked out of the latte-sipping, “privileged” designer-couch social settings where people make (by European standards) good money.
At the same time, Can has “large” – meaning fairly expensive – headphones and a smartphone. How disadvantaged are you if you can buy and maintain the account of a smartphone?
He photographs the shiny coffeemaker, the plants in concrete planters and the paternoster carrying men and women in business dress. At this point, Can is merely a guest. With his plaid shirt and large headphones dangling around his neck, he still looks noticeably out of place in the Munich offices of the Boston Consulting Group (BCG). He is there because one of the management consultants is his personal coach.
After this set-up, aimed to present Can as a victim of some kind of injustice, the story introduces a government-run program that requests of “privileged” people that they take even more of their time to spend on the “disadvantaged” – more time, that is, than they already plunk down through Germany’s vast, intrusive tax system:
The employment office has brought them together, and now they are collaborating on a project: Can’s future. It had looked pretty grim until now. Can had what advisors at the employment office call “difficult starting conditions.” He grew up in a neighborhood with many high-rise buildings and very few music schools. He repeated the 5th, 7th and 10th grades and left school with close to a failing grade in math and German. He didn’t even bother to send out job applications.
So here is a question that Der Spiegel carefully avoids. Can’s parents were Turkish immigrants. They came to Germany to do what? If they came there to build a better future for their kids, then why did they not make sure they did well in school? A kid who has to repeat three grades out of ten is either mentally incapable of going to school and needs serious help, or he is growing up in a home where the Western norm system is a notable absentee.
Clearly, Can does not belong to the former category, so the only conclusion we can draw is that he comes from a home where his parents did not make hard work, individual responsibility and commitment to one’s own future were the prevailing values.
Does lack of parental responsibility give children the right to other people’s time and money? No. Voluntary help is a different matter, though.
Now a consultant is trying to help him, a man “from another world,” as Can says, from a world in which people print their Ph.D. titles on their business cards and send their children on foreign exchange programs. From Mondays to Thursdays, BCG consultant Fabian Barthel works on plans for roads and dams in Africa. He spends his Friday afternoons on pro bono work, helping Can find an apprenticeship — as a sort of personal aid worker. “Can’s starting conditions were definitely worse than mine. But it can’t be that this shapes the rest of our lives,” says Barthel. Or at least this doesn’t agree with his notion of justice, he adds.
If Mr. Barthel wants to use his time to provide help for children and young men and women from poor backgrounds, then that is only something we should respect him for. But there is a side to this story that Der Spiegel does not provide: Germany has one of the most elaborate welfare states in the world, with generous assistance to families like Can’s. All this is paid for with high taxes taken predominantly out of the paychecks, and added on top of the consumption, of people like Mr. Barthel. He has already paid for all the assistance that Can could ever ask for, and yet the government asks him to chip in more, as a pro bono case worker for a government-run employment program.
At some point, even a German taxpayer should ask himself: when is government big enough?
Posters and flyers distributed around Germany provide people like Can and Barthel with an idea of how the political parties define justice. Politicians with the center-right Christian Democratic Union (CDU) and its Bavarian sister party, the Christian Social Union (CSU), praise child care subsidies for parents who stay home with their children. The center-left Social Democratic Party (SPD) promises more stable pensions. Lawmakers say that everything that’s good about the German system should remain as it is.
In other words, re-arrange the deck chairs on the M/S Welfare State:
The parties have discovered the benefits using social justice as a campaign tool. The J-word is a common theme in many election platforms. The Greens invoke justice about 60 times while the SPD mentions the word almost 40 times in its program. The Left Party follows close behind. The SPD says it wants to contain what its chancellor candidate Peer Steinbrück, calls “the centrifugal forces in society,” by raising taxes on higher-earners. The Greens want to impose a levy on the assets of the wealthy. Their voters support “an equitable distribution of taxes,” even if it means reaching into their own pockets, says Katrin Göring-Eckardt, the Green Party’s top candidate.
And where are the conservatives, you ask?
Conservatives, meanwhile, aren’t tying the promise of social justice to higher taxes, but to government benefits. They want to increase pensions for older mothers and boost small retirement pensions by turning them into a “life achievement pension.” Chancellor Angela Merkel’s party also wants to increase the childcare subsidy next year. “Every family is different — and each family is especially important to us,” the conservatives have printed on their campaign posters. The message is clear: We are throwing money at you.
With this commitment to social justice, how can anything possibly go wrong in Germany? After all, the same concept has worked so brilliantly in Greece, Italy, Spain, Portugal, France…
In fairness, the Spiegel article does report that Germans in general are expressing weariness when it comes to taxes:
About two-thirds of Germans believe that social conditions have become more inequitable in the last legislative period. At the same time, the share of Germans who view the tax system as unfair has increased sharply. Only 21 percent of those polled consider income distribution to be the most important problem.
German taxpayers are bankrolling good parts of the Greek welfare state on top of their own. As a result, the German economy has come to a standstill and it is becoming increasingly difficult for German families to improve their lives through hard work, career commitment and good management of personal finances. When economic realities bite and don’t let go, eventually the pain sets in.
This does not mean that Germans in general are on their way to abandoning the concept of social justice. But it means that they are at least grumbling about ancillary aspects of their welfare state. This raises the big question whether or not they will change their minds about the welfare state’s general principles fast enough to save the European continent from becoming a full-scale economic wasteland.