CF&P E-mail Update, January 13, 2005

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Center for Freedom and Prosperity's E-mail Update

1) Washington Update

2) Dan Mitchell: US elections impact offshore world

3) Great summary of "offshore" developments

4) Florida professor rips OECD tax harmonization agenda

5) The mystery of UN "moral authority"

6) Economic Freedom . . . how do we get there?

7) America's "sluggish" economy outperforms the rest of the world

8) President's Chief Economic Adviser explains benefits of tax reform and territorial taxation

9) Richard Rahn: Treasury Secretary needs to seize new opportunity

10) A pro-growth agenda for the Treasury Department

11) Microsoft under attack by the EU

12) The decline and fall of France

13) Nobel Laureate Edward Prescott and Columnist Robert Novak Promote Social Security reform

14) The US does not have a free-market health system, but other nations are even worse

15) Real tax reform requires smaller government

16) Falling dollar being used a Trojan Horse for tax increases

17) Trade surplus does not mean prosperity

18) The economic wisdom of America's Founding Fathers


1) Washington Update

Next week, President Bush will begin his second term in office and the 109th Congress will begin its third-week.  CF&P is also getting ready to start our fifth annual winter tax competition educational campaign on Capitol Hill.  We plan to meet with members and staff of the tax-writing committees, finance and banking committees, congressional leadership offices and new Members of both the House and Senate. Along with our Hill visits, we also plan to meet with Bush Administration officials. We will also be hosting/participating in several public forums this winter and we will let you know about them with plenty of advanced warning.

Here is a list of some of the issues we are tracking:

  1) The OECD "harmful tax competition" scheme
  2) OECD funding
  3) The IRS interest-reporting regulation
  4) European Union tax harmonization proposals
  5) United Nations International Tax Organization
  6) Corporate inversion and international corporate taxation
  7) Open registries vs. closed registries
  8) Income tax reform
  9) Social Security reform

Dan Mitchell discusses many of these issues in an article leading off our update. The update also highlights several other items, including the EU's assault on low-tax countries; the OECD's intellectually shoddy economic thinking; UN's "moral authority"; WSJ's/Heritage Foundation's Index on Economic Freedom; benefits of tax reform and territorial taxation; EU's attack on Microsoft; the decline and fall of France; and the economic wisdom of America's Founding Fathers.

Also, please make sure to stop by and read our daily blog on our home page The Market Center Blog.  We have at least 3 and as many as 10 blogs a day and it is seen by thousands of readers --

Best regards, AQ


2) Dan Mitchell: US elections impact offshore world

[Excerpt from Offshore Investment article:]

President Bush's stunning re-election victory is encouraging news for tax competition - and therefore also a positive development for international financial centres. Unprecedented Republican gains in the House and Senate are equally important, particularly since a bigger GOP (Republican) majority means more allies in the battle against the various tax harmonisation schemes being advocated by the European Union (EU) and Organisation for Economic Co-operation and Development (OECD).

The Republican victories are good news for several reasons. First and foremost, it means that market-oriented officials are far more likely to control the levers of power. This does not mean that Republicans automatically believe in competition and Democrats inevitably support cartelization, but there is no doubt that Kerry Administration policy makers would have been far less sympathetic to tax competition. Indeed, it is quite likely that a Kerry victory would have resulted in a dramatic shift to the left on these issues. His constant use of classwarfare themes and his specific attacks against corporate inversions and "offshore" tax planning certainly pointed in that direction. Moreover, while Bush Administration economic officials have been far from perfect on tax competition issues, one can only imagine the adverse consequences if a bunch of left-wing lawyers had been appointed to key Treasury Department positions.

The recent election results also are good news because congressional Republicans are likely to become more effective and aggressive advocates of tax competition. In part, this is simply due to the greater number of GOP elected officials. Congressional Republicans already have been important allies in the battle against EU and OECD proposals, and four new Senators and several new representatives will augment the chorus of opposition.

But it is also important to understand that the Republican Party is becoming a more philosophically principled organisation. In the last four decades, the base of the GOP has shifted from the Northeast and Midwest to the South and West - and this shift has meant a Republican Party that is more ideologically committed to free market policy. The 2004 election continued this trend. Indeed, southern states gave the Republicans five new Senators, and one state - Texas - is responsible for the bigger GOP majority in the House of Representatives. [Link to full article below:]

December 2004/January 2005, Offshore Investment, by Dan Mitchell, US elections impact offshore world


3) Great summary of "offshore" developments: Battle between "offshore" jurisdictions and the pro-harmonization bureaucrats at the OECD and EU

Richard Teather of Bournemouth University in the UK has an excellent status report of the ongoing battle between "offshore" jurisdictions and the pro-harmonization bureaucrats at the OECD and EU. His analysis about the lack of a "level playing field" - even though it is the wrong level playing field - is completely correct. As he notes, persecuted low-tax jurisdictions should reject all tax harmonization schemes:

[Excerpt from Mr. Teather's article:]

Even if the Directive does come into force it is unlikely to destroy the offshore finance industry, even in those jurisdictions that have been pressured to implement it. Firstly, of course, it only affects investors who are resident in the EU; deposits from USA and other residents will not be affected. However even for EU investors, the Directive is full of holes and should be easily avoidable; indeed the Swiss have dubbed it the "fools' tax" because only those who do not take proper advice will be harmed by it. It is of course impossible to give firm advice at this stage, but there seem to be two main methods of avoiding the impact of the Directive: To begin with, the bank or other person paying interest is under no obligation to investigate whether or not the person to whom interest is paid is actually the beneficial owner. For example, if a bank in the Turks & Caicos Islands pays interest to a trustee based in a jurisdiction not subject to the EU's rules, then the bank will not have to deduct tax from that payment unless it is actually informed by the trustee that the beneficiary of the trust is an EU resident. Secondly, the Directive only applies to interest, not to dividends. An EU investor can therefore set up a company in the Turks & Caicos Islands and invest share capital into it. That share capital can then be deposited by the company into a bank, but provided the company is tax resident in the Turks & Caicos Islands the recipient of the interest earned (the company) will not be an EU resident and so the Directive will not apply. The EU resident individual investor will receive dividends from the company, not interest, and so again the Directive will not apply. ...The OECD members have carried out a review of their own harmful tax practices, and claim that they have removed or rendered harmless almost all of them. However this review has ignored many of the more important regimes, and is open to strong accusations of favouritism with OECD members being treated more leniently than non-members.

...The low-tax jurisdictions are therefore in a strong position against the OECD, provided they keep insisting on the "level playing field" of fair treatment for OECD members and non-members. The danger is that the OECD is trying to separate out information exchange; most of the OECD members are willing to introduce this if they can then insist that the non-members do the same. The low-tax jurisdictions must resist this move and insist that the whole package needs to be implemented before a level playing field is in place. In other words, that the OECD members must genuinely dismantle all of their harmful tax regimes before information exchange is imposed. As many of the OECD members are clearly unwilling to do this, the OECD process can be lost in the sand for many years, possibly indefinitely. In addition, the current USA government is not fully supportive of these moves by the OECD. This should make OECD sanctions, should any be imposed, less effective.

...In Europe at the moment, politicians are feeling trapped by electorates who are unwilling to pay any more tax but want better public services for what they do pay. In the UK for example, government advisers now believe that tax levels above 43% of GDP (only just above the current levels) will seriously damage their electoral prospects. With nearly half the nation's wealth, one would have thought that governments should be able to provide a few half-decent hospitals. However most of this money is creamed off by the politicians' various client groups, whether those who have become dependent on welfare payments or the armies of middle managers who have a stranglehold on the inefficient state services. In the rest of Europe the problem is even worse, with even less reform and crippling unfunded pension liabilities. What the politicians would like to do is soak the "rich" for a little more tax money, raising more funds without directly affecting any electorally significant group. Of course high taxes on savings income damages investment, reduces economic activity and jobs and ultimately makes the whole country poorer, but it is still a very tempting short-term target. Their problem is that since the last time this was tried in the 1970s, capital has become much more mobile and now can easily shelter in tax havens. Raising taxes on the rich would simply move money offshore rather than increase the government's revenue. European governments have therefore given in to the temptation for a short-term solution. Whatever the long-term effects on the economy, they would rather muzzle the tax havens to leave themselves free to raise taxes on investment capital.

...Low-tax and lightly-regulated jurisdictions like the Turks & Caicos Islands play a beneficial role of the world economy. Not only do they improve the efficiency of international capital markets, and therefore increase investment and jobs all around the world, but they also force other governments to use their tax revenues more efficiently. High-tax governments resent this and would rather stamp out such jurisdictions, leaving themselves free to raise taxes whatever the cost to the economy and long-term detriment to their citizens. [Link to full article below:]

Winter 2004/05, By Richard Teather, Death by Taxes, Times of the Islands, Turks & Caicos Islands

January 11, 2005, The Market Center Blog


4) Florida professor rips OECD tax harmonization agenda: Criticizes shoddy economics of Paris-based bureaucracy

Using economic analysis, an economist dismantles the intellectually shoddy position of the Organization for Economic Cooperation and Development.

[Excerpt from Dr. McGee's paper:]

As trade and investment barriers fall, investors are able to take advantage of an ever increasing number of investment opportunities. That sounds like good news, doesn't it? The problem with this scenario, if you are one of the bloated, high-tax Western European welfare states, is that you are witnessing an exodus of investment capital to jurisdictions that are more tax friendly. ...If private parties engage in rate fixing, they are subject to fines and jail, but when government officials do basically the same thing, it is perfectly legal. Why is that? Their excuse is that they are doing it in the public interest. But how is it in the public interest to raise tax rates? ...There is an inverse relationship between the rates a government charges and the rate of economic growth. Countries that have the lowest tax rates tend to have the highest economic growth. One reason for that is because investment capital tends to flow into low tax countries and out of high tax countries. ...Since low rates foster economic growth and the expansion of employment, and since these are among the OECD's stated goals, it seems inappropriate that it should be targeting low tax countries instead of high tax countries. Targeting low tax countries makes the OECD's claim that it is not trying to raise tax rates very difficult to believe. ...If the bloated welfare states of Western Europe want to be competitive with the lean non-welfare states, they can be competitive. All they have to do is relinquish their welfare states and let taxpayers keep more of the money they have earned. They should not use the force of government to impose sanctions that only do harm to nations that have done nothing wrong. [Link to full paper below:]

November 2004, Barry University Andreas School of Business Working Paper,  by Robert W. McGee, Is Tax Competition Harmful? (click on "SSRN" under "Download the document from:")

December 29, 2004, The Market Center Blog


5) The mystery of UN "moral authority"

David Frum correctly asks why anyone should pay deference to the United Nations. Even when the international bureaucracy tries to do the right thing, it is hindered by incompetence and corruption. But all too often, it doesn't even try to do the right thing.

[Excerpt from David Frum's column:]

The helicopters are taking off and landing now in the tsunami-shattered villages and towns. The sick are being taken for treatment. Clean water is being delivered. Food is arriving. Soon the work of reconstruction will begin. The countries doing this good work have politely agreed to acknowledge the "coordinating" role of the United Nations. But it is hard to see how precisely the rescue work would be affected if the UN's officials all stayed in New York--or indeed if the UN did not exist at all. The UN describes its role in South Asia as one of "assessment" and "coordination." Even this, however, seems to many to be a role unnecessary to the plot. The Daily Telegraph last week described the frustration of in-country UN officials who found they had nothing to do as the Americans, Australians, Indonesians, and Malaysians flew missions. It will be the treasury departments of the G-7 missions that make decisions on debt relief, and the World Bank, aid donor nations, private corporations, and of course the local governments themselves that take the lead on long-term reconstruction. And yet we are constantly told that the UN's involvement is indispensable to the success of the whole undertaking. How can that be? ...In a notable interview on December 31, Clare Short, the former international development secretary, explained that the UN possessed a unique "moral authority", and without this authority, the relief effort would be in trouble because ... well, after that it gets hazy. ...Whence exactly does this moral authority emanate? How did the UN get it? Did it earn it by championing liberty, justice, and other high ideals? That seems a strange thing to say about a body that voted in 2003 to award the chair of its commission on human rights to Mummar Gaddafi's Libya. Did it earn it by the efficacy of its aid work? On the contrary, the UN's efforts in Iraq have led to the largest financial scandal in the organization's history: as much as $20 billion unaccounted for in oil-for-food funds. UN aid efforts in the Congo have been besmirched by allegations of sexual abuse of children; in the Balkans, by charges of sex trafficking. Is the UN a defender of the weak against aggression by the powerful? Not exactly. Two of this planet's most intractable conflicts pit small democracies against vastly more populous neighbouring states. In both cases, the UN treats the democracies--Israel, Taiwan--like pariahs. ...If the UN keeps failing, the answer is not to ignore its faults, but to reform or replace it. There is growing interest in some American quarters in the idea of a new international association, open only to countries that elect their leaders democratically. [Link to full article below:]

January 10, 2005, American Enterprise Institute, By David Frum, This Disaster Exposes the Myth of the UN's Moral Authority

January 11, 2005, The Market Center Blog

Auditors uncover massive fraud at the UN ~ January 10, 2005


6) Economic Freedom . . . how do we get there?

America's biggest liability is high tax rates and too much government. The solution - at least in part - is tax reform and social security reform:

[Excerpt from Jack Kemp's column:]

Last week the Wall Street Journal/Heritage Foundation released their annual Index on Economic Freedom [link below], which concluded for the first time that America no longer ranks among the top 10 freest economies in the world - this despite the fact that our score remained unchanged from the previous year. Instead we fell in the ranking because while we were trending water, Chile, Australia and Iceland further opened their economies and surpassed us. America's worst index category was the "fiscal burden" of government, due to Washington's rapidly growing spending and one of the highest corporate tax rates in the world. Excessive regulation is another reason the United States failed to the make the top 10. While not mentioned specifically by the index, Social Security is a major piece of the federal government's budget, and due to the well-meaning but flawed pay-as-you-go structure of the program, Social Security reform looms as one of the greatest barriers to sound budget policy. Ironically, however, this problem also creates perhaps the greatest opportunity to expand economic freedom in our lifetimes. On this front we cannot afford to continue to put our heads in the sand. If we do nothing, we will fall behind. We are already behind. More than 20 nations have already reformed their retirement security programs, replacing pay-as-you-go systems with personal accounts that workers own and control. In fact, Chile - a nation that passed us on the index this year - was the first nation to create personal accounts. ...Another area we are falling behind is in our tax policy, despite the positive impact the 2003 tax rate reductions have had on economic growth. This year Romania and Georgia joined the "flat-tax club," bringing the number of nations in Europe to adopt the flat tax to eight. So far, Georgia has the lowest flat tax of 12 percent on corporate and personal income. Here in America, both the individual income and corporate income tax codes are in dire need of reform. We need to move further toward removing barriers to work, saving, investing and entrepreneurial risk-taking. On this front we definitely cannot afford to stand still. [Link to full article below:]

January 10, 2005,, by Jack Kemp, The road to serfdom?

Link to 2005 Index on Economic Freedom

January 11, 2005, The Market Center Blog


7) America's "sluggish" economy outperforms the rest of the world

America is far from perfect, but sometimes the key is being "less worse" than almost everybody else. The Wall Street Journal explains that US growth levels and unemployment rates are the envy of the world. The moral of the story, not surprisingly, is that nations with lower taxes and smaller government do better than oppressive welfare states:

[Excerpt from WSJ editorial:]

According to the November forecast of the Organization for Economic Cooperation and Development, gross domestic product in the U.S. is expected to increase by 4.4% in 2004. Elsewhere, the OECD predicts growth of 4% for Japan, 2.7% for the U.K., 2.1% for France and 1.2% for Germany. For the 12-country euro zone, the figure is 1.8%. To put matters in historical perspective, the last time Japan, Britain, France and Germany had growth rates at or in excess of 4.4%, the years were 1990, 1994, 1989 and 1991, respectively. ...Overall, the U.S. economy has added 2.3 million jobs since the third quarter of 2003, bringing the unemployment rate down to 5.4% from 6% in October 2003. In Germany, the unemployment rate is 10%; in France it's 9.5%. For the 27 countries of the OECD, the average unemployment rate is 6.8%. Only Britain and Japan, among the major economies, have unemployment rates lower than the U.S. ...To look closely at international economic data is to be reminded that countries with comparatively low tax rates and regulatory burdens consistently outperform countries with high ones. Of course it's nice to know that America's "sluggish" economy remains a world-beater. It's even better to know why. [Link to full article below:]

December 30, 2004, The Wall Street Journal:  Review & Outlook, That 'Sluggish' Economy: It's still the strongest in the world.

December 31, 2004, The Market Center Blog


8) President's Chief Economic Adviser explains benefits of tax reform and territorial taxation


In a recent speech, Greg Mankiw of the Council of Economic Advisers discussed the importance of low tax rates. He also said the tax code should not discriminate against saving and investment and noted the growing consensus for territorial taxation.

[Excerpt from Greg Mankiw's column:]

The current tax code is a drag on the economy, discouraging saving and investment, and requiring individuals and businesses to spend billions of dollars and millions of hours each year to comply with the system. The President has stated that his goals are to make the tax code simpler, to make it more fair, and to further promote growth and job creation. ...As a general matter, the less the tax code distorts decision-making, the better the allocation of resources, and the more prosperous the economy will be. Standard economic theory indicates that the distortion of any tax rises with the square of the tax rate. That is why the standard mantra for economists interested in tax reform is .broaden the base, lower the rates. A large scholarly literature in economics has pointed out that another way to strengthen the economy would be to reduce the tax bias against saving and investment inherent in the current system. This literature suggests that the optimal tax system would use consumption, rather than income, as the tax base. Under an income tax, a person who immediately spends all his wages pays lower taxes over his lifetime than his neighbor who earns the same amount but chooses to save and invest in order to enjoy a more prosperous retirement or to leave a bequest to his children. By contrast, under a consumption tax, these two families would pay the same tax in present value. Savers would no longer be disadvantaged relative to spendthrifts. The result would be greater saving, increased capital accumulation, and higher growth in productivity and wages. of the first questions to ask about the corporate income tax is whether it should have a global reach, or whether it should apply only to income earned within the United States . My reading of the literature on this topic is that economics profession once favored a global tax system. But that consensus is now eroding, and recently many economists have favored a territorial system. [Link to full article below:]

December 2, 2004, Chairman Council of Economic Advisers' Comments at the American Enterprise Institute, by Dr. N. Gregory Mankiw, The Economic Agenda

December 21, 2004, The Market Center Blog

Congressional Budget Office acknowledges supply-side impact of tax policy ~ December 21, 2004


9) Richard Rahn: Treasury Secretary needs to seize new opportunity

Writing in the Washington Times, Richard Rahn explains that Secretary John Snow undermined his tenure at Treasury by failing to override the bureaucracy and implement changes to boost America's economic performance. Two early tests of Snow's second-term performance are whether he modernizes the revenue-estimating process and whether he withdraws a Clinton-era regulation that would force US banks to put foreign tax law above US tax law.

[Excerpt from Richard Rahn's column:]

Despite the urgings of many tax economists and scholars in the major think tanks (as well as some in the Bush White House), Mr. Snow has done little to insist his own tax revenue operation move away from static analysis and do more realistic dynamic tax scoring. Moreover, he has tolerated performance by some of his staff whose personal agendas have undermined administration positions. One example is a proposal (made in the last week of the Clinton administration) by the Internal Revenue Service to provide tax information to certain foreign governments (such as France) on nonresident aliens who invest in the U.S. economy and have no U.S. tax liability. Senior White House economic officials and many members of Congress, plus virtually every regulatory agency, industry group and public-policy organization that testified on the proposal oppose it. Opposition is intense because the move would undermine our economic and national security, violate financial privacy rights and weaken the dollar. Mr. Snow told several senior members of Congress he would withdraw the proposal. By not doing so he has damaged his credibility. [Link to full article below:]

December 29, 2004, The Washington Times, By Richard W. Rahn, The trial of John Snow

December 29, 2004 The Market Center Blog


10) A pro-growth agenda for the Treasury Department

Writing for the Wall Street Journal editorial page, Steve Forbes explains why a flat tax, strong dollar, and Social Security privatization are key elements for a successful Treasury Department:

[Excerpt from Steve Forbes' column:]

The federal income tax code. Your position should be simple: Get rid of it. Start over. Replace it with a flat tax... The current system is an abomination. It is a stain on our national character and our politics. It retards economic growth and encourages the worst in us. It bars our people from fully realizing one of the critical components of the American dream -- the opportunity for each of us to discover and develop to the fullest our God-given talents. Income tax rates are far higher than they should be because of the code's Byzantine complexities. Think of it this way: Politicians tax us a dollar and then give us back -- unevenly, inequitably -- 50 cents in various credits, deductions, exemptions. Why not just tax us 50 cents in the first place and save everyone all the trouble? High tax rates retard economic growth. Taxes are a price. The tax you pay on your income is the price you pay for working; on profits, the price you pay for being successful; on capital gains, the price you pay for taking risks...

The dollar. Leave it alone. Get away from this crazy theory that a cheap dollar will cure our perceived trade woes and give us greater prosperity. Richard Nixon had the same illusion in 1971, when he severed the dollar from gold -- a cheap dollar would improve our balance of trade, he thought. All we got was a decade of stagnation and inflation. Urge Alan Greenspan to have the Federal Reserve soak up excess dollars until the price of gold goes below $400 an ounce. The dollar should be a fixed measure of value, just as is the foot (12 inches) or the hour (60 minutes). ...The dollar's value is not an economic issue -- it is, fundamentally, a moral one. When an individual receives a dollar for his labor, what right have politicians, central bankers or other "we-are-smarter-than-the-American people" Mandarin types to change the value of what that individual receives for his or her labor? No windfall losses, no windfall gains. Debasing the dollar just breeds inflation. ...Inflation is a destroyer. It undermines the social fabric. "There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose," is John Maynard Keynes' apt summary.

Social Security. Keep in mind that any proposed changes to the system will create a political firestorm, that Democrats and other demagogues will rail that you are undermining the wellbeing of the elderly. Rather than recommend tepid reform, you may as well go for something big. Instead of allowing workers to put 2% (out of 12.4%) of their Social Security taxes into personal accounts, allow them to put in 6% or 8%. That way workers who choose to take this option would start seeing meaningful money quickly accumulate in their accounts. Critics will cry that we will have to float bonds to implement this kind of reform. So what? Social Security's unfunded liabilities are well in excess of $10 trillion, versus the $7 trillion of our official national debt. So the liability is already there. A well-structured reform would mean that any borrowings could be amortized over a 30-year to 40-year period. It would turn Social Security from a pay-as-you-go liability into a capital-creating, economy-growing asset. [Link to full article below:]

December 20, 2004, Wall Street Journal, By Steve Forbes, A Letter to John Snow,,SB110350609792404469,00.html?mod=opinion&ojcontent=ot ep (subscription required)

December 21, 2004, The Market Center Blog


11) Microsoft under attack:  EU seeks to achieve through regulation what it can't achieve in the field of competition

A article analyzes the implications of the EU's regulatory assault against Microsoft.

[Excerpt from George Pieler's column:]

There can be no doubt that Europe wants to give the U.S. serious competition for the role of the world's economic leader. On December 20, 2004, when Judge Bo Vesterdorf of the European Court of First Instance handed the European Commission a preliminary victory in its procedural wrangling with Microsoft, the judge (by design or not) tilted the regulatory playing field strongly in favor of Europe and its recently departed antitrust czar, Mario Monti. ...But for all its regulatory prowess, Europe as a political entity remains seriously constrained from achieving the economic power it wants. It is highly dependant on the US (and its taxpayers) for providing its military defense, and Europe, which has indeed begun to understand the virtues of lower taxes for the corporate sector, cannot really break out of its high-tax and pro-regulation regime without abandoning its commitment to massive welfare state spending. That it will not do, at least not until the states of the New Europe from the east and south of the continent are able to wean political power away from France and Germany. The fact is, for all its regulatory braggadocio, Europe's superpower status is more image than reality. With the US and Asia driving world economic growth, Europe is living on borrowed intellectual and entrepreneurial resources, and in that sense is deeper in debt than the US is in fiscal terms. Europe's Microsoft victory is a major symbol of Europe's ambitions, and a foreboding of what could happen if America and Asia fail to reassert the primacy of market forces against global regulation. Maybe Europe needs to "unbundle" its commitment to 19th century socialism from its 21st century economic ambitions. If it does, the US could have a real competitor to deal with. [Link to full article below:]

January 7, 2005,, By George Pieler, Courting Disaster

January 9, 2005, The Market Center Blog


12) The decline and fall of France

A columnist chronicles the ongoing collapse of the French economy. Unfortunately, the political elites benefit from bloated government and have very little incentive to liberalize.

[Excerpt from column:]

France has declined because it is incapable of modernising. During this period average annual economic growth went down from 3% to 1.8%, while the productivity growth declined from 4.2% per year to 1%. Consequently, France is the only developed economy in which, over a quarter of a century, the level of unemployment exceeds 9% of the active population, whereas 20% of the potential labour force has been excluded from the labour market, while the participation rate remains the lowest for the whole OECD area (58%, of which 48% for the private sector). Meanwhile public finance is completely out of control. The accumulation of deficits (4.1% of GDP in 2003) has resulted in an explosion of public debt, which will soon reach 1,000 billion euros (62% of GDP against 23% in 1980). ....there is a hard core -- consisting of politicians, civil service mandarins and union officials, including both left- and right-wing elites -- which is keen to preserve the rigid social statist system in France, which protects their jobs and status. Their consensus transcends the differences between the main political parties. [Link to full article below:]

January 7, 2005,, By Hans Labohm, French Free Fall

January 7, 2005, The Market Center Blog


13) Nobel Laureate Edward Prescott and Columnist Robert Novak Promote Social Security reform

Writing in the Wall Street Journal, Nobel Laureate Edward Prescott outlines why demographic changes necessitate a switch to a system based on mandatory private saving and columnist Robert Novak comments on the critics of personal retirement accounts.  Mr. Novak reports that critics say that privatization is too expensive since government will need to borrow money to finance benefits for current retirees. This is true, but it is less than the amount of money that will be needed to bail out the current system.

[Excerpt from Dr. Prescott's column:]

Social Security was developed at a time when the number of workers paying into the system greatly outnumbered those who were receiving funds, and thus the promise made by government was easily kept. But times change while policies atrophy, and Social Security has evolved into a system that places an increasingly onerous burden on the young; the ratio of workers to elderly has shifted from 41-to-1 in the 1930s, to 3-to-1 today. Young workers today are being told that their Social Security contributions -- or taxes -- may have to increase to support the burgeoning elderly population. Moreover, those young workers are being warned that the same benefits will not apply to them -- that they will have to work longer and receive less than the folks they are now supporting. Such are government promises, especially those grounded on ill-founded policy. ...The reason we need to have mandatory retirement accounts is not because people are irrational, but precisely because they are perfectly rational -- they know exactly what they are doing. If, for example, somebody knows that they will be cared for in old age -- even if they don't save a nickel -- then what is their incentive to save that nickel? Wouldn't it be rational to spend that nickel instead? So, indeed, people are acting rationally when they choose not to save. We have rational people making choices based on the rules. The trick is to get the rules right. A mandatory retirement system, properly designed, would establish effective rules. [Link to full article below:]

[Excerpt from Mr. Novak's column:]

The Democratic Party establishment is appalled at the thought of private Social Security accounts turning ordinary Americans into owners of stocks and bonds and, therefore, potential Republicans. The argument by Democrats that private accounts are too risky fails the test of history. Nobody can find a 20-year period in America when investments have not gained. Accordingly, the central argument against private accounts has become that they cost too much. If 4 percentage points of the 12.4 percent Social Security payroll tax could be invested privately, transition costs were estimated at $1 trillion. If a 6.5 percent contribution envisioned by a bill sponsored by Sen. John Sununu and Rep. Paul Ryan were permitted, the estimated cost would rise to $2 trillion. ...transition costs are "significantly smaller" than costs from doing nothing about the estimated $12 trillion liability in the Social Security system. [Link to full article below:]

December 29, 2004, The Wall Street Journal, By Edward C. Prescott, It's Irrational to Save,,SB110428249934411688,00.html?mod=opinion&ojcontent=ot ep

December 30, 2004,, by Robert Novak, What transition costs?

Schwarzenegger promotes much-needed public pension reform ~ January 6, 2005

Higher taxes are not the solution to Social Security mess ~ December 23, 2004


14) The US does not have a free-market health system, but other nations are even worse

Walter Williams reviews an excellent new book, "Miracle Cure," (link below) that exposes many of the myths about health care - including the preposterous notion that America has a free market system:

[Excerpt from Dr. Williams' column:]

The recently published "Miracle Cure," by Sally Pipes, president of the San Francisco-based Pacific Research Institute, exposes health-care myths while explaining why the sometimes-touted Canadian style health care isn't the answer. ...the myth that our health-care problems derive from the fact that we have a free-market health-care system. Little can be further from the truth. The government has been the largest participant in our health-care system since the 1960s. Today, the government directly pays for 45 percent of health-care spending. Government intervenes in the form of tax subsidies and costly regulations on private insurers. Regulations imposed on medical practitioners are oppressive. According to a study by PricewaterhouseCoopers, for every four hours that a physician devotes to caring for a Medicare patient, hospital administrators spend 30 minutes on Medicare paperwork. For emergency room care, it's one hour spent on paperwork per one hour spent caring for a patient. ...Americans shouldn't imitate Aesop's dog by looking to Canada's socialized medicine as a solution to our health-care problems and lose what we have. A much smarter move is to repeal previous government-created "solutions" that have marched us nearer to socialism in the provision of medical services. In a word or two, get government out of our hospitals and doctor's offices. [Link to full article below:]

January 12, 2005,, by Walter E. Williams, Greedy or ignorant

September, 2004, Pacific Research Institute, by Sally C. Pipes, Miracle Cure: How to Solve America's Health-Care Crisis and Why Canada Isn't the Answer

January 12, 2005, The Market Center Blog


15) Real tax reform requires smaller government

Walter Williams explains that good tax reforms like the flat tax should be accompanied by reductions in the size of government. He also warns that repeal of the 16th Amendment would be an absolute requirement before considering a national sales tax.

[Excerpt from Walter Williams' column:]

Keeping the numbers small, suppose the annual value of what Americans produce, our gross domestic product, is $100. If government spends $40 of it, of necessity the government must force us to spend $40 less. There are several ways this can be done. Government could tax us $40. Government could borrow, thereby driving up interest rates and reducing private spending. Government could simply print money, which would cause inflation and reduce our purchasing power. Finally, government could employ some combination of the three. The bottom line is that if government spends $40 of our GDP, we can't spend that same $40. There's no question that tax reform is needed, but tax reform is secondary to a much larger issue -- federal spending. From 1787 to 1920, except during war, federal spending was a mere 3 percent of GDP, compared to today's 20 percent. If the federal government takes only 3 percent of the GDP, just about any tax system is relatively non-oppressive. However, if government were to take 50 percent, 60 percent or 70 percent of the GDP, you tell me what tax system would be non-oppressive. ...Before we accept a national sales tax, there are two minimal requirements. First, there must be a repeal of the 16th Amendment so Congress can't hit us with both an income and sales tax. Second, there must be a constitutional amendment fixing the national sales tax at a certain percentage that can only be increased by a three-fourths vote of the House of Representatives. People have advocated a national sales tax or a flat income tax for years, and I don't want to rain on their parade. But here's my prediction: Congress will never enact a sales tax or a flat tax. Why? The two most powerful congressional committees are the House Ways and Means Committee and the Senate Finance Committee. Both dispense tax favors to different Americans that come at the expense of other Americans. With a sales or flat tax, their Santa Claus roles, not to mention campaign contributions, would be diminished. On top of that, they'd have restricted opportunities for social engineering through fiddling around with the tax code. [Link to full article below:]

December 22, 2004, Townhall,com, by Walter E. Williams, National sales tax

December 23, 2004, The Market Center Blog


16) Falling dollar being used a Trojan Horse for tax increases

Alan Reynolds explains that there is no link between budget deficits, trade deficits, and the falling dollar. The first is a fiscal policy issue, and is properly understood as a symptom of excessive government spending. The second is merely a reflection of the fact that Americans are richer than the rest of the world and therefore can buy more from others than they buy from us. Last but not least, monetary policy may be heading in the wrong direction and hurting the value of the dollar, but this can only be fixed by shifting to a better monetary policy, not be raising taxes.

[Excerpt from Alan Reynolds' column:]

Some of the most painful errors in economic policy resulted from the belief monetary problems were not monetary but fiscal - caused by budget deficits. Blinded by such fiscal fundamentalism, President Hoover persuaded Congress to triple income tax rates in 1932, President Lyndon Johnson proposed a surtax as a counterproductive alternative to Federal Reserve tightening in 1968-69. A series of Japanese governments imagined wasteful public works schemes and new taxes on consumers and investors would somehow undo the Bank of Japan's prolonged deflation. Over the past two decades, the U.S. dollar has often gone up and sometimes down. Although these ups and downs were transparently unrelated to budget deficits or surpluses, apostles of the quaint Keynesian faith have nonetheless misspent two decades alternating between predictions that budget deficits must push the dollar up or down. ...Any proposal to "fix" the current account deficit by imposing brutal European or Japanese tax policies on the United States simply aims to weaken the U.S. economy and thus reduce demand in general, including demand for imports. It "works" only in the same sense recessions have always cut our need for imported industrial materials, components and equipment, and our ability to pay for them. [Link to full article below:]

December 19, 2004. The Washington Times, By Alan Reynolds, Dollars and deficits

December 20, 2004, The Market Center Blog


17) Trade surplus does not mean prosperity

Protectionists often assert that a trade deficit is a sign of weakness and a trade surplus is a sign of strength, but this is backwards thinking. Germany's economy is in the toilet even though they are the world's biggest exporter. And America's record trade "deficit" actually is a sign of strength since it is largely the result of two factors: America's fast economic growth, which means the US can afford to buy a lot from the rest of the world; and America's strong economy, which attracts huge amounts of foreign investment.

[Excerpt from WSJ editorial:]

...we hope we aren't being impolite to ask -- what does an economy with a sizable trade surplus and huge exports look like? We don't need to look far. The only country that exports more than the U.S. is Germany, which conveniently has a comfortable trade surplus that stretches back as far as the eye can see. But despite being the world's leading exporter, Germany can't seem to hitch a ride on the global economic recovery. "The world economy is booming like it hasn't in 28 years but the German economy is not participating," the Ifo institute, one of that country's leading economic research centers, said in a report last month. Growth in 2004 was probably only around 1.7% and might slow to around 1.2% this year. This "recovery" follows on the heels of three years of near-total stagnation -- the longest no-growth period in German history. It's no surprise, then, that over the past four years German unemployment has risen to record levels. Just last week, Germany's labor office reported the worst job numbers since reunification. Almost 4.5 million people, or 10.8% of the work force, were unemployed in December. That's double the U.S. rate. ...the next time someone tells you how much better off Americans would be with a trade surplus and a capital-account deficit, ask them why, if a trade surplus is the key to economic strength, Germany remains caught in a mercantilist mire. [Link to full article below:]

January 10, 2005,  The Wall Street Journal:  Review & Outlook, The German Disease,,SB110531834344221239,00.html?mod=opinion&ojcontent=ot ep (subscription required)

January 10, 2005, The Market Center Blog

A victory for free trade and poor people ~ December 31, 2004


18) The economic wisdom of America's Founding Fathers

A column quotes many of America's early leaders on the value of limited government. It is a shame that today's politicians do not have the same understanding and appreciation of the benefits of a free society:

[Excerpt from column:]

The author of our Constitution, James Madison, wrote in The Federalist Papers: "The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation and foreign commerce." ...All of our Founders were rightly concerned about this power -- indeed, our nation was born out of revolution to unjust taxation. No sooner was our Constitution ratified than Madison challenged his colleagues to refrain from extra-Constitutional expenditures: "I cannot undertake to lay my finger on that article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents...." Of the "General Welfare," Benjamin Franklin observed: "I am for doing good to the poor, but...I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. I observed...that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer." As for the effect of excessive taxation on the economy, Alexander Hamilton wrote: "If duties are too high, they lessen the consumption; the collection is eluded; and the product to the treasury is not so great as when they are confined within proper and moderate bounds." [Link to full article below:]

December 17, 2004,, by Mark Alexander, Real tax reform: A century late and a few trillion dollars short

December 20, 2004, The Market Center Blog


Best regards,

Andrew Quinlan
Center for Freedom and Prosperity


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