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CF&P E-mail Update, September 20, 2005

Center for Freedom and Prosperity's E-mail Update

1) Left-wing groups endorse global tax authority

2) Growth is better for the poor than redistribution

3) FDR's policies helped turn a recession into a depression

4) Flat tax economies grow twice as fast

5) Flat tax beginning to sweep Western Europe

6) Why should the federal government subsidize New Orleans?

7) Less government is the way to rebuild New Orleans

8) Government-subsidized flood insurance is costly - and deadly

9) Some final words on government incompetence and natural disasters

10) U.N. Law-of-the-Sea treaty would give more power - including tax authority - to a fundamentally corrupt institution

 

1) Left-wing groups endorse global tax authority.

In an attack on fiscal sovereignty, the Tax Justice Network and Christian Aid have joined the OECD campaign against tax competition and good tax policy. Both leftist groups are reflexively opposed to pro-growth policies. Both organizations want higher taxes and more redistribution, notwithstanding the miserable results in nations that have adopted these policies. Most disturbing, both want a global tax authority to trample the right of nations to adopt good tax law.

[Excerpt from Tax Justice Network report]

Strengthening international tax coordination between governments ...is a very valuable first step. In the longer-term, a single world tax framework may be necessary to deal with some aspects of international tax policy... Faced with the pressures of the globalisation of capital movements and the threat that companies will relocate unless given concessions on lower regulation and lower taxes, governments have responded by engaging in tax competition to attract and retain investment capital. Some states with limited economic options have made tax competition a central part of their development strategy. This inevitably undermines the growth prospects of other countries, as they attract investments away from them, and has stimulated a race to the bottom. ...governments must regain the capacity to tax their citizens as well as businesses operating within their borders, and to use the revenues to finance ...wealth redistribution. ...The UN's second role  is as host of a little known committee now called the Committee of Experts on International Cooperation in Tax Matters. ...To date its influence appears to have been limited, but its status was upgraded in 2004, apparently in accordance with the wishes of UN Secretary General Kofi Annan. The significance of this move is high. This is the only global committee that considers international taxation matters and could potentially form the basis of a World Tax Authority... There is a clear need for a World Tax Authority (WTA) to monitor the impacts of fiscal policies on trade and investment patterns, and to protect national tax policies from harmful practices. ...One organisation that has attempted to remedy the situation is the OECD, which has a considerable expertise in this area... The most appropriate body to take on the functions of a WTA would be the United Nations, which could and should evolve its existing Committee of Experts on International Cooperation in Tax Matters to fill this role. ...For a WTA to be successful, it would need to establish policies in the areas referred to above. [Link to full article below:]

[Excerpt from Christian Aid report]

Strengthening international tax cooperation is a crucial part of remedying the current imbalance between multinational business and tax regimes that are confined to national boundaries. ...Strategies such as setting a global minimum rate of corporate taxation should be considered. ...One solution...is a World Tax Authority, which would be developed out of the sharing of information between national tax authorities. This would monitor the impact of tax policies and protect national policies from harmful international practices, such as those described in this briefing. Such an authority would be responsible for tackling tax competition [and] tax havens ...thereby leveling the global playing field. [Link to full article below:]

September 2005, Tax Justice Network, Tax Us If You Can
http://www.taxjustice.net/cms/upload/pdf/tuiyc_-_eng_-_web_file.pdf

September 2005, Christian Aid, The Shirts Off Their Backs: How tax policies fleece the poor
http://www.christian-aid.org.uk/indepth/509tax/Tax%20Briefing%20Report%20(2).pdf

 

2) Growth is better for the poor than redistribution.

A political debate is brewing in China about income inequality. Leftists whine about a growing gap between rich and poor. More sensible people counter by pointing out that free market reforms have enabled everyone to get much richer - so why worry if some are getting richer faster than others are getting richer. This is quite similar to the debate that takes place in America and elsewhere. The left stubbornly believes that the economy is a fixed pie and that only redistribution can improve living standards for the poor. Yet world history provides countless examples that the growth generated by unfettered markets is the best way to boost income for everyone. Hopefully Chinese communists and American leftists someday will understand this simple concept.

[Excerpt from The Wall Street Journal]

Will a new fixation on egalitarianism in China take that country back to Maoism? If the hand-wringing about income inequality in China translates into policies that will penalize hard work, talent and risk-taking, or get in the way of reform, the answer could be yes. If, on the contrary, the social resentments generated by Communist Party corruption and cronyism are addressed, China could have a useful debate. ...The measure that the stories in China have been using -- one beloved of academics the world over -- is the United Nations Development Program's so-called "Gini coefficient index." In the UNDP's own words, the index measures the extent to which income distribution "deviates from a perfectly equal distribution." Zero is "perfect" egalitarianism, and the higher score you get supposedly the worse. ...In 2003, when China began to implement its WTO reforms, its index was at 40. In 1992, when the reforms stemming from Deng Xiaoping's southern voyage started, the index was at 37.4. And in 1980, a year after the reforms were first launched, it was at 33. This means that China's income gap has grown 36% in the last quarter century of economic reform. But, hang on, in that time China has seen not just one of the fastest rates of economic growth in modern history, but also one of the most astonishing records of poverty reduction. By the World Bank's own estimates, the number of people living in poverty had been reduced to 29 million in 2001, from 80 million in 1993 and 250 million when the reform process got under way in 1979. ...It is almost axiomatic that during periods of high growth, some will improve their lot at a higher rate than others. But the lot of those at bottom also improves, in the case of China markedly. Simply put, in order for the whole of society to advance, talent and hard work must be rewarded. Income redistribution schemes that penalize these virtues will do the opposite. [Link to full article below:]

September 23, 2005, The Wall Street Journal, Review & Outlook: Letting the Gini Out of the Bottle
http://online.wsj.com/article/0,,SB112742703711749100,00.html?mod=opinion&ojcontent=ote p   (subscription required)

 

3) FDR's policies helped turn a recession into a depression

Chris Edwards of the Cato Institute has an excellent two-pager summarizing how Herbert Hoover's big government policies started the economic downturn and how Franklin Roosevelt's "New Deal" turned a recession into an economic catastrophe:

[Excerpt from Chris Edwards' study]

The economic policies of the 1930s are a continuing source of myth and confusion. Many people believe that capitalism caused the Great Depression and that President Franklin Roosevelt helped to end it. ...Such often-stated claims are incorrect. Misguided federal policies caused the downturn that began in 1929, and they prevented the economy from fully recovering for a decade. Policy blunders by the Federal Reserve, Congress, and Presidents Herbert Hoover and Roosevelt battered the economy on many fronts. ...The Depression was a uniquely severe contraction. ...Real output only regained its 1929 level in 1936, but then output plunged again in 1938. The unemployment rate stayed persistently high at more than 14 percent for 10 years (1931 to 1940). By contrast, the economy recovered rapidly after a sharp contraction in 1921. Real output fell 9 percent in 1921 and unemployment rose to 11.7 percent. But the economy bounced back with output recovering all its lost ground in 1922. Unemployment fell to 6.7 percent in 1922 and 2.4 percent in 1923. The secret to the quick recovery was that the government generally stood aside and let the market recover by itself-wages and prices adjusted, resources shifted to new areas of growth, profits recovered, business optimism returned, and investment rose. By contrast, government policies in the 1930s prevented the U.S. economy from recovering. ...President Hoover signed into law the Revenue Act of 1932, which was the largest peacetime tax increase in U.S. history. The act increased the top individual tax rate from 25 to 63 percent. After his election in 1932, Roosevelt imposed further individual and corporate tax increases. The highest individual rate was increased to 79 percent. State and local governments also increased taxes during the 1930s, with many imposing individual income taxes for the first time. All these tax increases killed incentives for work, investment, and entrepreneurship at a time when they were sorely needed. ...The centerpiece of the New Deal was the National Industrial Recovery Act of 1933. It created "codes" or cartels in more than 500 industries in order to limit competition. Businesses were told to cut output and maintain high prices and wages. ...Many New Deal policies raised employer costs, contributing to the extraordinarily high unemployment of the 1930s. NIRA industry codes required high wages. The new Social Security tax increased compensation costs. New minimum wage rules reduced demand for low-skilled workers. The Davis-Bacon Act required the payment of excessively high wages on federal contracts. Compulsory unionism and militant union tactics were encouraged under a series of laws. ...Roosevelt's antitrust crusade was typical of his antimarket approach. The Justice Department hired hundreds of new attorneys and began a lawsuit blitzkrieg in 1938 against dozens of industries for conspiring to keep prices high. The irony was that Roosevelt had spent his first term encouraging cartels, monopoly unionism, and other policies designed to boost prices and production costs. ...economically, Roosevelt and his "brains trust" had no idea what they were doing. They attempted one failed intervention after another. The Great Depression was a disaster, and sadly an avoidable one. [Link to full article below:]

September 2005, Cato Institute, by Chris Edwards, The Government and the Great Depression
http://www.cato.org/pubs/tbb/tbb-0508-25.pdf

 

4) Flat tax economies grow twice as fast

A British public policy organization reports that Eastern European economies that have adopted flat tax systems are growing twice as fast as those that have retained so-called progressive tax codes:

[Excerpt from the Reform Bulletin]

Estonia and Lithuania introduced a flat tax in 1994, with Latvia following in 1995. Russia (2001), Serbia and Ukraine (2003), Slovakia (2004) and Georgia and Romania (2005) have followed. Outside of east Europe, a flat tax has operated in Jersey and Guernsey since 1940 and 1960 respectively, and in Hong Kong since 1947. ...Lower marginal rates of taxation remove disincentives for work and increase disposable income among the wealth-creating sections of the economy. This stimulates investment and economic growth. Eastern European countries with a flat tax have grown twice as fast as countries without. They have had an average annual GDP growth of 5.3 per cent, compared with only 2.6 per cent among those without. [Link to full article below:]

September 8, 2005, Reform, Bulletin - 8 Sep 2005
http://www.reform.co.uk/website/pressroom/bulletinarchive.aspx?o=110

 

5) Flat tax beginning to sweep Western Europe

While the concept of the flat tax has been around for centuries, the modern father of the flat tax is Alvin Rabushka of Stanford University's Hoover Institution. Alvin must be feeling good about the way the flat tax is succeeding in Eastern Europe, and his latest commentary is about the growing interest in tax reform in Western Europe.

[Excerpt from Dr. Rabushka's column]

Suddenly, the flat tax is germinating in Western Europe, home to governments that generally profess the "social market economy" of high taxes and redistribution of income. Slow growth and unemployment seems to be changing minds. The flat tax is currently the centerpiece of tax policy debate in Germany, the United Kingdom, Greece, and Italy. ...A complete roundup of Western Europe would include Denmark and Finland, where small political parties are expressing their interest in the flat tax, and Spain, where two professors who serve as economic advisors to the prime minister have written a paper supporting a flat tax for Spain. It's too early to predict the adoption of the flat tax in any or all of these countries, but the idea has clearly taken root. [Link to full article below:]

August 30, 2005, The Russian Economy, by Alvin Rabushka, The Flat Tax Gathers Momentum in Western Europe
http://www.russianeconomy.org/comments/083005.html

 

6) Why should the federal government subsidize New Orleans?

Veronique de Rugy of the American Enterprise Institute has the courage to ask why taxpayers should subsidize homeowners and businesses that voluntarily choose to live in a city that is below sea level. And if taxpayers are going to subsidize such a city, shouldn't it be taxpayers in that city and state rather than the federal government?

[Excerpt from Dr. de Rugy's column]

...it is the unintended consequences of federal spending through the Army Corps of Engineers that ultimately led to this disaster. As we know, government spending changes people's incentives and behaviors. There is a chance that the billions spent on building levees over the past several decades -- preventing New Orleans from being naturally flooded as it would have otherwise -- ultimately allowed the city of New Orleans to continue to grow even though it is under sea level. Without that spending, people in New Orleans may have been prompted to realize that it was too risky to live there and adjusted their behavior accordingly. But this ignores an equally important issue: The federal government was designed to have specific and limited powers with most basic government functions left to the states. The federal government should only be in charge of delivering goods that promote the welfare of all -- public goods. National defense for instance, benefit all the states, so the federal government should make these investments. But the benefits of preparing against and preparing to respond to natural disasters are enjoyed by the residents of a particular state, rather than all states, so these investments should be made at the state level. ...once the emergencies have been addressed and the disaster-stricken areas are back to normal (or as back to normal as one can hope), lawmakers at the federal and state level should take a sober look at who should be responsible for minimizing the damage of future disasters. [Link to full article below:]

September 7, 2005, TCS Daily, By Veronique de Rugy, Fools Rush In Font Size:
http://www.techcentralstation.com/090705I.html

 

7) Less government is the way to rebuild New Orleans.

The Wall Street Journal opines on the need for free market reforms to help recover from the hurricane. Lower taxes and school choice are important priorities, and the Journal warns against pork-barrel spending. The editorial also notes that the private sector successfully responded to previous natural disasters.

[Excerpt from The Wall Street Journal]

Why not allow the Gulf to operate as a laboratory for a flat tax, with an 18% rate and no taxes whatsoever on capital investment for businesses -- small and large? And if this works for New Orleans, as it has for so many of the former economically ravaged nations of East Europe, then make it the law of the land. The Bush plan also provides an "urban homesteading" feature, whereby low-income families would be given a free plot of federal land in the ruined areas in exchange for a commitment to build a home there. It's a truism that people better maintain homes that are their own property. The plan also contains what amounts to a voucher for students uprooted by Katrina. They'd be able to use up to $7,500 for public, but also for private or religious, schools -- which has the teachers unions up in arms. Leave it to the National Educational Association to let its own monopoly interests trump the welfare of kids, even in the wake of a disaster. ...The price tag for these proposals would be a tiny fraction of the cost of a federally directed welfare state/public works effort, which seems to be the choice of Democrats -- and too many Republicans. Congress has already appropriated $62 billion in federal aid and another $100 billion is in the works. That's all new spending, by the way; a better option would be to divert money from pork-barrel projects to Katrina relief. ...At least one-half of the structures in San Francisco were toppled or burned to the ground, and a quarter million Californians left homeless, by the Great Earthquake of 1906. Within three years the city was rebuilt without any FEMA aid, Small Business Administration loans or federal housing assistance. Similarly the Chicago Fire of 1871 razed virtually every building in the entire downtown business district (save for the famous Water Tower), while scores of outlying neighborhoods were destroyed. As a recent report from the Foundation for Economic Education details: "Within two years this burned city had been almost completely rebuilt through private aid and initiative." [Link to full article below:]

September 21, 2005, The Wall Street Journal, Review & Outlook: In the Gulf Zone
http://online.wsj.com/article/0,,SB112726718315246970,00.html?mod=opinion&ojcontent=ote p   (subscription required)

 

8) Government-subsidized flood insurance is costly - and deadly.

Subsidizing bad decisions is rather silly, so it should come as no surprise that the government is encouraging people to build homes where they are most likely to be damaged. If people want to build homes in flood plains and hurricane-prone beaches, that is their right. But they should not have the right to purchase insurance subsidized by you and me. USA Today explains why this is a recipe for disaster.

[Excerpt from USA Today]

This unprecedented march to the sea has been abetted by unwise government policies that encourage living along the coast. Principal among them: the National Flood Insurance Program. Started in 1968, federal flood insurance subsidizes development in coastal areas and other regions subject to flooding by offering insurance at bargain rates underwritten by the government. As of last year, about 4.6 million policies were in effect with an average annual premium of $438. These premiums are nowhere near enough to cover the program's losses. Earlier this month, Congress authorized the program to borrow $3.5 billion for Katrina-related payments, an amount most experts believe is just the beginning and few believe will be repaid by property owners. The program not only brings big government into an area better left to private enterprise, it also achieves the opposite of its goal. By lowering the cost of maintaining a home on flood-prone lands, it increases the populations in these areas. That in turn leads to more, and more costly, disasters. [Link to full article below:]

September 20, 2005, USA Today, How you pay for people to build in flood zones
http://www.usatoday.com/news/opinion/editorials/2005-09-20-our-view_x.htm

 

9) Some final words on government incompetence and natural disasters

Townhall.com has a great series of columns today. Alan Reynolds explains why disasters are bad for the economy, contrary to the foolish comments of Keynesian economists. Emmett Tyrell notes that environmental radicals blocked policies (which should have been undertaken by state and local governments, but that's a separate issue) that would have protected New Orleans. Larry Elder quotes Milton Friedman on the critically important role of market-determined prices. And Tom Sowell compares to the efficiency of the private sector to the incompetence of government.

[Excerpt from Dr. Reynolds' column]

The alleged "fiscal stimulus" of $62.3 billion of debt-financed federal funding in the hurricane-afflicted cities is pure illusion. The notion that replacing destroyed property will somehow boost the economy is, as economist Walter Williams reminds us, the old "broken window fallacy" exposed by Frederic Bastiat in 1848. Breaking windows may create work for glaziers, but property owners whose windows were broken will then have less money left over to spend on something more enjoyable. Society then has to devote scarce real resources to this unfortunate task, rather than another. ...The congressional spending spigot...is an open invitation to waste. Federal billions may even be used to reimburse the losses of households or firms who did not purchase the heavily subsidized flood insurance. That would set a disaster-prone precedent. Anyone who anticipated wisdom and foresight from any level of government was once again disappointed. [Link to full article below:]

[Excerpt from Mr. Tyrrell's column]

...a congressional task force reported that the levees that failed in New Orleans would have been raised higher and strengthened in 1996 by the Army Corps of Engineers were it not for a lawsuit filed by environmentalists led by who else but the Sierra Club. ...According to a recent report in the Los Angeles Times, a 1977 lawsuit filed by Save the Wetlands stopped a congressionally-funded plan to protect New Orleans with a "massive hurricane barrier." A judge found that New Orleans' hurricane barrier would have to wait until the Army Corps of Engineers filed a better environmental-impact statement. Now, because those who would have improved hurricane protection in New Orleans were prevented by the environmentalist rigorists, the wetlands are polluted and imperiled and New Orleans has suffered the damage that practical minds have been trying to prevent for three decades. [Link to full article below:]

[Excerpt from Mr. Elder's column]

In economists Milton and Rose Friedman's classic book "Free to Choose," they explain supply and demand. ..."Prices . . . transmit information. . . . Suppose that a forest fire or strike reduces the availability of wood. The price of wood will go up. That will tell the manufacturer of pencils that it will pay him to use less wood, and it will not pay him to produce as many pencils as before unless he can sell them for a higher price. The smaller production of pencils will enable the retailer to charge a higher price, and the higher price will inform the final user that it will pay him to wear his pencil down to a shorter stub before he discards it, or shift to a mechanical pencil. . . . Anything that prevents prices from expressing freely the conditions of demand or supply interferes with the transmission of accurate information." ...the disaster-driven higher price creates opportunities for people outside the area to rush in supplies. Capping profit, in a time of sudden and severe shortage, creates a disincentive on the part of others to come in with supplies. [Link to full article below:]

[Excerpt from Dr. Sowell's column]

Well before Katrina reached New Orleans, when it was still just a tropical depression off the coast of Florida, Wal-Mart was rushing electric generators, bottled water, and other emergency supplies to its distribution centers along the Gulf coast. Nor was Wal-Mart unique. Federal Express rushed 100 tons of supplies into the stricken area after Katrina hit. State Farm Insurance sent in a couple of thousand special agents to expedite disaster claims. Other businesses scrambled to get their goods or services into the area. ...In both emergency times and normal times, governments have different incentives than private businesses. ...The country does not have one dime more resources available when those resources are channeled through government. The resources are just handled less effectively by government and dispensed in an indiscriminate way that encourages people to continue locating in the known path of predictable disasters. [Link to full article below:]

September 15, 2005, Townhall.com, by Alan Reynolds, Hurricane economics
http://www.townhall.com/columnists/alanreynolds/ar20050915.shtml

September 15, 2005, Townhall.com, by Emmett Tyrrell, Poor Al
http://www.townhall.com/columnists/emmetttyrrell/et20050915.shtml

September 15, 2005, Townhall.com, by Larry Elder, 'Gouging' and 'dumping'
http://www.townhall.com/columnists/larryelder/le20050915.shtml

September 15, 2005, Townhall.com, by Thomas Sowell, FEMA versus Wal-Mart
http://www.townhall.com/columnists/thomassowell/ts20050915.shtml

 

10) U.N. Law-of-the-Sea treaty would give more power - including tax authority - to a fundamentally corrupt institution

Frank Gaffney's Townhall.com column warns that the Law-of-the-Sea treaty is an assault on American sovereignty. It is very disturbing that the Bush Administration is supporting this radical proposal. The U.S. Senate is the last line of defense to stop this misguided scheme to give more power to an anti-American, anti-freedom international bureaucracy.

[Excerpt from Mr. Gaffney's column]

Unfortunately, since Ronald Reagan's day, American governments have tended to pay too little attention to sovereignty-sapping treaties and institutional power-grabs by the United Nations and other multilateral organizations. To his credit, Mr. Reagan recognized the Law of the Sea Treaty for what it was intended to be by the World Federalists and so-called non-aligned movement types who had a significant hand in shaping its supranational International Seabed Authority and related entities: a highly precedential, and undesirable, vehicle for establishing world-government mechanisms to control the "international commons" (in this case, the oceans) at the expense of sovereign states. President Reagan refused to agree to LOST's ratification in part because he found anathema the idea of empowering an international organization to raise its own revenues through what amount to taxes on seabed mining and energy exploitation. Regrettably, the Bush Administration has to date chosen to overlook this and the Treaty's other adverse implications for U.S. sovereignty, and says it supports LOST's ratification. ...Of arguably greatest importance is the U.S. refusal to empower the United Nations to levy taxes - a step that would, as with the Law of the Sea Treaty, advance the organization's ambitions to promote world government. Globo-taxes would also eviscerate what remains in the way of American leverage to effect real reform of the UN and to punish its misbehavior. It is estimated that one proposed tax on international currency transactions alone would be able to generate a staggering $13 trillion in revenue. Just as Hurricane Katrina ruptured the levees protecting New Orleans, the UN's concerted assault on the barriers to further erosion of American sovereignty threatens to swamp our freedom of action and our founding principle of "no taxation without representation." It behooves President Bush to reject any Outcome Document that leaves the door open to globo-taxes, let alone one that endorses them outright. [Link to full article below:]

September 12, 2005, Townhall.com, by Frank J. Gaffney, Sovereignty levees breached?
http://www.townhall.com/columnists/frankjgaffneyjr/fg20050912.shtml

 

Best regards,

Andrew Quinlan
Center for Freedom and Prosperity
President
202-285-0244
quinlan@freedomandprosperity.org
www.freedomandprosperity.org

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