Saturday, June 17, 2006

Evening at FEE

Last night's Evening at FEE featured Daniel J. Mitchell of the Heritage Foundation. "The Moral Defense of Tax Havens" doesn't begin to describe his terrific address on "tax havens" (his top three are Switzerland, Liechtenstein and the Cayman Islands) as a way for people to flee oppressive taxation. As a supply-side economist, Dr. Mitchell also made an indirect case for the flat tax. Not only does it generate more revenue by encouraging people to produce more, it generates more by not discouraging people from reporting taxes. He pointed to Venezuela, where kidnappers bribe bank officials to discover what families can afford to pay large ransoms. As he said, there would be no question if he were given the choice between dutifully paying taxes and having to hide wealth to protect his family.

If your tax system is so oppressive that your citizens save money abroad, you only deprive your own economy of investment capital. But cut taxes, and the capital will almost seek you on its own. Ireland still has relatively high individual income taxes, but after it slashed its corporate tax to 12.5%, it ceased to be "the sick man of Europe" and has since attracted companies from all over the world. It's now the second wealthiest (per capita) nation in Europe, Dr. Mitchell said, after Luxembourg, which itself is a tax haven. I'll add that Luxembourg is one of the few countries with higher per capita GDP than the U.S., which is a bad comparison because of the size differences. However, Luxembourg's tax system wisely allows for what's called a "holding company" (a tricky way to get around the normal 30.38% corporate income tax rate).

Tax policy is something I try to emphasize, because it's the difference between the stagnation of the 1930s (after Hoover's and FDR's tax hikes) and American prosperity since Reagan's tax cuts. So I really enjoyed the event, particularly Dr. Mitchell's two France-bashing jokes. Did you hear of the French rifle for sale on ebay? "Never fired, dropped only once." Afterward I spoke with him for a few minutes, introducing myself with, "Blessed is he who comes in the name of Arthur Laffer."

FEE is all about Austrian economics, and the professor who influenced me the most (and introduced me to FEE) is a die-hard Austrian. However, I am a supply-sider. I don't have a problem with government debt like many Austrians do, that is, unless the central bank creates money just so the government can borrow it. What Dr. Mitchell and I worry more about is the size of government, not debt itself. In fact, the federal debt right now is in fact pretty manageable and quite easy to finance. For all the fear-mongering about foreigners losing confidence in the dollar, foreigners still love our Treasury bonds.

I explained before that the trade deficit since 1997 has exceeded the federal budget deficit, allowing foreigners to fund much of our federal borrowing by turning their dollars into Treasury bonds, and that means the Fed doesn't have to create money specifically to finance the debt. At the same time, the economy (and thus tax receipts) have grown faster than the debt. As our friend Steve Conover noted last September, federal borrowing now is 9-10% of our tax receipts, compared to 18% in the early 1990s. I actually remember 25% at one point, but that could be a matter of accounting and/or sensationalism. The big problem is the Social Security obligations that will blow up in our face starting in 2017 -- that's another story.

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