Dude, Where’s My W-2?

Let me tell you how it will be;
There’s one for you, nineteen for me.
‘Cause I’m the taxman,
Yeah, I’m the taxman.

-The Beatles

 

A Possible Impetus For Change

Last fall, the international media focused much of its attention on European elections that promised to shake up the old European order. For those seeking real economic change in the form of market liberalization, those elections were partial letdowns. For instance, many analysts believe that a clear-cut Merkel victory in Germany could have provided the impetus necessary for much needed economic reform and market liberalization in other Western European countries. Following the formation of a grand coalition in Germany, it appears that constant compromise may prevent Angela Merkel, the new Chancellor of Germany, from carrying out her intended reforms. It is also uncertain what direction Poland’s newly elected center right coalition government will take the country. Before coming to the conclusion that all hope is lost regarding Western European change, one must consider an economic force that has been slowly moving westward, originating in the tiny nation of Estonia. The flat tax, which applies a constant rate of taxation, is exerting economic pressure in the form of tax competition on the high tax economies of Western Europe, slowly forcing economic change in those countries.

Reactionary Yet Opportunistic

From a historical perspective, it is interesting that many of the countries who have enacted constant rates are ex-communist nations who have voluntarily moved in the opposite direction of Soviet central planning, the failed communist system that attempted to control every aspect of economic activity. Much like the iron curtain before it, the flat tax movement and free market values are slowly moving westward, with Greece facing a crucial decision this year regarding the adoption of a 25% flat tax. In the recent Polish election, the pro flat tax Civic Platform Party came in a close second, and will now share power with the victorious Law and Justice party. In Germany, the early election campaign of Angela Merkel featured a proposed finance minister who was an outspoken supporter of a flat tax. Unlike the spread of communism, however, the flat tax movement is being voluntarily implemented.

Mail Order Brides are no Longer Estonia’s Chief Export

 

The flat tax system, which uses a single tax rate that is applied to wage earners and corporations that begins taxing after a certain income threshold is reached, has been successful in several nations beginning in 1994, when Estonia introduced a 24% tax rate. By attracting business from abroad, Estonia’s economy grew at double digits in 1997, and has averaged about 6% GDP growth per year since. Russia, a nation whose complicated tax code caused widespread evasion, instituted a flat tax in 2001. It is estimated that in the years leading up to the 2001 flat tax, Russia’s biggest corporations ignored 29% of their tax obligations, while 63% substituted goods or services instead of hard currency. This made Russia susceptible to debt defaults as their coffers reached record lows. In 1998 Russian government revenues were 12.4% of GDP. By implementing a simplified tax code, Russia eliminated loopholes and increased its revenues in real terms by 28% in 2001, 21% in 2002, and 31% in 2004.

Opponents of a flat tax, who believe that a flat tax is meant to line the pockets of the rich and will result in lower government revenues, fail to realize that flat tax systems do not tax earners below a certain threshold, allowing the poorest workers to be exempt from taxes. The revenue question is answered by looking at Russia, a nation who learned that the best way to get higher revenues is to give people more incentive to report their taxes by keeping tax rates low. Ideally, a low tax rate would result in more wealth creation, which could generate even greater revenue. Remember, the examples cited in this article are from countries that had an insanely restrictive, command style tax code. The flat tax is also making Western Europe increasingly uncompetitive, as businesses and investment dollars flow into Eastern Europe.

Implications

In response to widespread eastern European acceptance of a flat tax, Western Europe is beginning to consider tax reform. According to the Economist, Germany has already made plans to cut its corporate tax rate from 25% to 19%, and the in Britain, the Opposition Conservatives announced on September 7, that they would set up a panel to study a flat tax proposal. As investment dollars and businesses continue to flock to Eastern Europe from Western Europe, it will be increasingly apparent to Western Europe that in order to maintain its standard of living, it will need to make radical changes in its tax policy.

Conclusions

It will be interesting to see how the Western European nations deal with tax competition from the east. It is apparent that the increasingly uncompetitive Western European nations will need to modernize their economies in order to compete. It will also be interesting to see how the continued success of an Eastern European flat tax effects the current tax situation in America, where our own tax code has broken the nine million word mark.

-JPL

Links of Interest

http://www.washingtonpost.com/wp-dyn/content/article/2006/05/31/AR2006053102043.html

 

Cours, camarade, le vieux monde est derrière toi !

On the Anniversary of a Riot

On May 17, 1968, a general strike paralyzed France. Started by angry students at Paris’ Sorbonne, the powerful French Labor unions eventually joined, resulting in millions of French workers walking out of work demanding economic and social change. A week later, on May 24 1968, radical students raised a red flag over the Paris Stock Exchange and threatened to burn it to the ground. Eventually, Prime Minister Pompidou negotiated with prominent Union leaders and appeased the students by passing legislation that improved education funding and guaranteed minimum working conditions. French politicians, eager to please their constitutents and afraid of radical rabble rousers, passed increasingly socialist legislation in the following years that created an almost unpenetrable labor market for outsiders, strict hiring and firing laws, high costs for employers, and near ten percent unemployment. Although some good came out of changes brought on after the 1968 riots, the employment situation caused by socialist French employment policies has resulted in a nation in dire need of labor market liberalization. We will evidence this by adding context and perspective to two subsequent riots, those that took place in Fall of 2005, and the most recent riots related to Chirac’s CPE.

When thrown, stale baguettes make surprisingly effective projectiles
Fast Forward

Initially incited by the accidental death of a muslim youth, the riots that shook France in the Fall of 2005 lasted over twenty days, as disaffected muslim youth in the suburbs of Paris burnt cars and businesses. Seen as a threat to the French secular model, French muslims of North African descent face discrimination in an almost impenetrable workplace. Unemployment among native born French university graduates of North African origin is estimated by the BBC to be 26.5%, compared to white graduates’ 5%. According to BBC, “a French non-profit group said that after they sent identical curriculum vitaes (CVs) to French companies with European- and African or Muslim-sounding names attached, they found CVs with African or Muslim sounding names were systematically discarded. In addition, they have claimed widespread use of markings indicating ethnicity in employers’ databases and that discrimination is more widespread for those with college degrees than for those without.” It is evident that the riots that gripped France in the Fall of 2005 were the result of an unemployed, disenfranchised population who were fed up with their treatment at the hands of the society that has failed them.

When clowns cry

The CPE

In an attempt to liberalize the choked up French employment situation, Prime Minister Dominique De Villepin proposed the CPE, an amendment that attempted to tackle double digit unemployment. In France, after you are hired by a company, it is almost impossible to be let go, barring factors such as being violent on the job. This makes it extremely hard to fire incompetent workers or those not suited for the position, causing employers to be reluctant to hire. The CPE’s most controversial element was that it allowed workers under the age of 26, or who have been there less than two years, to be let go if the employer did not think they were right for the position for whatever reason. The proposal of the CPE was met by riots and protests as over three million demonstrated on April 4, 2006. The CPE was withdrawn on April 10, 2006.

Let them eat brie

Conclusions

It is apparent that employment has been a contentious issue among the French for the past few decades. The riots in 1968 helped bring about the socialist employment practices that have been partly responsible for the high unemployment rate today due to employer’s reluctance to hire new workers. It is also apparent that the French muslim underclass, who are discriminated against in the workplace, desperately need measures such as the CPE to be passed in order for their condition to be improved, as a loosening of hiring restrictions would allow them to prove themselves as equals in the workplace. The mostly white protesters that were protesting the CPE could have been doing so in an attempt to retain their status in a country that is increasingly threatened by the pressure of globalisation, something that will eventually cause the French to modernize or face serious economic and social consequences.

-JPL