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Tyranny of the Taxers

June 18, 2013 in Economics

By Richard W. Rahn

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Richard W. Rahn

There is an all-too-common tendency for humans (particularly members of the political class) to blame or scapegoat others when they bungle their jobs. We are now being treated to the meeting of the Group of Eight — where the “leaders” of eight major countries are looking for excuses for why they have made such a mess of their own economies. Rather than acknowledge that the reason for such poor performance is excessive government spending, taxation and regulation, members of the G-8 are blaming their ills on lower-tax jurisdictions, which they pejoratively label “tax havens.”

In fact, all of the so-called tax havens have substantial taxes and significant government sectors. They also tend to have lower marginal tax rates on capital and labor income, which has enabled them to make their citizens rich and healthy. Many studies show that when government spending exceeds approximately 25 percent of gross domestic product, economic growth tends to slow, fewer jobs are created and the general welfare ultimately declines. If the G-8 had responsible leaders, the group’s summit would have as an agenda item “ways to downsize government.” Instead, their agenda includes how to increase tax revenue by going after jurisdictions with low tax rates. They disguise these schemes by using the phrases “increasing tax-base harmonization,” “tax information sharing” and “tax transparency.”

As can be seen in the accompanying table, low unemployment rates tend to be associated with smaller government sectors, and vice versa. This relationship can be shown with most governments over time and with cross-sectional studies. Many British overseas territories such as the Cayman Islands are attacked because they have no corporate and individual income taxes, and never have. They are not shown in the table because they are not totally independent from the United Kingdom.

Hong Kong and Singapore, which are former British colonies, have been successful by maintaining the British common-law legal system, coupled with low maximum marginal tax rates on income — 15 percent in Hong Kong and 20 percent in Singapore — low levels of economic regulation and limited government. Forty years ago, these jurisdictions were poor and without natural resources. They did have economic freedom, though, and relatively low levels of corruption. Now Hong Kong has a per-capita income close to that of the United States, and Singapore’s real per-capita income is substantially higher than that of the average American.

If big government were the key to economic success, France, with more than half of its GDP accounted for by government, would have rapid economic growth rather than an unemployment rate of …read more

Source: OP-EDS

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