Matt Yglesias

The Estonian Miracle

Here’s Cato’s Daniel Mitchell writing in April 2007:

The International Herald Tribune reports that the new government in Estonia plans to lower the rate on the flat tax from 22 percent to 18 percent. Estonia already ranks as one of the world’s most laissez-faire economies. Reducing the flat tax rate – which was originally imposed at a rate of 26 percent – will further enhance Estonian competitiveness and increase the power of tax competition in Europe.

Ah, Estonia:

Estonian GDP Shrinks By An Annual 15.6% In The First Three Months Of 2009

Well, the best thing that can be said about this is that it wasn’t as bad as the 18% contraction recorded in Latvia.

Back to Daniel Mitchell, writing with his colleague Chris Edwards who observe that “Latvia became the third Baltic country to adopt a flat tax . . . Latvia has experience rapid economic growth in recent years . . . like in Estonia, Latvia has been able to cut the overall size of its government.”

Not, of course, that flat taxes breed spectacular economic meltdowns. But many of the “miracle” economies pointed to by the right as proving the virtues of tax cuts—Ireland, the Baltics, to a lesser extent other neoliberal regimes in Central Europe—in fact clearly seem to have powered their past several years worth of growth largely by tapping the credit bubble in even bigger ways than the United States did.

Meanwhile, recall that the shoe of Eastern European defaults hasn’t necessarily finished dropping yet. The impact would be felt primarily in European banks, but it still spells trouble for everyone.

The Case for Corporate Tax Reform

Earlier today I was trying to say something intelligent about the Obama administration’s corporate tax proposals that wouldn’t require me to obtain detailed knowledge of the Obama administration’s corporate tax proposals. So I said that it seemed to me that the logic of these proposals implied that we should do a bigger, broader reform of the corporate income tax aimed at closing a wide variety of loopholes and deductions in exchange for lowering the headline rate. Ezra Klein points out that the administration has smart guys like Jason Furman working for it so they’re aware of this:

Jason Furman: Marc, you should understand that today’s announcement is a down-payment on the President’s overall tax agenda. As he said in his remarks today, “the steps I am announcing today will help us deal with some of the most egregious examples of what’s wrong with our tax code and will help us strengthen some of these other efforts. It’s a down payment on the larger tax reform we need to make our tax system simpler and fairer and more efficient for individuals and corporations.” That said, the proposals the President made today would start to simplify the tax code. This includes the President’s proposal to reward companies that create jobs in America – which would make the research and development tax credit permanent, adding more predictability and stability to the tax code because companies would no longer have to worry about whether or not the credit would expire or continue.

Specifically on the corporate tax front, during the campaign Senator John McCain (R-AZ) spent a lot of time praising the low corporate tax rates of Ireland. This is a fair but, but the Irish corporate tax code has many fewer available deductions and credits than does the American system, so they wind up raising more money from corporate taxes than we do:

A broad corporate tax reform—perhaps specifically modeled on the Irish system, perhaps not—would be good policy that you could envision achieving bipartisan support. At the moment, the administration is pushing its two big “mandate” items—health care reform and a broad overhaul of energy policy. But if you’re hoping to have an administration that lasts eight years without running out of ideas, I think this is an excellent Year Three or Year Five policy initiative. Ezra points out that “tax reform is an important issue, but it’s never the main crisis, and so no one quite wants to risk political capital on it.” But “never” is a long time. I think there’s actually plenty of time to move on to this issue once the administration sees what it can get on health and energy.

The Things People Say

Just as you can apparently be hailed as a brilliant reporter for peddling bogus conspiracy theories about Iraqi links to al-Qaeda, it seems that stringing together random nutty quotes from Hamas figures to draw the conclusion that Hamas is an organization of unappeasable madmen now counts as brilliant analysis. But of course the problem with this sort of thing—and precisely parallel efforts with regard to Iranian leaders or Hezbollah leaders or whomever else—is that when you look at the record as a whole it turns out that people say all kinds of things. Yesterday, for example, Israel killed a senior Hamas guy named Said Sayyam who was prone to saying stuff like this:

The air strike on Sayyam was apparently an attempt by Israel to deliver an image of victory in its offensive against Hamas. The Israel Defense Forces understands that Hamas’ agreement in principle to the Egyptian proposal for a cease-fire in Gaza signals that the campaign is nearing its end.

In an interview with Haaretz in November 1995, Sayyam said, “I do not hate [Israelis] for being Jewish or Israeli but because of what they have done to us. Because of the acts of occupation.”

In response to a question about whether he saw a chance for change in relations between Palestinians and Israelis, he said, “It is difficult to forget what was done to us. If the reason for the hate will not exist, everything is possible.”

Now what’s the “real” Hamas here? Honestly, I have no idea. I have no idea how it is that people reach such firm conclusion about who it is and isn’t possible to negotiate with. I think the record of history is simply that these things are very uncertain. If you look, for example, at the series of events from the Anglo-Irish War through the Irish Civil War and the Irish Free State era, I don’t really know how anyone would have predicted in advance which people would turn out to be the irreconcilables and which would turn out to be open to compromise.

Irish Corporate Taxes: Bring It On

John McCain offered an unusually specific argument at the debate on Friday in favor of his plan for a reduction in the corporate income tax rate, specifically citing Ireland as an example of a low tax jurisdiction we should emulate:

The trouble, as is fairly well-known, is that the US corporate income tax is so loophole ridden that you can’t just look at the nominal rates. Its true that the Irish corporate tax rate of 12.5 percent (not 11 as McCain said) is lower than the rate in the United States. But as Igor Volsky observes at the Wonk Room, Ireland actually collects substantially more revenue from its corporate income tax: “In the United States, corporate revenues as a percentage of GDP was about 2.2 percent; Ireland raised close to 4 percent.”

In short, Ireland really could be a model for successful reform in the United States; reform that would be aimed at growing the tax base by closing loopholes and, in exchange, lowering the rate. That would, if calibrated correctly, both boost economic growth and efficiency somewhat and also increase tax revenues. But a simple across-the-board rate cut would accomplish nothing of the sort. What’s needed is real coherent reform along the lines of what was undertaken in the mid-1980s.