Taxes and Devaluation Prolonged the Great Depression

Politicians on both sides of the Atlantic should take a long hard look at an op-ed by Arthur Laffer in today’s Wall Street Journal. Laffer plots the consequences of federal and state tax hikes and protectionist increases in trade duties in the early 1930s and he takes issue with the current Federal Reserve chairman that the monetary supply was tight. “The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both.” Laffer shows this wasn’t the case: “The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get,” Laffer notes.

Laffer doesn’t blame fed policy on taxes and the money supply for causing the Great Depression — he points the finger at the protectionist Smoot-Hawley tariff of June 1930 as the catalyst that got the whole process going. But he does see tax hikes and loose money supply as worsening the situation and causing the double-dip in the economy in 1937. “Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy’s relapse in 1937.” In fact, the tax hikes were eye-opening.

“The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s.”

The only way out of the mess in the U.S. and U.K. is for spending cuts but they should targeted away from front-lines services such as schools and hospitals. And in the U.S. government intervention is needed on the health care front to provide affordable health insurance for all and a choice of public and private options. Not only is that a moral necessity but an economic one before the U.S. health system contributes to the bankrupting of America.

All So Obvious — UK Brain Drain and Taxes

Back in April I blogged on what the consequences of Britain’s tax hikes would be: businesses packing up and leaving. Today a survey published in the Daily Telegraph suggests that hundreds of businesses are thinking about exiting and setting up overseas, and one-in-five entrepreneurs say they would not consider starting up in the UK again.

When will politicians learn that we live in a wired world and that tax competition strengthens the link between diminishing returns and high taxes. Meanwhile, Britain pours out money for military adventurism abroad — Iraq and Afghanistan — and is planning to spend billions on an updated nuclear weapon — all to prove Britain still rules the waves. And we lecture Putin that national greatness should not nowadays be equated with military greatness.

Things Can Only Get Worse

Recall the theme song New Labour blasted out in 1997 as it savoured its election victory — Things Can Only Get Better? Well that seems to be the promise that Chancellor Alastair Darling offered in his grim annual Budget delievered today. While outlining the full depth of the economic crisis that still might have the UK having to go cap in hand to the IMF, Darling forecast that the British economy would revive next year with a rapid bounce-back, modest at first with a 1.25 percent growth rate and subsequently rising to 3.5 percent in 2011.

Trouble is, no one with any credibility is predicting such growth rates.

The Bank of England’s forecast for 2011 is 2.5 percent. In its latest World Economic Outlook, the IMF saw no growth for the UK on the horizon next year, arguing that the British economy would continue to shrink. The IMF and Darling are at odds also about the forecasts for this year. The Chancellor maintained that output would shrink by 3.5 per cent 2009 – more than doubling his previous forecast. But the world body believes that 2009 will be even harsher for the UK and is forecasting a slump of 4.1 percent.

Those percentage differences may look small but they will have tremendous consequences for how Britain fares in its attempts to borrow the money it needs to cope with the bank bail-outs and increasing government spending.

The markets reacted even before the Chancellor finished delivering the Budget. The price of British government bonds plunged as investors learned the government will be looking to raise 240 billion pounds this year, far more than expected. Most analysts thought the government would be looking for 180 billion pounds. The pound also fell in value on the currency markets.

And taxes…forget 45 percent for high earners. The Chancellor announced a top rate of 50 percent. Belgium looks cheaper, especially with better public health care!  

 

 

 

More on Taxes

You would have thought that Brown and Darling would have learnt a lesson about tax hikes. Back in early 2008, Britain’s Labour leaders had to back-track on some of their plans to “crackdown” on rich foreigners resident in the UK but not domiciled there for tax purposes. Inadvertently, he provided a major object lesson on the importance of tax competition.

Unnerved by the Conservatives, who promised that in government they would impose a levy on rich foreigners, Brown and Darling, announced just before Christmas that come spring, tax rules on foreigners resident in the UK would change. Under the previous regime, foreign residents could claim “non-domiciled” status and avoid paying tax on overseas earnings and offshore assets. Only money brought into the UK or generated there was liable to income tax or capital gains tax.

Brown’s new proposal would have all non-domiciled foreigners resident in the UK for more than 7 years paying an annual tax charge of 30,000 pounds (now about $45,000 but then $60,000).

According to the government’s theory, hugely wealthy foreigners wouldn’t up and leave just because of a mere $60,000, although, of course, for families it could be a lot more than $60,000, if spouse and adult children were taken into account.

To make matters much worse, the British government also started to talk about introducing new residency rules and rules on taxing offshore trusts.

In February 2008, I wrote this for the Cato Institute blog: “Government spokesmen, along with supporters of the tax crackdown, including rather strangely the editorial writers at the Financial Times, pooh-poohed the notion there would be an exodus of the wealthy and entrepreneurial just because of the tax changes. They have been arguing that London is too important, what with its deep pool of financial and international legal expertise. Low-tax cantons in Switzerland or non-tax Monaco or offers of generous tax treatment in, say Greece, would hardly compensate for what London has to offer.

Foreigners apparently have been thinking otherwise. Many of the country’s richest foreigners have already started to relocate to Geneva, Zurich, Barbados or Ireland. This week, Irish paper king Dermot Smurfit announced he was planning to move to Switzerland and there were reports that dozens of Greek shipping magnates were exploring the possibility of moving back to Athens – a transfer that would cost the British economy annually $10 billion alone, and in the long term maybe two or three times more. The $60,000 annual levy per non-domiciled foreigner would bring in annually $1.6 billion.

Belatedly, the alarm bells have started to ring. The British government is poised to announce, possibly tomorrow, an embarrassing back-down. Taxing offshore trusts is now likely not to happen, although the $60,000 levy per non-domiciled foreigner will remain.

The reversal highlights the importance of tax competition. But there still might be long-term consequences from Brown’s botched handling of the affair. Non-doms who have already moved overseas are unlikely to return and the London-based Greek shipping magnates, who control a quarter of the Greek shipping industry, are now being courted energetically by Athens, with offers of generous tax treatment and subsidies.”