A Sordid Combination of Tax Greed and Odious Protectionism

Tax-news.com reports that the French and Italian governments want Europe to impose a tax on imports from nations that don't adopt misguided climate-change/global-warming rules. This is awful policy, but the good news is that such a policy presumably won't happen unless all 27 European Union nations agree:

France and Italy have demanded that the European Union (EU) consider the introduction of a carbon tax on imports from outside the EU, where countries do not comply with EU standards on environmental issues. In a joint letter to Jose Manuel Barroso, the head of the European Commission, President Sarkozy of France and Prime Minister Silvio Berlusconi of Italy stressed that: “It would be unacceptable if the ambitious efforts already agreed by the EU to reduce greenhouse gas emissions… were compromised by carbon leaking due to... insufficient action by certain third countries.” The letter went on to say that the tax could be used to pressurize third world countries to adopt measures to reduce their carbon emissions. ...The irony is that the French government recently abandoned a plan to introduce a carbon tax in the country following a ruling that it was unconstitutional. The French government’s view is that any new carbon tax would only be viable if it was adopted by all 27 EU member states.

Is Obama Planning to Repeat the Mistakes of Hoover and Roosevelt?

Art Laffer has a compelling column in the today's Wall Street Journal discussing how higher tax rates under Presidents Hoover and Roosevelt played an important role in driving the economy into a ditch during the 1930s. The interesting question, of course, is the degree to which President Obama is going to repeat these mistakes. We already see that some of the mistakes that happened during the Great Depression are being replicated, including higher government spending (with a big help from Bush), more government regulation, and protectionism. The good news, so to speak, is that Obama is moving policy in the wrong direction in small steps, whereas Hoover and Roosevelt took giant leaps. So while it is likely that our long-term growth rate will be dampened, hopefully there will not be a lengthy period of economic stagnation:

While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. 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 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%. But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000. ...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. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

Barney Frank Endorses Regulatory Protectionism

When a government increases the burden of taxes, spending, and/or regulation, this makes it more likely that productive resources - on the margin - will gravitate to jurisdictions with better economic policy. Crafty politicians understand that the freedom to cross borders is a threat to statist policies, which is why international bureaucracies dominated by high-tax nations, such as the Organization for Economic Cooperation and Development, are trying to undermine tax competition between nations by imposing fiscal protectionism. The same is true for regulation. The Chairman of a key House committee wants to impose regulatory protectionism to restrict the ability of Americans to patronize banks and other financial services companies based in jurisdictions with more laissez-faire policies. The Financial Times has the unsavory details:

Barney Frank, chairman of the House financial services committee, said he was concerned the new US push to regulate banks and brokers more rigorously could put it at a competitive disadvantage if other countries did not follow suit. As a result, he would like to ban US banks from doing business with countries not subject to similarly tough standards on everything from leverage limits and capital requirements to rules on transparency and clearing of derivatives. “Once we have rules  . . . we will say to anybody who wants to be an outlier, ‘you forfeit your right to participate in the American system’,” Mr Frank told the Financial Times. “We will instruct the [Securities and Exchange Commission] and Treasury and the Fed to deny access to the American financial system to any country that holds itself out as a haven to escape our financial regulation.” ...While Mr Frank is a powerful committee chairman, he would have to win over the rest of Congress and the administration to get his idea made into law. He is also certain to face strong opposition both inside and outside the US. “It is absolutely the wrong approach,” said a top industry lawyer, who did not want to be identified criticising Mr Frank. “The assumption is that everybody has to do business in the US and we can set global standards. That is absolute nonsense. There are alternatives, including Hong Kong,” the lawyer added. ...Tim Ryan, president of the Securities Industry and Financial Markets Association, said that US regulations should not be imposed on other countries. ...The European Commission has an exclusion provision in its proposed directive on alternative investment managers. Outside managers and funds would be excluded if their home states did not offer comparable levels of regulation and tax co-operation. That proposal is seen as a protectionist effort to box out US groups and may be revised. Mr Frank’s interest in banning groups from non-co-operating countries stems in part from the US experience after it adopted the Sarbanes-Oxley corporate accountability law. Many overseas companies opted to list outside the US rather than comply with Sarbox requirements.