Tuesday, August 04, 2009

The Curse of the Heritage Foundation

We can't help noticing that every time the Heritage Foundation (or the Center for Freedom and Prosperity or the Cato Institute) praise a country, usually calling it a "tiger" of some sort -- the country in question soon seems to plunge into some sort of toxic economic spiral. We recently noted this with Iceland.

Now take this from the Heritage Foundation in 2005, also written by its Senior Fellow Daniel Mitchell (pictured):

"In a remarkable development, former communist nations are lead ing a global tax reform revolution. Estonia was the first to adopt a flat tax, implementing a 26 percent rate in 1994, just a few years after the collapse of the Soviet Union. The other two Baltic republics of the former Soviet Union enacted flat taxes in the mid-1990s, with Latvia choosing a 25 percent rate and Lithuania picking 33 percent."

Now let's take a look at today's FT:

"While business headlines in the rest of the world speak of clearing skies and rays of sunshine, the Baltic states are still in the midst of a howling economic gale. Despite the region’s small size, the intensifying crisis in the Baltics cannot be treated as a freakish local squall of little concern to outsiders. Bank failures or plunging currencies in the three Baltic nations – Latvia, Lithuania and Estonia – could threaten the fragile prospect of recovery in the rest of Europe. These countries also sit on one of the world’s most sensitive political fault-lines. They are the European Union’s frontier states, bordering Russia."

Please, Mr. Mitchell - stop!

Latvia seems to have gained some better sense recently on the flat tax question. Read more about flat taxes here.


Blogger Physiocrat said...

The Baltic states are mostly suffering from the after effects of a property (land price) bubble pumped up by some of the Swedish banks. Which is why the Swedish kronor has been weak for most of the year.

Had they enacted land value taxation when they got out of the Soviet Empire they wouldn't have had a property bubble and they wouldn't have had to bother with taxes on income in the first place.

Due to lack of effective land value taxation there are buildings in the centre of Tallinn which are still derelict nearly 20 years after independence, and of course the Russian minorities have had problems from the start.

Take a look at Dauvagpils - the only way to rescue a place like that is a flat tax of 0% on wages and pick up what is available from a land value tax.

10:17 am  
Anonymous TJN said...

That comment makes no sense. "they wouldn't have had to bother with taxes on income." You can baldly state anything, and hope that someone will accept it; that doesn't make it any more reasonable. To say "the only way to rescue a place like that is a flat tax of 0% on wages" is nonsensical.

11:18 am  
Blogger Physiocrat said...

Of course my statement does not make sense on its own but there is a mass of theory behind it which cannot be explained in the context of a brief blog response.

But if the question is about the amount of tax which can be raised, the point is that taxes on wages goods and services are ultimately at the expense of land values. In the absence of such taxes, land values are higher and the land value tax base is higher.

The Physiocrats argued that all taxes come out of land rent and this statement has not been effectively refuted.

1:22 am  

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