Mainstream economics proving its irrelevance, yet again.

n today’s Wall Street Journal, Nobel laureate Peter Diamond and Emmanuel Saez write “High Tax Rates Won’t Slow Growth”. This is certainly out of the box thinking – the box that defines the foundation of economics. The First Law of Demand states that as prices go up demand goes down. This is apparent to all of us who do our own shopping. Taxes are part of the price of that which is taxed, so higher taxes will necessarily reduce that activity. For example, taxes on cigarettes reduce smoking.

But Diamond and Saez tell us the Law doesn’t apply to income taxes on high-income earners; that raising taxes on them will not reduce their propensity to work or invest for the long-term:

“But will taxable incomes of the top 1% respond to a tax increase by declining so much that revenue rises very little or even drops? In other words, are we already near or beyond the peak of the famous Laffer Curve, the revenue-maximizing tax rate?

The Laffer Curve is used to illustrate the concept of taxable income “elasticity,”-i.e., that taxable income will change in response to a change in the rate of taxation. Top earners can, of course, move taxable income between years to subject them to lower tax rates, for example, by changing the timing of charitable donations and realized capital gains. And some can convert earned income into capital gains, and avoid higher taxes in other ways. But existing studies do not show much change in actual work being done.”

Existing studies can be rigged in a lot of ways, for instance by ignoring the long-term effects of lower after-tax wage rates. Do these studies somehow measure the propensity of school children to work towards a medical degree under conditions of high versus low doctor salaries? And what are the effects on would-be entrepreneurs?

Taxes matter, though it is certainly true that the degree to which they matter depends on a number of factors, including the type of tax, the culture, the relative income of those being taxed, etc. However, Diamond and Saez tell us that cross-country and historical evidence provides no support for the idea that income taxes affect growth:

“There is no clear correlation between economic growth since the 1970s and top tax-rate cuts across Organization for Economic Cooperation and Development countries.

For example, from 1970 to 2010, real GDP annual growth per capita averaged 1.8% and 2.03% in the U.S. and the U.K., both of which dramatically lowered their top tax rates during that period, while it averaged 1.72% and 1.89% in France and Germany, which kept high top tax rates during the period. While in no way does this prove that higher top tax rates actually encourage growth, there is not good evidence from the aggregate data supporting the view that higher rates slow growth.”

My recent study comes to just the opposite conclusion, showing a strong correlation between top marginal rates and growth in the OECD over the last 11 years. (Read more)

Many of these Americans have been able to leverage family networks, language skills and cultural knowledge gleaned from growing up in immigrant households.

Jonathan Assayag, 29, a Brazilian-American born in Rio de Janeiro and raised in South Florida, returned to Brazil last year. A Harvard Business School graduate, he had been working at an Internet company in Silicon Valley and unsuccessfully trying to develop a business.

“I spent five months spending my weekends at Starbucks, trying to figure out a start-up in America,” he recalled.

All the while, Harvard friends urged him to make a change. “They were saying: ‘Jon, what are you doing? Go to Brazil and start a business there!’ ” he said.

Relocating to São Paulo, he became an “entrepreneur in residence” at a venture capital firm. He is starting an online eyewear business. “I speak the language, I get the culture, I understand how people do business,” he said.

Calvin Chin was born in Michigan and used to live in San Francisco, where he worked at technology start-ups and his wife was an interior decorator. Mr. Chin’s mother was from China, as were his paternal grandparents. His wife’s parents were from Taiwan.

They are now in Shanghai, where Mr. Chin has started two companies — an online loan service for students and an incubator for technology start-ups. (Read more)

Very comprehensive & insightful:

The Misconstruction of the Euro

In the eurozone, there are fiscally independent sovereign governments coexisting with one (central) banking system. This is a unique construction as normally there is one government with its own banking system.

Governments can finance their deficits through the banking system and money creation. When governments spend more than they receive in tax revenues, they typically issue government bonds. The financial system buys an important part of these bonds by creating new money. Banks purchase these bonds because they can use them as collateral for new loans from the European Central Bank (more precisely the European System of Central Banks).

New money flows to governments that monetize their deficits indirectly. The cost of the indirect monetization is born by all users of the currency in the form of a reduced purchasing power, i.e., inflation. If there is one government per central-banking system, the whole nation bears the cost of the deficit monetization. However there are in the eurozone several governments running their own budgets.

Imagine that all governments but one have a balanced budget. The one deficit government can then externalize onto other nations part of the costs of its deficit in the form of higher prices. This monetary redistribution is the already-existing transfer union in the EU.

A government like the Greeks’, with high deficits, prints government bonds bought and monetized by the banking system. As a consequence, there is a tendency for prices to rise throughout the monetary union. The higher the deficit of a government in relation to the deficits of other countries, the more effectively it can externalize the costs of a deficit. The incentives of this setup are explosive as governments benefit from deficits higher than those of their eurozone neighbors.

The Stability and Growth Pact designed to contain these incentives utterly failed because governments themselves judge whether sanctions are imposed on them.

. . . .

The EMU provokes conflicts between otherwise peacefully cooperating nations. Redistribution is always a potential cause of social stress. The monetary redistribution in the EMU was not understood by the bulk of the population and, thus, did not cause conflicts. The bailouts, the rescue fund, and the interventions of the ECB that were ultimately caused by the setup of the EMU have made the redistribution between countries more obvious.
Murphy, Robert P.

$25.00 $22.00

Germans do not like maintaining the Greek welfare state. In the German media Greeks are called “liars” and “lazy.” The Greek media, in turn, demanded reparations for World War II. While the Germans do not like paying for the periphery, people in peripheral countries blame Germans for austerity measures. They feel that the unpopular measures are imposed on them by foreign (German) pressure. Within the EMU, these clashes and conflicts will continue and probably increase. Remaining in the EMU implies living in such an atmosphere and the risk of escalation.

To make an understatement, the costs of the Eurosystem are high. They include an inflationary, self-destructing monetary system, a shot in the arm for governments, growing welfare states, falling competitiveness, bailouts, subsidies, transfers, moral hazard, conflicts between nations, centralization, and in general a loss of liberty. In addition, these costs and risks are rising day by day. Considering all this, the project of the euro is not worth saving. The sooner it ends, the better. Alternatives exists. A return to sound money such as the gold standard would boost responsibility, harmony, and wealth creation in Europe. (Read more)

I love the beginning of this video.

http://www.mises.org/daily/5997/Market-Order-in-WarTorn-Iraq

Egan-Jones Cuts US Credit Rating ===> SEC Officially Files Charges Against Egan-Jones

witzerland will allow banks to hand over the names of any employees and other third parties who helped wealthy Americans evade taxes to U.S. prosecutors, a Swiss newspaper reported on Saturday.

Eleven Swiss banks including Credit Suisse (CSGN.VX) and Julius Baer (BAER.VX) are under investigation in the United Stated for aiding U.S. citizens suspected of dodging taxes.

In the latest attempt to end the long-running dispute, Switzerland’s Federal Council has now authorized banks to hand over email traffic in connection with such clients to U.S. prosecutors, the Tages-Anzeiger newspaper reported. (Read more)

High joblessness in the home of U.S. space flight

(Read more)

From today’s Open Europe news summary:

Benoît Coeuré, ECB executive board member, hinted yesterday that the ECB could renew its purchases of eurozone government bonds if fears over Spain continue to spread, although Jorg Asmussen, another member of the ECB’s executive board, insisted that the ECB “has done its part”, following its unlimited long term lending operations. Meanwhile, a leader in Wirtschaftswoche argues that Germany is facing inflation as a result of the ECB’s actions, concluding that “Germany will bleed for the euro”.