http://www.realclearpolitics.com/ar...truth_about_taxes_and_spending_in_europe.html Several European countries, including Cyprus, have been mired in economic stagnation or decline for five years or more. Yet other countries in Asia and Latin America have flourished. What are the weakest economies doing wrong? What are the strongest doing right? Several European countries, including Cyprus, have been mired in economic stagnation or decline for five years or more. Yet other countries in Asia and Latin America have flourished. What are the weakest economies doing wrong? What are the strongest doing right? Economist Jim O’Neill coined the acronym BRIC in 2001 to refer to four economies which showed great potential then and now — Brazil, Russia, India and China. More recently, he added four more promising MIST economies — Mexico, Indonesia, South Korea and Turkey. In mid-2008, The Economist magazine drew a sharp contrast between the booming BRIC economies and four feeble PIGS — Portugal, Italy, Greece and Spain. By 2010, after Ireland and Great Britain bailed out their banks, that unkind acronym was stretched to PIIGGS. All PIIGGS have two things in common. First of all, government spending grew dramatically — from an average of 43.2% of GDP in 2007 to 52.6% by 2010. Spending was modestly trimmed by 2012 in a few cases, yet the ratio of spending to GDP still remained 3 to 6 percentage points higher than it had been in 2007. This sad story was repeated in Cyprus, where government spending soared from less than 34% of the economy in 1995 to 47% in 2010. Despite this explosive growth of government spending among the PIIGGS, economist Paul Krugman’s End the Depression Now! somehow attributes southern Europe’s slump to “frantic, savage attempts to slash spending.” In a recent New York Times column, Krugman suggested that Ireland suffers from grossly insufficient government spending, and contrasted Ireland’s alleged penny-pinching with “the true economic miracle that is Iceland … (which) thanks to its embrace of unorthodox policies, has almost fully recovered.” What actually happened is that government spending in Ireland soared to 66.1% of GDP in 2010 — up from 36.8% in 2007 — when the government shocked the markets by bailing out the banks in September 2010. The budget deficit suddenly spiked to 30.9% of GDP. Irish bonds collapsed. In Iceland, which didn’t throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011. Iceland’s economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects. When Krugman and others describe the recent European spending spree as “austerity,” that begs the key question: Austerity for whom? The PIIGGS imposed no austerity at all on the public sector in the past five years. Government spending on bailouts, subsidies, grants, salaries and entitlements commands a much larger share of these economies than it did just a few years ago. European austerity has been focused on the private sector — namely, taxpayers with high incomes. That is the second thing the PIIGGS have in common. The highest income tax rate was recently increased in every one of the troubled PIIGGS except Italy (where it was already too high at 43%). The top tax rate was hiked from 40 to 46.5% in Portugal, from 41 to 48% in Ireland, from 40 to 45% in Greece, from 40 to 50% in Great Britain, and from 48 to 52% in Spain. Apparently envious of the PIIGGS, France even flirted with a 75% tax. It is enlightening to compare the depressing performance of these tax-and-spend countries to the rapidly-expanding BRIC (Brazil, Russia, India and China) and MIST economies (Mexico, Indonesia, South Korea and Turkey). Government spending is frugal in these countries, averaging 32.1% of GDP in the BRICs and 27.4% for the MIST group. Rather than raising top tax rates, all but one of the BRIC and MIST countries slashed their highest individual income tax rates in half; sometimes lower. Brazil cut the top tax rate from 55 to 27.5%. Russia replaced income tax rates up to 60% with a 13% flat tax. India cut the top tax rate to 30% from 60%. Similarly, the top tax rate was cut from 55 to 30% in Mexico, from 50 to 30% in Indonesia, from 89 to 38% in South Korea, and from 75 to 35% in Turkey. In China, statutory income tax rates can still reach 45% on paper, but that is only for high salaries and is widely evaded. Investment income is subject to a flat tax of 20%, the corporate tax is 15-25%, and China’s extremely low payroll tax adds almost nothing to labor costs. Lower tax rates and faster economic growth in these countries didn’t mean bigger budget deficits. On the contrary, only one of of the eight MIST and BRIC countries (India) has a significant budget deficit. In short, the world economy has become divided into two groups: (1) sickly PIIGGS with chronic fiscal crises and (2) booming BRIC and MIST economies with modest government spending, lower tax rates and vigorous growth of both the economy and tax receipts. Unfortunately, the U.S. has lately been drifting nearer the PIIGGS camp. The highest tax rates were just increased and federal spending is nearly 23% of GDP — way up from the 19.2% average of 1997-2007. If U.S. legislators hope for better results—for both the economy and the budget—they must shun the failed policies of the PIIGGS and instead embrace the proven policies of the rapidly-growing BRIC and MIST economies. What works, these successful economies discovered, is (1) to prevent government spending from growing faster than the private economy that supports it, and (2) to reduce rather than increase the highest, most damaging tax rates.
Good read, Ive been following Iceland for awhile. Love how they handled the bankers, EU and bailouts. Im surprised they arn't used more as a model for recovery. Im surprised about Mexico, I figured they were all doom and gloom with the cartels taking over. I think the France's 75% tax is misrepresented here, as I understand it its just meant for the top earning CEO's as a way of trying to reduce their gross embezzlement of their companies money, in the form of their salary, and at the expense of their workers.
The problem we have is that we're stuck in entitlement mode. And the general population has jumped on board. We have to change attitudes and get rid of the fraud first.
Roubini http://www.slate.com/articles/busin...s_in_the_u_s_economy_looks_pretty.single.html A Rose Among Thorns The U.S. economy has its problems, but it’s still better than everywhere else. By Nouriel Roubini|Posted Sunday, April 7, 2013, at 7:30 AM In the last four weeks, I have traveled to Sofia, Kuala Lumpur, Dubai, London, Milan, Frankfurt, Berlin, Paris, Beijing, Tokyo, Istanbul, and throughout the United States. As a result, the myriad challenges facing the global economy were never far away. In Europe, the tail risk of a eurozone break-up and a loss of market access by Spain and Italy were reduced by the European Central Bank’s decision to backstop sovereign debt. But the monetary union’s fundamental problems—low potential growth, ongoing recession, loss of competitiveness, and large stocks of private and public debt—have not been resolved. Moreover, the grand bargain between the eurozone core, the ECB, and the periphery—painful austerity and reforms in exchange for large-scale financial support—is now breaking down, as austerity fatigue in the eurozone periphery runs up against bailout fatigue in core countries like Germany and the Netherlands. Austerity fatigue is clearly evident from the success of anti-establishment forces in Italy’s recent election; large street demonstrations in Spain, Portugal, and elsewhere; and now the botched bailout of Cypriot banks, which has fueled massive public anger. Throughout the periphery, populist parties of the left and right are gaining ground. Meanwhile, Germany’s insistence on imposing losses on bank creditors in Cyprus is the latest symptom of bailout fatigue in the core. Other core eurozone members, eager to limit the risks to their taxpayers, have similarly signaled that creditor “bail-ins” are the way of the future. Outside the eurozone, even the United Kingdom is struggling to restore growth, owing to the damage caused by front-loaded fiscal-consolidation efforts, while anti-austerity sentiment is also mounting in Bulgaria, Romania, and Hungary. In China, the leadership transition has occurred smoothly. But the country’s economic model remains, as former Premier Wen Jiabao famously put it, “unstable, unbalanced, uncoordinated, and unsustainable.” China’s problems are many: regional imbalances between its coastal regions and the interior, and between urban and rural areas; too much savings and fixed investment, and too little private consumption; growing income and wealth inequality; and massive environmental degradation, with air, water, and soil pollution jeopardizing public health and food safety. The country’s new leaders speak earnestly of deepening reforms and rebalancing the economy, but they remain cautious, gradualist, and conservative by inclination. Moreover, the power of vested interests that oppose reform—state-owned enterprises, provincial governments, and the military, for example—has yet to be broken. As a result, the reforms needed to rebalance the economy may not occur fast enough to prevent a hard landing when, by next year, an investment bust materializes. In China—and in Russia (and partly in Brazil and India)—state capitalism has become more entrenched, which does not bode well for growth. Overall, these four countries (the BRICs) have been overhyped, and other emerging economies may do better in the next decade: Malaysia, the Philippines, and Indonesia in Asia; Chile, Colombia, and Peru in South America; and Kazakhstan, Azerbaijan, and Poland in Eastern Europe and Central Asia. Farther East, Japan is trying a new economic experiment to stop deflation, boost economic growth, and restore business and consumer confidence. “Abenomics” has several components: aggressive monetary stimulus by the Bank of Japan; a fiscal stimulus this year to jump start demand, followed by fiscal austerity in 2014 to rein in deficits and debt; a push to increase nominal wages to boost domestic demand; structural reforms to deregulate the economy; and new free-trade agreements—starting with the Trans-Pacific Partnership—to boost trade and productivity. But the challenges are daunting. It is not clear if deflation can be beaten with monetary policy; excessive fiscal stimulus and deferred austerity may make the debt unsustainable; and the structural-reform components of Abenomics are vague. Moreover, tensions with China over territorial claims in the East China Sea may adversely affect trade and foreign direct investment. Then there is the Middle East, which remains an arc of instability from the Maghreb to Pakistan. Turkey—with a young population, high potential growth, and a dynamic private sector—seeks to become a major regional power. But Turkey faces many challenges of its own. Its bid to join the European Union is currently stalled, while the eurozone recession dampens its growth. Its current-account deficit remains large, and monetary policy has been confusing, as the objective of boosting competitiveness and growth clashes with the need to control inflation and avoid excessive credit expansion. Moreover, while rapprochement with Israel has become more likely, Turkey faces severe tensions with Syria and Iran, and its Islamist ruling party must still prove that it can coexist with the country’s secular political tradition. In this fragile global environment, has America become a beacon of hope? The U.S. is experiencing several positive economic trends: housing is recovering; shale gas and oil will reduce energy costs and boost competitiveness; job creation is improving; rising labor costs in Asia and the advent of robotics and automation are underpinning a manufacturing resurgence; and aggressive quantitative easing is helping both the real economy and financial markets. But risks remain. Unemployment and household debt remain stubbornly high. The fiscal drag from rising taxes and spending cuts will hit growth, and the political system is dysfunctional, with partisan polarization impeding compromise on the fiscal deficit, immigration, energy policy, and other key issues that influence potential growth.
The bottom line is that where they're raising taxes, the economies are sucking worse. Where they cut spending, the economies rebound both quickly and strongly.
