Tuesday, January 30, 2018

Sub-Saharan Africa Is Really Really Poor

President Trump has instructed Secretary of State Rex Tillerson to take an extended trip to Africa in March 2018.   Perhaps the purpose of his trip is to sooth the hurt feelings and anger of  African leaders over the unsavory remarks President Trump allegedly made about African countries in discussing U.S. immigration policy.

What will Secretary Tillerson find?

The World Bank ranks all 187 countries in the world by GDP (in PPP dollars) per capita.  In 2017, of the bottom 34, 27 are in Sub-Saharan Africa.  They range from no. 153 (Cameroon, $3,359) to no. 187 (Central African Republic, $681).  GDP per capita is even lower in nominal (current exchange-rate) dollars.  To put this in perspective, in 2017 per capita GDP (in PPP dollars) was $39,388 in South Korea and $59,495 (2017) in the U.S.

The 27 countries, in alphabetical order, include Benin, Burkino Faso, Burundi, Cameroon, Central African Republic, Chad, Comoros, Democratic Republic of the Congo, Ethiopia, Gambia, Eritrea, Guinea-Bissau, Liberia, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, South Sudan, Sao Tome and Principe, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zimbabwe.

Between 1957 and 1965, 30 African countries secured their independence from the European colonial powers.  Another 10 achieved independence during 1966-70.  The vast majority of Sub-Saharan African countries have been self-governing for a half-century or more.

Most began as parliamentary democracies, but the new nations quickly gave way to authoritarian regimes of one form or another. Sub-Saharan democratic politics became known as “one man, one vote, one time.”  The most recent report of Freedom House, which classifies countries on the basis of political freedom and civil liberties as ”free,” “largely free,” “largely unfree,” and “unfree,” rates most Sub-Saharan countries “unfree.”

Since decolonization, Overseas Development Assistance (foreign aid) has poured into Africa.  Annual average aid amounted to $19.4 billion during 1970-79, $29.6 billion during 1980-89, $31.8 billion during 1990-99, $39.1 billion during 2000-09, and $56.6 billion during 2010-14 ($1.4 trillion dollars in all between 1970 and 2014) .

Loans to Sub-Saharan Africa amounted to $18.5 billion in 2010, more than doubling to $40.7 billion in 2013.  Excluding South Africa, the external debt of Sub-Saharan Africa increased from $228 billion in 2008 to $378 billion in 2013, despite cancellation of over $100 billion in debt. 

Individual countries and multinational organizations have also provided technical expertise, medical and educational assistance, and economic policy advice.  Western scholars and their graduate students have written hundreds of books and thousands of dissertations and articles about Sub-Saharan Africa.  Centers on African Studies are ubiquitous in American and European universities.  These organizations and individuals have a stake in the status quo.  Self-supporting and fast-growing African “tigers” are not in their financial or professional interest.

Celebrities from all walks of life have traveled to Sub-Saharan African countries to bring attention to the dismal plight of their people.

And yet, most of Sub-Saharan Africa remains mired in poverty.

Secretary Tillerson is likely to state that the U.S. wants to partner with Sub-Saharan countries to help improve governance and living standards.  He will likely offer additional financial and technical assistance.  He will tell Africa’s leaders that President Trump values their friendship and hopes they will join the U.S. in fighting terrorism.

And nothing will change.  Sub-Saharan Africa will remain mired in poverty until there is a change in governance, economic policies, cultural attitudes, and an end to tribal conflict.

I’m from Missouri, the “show me” state.

Saturday, January 20, 2018

Prosperità per L’Italia

Italy is a wonderful country.  It has spectacular monuments, museums, churches, castles, cuisine, wine, and beautiful women:  Sophia Loren, Gina Lollobrigida, Claudia Cardinale, Monica Vitti, and Virna Lisi to name a few.

Italy is among the best countries in the world to spend two weeks on holiday.  There is so much to see, do, eat, and drink.  But Italy is a dreadful place in which to live, work, and especially pay taxes.

All that could change on March 4, 2018.  Italian voters have a chance to restore prosperity for themselves and their country, and show the way forward for all of Europe.

A coalition of center-right parties (market-oriented, low-tax conservative parties in American parlance) agreed to an electoral pact on Thursday, January 18, 2018.  Silvio Berlusconi of Forza Italia, Matteo’s Salvini of Lega Nord, and Georgia Meloni of Nationalist Brothers of Italy listed ten measures in their joint platform.  Topping the list was a single-rate flat tax:  Salvini proposes 15%, Berlusconi about 20%, with Meloni concurring in the general concept.

Should the coalition form the next Italian government, the flat tax will be the first measure it submits to Parliament.  A text of the law already exists, with only the exact rate to be set.  It would be relatively easy to select, say, a rate of 18-19%, with an agreement to reduce the rate one percentage point each year to 15% if revenue materializes as projected.

Italy would likely experience the benefits shown by President Trump’s reduction in the U.S, corporate tax rate from 35% to 21%.  Money would pour into Italy all over Europe and offshore for investment.  Tax evasion would decline.  New jobs would be created.  Young Italians could move out of their parents’ apartments and buy their own place.  Those who moved abroad in to earn a better living would return home to grab new opportunities.

It’s that simple!

As one of the big three in the European Union along with France and Germany, other European countries would find it necessary to follow the Italian example and adopt similar low, flat taxes.  All of Europe would enjoy a sustained economic boom.

PS.  By way of disclosure, I carefully reviewed, and prefer, the Northern League’s 15% flat tax plan, which originated with its chief economic advisor, Armando Siri.  I also met with Berlusconi to discuss the flat tax.  I believe the narrow difference between the two plans can be easily resolved into a single flat-tax plan.

Wednesday, January 3, 2018

Sweden’s Cashless Economy Comes To America

On Tuesday morning, January 2, 2018, I went to the local post office in Palo Alto to mail a book.  There was no line.  I walked up to the counter, was greeted by a friendly employee, and placed the package on the scale.

The price came to $3.12.  I took out my wallet and coin purse to pay.  She asked me if I had a credit or debit card.  “Why?” I replied.  “Because we cannot accept cash this morning.”  “Why not?” I then asked.  “Is this a test of Sweden’s cashless economy?”  “No.” she replied.  “We are unable to open the safe this morning.”

“But I have exact change,” I said.  “No,” she said.  “Only credit or debit cards are acceptable until we can open the safe.”

I even offered to show my driver’s license with photo to accompany an exact cash payment.  No was still no.

A few customers in line turned around and left the post office.

Welcome to cashless America.  Now I will be prepared for my next visit to Sweden.

Tuesday, January 2, 2018

Evaluating Trump’s Tax Cut And Tax Reform

The commentariat has spilled millions of gallons of digital ink and spoken millions of syllables on the pros and cons of President Trump’s tax cut and the degree to which it represents real tax reform.

Supporters point to the lower 21% corporate tax rate and expensing (100% first-year write-off) of investment spending, the latter for only five years, but perhaps to be extended upon its expiration.  In combination, these should encourage investment in new business, expansion of existing business, new jobs, higher wages, and a higher return to capital.

Supporters also praise doubling the standard deduction, which is projected to reduce the share of individual tax returns with itemized deductions from about one-third to one-tenth.  This is an indirect way of simplifying the tax code by reducing the benefits of itemizing.  Ideally, it would be nice to eliminate all deductions, preferably by sheer brute political will in exchange for yet lower rates.

A 500-page law with 500 pages of explanation cover a lot of ground.  I will leave details to the tax lawyers and accountants.

Here I want to put the tax reform into a broader context, namely, how does it compare with an ideal income tax code:  a progressive, fully integrated, cash-flow expenditure tax.

You are correct if you recognize that ideal as the Hall-Rabushka Flat Tax, first proposed in 1981, which many commentators have called the “gold standard” of tax reform.  (The current edition of the book is free online at the Hoover Press.)  Its core features include (1) expensing of business investment, (2) a single flat rate on all labor and business income, (3) full integration, (4) progressive in the form of a personal allowance for all taxpayers based on the composition and size of households, in effect a zero rate up to a specified level of income, and (5) no taxation of interest, dividends, capital gains, gifts, and estates.

A variation of the flat tax has been adopted in more than 40 countries and political jurisdictions around the world.  Estonia, for example, has eliminated the corporate income tax.  I encourage you to have a look at specific legislation in these territories to see how a flat tax has been put into practice.

To summarize, pieces of the new tax code are a good start.  Much more remains to be done.  Perhaps in a second Trump term!