Carpe Diem

Success of the 13% Flat Tax in Russia

From the conclusion an NBER Working Paper “Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia”:

The 2001 Russian flat rate income tax reform (flat rate of 13%, see chart above) has often been heralded as a success story and has been credited with large increases in tax revenues and an improved business climate. Although it has been difficult to differentiate between myth and reality with the Russian experience, many other transitional countries have followed suit with flat rate income tax reforms, and an increasing number of countries around the world are considering the adoption of a flat rate income tax.

In this paper we focus on the impact of the flat income tax rate on tax evasion, an issue that was, and continues to be, a major problem in Russia as well as in many other transition and developing countries. We argue that the flat tax reform was instrumental in decreasing tax evasion and that, to a certain extent, greater fiscal revenues for Russia in 2001 and several years beyond can be linked to increased voluntary tax compliance and reporting (see chart above).

The most significant reduction in tax evasion was for taxpayers that experienced the largest decrease in tax rates after the flat rate income tax was introduced. We also find that this decline in tax evasion was likely due to changes in voluntary compliance as opposed to greater enforcement effort by the tax administration authorities.
Carpe Diem

Whining Has Been a National Pastime for 200 Years

Adam Smith was a remarkably insightful guy. He not only figured out how expanding trade allows the division of labor, thereby creating wealth and raising living standards, he also realized how hard it is to get people to believe they’re better off than their ancestors. He discovered declinism way back in 1776:

“The annual produce of the land and labour of England is certainly much greater than it was, a century ago. Few people doubt this, yet during this period, five years have seldom passed in which some book or pamphlet has not been published pretending to demonstrate that the wealth of the nation was fast declining, that the country was depopulated, agriculture neglected, manufactures decaying, and trade undone. Nor have these publications been all political party pamphlets. Many of them have been written by very candid and very intelligent people, who wrote nothing but what they believed, and for no other reason but because they believed it.”

Sound familiar?

Nowadays, candid and intelligent people–not to mention partisans–tell us that the average American’s standard of living has barely budged in decades. Supposedly only the rich are living better, while everyone else stagnates or falls behind.

Continue reading Virginia Postrel’s excellent Forbes article “The American Standard of Whining” here. (It’s from September 2006, but still just as relevant today as then.)

Carpe Diem

Global Strength Powers CAT to Record Sales, Profit

On today’s CBS Sunday Morning program, there was a story about:

BOOM TOWN: Peoria, Illinois: It’s home to Caterpillar tractors. As the U.S. economy slides downwards, Caterpillar’s sales worldwide are booming. Cat has been adding jobs in the U.S. and reporting record profits for the last four years. We take a look at a global success story in the heart of Illinois.

From Caterpillar’s 4Q 2008 Earnings Release:

PEORIA, Ill.Caterpillar Inc. (NYSE: CAT) announced the fifth straight year of record sales and revenues and the fourth consecutive year of record profit. For 2007, sales and revenues were $45 billion, up 8%, and profit per share was up 4% from 2006. The company also reported record fourth quarter sales and revenues of $12 billion, 10% higher than the fourth quarter of 2006, and profit per share up 14% from a year ago.

“Our broad global footprint has enabled us to benefit from strong economic growth outside the United States, as global markets for mining, energy and infrastructure development are booming,” said Chairman and Chief Executive Officer Jim Owens.

And thanks to a strong global economy, 2008 looks even better for CAT:

“We are forecasting 2008 to be the sixth consecutive year of record sales and revenues driven by strength in the economies outside North America, strong worldwide engine demand and a slight rebound in on-highway truck engine sales. These factors will more than offset continued weakness in the North American machinery market.

We expect 2008 to be the fifth consecutive year of record profit per share, a reflection of our broad global footprint and diverse products and services.”

2007 Sales Summary for Catepillar Machinery:

North America: -11% (-$1.6 billion)

Europe, Africa, Middle East: +38% (+$2.4 billion)

Latin America: +24% (+$0.60 billion)

Asia Pacific: +31% (+$0.90 billion)

Overall Sales: +9% ($2.3 billion)

Comment: Caterpillar’s story seems increasingly common. Despite a slowdown in U.S. sales, CAT’s overall global sales are strong, more than “offsetting weakness in the North American market,” allowing U.S.-based MNCs like CAT to remain profitable and healthy in spite of weakness here (see sales figures above, and see chart above showing America’s declining share of world GDP using IMF data).


This kind of support from overseas markets makes this economic slowdown (not yet a recession) different from past periods. For example, in the 1990-1991 recession and recessions before that (and during previous economic slowdowns), I don’t think CAT and other U.S. manufacturers had the kind of support from markets outside the U.S. that exists today. See this
related CD post.
Carpe Diem

“Buy American”: Collectivist, Un-American Bigotry

Ayn Rand Institute:

Philosophically, Americanism means individualism. Individualism holds that one’s personal identity, moral worth, and inalienable rights belong to one as an individual, not as a member of a particular race, class, nation, or other collective.

But collectivism is the premise of “Buy American.” In purchasing goods, we are expected to view ourselves and the sellers not as individuals, but as units of a nation. We are expected to accept lower quality or more expensive goods in the name of alleged benefits to the national collective.

Most “Buy American” advocates are motivated by misplaced patriotism. But for some the motive is a collectivist hostility towards foreigners. This xenophobic attitude is thoroughly un-American; it is plain bigotry.

Giving preference to American-made products over German or Japanese products is the same injustice as giving preference to products made by whites over those made by blacks. Economic nationalism, like racism, means judging men and their products by the group from which they come, not by merit.

Carpe Diem

An Ordinary American Tests the American Dream

Christian Science Monitor:

In a test of the American Dream, Adam Shepard (pictured above) started life from scratch with the clothes on his back and $25. Ten months later, he had an apartment, a car, and a small savings.

The effort was inspired after reading “Nickel and Dimed,” in which author Barbara Ehrenreich takes on a series of low-paying jobs. Unlike Ms. Ehrenreich, who chronicled the difficulty of advancing beyond the ranks of the working poor, Shepard found he was able to successfully climb out of his self-imposed poverty.

He tells his story in “Scratch Beginnings: Me, $25, and the Search for the American Dream.” The book, he says, is a testament to what ordinary Americans can achieve.

Carpe Diem

Impact of Cell Phones on Grain Markets in Niger

An interesting job market paper from a UC-Berkeley Ph.D. candidate Jenny Aker, “Does Digital Divide or Provide? The Impact of Cell Phones on Grain Markets in Niger.”

Abstract: Due partly to costly information, price dispersion across markets is common in developed and developing countries. Between 2001 and 2006, cell phone service was phased in throughout Niger, providing an alternative and cheaper search technology to grain traders.

The results provide evidence that cell phones reduce grain price dispersion across markets by a minimum of 6.4% and reduce intra-annual price variation by 10%. The primary mechanism by which cell phones affect market-level outcomes appears to be a reduction in search costs, as grain traders operating in markets with cell phone coverage search over a greater number of markets and sell in more markets. The results suggest that cell phones improved consumer and trader welfare in Niger, perhaps averting an even worse outcome during the 2005 food crisis.

Conclusion: Information technology is often considered to be a low priority when compared to other basic needs, such as food, water, shelter and health care . While basic needs cannot or should not be overlooked, cell phones could be a powerful development tool for farmers, traders and consumers.

Read a summary of the
paper here.

Carpe Diem

Railroad Renaissance: Thanks in Part to China Trade

Wall Street JournalFor decades, railroads spent little on expansion, even tore up surplus track and shrank routes. But since 2000 they’ve spent $10 billion to expand tracks, build freight yards and buy locomotives, and they have $12 billion more in upgrades planned (see map above of recent upgrades).

Railroad operators are pressing for advantage over their main competitor, long-haul trucking, which has struggled with rising fuel prices, driver shortages and highway congestion. Railroads say a load can be moved by rail using about a third as much fuel as it takes to haul it by truck. And rail transport is becoming more efficient still, they say, as operators speed their lines and logistics companies build huge warehouse areas along routes.

Demand for rail service increased sharply when the U.S. economy and Asian imports surged starting in 2003. Now, increasingly, railroads are moving finished consumer goods, often made in Asia, from ports to major cities. Tight capacity on major routes enabled railroads to raise prices. The growth in freight volume has slowed along with economic growth, but shippers say they’re still planning to increase their use of rail transport because of the cost.

Comment: The way Lou Dobbs and others criticize international trade, you would think that trade with countries like China is a complete drain on the U.S. economy, almost as if American consumers somehow acquired goods made in China without any additional benefits for the U.S. economy. But this story suggests otherwise – many U.S. jobs are created and supported by trade with China, including jobs in the transportation industry. Further, Chinese goods are purchased at U.S. retail outlets like Macy’s, Wal-Mart and Target, creating and supporting U.S. jobs in the retail sector.

Carpe Diem

President John F. Kennedy, Early Supply-Sider


Hillary and Barack, listen up!

In this video from August 13, 1962, when the highest marginal individual income tax rate was 91% and the highest marginal corporate tax was 52%, President John F. Kennedy announced his plan to introduce permanent, across-the-board tax cuts for both individuals and corporations. Kennedy argued that both “logic and equity” demanded tax relief for Americans, and that the dollars released from taxation would create new jobs, new salaries, and spur economic growth and an expanding American economy, thereby creating more tax revenues.

Kennedy’s supply-side tax cuts were passed, and by 1964 the top personal tax rate was 77%, dropping to 70% in 1965. In 1965, the corporate tax rates were reduced to 22% and 48%, from previous rates of 30% and 52%. The Kennedy tax cuts did help expand the economy, resulting in a 106-month economic expansion during the 1960s, the longest expansion in U.S. history until the 120-month expansion of the 1990s. Tax revenues grew by 65% from 1965 to 1970.

They sure don’t make Democrats the way they used to.