Meanwhile, In Zagreb

Far and away the best feature on the Cato @ Liberty blog is Daniel Mitchell's relentlessly dishonest propagandizing on behalf of the flat tax, conducted primarily through random cherry-picking of Eastern European economic statistics. Today, though, things hit a snag as Mitchell uncovers this tale of an Austrian economist telling Croatians that their current tax status quo resembles Austria's and that they should stick with it. Mitchell is naturally outraged that anyone would ignore the lessons of, say, the Bulgarian miracle:

Too bad nobody asked Professor Widhal why Croatia should seek to have a tax system similar to Austria’s. Unless, of course, Croatia wants to stumble along with growth of 1 percent yearly while its flat-tax neighbors grow by 5 percent annually.

But look here -- Croatia's not growing at 1 percent. It's been growing at . . . a bit less than five percent for years, just like loads of other Eastern European countries. It's almost as if the cause of high growth levels in these states is that the Communist legacy left them poor (small base allows for fast growth) but relatively well-endowed in terms of human capital and thus poised for fairly rapid growth after making the transition away from Communism. The flat tax has pretty much nothing to do with it.

Comments

Matthew, your sense of sarcasm gets better and better.

Posted by James F. Elliott | May 14, 2007 12:45 PM

I'm with Mitchell -- the only reason we do not see China-like 10.5% annual GDP growth is because our top marginal tax rate is too low. We must raise it to 45% immediately.

Posted by Steven Engelhardt | May 14, 2007 12:57 PM

It's always worth pointing out that the "flat tax" advocated by Republicans like Steve Forbes has never actually been flat. It's a slick marketing term -- why give them ground by using it?

Posted by marc h. | May 14, 2007 1:15 PM

"small base allows for fast growth" -- why does it strike me as SO radical to see a pundit / journalist who is as minimally numerate as, say, the reasonably intelligent guy in the office accounting department? It's a refreshing thing to see, anyway.

Posted by mq | May 14, 2007 1:32 PM

Yes, well as usual, Matt, you're missing the really big Eastern European news -- namely, that Serbia won the Eurovision song contest this year.

Posted by Glenn | May 14, 2007 1:32 PM

the Bulgarian miracle

Some of the best tasting sparkling wine (YMMV, I have unique tastes in sparkling wines -- what I like is too sweet for those who like bone dry champagne and too dry for those who don't like sparkling wines that are bone dry) I've ever had was from Bulgaria (Iskra Misket) -- it tasted soooo good (with a wonderful nose and amazing finish too), but it made you sooooo sick afterward.

I don't know why, but the store where I got it stopped carrying it at a certain point.

Actually, I think they retooled the wine anyway.

Posted by DAS | May 14, 2007 1:37 PM

I say we move to a phat tax. That would surely shake the house.

(also, a shout out to my boy Steve E upthread)

Posted by dbt | May 14, 2007 1:41 PM

it's easy to make fun of the dishonesty of the flat tax guys, but within their scheme is a good scheme: the simplified tax.

i believe there's a lot of room for a democrat to call for a highly simplified albeit progressive tax system.

Posted by howard | May 14, 2007 1:41 PM

I'd be interested in Matt's thoughts on the corporate income tax rate. There does seem to be a significant correlation between strong economies and relatively-low corporate income tax rates, that can't be explained by countries recovering from communism.

Many economically successful countries with higher top income tax rates than the U.S. (e.g., Australia, Sweden, Ireland) have lower corporate income tax rates than us. This makes sense when you consider that most economic movers & shakers make the bulk of their money from their ownership stakes rather than their salaries.

In light of this, I wonder sometimes about the disconnect between the American left's focus on progressive income taxes and their paradigm of class warfare: The highest economic class, for the most part (since they are mostly compensated as owners of capital), isn't terribly effected by high income tax rates; instead, it's really the "working rich" who are: high-salaried professionals.

Posted by Dave | May 14, 2007 1:43 PM

again, your point that countries grow fast after communism has almost nothing to do with the point that flat-tax countries grow faster than non-flat-tax countries. i'm not a flat-tax enthusiast, nor have i studied the region's economies much, but croatia does have a relatively low growth rate compared to its neighbors. and this despite the fact that it is relatively highly endowed with resources (natural, human).

Posted by cyates | May 14, 2007 2:12 PM

Dude, from the quote, the Cato guy seems to be saying that Austria's growth is around 1% while Croatia and its neighbors are around 5% annually. He's asking "Why would Croatia want to be like Austria?"

Whether the point has any merit, it's important to argue against what he's actually saying.

Posted by vg | May 14, 2007 2:58 PM

well, as matt said, "small base allows for fast growth." i think most people already know that, and that the author is assuming that readers will adjust for the differences. we dont have to take the quote completely literally and assume he thinks that croatian growth will slow to 1% because of their tax system.

Posted by cyates | May 14, 2007 3:02 PM

He's asking "Why would Croatia want to be like Austria?"

But Croatia already has a tax system like Austria's. His false assumption is that the tax system determines the rate of growth, and therefore if Croatia adopts Austria's tax system, it will have a similar rate of growth. But since Croatia already has that system and has a much higher rate of growth, his argument is shown to be fallacious.

Posted by Steve | May 14, 2007 3:05 PM

Actually, the flat tax as originally proposed by Steve Forbes was somewhat progressive. His original proposal, as I recall, was a flat tax rate of 20% with a $7500 dependent exemption. Thus, a family of 4 with an income of $30,000 wouldn't pay a nickel in income tax. A family of 4 with an income of $60,000 would pay a tax of $6000, an effective rate of 10%. A family of 4 with an income of $90,000 would pay a tax of $12,000, an effective rate of 13.3%.

Posted by SLC | May 14, 2007 3:20 PM

Steve:

"His false assumption is that the tax system determines the rate of growth"

Is his argument really that the tax system by itself determines the rate of economic growth? Is yours that the tax system has no effect on the rate of growth? Why not put ideology aside and try to figure out what sort of tax systems enhance economic growth?

Posted by Dave | May 14, 2007 3:29 PM

Is his argument really that the tax system by itself determines the rate of economic growth?

How things have changed. Back when I was younger, people would read links and find the answers to questions about the links.

Of course, in this case, the answer is in the quote MY used, so there really is no excuse for this question.

Posted by Rambuncle | May 14, 2007 3:45 PM

Is his argument really that the tax system by itself determines the rate of economic growth?

Yep, that's why he says that if Croatia adopts a tax system like Austria's, they'll have growth of 1 percent just like Austria.

Is yours that the tax system has no effect on the rate of growth? Why not put ideology aside and try to figure out what sort of tax systems enhance economic growth?

I didn't really have an argument, but if I did, it would be that ideologues have a well-established track record of cherry-picking whatever country happens to support their argument, and thus we should be exceedingly skeptical of arguments like "gay marriage has been a disaster in Luxembourg."

Posted by Steve | May 14, 2007 4:07 PM

It is true that we won Eurovision. We had the best song in the competition.

When it comes to Croats, they are perennial Austrian lackeys. The Viennese economist had every right to expect Croats to obediently follow his instructions on tax policies.

Posted by Ethnic Riot | May 14, 2007 4:11 PM

"ideologues have a well-established track record of cherry-picking whatever country happens to support their argument, and thus we should be exceedingly skeptical of arguments like "gay marriage has been a disaster in Luxembourg."

Sounds great, so why not examine the issue objectively and empirically? What sorts of tax systems enhance economic growth? I don't see many of those questions asked here.

Posted by Dave | May 14, 2007 4:33 PM

Are you assigning me homework or something? This is a blog comment section.

Posted by Steve | May 14, 2007 4:40 PM

"Are you assigning me homework or something? This is a blog comment section."

Of course not. I'd just be interested to know if you are (or anyone else on here is) even curious about those questions.

Posted by Dave | May 14, 2007 4:52 PM

You really want to know? email Christian Widhal from Vienna University and he'll tell you his thoughts. I mean it his job after all.

Posted by Rob | May 14, 2007 5:07 PM

Dave: stop with the strawman. Your questions have nothing to do with the discussion. If you read Mitchell's blog post you will see that he is insinuating exceeding forcefully that Croatia would have Austria's shitty, slow-growing economy if it had a tax system like Austria. He says how stupid it would be to not have a flat tax because Bulgaria is doing awesome.

Matt then pointed out that Croatia already has a good growth rate (the bar of 5% that Mitchell himself set) with its non-flat tax system.

Does tax rates affect economic growth? Undoubtedly. To what extent? I don't think many people have the foggiest idea. In part because punditry on taxes in the USA is next to useless, almost exclusively relying on simplistic Club For Growth formulations about how taxes are 100% bad, marbled with deceitful comments as Matt pointed out above. I remember a lot of neocons were cheering wildly when Iraq implemented the flat tax, for example. So Mitchell is, in effect, part of the problem when it comes to getting a good grasp on what sort of tax systems encourage the most growth. Of course, its an extremely complex problem even without charlatans like Club For Growth and Cato running around.

Posted by N1L | May 14, 2007 5:08 PM

I'd just be interested to know if you are (or anyone else on here is) even curious about those questions.

Yes, I'm curious to know. Now, please explain to me why you're interested to know whether I'm curious, since I'm just some anonymous guy on the Internet.

Posted by Steve | May 14, 2007 5:21 PM

Steve,

Suddenly, I'm not so curious in anything you have to say. Still curious about what others might might think though.

Posted by Dave | May 14, 2007 5:24 PM

N1L:

I'm on record here calling Stephen Moore of the Club for Growth an idiot. He's clearly an ideologue uninterested in objective, empirical inquiry. That said, why the resistance to broadening the discussion to relevant general questions about tax policy? After all, the point of Matt's post wasn't limited to Croatian tax policy, was it? It was dig at the Cato Institute's Daniel Mitchell for his "dishonest propagandizing on behalf of the flat tax". The questions relevant to most of us, Yglesias and Mitchell included, relate to American tax policy.

Want to slam someone for allegedly cherry-picking international data to support his ideological position? Fair enough. Let's all agree that cherry-picking data is bad. Seems like it would be useful though to have a discussion about what sorts of tax policies might enhance economic growth, whatever they may be. Perhaps also a meta-discussion of to what extent economic growth concerns should inform the crafting of tax policy.

Posted by Dave | May 14, 2007 5:54 PM

Dave -- I don't give a shit about the theory about economic growth, I just want to spout populist rhetoric about how the rich are ripping us off and how we should take all their stuff and be happy.

Now I'm curious about what you think about what I think.

Posted by Barbar | May 14, 2007 5:56 PM

Gawd, feed a troll in haste, repeat at leisure. I'll never learn.

Posted by Steve | May 14, 2007 6:06 PM

Barbar,

I think it's an odd juxtaposition: your trollish comment here with the picture I have in my mind from childhood of you serving hot chocolate or something to the other little elephants in your family.

Posted by Dave | May 14, 2007 6:22 PM

The CIA world factbook has Austria's real GDP growth for 2006 as 3.3%, and the IMF is projecting real GDP growth of 2.8% and 2.4% for 2007 and 2008 respectively.

I'm pretty sure that those numbers are greater than 1.

Posted by daveNYC | May 15, 2007 1:04 AM

The Austrian economy is doing very well, primarily because of the enlargement of the EU - it's a strategic location in terms of transport, trade and infrastructure, and it's becoming a financial centre for the region. This is orthogonal to its tax'n'spend policy.

Posted by Alex | May 15, 2007 5:47 AM

That was Babar, wasn't it, Dave?

Posted by SqueakyRat | May 15, 2007 8:36 AM