Friday, April 27, 2007

Estonia vs Connecticut: Don’t bet on Connecticut

What do the following countries have in common: Iceland, Lithuania, Latvia, Russia, Serbia, Ukraine, Slovakia, Georgia, Romania and Macedonia?

They all have growth rates of 6.9 percent and, according to an editorial in the Providence Journal of Rhode Island, “a much higher rate of gross capital formation” than other European countries. By comparison, the growth rate in Connecticut is too small to measure. Among national competitors, Connecticut is dead last in job growth and its out migration of students and young entrepreneurs places it near the bottom percentile.

So what’s the big secret?

All the Eastern European countries, no longer henpecked by Soviet socialists, have adopted a flat tax. Once an economic basket case, Ireland, which has reduced its taxes, is now known as the “Celtic Tiger.” Estonia is next in line for prosperity. Following its adoption of a flat tax, Estonians will be able to complete their tax forms in 15 minutes.

As the Providence Journal puts it, “Some 84 percent file their taxes electronically. No hair-pulling, no accountants, no incomprehensible instructions, no file cabinets full of receipts, no blizzards of tax forms. Estonia taxes everyone at the same flat rate — 22 percent, soon to be cut to 20 percent — with a few exemptions for mortgage interest, education expenses and charitable giving. People with very low incomes are exempt from paying taxes.”

By contrast, here in the United States, “taxpayers confront a tax code that is more than 66,000 pages long, and so convoluted that experts — including the Internal Revenue Service itself — cannot comprehend it. The average taxpayer, studies suggest, must spend more than 37 hours completing his or her forms. For the self-employed, it’s far worse. The cost in lost time and accounting fees was some $265 billion in 2005, the Tax Foundation estimates — more than the federal deficit and the equivalent of charging taxpayers another 22 cents for every dollar they must send to the government.”

Both the flat tax and its ugly twin sister, the progressive tax, have measurable consequences. Since the flat tax permits people to keep more of their own income, that income is returned into the general economic pool in the form of investments. Every time a consumer purchases a product, he is investing in the product; that is to say, he is sending a message to the producer to hire more people to increase production.

These kinds of investments increase business activity, create jobs and – though it seems counterintuitive – result in increased tax revenues by nurturing more tax producers. Capital formation is the pool of money available to industry to expand, create jobs and produce more goods. Connecticut is near bottom in capital formation.

Connecticut Democrats – who don’t get out in the world much, so insular are they – now have decided to adjust the tax code to make it more progressive and less flat. Under a flat tax code, everyone pays the same rate; under a progressive tax code, rates are higher for those whose income is greater.

Republicans will not be able to arrest the state’s decent into non-prosperity unless they are willing to adopt as public policy some novel ideas advanced more than a century ago by the father of the modern Republican Party, who said:

“You cannot bring about prosperity by discouraging thrift. You cannot strengthen the weak by weakening the strong. You cannot help the wage earner by pulling down the wage payer. You cannot further the brotherhood of man by encouraging class hatred. You cannot help the poor by destroying the rich. You cannot keep out of trouble by spending more than you earn. You cannot build character and courage by taking away man's initiative and independence. You cannot help men permanently by doing for them what they could and should do for themselves” -- Abraham Lincoln
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