Tuesday, February 18, 2014

Labs in free(er) markets

Walter Russell Mead posts on the new Pacific Alliance - an economic pact between Mexico, Peru, Chile, and Colombia (and coming soon: Costa Rica) that Mead "has the potential to recolor Latin America’s economic map and introduce some new regional powerhouses to the world stage" (via Instapundit):

The newly formed bloc is made up of Latin America’s fastest growing economies. These states boast the region’s most competitive, business-friendly economies and the lowest inflation rates. Current transactions between these countries represent a mere 4 percent of their total trade; the potential for increased financial cooperation is immense. They have already eliminated 92 percent of trade tariffs.
Meanwhile, Reason.com discusses a meta-study on American state taxation and regulation:
Of the 112 academic studies we found on overall state or local tax burdens, for example, 72 of them-64 percent-showed a negative association with economic performance. Only two studies linked higher overall tax burdens with stronger growth, while the rest yielded mixed or statistically insignificant findings.

On smaller categories of taxation, the trend was similar: There was a negative association between economic growth and higher personal income taxes in 67 percent of the studies. The proportion rose to 74 percent for higher marginal tax rates or tax code progressivity, and 69 percent for higher business or corporate taxes.

Some of the strongest negative results appeared when scholars were able to isolate policy variables from background effects. For example, a 1996 study in the American Economic Review exploited the fact that some foreign countries gave domestic tax credits to companies that pay taxes in the United States, so those companies would be expected not to care much about state tax rates. In other countries, companies didn't receive such credits and would thus be subject to greater variation in state tax burdens. By looking at the behavior of firms based on their home country, author James Hines of the University of Michigan found that "state taxes significantly influence the pattern of foreign direct investment in the U.S." A 1 percent change in the tax rate was associated with an 8 percent change in the share of manufacturing investment from taxed investors.

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