Dne: 18. oktober 2011
Pija Kapitanovič, who is a 2011 Freedom and Transition seminar alumna, interviewed Daniel J. Mitchell, Senior Fellow at the Cato Institute in Washington, DC. Mitchell is a top expert on tax reform and supply-side tax policy, while he is a strong advocate of a flat tax and international tax competition.
You have recently visited Slovenia, where you gave lectures at the Liberty Seminars as well as at a conference in Ljubljana. I wonder, what are your thoughts about Slovenia? Is there any hope for us? Would you live here?
Slovenia is a beautiful country with well-educated and productive people. Unfortunately, the burden of government is very high. Government spending is consuming nearly 50 percent of the economy’s output and this is a big drain on the productive sector. It also helps explain why Slovenia suffers from some of the highest tax rates in Europe. High tax rates are very foolish in a competitive global economy.
How do you define liberalism? What does it advocate for?
Liberalism (in the classical sense) is the belief in individual liberty, small government and free markets. It is the notion that individual sovereignty, families, and civil society should rank above statism and government control.
How would you answer to those that claim that banks are the major reason for the global recession?
The weakness of the banking sector is both a cause and a symptom of the recession. It is a partial cause of the recession (at least in the United States) because the Federal Reserve set interest rates too low and government-created mortgage agencies – Fannie Mae and Freddie Mac – created incentives for bad mortgages. Banks, however, foolishly responded to bad government policy by lending too much money to the real estate sector. But some banks also are in trouble simply because the overall economy is weak. And banks in Europe are in trouble largely because of the sovereign debt crisis. Is that their fault, or the fault of the governments that are spending too much money? Plenty of blame for both.
Does the free market theory argue for any kind of government interactions in society?
While some scholars speculate about whether the private sector can provide just about everything, the general consensus is that government should provide core public goods such as national defense, public safety, rule of law, property rights and some types of physical capital (infrastructure) and human capital (education).
Do you think education should be provided by the government?
Education originally was a family responsibility, oftentimes through the church. Then governments took over the sector and created monopoly school systems. This generally has led to a bad combination of ineffectiveness and high cost. Several nations, such as Sweden, the Netherlands and Chile (as well as a few state and local governments in the United States) are getting better results by shifting to choice-based systems that give families vouchers to choose the school that is best for their child.
Which country is economically the freest?
According to Economic Freedom of the World, which was just released, Hong Kong is the most free economy and Singapore is the second most free. Slovenia, however, is among the lowest-ranked nations in Europe.
The Slovenian government wants to privatize 1.495 public entities—from cultural, educational, social, science, health and sport. People are afraid that this move will only enrich a few rent seekers, like we have witnessed in the past with the previous privatizations. What do you think is the solution?
Privatization is very important, both to reduce the burden of taxpayers and to put resources in the private sector where there are incentives to us them efficiently. The challenge is how to privatize when corrupt politicians historically have abused the process to reward political allies and campaign contributors. One possible way of thwarting the corruption is to require completely transparent processes for selling or transferring state-run institutions to the private sector.
When the private sector does not have enough capital it resorts to the banks, which in the Slovenian case are in majority of the sector state-owned. Such developments lead to corruption and political involvement in matters that should be kept private.
State-owned assets should be sold in a public auction. That includes the banks. The highest qualified bidder buys the assets, so there is no need to worry whether there is enough money in the private sector.
Our economy is still in bad shape. Our BDP in 2010 increased only for 1,4 percent, while in 2011 increase is even smaller only 0,9 percent. At the same time we have a high rate of unemployment (11%) and our tax systems treats foreign investors as a treat to the economy.
Economic growth is being hampered by a public sector that is too big and too expensive. Slovenia should freeze government spending so that outlays cannot rise above current levels for at least three years.
Do you think Slovenia should implement a flat tax?
In addition to the spending freeze, Slovenia should get rid of the corrupt and discriminatory "progressive" tax and adopt a flat tax. A simple and fair flat tax with a low tax rate will help Slovenia compete in a global economy. Another pro-growth reform is personal retirement accounts, which would reduce the burden of social insurance taxes, boost national savings, and reduce long-term budget pressure.
How can we improve the economic climate and not risk social uprisings at the same time?
Economic growth promotes social harmony, so that is why free markets and limited government are the only long-term solution. There probably will be loud complaining – and maybe even protests – from the interest groups that benefit from big government. Slovenian lawmakers should use Estonia and Slovakia as positive examples of nations that have implemented good reforms and overcome lobbying by entrenched elites.
To improve peoples’ health, our government is proposing an extra tax on alcohol, tobacco and unhealthy foods. What do you think about it? Do politicians really care or they are just trying to raise additional funds for themselves?
Politicians should not try to control the lives of people, so I’m generally not happy about taxes designed to change behavior. But perhaps if such taxes were part of a revenue-neutral shift to a flat tax, the economic benefits would be so large that people would be in a much better position.
So, this means we should have a flat tax on income and an extra tax on before mentioned products?
The flat tax is a reform to minimize the damage of the personal income tax system. Most nations still have other forms of taxes, such as social insurance taxes and excise taxes.