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October 4, 2010 – Notes from the Field – Simon Black

In Business on October 4, 2010 at 12:27 pm

Sovereign Man
Notes from the Field

Date: October 4, 2010
Reporting From: Vilnius, Lithuania

The instability over the last few days was pretty intense… and no, I’m not talking about Ecuador. Over the weekend, somewhere between 1-3 million protestors in France demonstrated against President Nicholas Sarkozy’s plans to reform the broken French pension system– most notably by raising the retirement age from 60 to 62.

The French will hear nothing of this nonsense. After all, retiring at age 60 at the expense of other taxpayers is their God-given right… nevermind that people are living longer than ever before, and the existing pension system is completely unaffordable.

Given the wave of rioting we have seen across the continent, one thing is clear: Europeans will not accept austerity. It’s unclear where they expect to come up with the money to continue financing the pension system, but politicians really only have a limited playbook: inflation, debt, and taxes.

Time and time again, history has shown that this malignant trio is counterproductive and only serves to destroy an economy. If we take a brief survey of the world’s healthier economies, we can see that the key themes are fiscal conservation and incentives for productivity.

Here in Europe, one of the more interesting economic stories is in Estonia. Sandwiched between the Baltics, Russia, and Scandinavia, Estonia’s service and manufacturing-based economy suffered a terrible downturn, one of the worst in Europe. Unemployment in the country reached roughly 20% at its peak.

Rather than stuff its economy full of ridiculous stimulus measures and higher taxes, though, the government actually cut spending last year, eliminating unnecessary programs and taxpayer waste. Estonia has a long-term history of running a budget surplus, and its public debt is an easily manageable 7.2% of GDP.

More importantly, Estonia has imposed a very simple tax regimen that is extremely friendly towards business, entrepreneurs, and workers. Estonian businesses pay 0% tax on undistributed profits, thus providing an incentive for businesses to reinvest their profits for growth.

For distributed profits, the corporate tax rate, as well as the personal income tax rate, is a flat 21%. This rate will be reduced to 18% by 2012.

The net result for Estonia, which has experienced a market-led recovery, has been a steady decline in its unemployment rate and a return to economic growth… all without sacrificing its creditworthiness and indebting future generations.

Then you have a place like Hong Kong, one of the sharpest economies in the world with 5.9% GDP growth and a 4.2% jobless rate. Hong Kong -had- one of the lowest corporate tax rates in the world at 16.5%… until they decided that 16.5% was too much of a burden for small and medium sized business.

Going forward, the tax rate for these smaller companies will be cut to just 15%. This sends a clear message to the international community that Hong Kong is open for business, and that it wants talented entrepreneurs who can create value and generate jobs.

One final economy worth mentioning is that of Panama. The Central American republic posted 6% GDP growth recently as CEO President Ricardo Martinelli has taken steps to wipe out corruption, reduce regulation, and simplify the tax code.

Within these measures, he has eliminated at least 33 types of taxes and fees, cut some personal tax rates from 27% to 15%, reduced domestic corporate tax rates from 30% to 25%, and increased the consumption-based sales tax from 5% to 7%.

Martinelli recently appeared on FOX News late last month, and he paints the picture of his country’s economic health quite succinctly.

Persistently high unemployment rates in the world’s weaker economies will fall only when there is a market-driven incentive to create jobs. Higher taxes, more debt, and increased pension contributions are not the answer… and the countries that go down this road are only going to make things worse.

For anyone who is unemployed, there is no need to despair. You have skills, and your skills are in demand somewhere in the world. Seek opportunities outside of your home country and you will be generously rewarded for your courage and creativity.

Until tomorrow,

Simon Black
Senior Editor, SovereignMan.com

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