From the Richmond Fed, the focus is Latin America. Here is one insightful bit of many:
RF: What is your opinion of Hernando de Soto’s The
Other Path? What lessons can policymakers in Latin
America take from that book?Calvo: The main lesson is that regulations must be
simplified as much as possible in order to encourage the development
of the formal sector and, thus, most likely enhance the
pace of technical progress. However, I am skeptical that a major
overhaul of government regulations will have a major effect in
the short or medium term. The reason is that the informal sector
strongly relies on tax evasion and, unless you implement a
major tax moratorium – accompanied by substantially lowered
tax rates –firms are likely not to move to the formal sector,
even if all the red tape is eliminated. Moreover, a moratorium is
likely to have detrimental moral hazard implications.
I’m confused. If the costs of complying with government regulations and paying taxes are reduced, at some point won’t these costs be lower than the benefits of being in the formal sector and thus being able to take advantage of protection of property rights and contract enforcement? Or is there some sort of path dependency that makes businesses that start out in the informal sector less likely to switch even if seems to become worth it?
the morald hazard is that they wont pay their tax debt because the will wait another amnesty.
I’m with Jacq on this. There are benefits to operating a business in the sunshine (such as dispute resolution) that do not accrue to businesses that opperate underground (where dispute resolution often means breaking someone’s kneecaps). At some point of regulation reduction (and de Soto demonstrates that “regulation” often means a checklist that extends the length of a hallway) there are benefits to stepping out and into the sunshine, even if you consider the cost of taxes. Instead of a tax moratorium, consider a permanent tax reduction along with the reduction in regulations. The larger tax base should offset the losses due to the rate reduction. Throw in a little crime reduction on the side (due to the reduction in broken kneecaps) and everyone is better off.
“The point is that the cost of paying taxes is very high, thus reducing the cost of govt. regulations will not have an impact.”
I don’t have my de Soto handy but I thought that he also advocated lowering tax rates because this would encourage more people to actually pay their taxes, thus bringing in enough new taxpayers into the system to offset the effect of the rate cuts on the tax revenue (sort of a Laffer curve of tax evasion)? Or am I thinking of someone else?
“the white elite owns most of the land, at least on paper, but it allows the brown masses to squat on some of it to preserve social peace.”
I wish someone would/could do a cross-country study to see if there is a positive correlation between the level of inequality in the distribution of formal land ownership in a country and the popularity of communist/socialist ideology and candidates…
Why is this shaping up to a guns vs butter debate? Reducing regulations and reducing businesses taxes need not be mutually exclusive.
Since they both seem highly desirable, I’m inclined to think that doing both at the same time would be healthy, although one needn’t wait on one if the other is politically deadlocked. But if they were both done at the same time and the economy boomed (even a mini-boom will do) as a result, no one would know which was the cause of the effect, so there would be added power to overcome rent seeking behaviour.
I’m with Jacqueline here, people seem to not be thinking on the margin. If reducing regulations reduces the cost to doing business legally, then at the margin you’d have more and more informal market business owners going legit. Not all of them, and not all at once, but it would start happening. Unless of course one thinks that regulation costs aren’t real costs….
happpyjuggler0,
This business of property rights runs up against the
wealth (land) distribution issue in Latin America.
These folks are squatting on some kind of owned property.
If it is privately owned there is a difficult problem.
If it is public, then giving out some kind of business
equivalent of “homesteading” becomes a lot easier.
It is worth keeping in mind that De Soto’s analysis is
very Peru-centric. Conditions vary across Latin American
countries in many ways. Calvo may have a broader perspective
(I think he is from Brazil, although maybe Venezuela or
somewhere else), although I have disagreed with his hard
focus on “cut taxes first,” even as that may be the most
doable thing in some cases. In any case, one needs to keep
in mind that important legal, institutional, social, economic,
political, and other details can vary widely across these
countries. Just think how the following compare with Peru,
not to mention each other: Mexico, Guatemala, Costa Rica,
Barbados, Cuba, Haiti, Brazil, Venezuela, Paraguay, Chile.
Forex day trading forex day trading
Forex trading software forex trading software
Forex forecast forecast forex
Forex trading training forex trading training
Forex education education forex
Comments on this entry are closed.