Taxes & Spending

Hillary to World: Raise Your Taxes!

Secretary of State Hillary Clinton, in her push for higher taxes around the world, asserted facts about Brazil’s economy that are contradicted by her own department’s official profile of the South American country.

Clinton has taken on an odd diplomatic priority by urging the U.S., and other countries, to raise taxes. She said during a trip to Pakistan that the country needed to increase taxes.

 

"At the risk of maybe sounding undiplomatic, Pakistan has to have more internal investment in your public services and in your business opportunities," she said last October. "By any fair measure, for example, the percentage of taxes of [gross domestic product] is among the lowest in the world. The United States, we tax ourselves, depending upon who is in power, somewhere between 16% and 23% of GDP, and right now, it usually hovers around 20%. You’re less than half of that."

Federal revenues make up about 20% of GDP. But add local taxes and fees and the number balloons to over 28% of GDP, according to the Tax Policy Center.

Clinton continued her tax-hike agenda recently at the Brookings Institute, and held up Brazil, which is forging closer ties with Iran, as an example of all the good things that can happen in a high-tax country.

Here is what she said, compared with what the State Department’s profile of Brazil says. The department updated the profile in February, after Clinton had been in office one year.

"Brazil has the highest tax-to-GDP rate in the Western Hemisphere, and guess what? It’s growing like crazy," she said.

Actually, the State Department report on Brazil states its "GDP dropped 0.8% in the first quarter of 2009."

The Tradingeconomics.com research firm shows that the U.S. economy, which Clinton believes does not tax enough, has out-preformed Brazil.

Brazil has experienced sluggish GDP rates, averaging 1.61% in 2007 before the world recession hit, compared to the U.S. averaging 2.5%, according to the firm’s inflation-adjusted numbers.

After the recession hit, Brazil’s economy was sluggish just like the U.S. economy. Brazil grew by 1.39% in 2008 and 0.96% in 2009, compared with -1.83% and 0.18% for the U.S., respectively. In other words, Brazil’s economy is hardly "growing like crazy," as Clinton asserted.

What’s more, while Clinton praised Brazil’s high-tax society, the State Department report criticized it: "Significant vulnerabilities remain in the Brazilian economy. The total tax burden is high, income distribution remains skewed, and the private business community complains of burdensome regulation. The global financial crisis has hampered President [Lula da Silva's] efforts to accelerate economic expansion."

The report has more criticism for Brazil’s tax system:

"In order to attract increasing levels of FDI [foreign direct investment], many business groups and international organizations have highlighted the need for Brazil to improve its regulatory environment for investments and to simplify the tax code."

The State Department report does not credit high taxes, as Clinton does, for Brazil’s growth. But it does single out somethings she rarely talks about: turning government-run enterprises over to private business.

The State Department said: "Many antiquated and burdensome state management structures that operated in the sector have been dismantled, though some of them still exist.

The Brazilian railroad industry has been privatized through concession contracts ranging from 30 to 60 years, and the ports sector is experiencing similar, albeit less expansive, privatization. In response to the dramatic deterioration in the national highway system, the federal government has granted concessions for existing highways to private companies, which in turn promise to restore, maintain, and expand these highways in exchange for toll revenues generated. New opportunities are expected to arise with the opening of the Brazilian civil airports to private management and investment through a federal concession model."

Clinton had one fact correct: Brazil has the highest percent of tax revenue (38%) compared to total GDP. Clinton credits those taxes for improved economic performance.

Argentina has a 23% tax share of GDP, yet has out-performed Brazil’s economy the past three years. Chile is at 17%, and its economy performed only slight below Brazil’s in those years.

Let’s fact-check another Clinton assertion about Brazil. She said at Brookings: "The rich are getting richer, but they’re pulling people out of poverty. There is a certain formula there, that used to work for us until we abandoned it — to our regret, in my opinion."

According to the CIA World Factbook, the percentage of Brazilians living below the poverty line is 26%. The 2000 edition said Brazil had a poverty rate of 17.4% in 1990. You might argue that Brazil’s embrace of high taxes has created more poor, not fewer.

Compare Brazil’s rate to two other modern-economic countries in South America with relatively low tax-rates: Chile and Argentina. Chile’s poverty rate is 18.2%; Argentina’s is 13.9% — both are substantially below Brazil.

Clinton made an overall pitch at Brookings for higher world taxes:

"I also believe you put your finger on one of the biggest international problems we have," she said to one question. "And I’ll just — you know, this is my opinion. I’m not speaking for the administration. So I will preface that with a very clear caveat. The rich are not paying their fair share in any nation that is facing the kind of employment issues, whether it’s individual, corporate, whatever the taxation forms are.

"So my view is that you have to get many countries to increase their public revenue collections in order to make investments that will make them richer over the long run. You have to work hard on the innovation, new-technology agenda, to try to create new forms of jobs. You have to strike the right balance, which is not easy. And different countries probably require different approaches between stimulus and restraint."

If Clinton wants to double-check any of her tax theories, she should look at the United States poverty rate. It rapidly descended after World War II, dropping from an estimated 30% to 13.2% in the late 1960s, at the dawn of the modern welfare state and the added taxes needed to feed it. Poverty plunged in the 40s, 50s and 60s due to the new modern economy, strong families and broader access to education. Where does the U.S. poverty rate stand today? The same 13.2 percent, meaning more people are in poverty today than 50 years ago, despite a generation of welfare programs.

Cartoon courtesy of Brett Noel

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