No State is an Island
the nation’s capitol, President Bush and proponents of Social Security
reform face an uphill fight in their attempt to partially privatize the
federal program. The press, in particular, has not been helpful in the
debate, often demagoguing the issue, and intimidating moderate Republican
members of the Senate’s Finance Committee from embracing reform
ideas. Sen. Gordon Smith fits this description, but he is not alone. So
too does Maine’s Sen. Olympia Snowe.
The outlook for Social Security reform in this 109th Congress is bleak,
and thankfully, the president at the end of session will not toss out
the concept of private accounts to get a deal with the Democrats and moderate
Republicans. The deal that opponents of private accounts want would be
similar to the bipartisan agreement of ’82, which temporarily restored
solvency to Social Security but also raised taxes significantly on employer
and employee contributions to the retirement program. That option is a
no-go this time. So too is raising the income cap on the current tax.
16 cover of The Economist magazine read: The flat-tax revolution.
Towards simpler, fairer, and better taxes. The magazine’s cover
story lists the European nations who have adopted a flat tax: Estonia,
Lithuania, Latvia, Russia, Serbia, Ukraine Slovakia, Georgia, and Romania.
What do these nations have in common? They are all former client states
of the departed Soviet Union. When the Iron Curtain fell, these small
nations were left with the worst economies in Europe. Why not start anew?
And if you’re building something from scratch, why not start with
a purer, more efficient tax code. The adoption of the flat tax by the
former Soviet states has suddenly made these nations laboratories for
economic growth, much in the same way that American states served as laboratories
for welfare reform in the early 1990s.
nations structuring their tax code in a more efficient manner will eventually
put pressure on larger countries with less efficient codes—make
that America. Already the American economy is burdened by a weak dollar,
a budget deficit that is roughly six percent of the GDP, a trade deficit,
and a tax system that could become increasingly uncompetitive in future
The Economist: The more complicated a country’s tax system becomes,
the easier it is for governments to make it more complicated still, in
an accelerating process of proliferating insanity – until, perhaps
a limit of madness is reached, and a spasm of radical simplification is
demanded. In 2005, many of the world’s rich countries seem far along
this curve. The United States, which last simplified its tax code in 1986,
and which spent the next two decades feverishly unsimplifying it, may
soon be coming to a point of renewed fiscal catharsis. Other rich countries,
with a tolerance for tax-code sclerosis even greater than America’s,
may not be so far behind.
case of “fiscal catharsis” that The Economist warns
about is why it appears that Congress and the president will end this
session without a major reform of Social Security. The president will
not accept a tax increase, especially with the country already in
questionable financial health, and Congress and the media will, most likely,
blame the deficits on the administration and use it as an excuse to not
accept partial privatization of the program.
stalemate will not last. The growing competitiveness of the world economy
means that U.S. and other wealthy nations will have to be more efficient
themselves. The good news for our federal government is that Pres. Bush,
by pushing for Social Security reform, has forced the conversation about
the federal government’s drag on our future competitive position.
This is the kind of conversation that is not happening on the state level.
to our current governor, Ted Kulongoski, or his potential competitors
in ’06, Kevin Mannix and Ron Saxton, but Oregon’s business
leaders know something that Oregon’s official leaders do
not: present and future globalization pressures are starting to magnify
Oregon’s increasingly uncompetitive position.
columnist Steve Duin recently accused Nike and Intel of selfish behavior
when the two large Oregon employers aggressively fought campaigns to a)
not be annexed by the City of Beaverton, or b) have its tax liability
limited in exchange for billions in future investment.
“While no man—at least, no residential taxpayer—is an
island, Oregon’s Fortune 500 companies are atolls with an attitude,
islands of self-interest, isolated planets, isolated planets with the
power to demand tax breaks unavailable to their commercial cousins or
the common man.” Duin continues, “Because legislators and
city/council bureaucrats are terrified of the big dogs, we’re stuck
with the pathetic bake sale. And our schools and human services will survive
on crumbs until the business leaders at Nike and Intel demand a better
compromise between their self-interest and the common good.”
thinking is wrong. Duin views the world as flat, very flat. However, his
views accurately reflect how Portland’s elected leaders and Oregon’s
state officials view business and how out of touch they are with pressures
of the modern, global economy. Nike and Intel leaders are neither arrogant
nor cheap, but there are minimum conditions these corporations need from
civic leaders to remain located in a region that is now known for being
out-of-step, by choice, with global corporate dynamism.
recounted on this page in October, another corporate leader, Wally Rhines,
CEO of Mentor Graphics (3,500 employees), laid out what should be the
minimum standard of economic reform in Oregon. Rhines said, “Land
use regulations and taxes are big negatives in Oregon. Higher education
is a positive, but just not positive enough. OSU turns out good engineering
graduates, just not enough of them, and they need to achieve a top 25
Rhines knows how to fix the Oregon economy: a sales tax, a world-class
university system, and land-use reform.
this is a secret that every other CEO in Oregon also knows. They know
this, not because they are selfish islands, but for the opposite reason.
In his fervent provincialism, Duin has it exactly backwards. Oregon’s
international businesses compete aggressively in a diverse, complex world
economy; their businesses compete under rules determined by much larger
forces than the small legislative bodies in county court houses or state
not Nike and Intel who are lost on the island – it is Portland and
Oregon’s leaders. With each passing day, their inability to understand
the world isolates them, and us, further.