Nobel Prize Winner has a shocking advice for Romania: Get out of European Union
Nobel Prize Winner Sir James Mirrlees has a shocking advice for Romania. In an interview for caleaeuropeana.ro, at VI Astana Forum, Mirrlees says that the radical solution is getting out of European Union.
Q: You are famous for the taxation in the public sector and there is quite a debate going about tax evasion, how to make sure everybody pays it. Tax system are constructed in a way that people feel that maybe they should look for a way to avoid them. How do you see this discussion? That everybody should pay taxes? What are the possible methods to direct the money to the state?
James Mirrlees: When the people were saying less of the flat tax were actually meaning less of the Lord tax, it doesn’t make any particular sense to do that, unless you can somehow show that you don’t need so much tax revenue. The taxing has nothing to do with the people being able or trying to escape the taxing. There’s no particular reason why a single income tax rate would reduce somehow the evasion rate and magically increase the revenue it can get. I am not saying there isn’t truth in the claim but starting from very high rates and the reducing this rates, it would be expected to increase the tax revenue rather than reduce it, it can happen. It may have happened in America at the point they would come from increasing them over night and then making them lower. And it very exciting in France where they announced 70% which is an effective tax rate leading a number of big names to leave. In a sense, you could say that they are encouraging tax avoidance, you could say it is taxing emigration which is legitimate but they could also decide to retire, and that is a different thing. The dimension of money, profit really does exist and the most important I think is actual evasion. On the other hand, of course, a lot of the evasion would be focused to Switzerland that is sensitive and other countries blame Switzerland.
Q: Which do you think is the biggest problem now? The fact that national governments are trying to get more money from taxation or the fact that the government sometimes doesn’t administrate properly the money given from the nation? Romania is fighting with fiscal evasion everyday, and the efficiency is not that obvious.
James Mirrlees: You are talking now about the efficiency of the government expenses , not in pursuing tax payers, but maybe in building hospitals or persuading teachers to turn up at school. I feel sometimes that people can be unfair to governments because the governments are having to deal with some of the areas where it’s hardest to achieve efficiency. The fact that the government does something that we call profit constraint, they have to do their best to make a profit, and cuts costs. It has to be a product at the end, there is a kind of trade, but it is different from country to country. We have an audit office in the European Union and it looks at particular areas of government spending from time to time and tries to asses what they have done and they do a very great job, rather few people do it.
In Europe, I have observed that normally, the auditors, the accounts are more or less refused to prove them because they say there are a lot ways in which the money can be badly used, and people are cheating. Parliaments can’t do anything about that. So that is not a very good example – having an audit office does not necessarily bring improvements. But we have a long term effect, one of the reasons why many countries in the EU are becoming a bit popular ( I am very concerned about that in the British case) is because of the evidence of inefficient spending and corruption. The Germans are thinking that they want to force governments to cut spending and perhaps increase taxation, even in circumstances like the ones now. More spending is needed in order to get the economy moving. And I can understand it, they use the argument of inefficiency, they look at Greece and say it has too many civil servants, and maybe they look at Romania and say that they do to, because it is a very good idea to find ways of getting rid of the unnecessary. And now look at the unemployment.
Q: In Romania, at the beggining of the crisis, Romanian government decided to cut slaries with 25%, and then decided to increase the value-added tax from 19 to 25% in the same period. And then the government changed and the left wing decided to cut investment funds from the budget because they wanted to give the money and the salaries back to the people. So the situation isn’ looking good, we are waiting for the European funds, but we have a low absorbtion rate.
James Mirrlees: Your roots are falling to pieces, you can’t repair the roots, the power station. These conditions reflect Germany’s wish that everybody cuts which is saying that they only care about the fiscal spending of the countries and trying to reduce the chance of default as much as possible and not concerned about the problems such as unemployment. People see no good results and see that this is worse than it was before. Some things need to be done, not now.
Q: What would you advise to do at the moment?
James Mirrlees: You can start thinking about how you change things but it is difficult to give an advice because you are in quite tight bite. The radical answer would be to get out of the European Union.
Q: Do you think this would be best for Romania now?
James Mirrlees: I think that would easen the shock better. So in order to be possible to do some of these things like spending more on roads, for example, or managing it with less tax increasing, because you need more money to do it and you can’t do that because the money supplies is controlled by other bank. So this is a much better way to adjusting the cost of labor. It is going to devalue more than by reducing them and you don’t have to reduce then the wages for the civil servants. So you are now able to expand and increase employment. But I have difficulty in thinking of the things you could withing the straight jackets of the euro-system.
Q: It would be a political solution to an economic problem?
James Mirrlees: The euro is a political issue, yes. The cost of having the euro is very considerable.
Q: There are some countries which have faced the question of maybe leaving the euro-zone, such as Greece. Should they do it?
James Mirrlees: We can’t claim that this completely solves the problems that arise from property crash in Spain, of the government deficits in Greece. I can think of other solution like in Germany, having increasing government spending and a lot of inflation so the price of the German merchandise would rise and they will pay for exports from Romania and Greece more that could rise to exports from Germany.
Sir James Alexander Mirrlees is a Scottish economist and winner of the 1996 Nobel Memorial Prize in Economic Sciences. He was knighted in 1998.
Born in Minnigaff, Kirkcudbrightshire, Mirrlees was educated at the University of Edinburgh (MA in Mathematics and Natural Philosophy in 1957) and Trinity College, Cambridge (Mathematical Tripos and PhD in 1964 with thesis title Optimum planning for a dynamic economy), where he was a very active student debater.
During his time at Oxford he published papers on economic models for which he would eventually be awarded his Nobel Prize. They centred on situations in which economic information is asymmetrical or incomplete, determining the extent to which they should affect the optimal rate of saving in an economy. Among other results, they demonstrated the principles of “moral hazard” and “optimal income taxation” discussed in the books of William Vickrey. The methodology has since become the standard in the field.
Mirrlees and Vickrey shared the 1996 Nobel Prize for Economics “for their fundamental contributions to the economic theory of incentives under asymmetric information”.