Harvard University’s Gita Gopinath: Stimulating...
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April 25, 2013 April 25, 2013 3 Subscribe Subscribe Search Marco Buchbinder About Marco Born in Milano and raised in Italy and the US, Marco has lived in five different countries, speaks four languages and has conducted business in every major region of the world. Marco currently leads EMC Corporation’s GTM Equity Investments Group, executing investments and JVs, primarily in the emerging markets. Recent Posts Upcoming Event: Doing Business in Brazil– Practical Experience & Lessons Learned China’s Venture Capitalist Landscape Harvard University’s Gita Gopinath: Stimulating Europe’s Growth OGSM Planning Framework Think Big, Not Small Archives Economics Economics Giving Back Giving Back Investment Investment Self Development Self Development Startups Startups About About Harvard University’s Gita Gopinath: Stimulating Harvard University’s Gita Gopinath: Stimulating Europe’s Growth Europe’s Growth by marcobuchbinder by marcobuchbinder With the troubled European economies struggling to restart their economic growth, while grappling with With the troubled European economies struggling to restart their economic growth, while grappling with extreme budget constraints, an up and coming, stellar economist from Harvard has proposed a remarkably extreme budget constraints, an up and coming, stellar economist from Harvard has proposed a remarkably simple solution. It is referred to as “fiscal devaluation” and it enables countries to generate growth through simple solution. It is referred to as “fiscal devaluation” and it enables countries to generate growth through exports, without resorting to devaluing their currencies exports, without resorting to devaluing their currencies Meet Gita Gopinath, the 41 yr. old Meet Gita Gopinath, the 41 yr. old Professor of Economics at Harvard University Professor of Economics at Harvard University, whose solution was , whose solution was recently implemented by France’s President Francois Hollande, as a mechanism to revive France’s recently implemented by France’s President Francois Hollande, as a mechanism to revive France’s languishing economy. languishing economy. Gita, tell us about the concept of fiscal devaluation. Gita, tell us about the concept of fiscal devaluation. Fiscal devaluation, by its name is an alternative to an exchange rate devaluation that is engineered using Fiscal devaluation, by its name is an alternative to an exchange rate devaluation that is engineered using fiscal instruments. There are several ways to engineer one. One “remarkably simple alternative” is to fiscal instruments. There are several ways to engineer one. One “remarkably simple alternative” is to increase value added taxes and cut payroll taxes. Countries in the euro zone, who do not have their own increase value added taxes and cut payroll taxes. Countries in the euro zone, who do not have their own currency to devalue, can use the VAT-payroll tax swap to revive growth through exports. By increasing currency to devalue, can use the VAT-payroll tax swap to revive growth through exports. By increasing value-added taxes while cutting payroll taxes, a government can affect gross domestic product, value-added taxes while cutting payroll taxes, a government can affect gross domestic product, consumption, employment, and inflation much as a currency devaluation would. Essentially, the higher VAT consumption, employment, and inflation much as a currency devaluation would. Essentially, the higher VAT raises the price of imported goods as foreign companies pay the levy on the products and services they raises the price of imported goods as foreign companies pay the levy on the products and services they export to that country. The lower payroll tax helps offset the extra sales tax for domestic companies, export to that country. The lower payroll tax helps offset the extra sales tax for domestic companies, Follow Follow Harvard University’s Gita Gopinath: Stimulating Europe’s Grow... http://marcobuchbinder.com/2013/04/25/harvards-gita-gopinath-... 1 of 4 9/23/13 4:30 PM
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Marco Buchbinder
About Marco
Born in Milano and raised in Italy and the US, Marco has
lived in five different countries, speaks four languages and
has conducted business in every major region of the world.
Marco currently leads EMC Corporation’s GTM Equity
Investments Group, executing investments and JVs,
primarily in the emerging markets.
Recent Posts
Upcoming Event: Doing Business in Brazil–
Practical Experience & Lessons Learned
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Harvard University’s Gita Gopinath: Stimulating
Europe’s Growth
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Harvard University’s Gita Gopinath: StimulatingHarvard University’s Gita Gopinath: StimulatingEurope’s GrowthEurope’s Growthby marcobuchbinderby marcobuchbinder
With the troubled European economies struggling to restart their economic growth, while grappling withWith the troubled European economies struggling to restart their economic growth, while grappling withextreme budget constraints, an up and coming, stellar economist from Harvard has proposed a remarkablyextreme budget constraints, an up and coming, stellar economist from Harvard has proposed a remarkablysimple solution. It is referred to as “fiscal devaluation” and it enables countries to generate growth throughsimple solution. It is referred to as “fiscal devaluation” and it enables countries to generate growth throughexports, without resorting to devaluing their currenciesexports, without resorting to devaluing their currencies
Meet Gita Gopinath, the 41 yr. old Meet Gita Gopinath, the 41 yr. old Professor of Economics at Harvard UniversityProfessor of Economics at Harvard University, whose solution was, whose solution wasrecently implemented by France’s President Francois Hollande, as a mechanism to revive France’srecently implemented by France’s President Francois Hollande, as a mechanism to revive France’slanguishing economy.languishing economy.
Gita, tell us about the concept of fiscal devaluation.Gita, tell us about the concept of fiscal devaluation.
Fiscal devaluation, by its name is an alternative to an exchange rate devaluation that is engineered usingFiscal devaluation, by its name is an alternative to an exchange rate devaluation that is engineered usingfiscal instruments. There are several ways to engineer one. One “remarkably simple alternative” is tofiscal instruments. There are several ways to engineer one. One “remarkably simple alternative” is toincrease value added taxes and cut payroll taxes. Countries in the euro zone, who do not have their ownincrease value added taxes and cut payroll taxes. Countries in the euro zone, who do not have their owncurrency to devalue, can use the VAT-payroll tax swap to revive growth through exports. By increasingcurrency to devalue, can use the VAT-payroll tax swap to revive growth through exports. By increasingvalue-added taxes while cutting payroll taxes, a government can affect gross domestic product,value-added taxes while cutting payroll taxes, a government can affect gross domestic product,consumption, employment, and inflation much as a currency devaluation would. Essentially, the higher VATconsumption, employment, and inflation much as a currency devaluation would. Essentially, the higher VATraises the price of imported goods as foreign companies pay the levy on the products and services theyraises the price of imported goods as foreign companies pay the levy on the products and services theyexport to that country. The lower payroll tax helps offset the extra sales tax for domestic companies,export to that country. The lower payroll tax helps offset the extra sales tax for domestic companies,
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reducing the need for them to raise prices. Since exports are VAT-exempt, the payroll cost saving allowsreducing the need for them to raise prices. Since exports are VAT-exempt, the payroll cost saving allowsproducers to sell goods more cheaply overseas, simulating the effect of a weaker currency. And finally, theproducers to sell goods more cheaply overseas, simulating the effect of a weaker currency. And finally, thepolicy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue.policy also can help on the fiscal front, as increased competitiveness can lead to higher tax revenue.
What kickstarted the idea?What kickstarted the idea?
The original concept behind fiscal devaluation goes back to JohnThe original concept behind fiscal devaluation goes back to JohnMaynard Keynes, who proposed increasing import tariffs and cuttingMaynard Keynes, who proposed increasing import tariffs and cuttingexport subsidies as an alternative to a currency devaluation (whenexport subsidies as an alternative to a currency devaluation (whencountries were on the gold standard). Euro zone rules would disallowcountries were on the gold standard). Euro zone rules would disallowany intervention that uses tariffs and subsidies. This is why we push theany intervention that uses tariffs and subsidies. This is why we push thealternative of VAT and payroll tax changes. It has often been conjecturedalternative of VAT and payroll tax changes. It has often been conjecturedthat fiscal taxes can substitute for currency devaluation, but this hasthat fiscal taxes can substitute for currency devaluation, but this hasnever really been proven. This is what we set out to figure out in ournever really been proven. This is what we set out to figure out in ourresearch. Initially we were skeptical that a couple of tax instrumentsresearch. Initially we were skeptical that a couple of tax instrumentswould do the job regardless of the details of the specific economy wewould do the job regardless of the details of the specific economy wewere applying it to. To our surprise we did find that indeed a VAT-payrollwere applying it to. To our surprise we did find that indeed a VAT-payrolltax swap worked exactly (not approximately) as a currencytax swap worked exactly (not approximately) as a currency
devaluation and this was insensitive to a large number of details about the economy.devaluation and this was insensitive to a large number of details about the economy.
We started work on this idea a couple of years ago. My co-author, Farhi, is a macro economist working onWe started work on this idea a couple of years ago. My co-author, Farhi, is a macro economist working onpublic finance issues, my other co-author, Itskhoki, is a trade economist and I work on exchange rates. Thepublic finance issues, my other co-author, Itskhoki, is a trade economist and I work on exchange rates. Thethree of us were able to use each other’s expertise to develop the idea.three of us were able to use each other’s expertise to develop the idea.
Are there any initial positive signs resulting from France’s implementation?Are there any initial positive signs resulting from France’s implementation?
Well, President Hollande recently has implemented a $27 billion tax cut for French companies and recently,Well, President Hollande recently has implemented a $27 billion tax cut for French companies and recently,Louis Gallois, former Airbus Chief, was quoted as saying that France was starting to turn the corner in aLouis Gallois, former Airbus Chief, was quoted as saying that France was starting to turn the corner in abusiness-competitiveness report commissioned by Hollande. However, in my opinion, the intervention wasbusiness-competitiveness report commissioned by Hollande. However, in my opinion, the intervention wastoo small and not executed as well as I would have liked. The size of the intervention in payroll taxes is tootoo small and not executed as well as I would have liked. The size of the intervention in payroll taxes is toosmall to make much of an impact and the VAT tax increase has yet to be implemented (You really need tosmall to make much of an impact and the VAT tax increase has yet to be implemented (You really need todo both at the same time). Further, there have been many other tax increases in France, in recent times,do both at the same time). Further, there have been many other tax increases in France, in recent times,that have the effect of undoing the benefits of a fiscal devaluation. The payroll tax cut is however hailed asthat have the effect of undoing the benefits of a fiscal devaluation. The payroll tax cut is however hailed asthe one pro-business development in France in recent times, so that is a good sign.the one pro-business development in France in recent times, so that is a good sign.
Which other countries could be primeWhich other countries could be primecandidates for fiscal devaluation?candidates for fiscal devaluation?
Countries whose central problem is a loss ofCountries whose central problem is a loss ofcompetitiveness would benefit from a fiscalcompetitiveness would benefit from a fiscaldevaluation. I would say that Spain and Portugal aredevaluation. I would say that Spain and Portugal arecandidates. Now of course, if everyone did a fiscalcandidates. Now of course, if everyone did a fiscaldevaluation no one gains (same as a currencydevaluation no one gains (same as a currencydevaluation). One imbalance that is often pointeddevaluation). One imbalance that is often pointedout is that Germany runs a trade surplus relative toout is that Germany runs a trade surplus relative toall other countries in the euro zone. A policyall other countries in the euro zone. A policyintervention that might be a good contribution for Germany to the euro zone is to do the reverse of a fiscalintervention that might be a good contribution for Germany to the euro zone is to do the reverse of a fiscaldevaluation. In 2007, Germany raised its VAT and cut payroll taxes. It might consider reversing suchdevaluation. In 2007, Germany raised its VAT and cut payroll taxes. It might consider reversing suchmoves, so that its competitiveness is realigned with that of the other countries in the euro area.moves, so that its competitiveness is realigned with that of the other countries in the euro area.
Finally, how would you describe the EU’s current prognosis and how do the next 12 months lookFinally, how would you describe the EU’s current prognosis and how do the next 12 months lookfrom your perspective?from your perspective?
These are interesting times. The one good news that came out of the EU in the past few months was theThese are interesting times. The one good news that came out of the EU in the past few months was thedecline in sovereign spreads for the troubled economies of Spain, Portugal, Greece and even Italy. Thisdecline in sovereign spreads for the troubled economies of Spain, Portugal, Greece and even Italy. Thiswas a combination of the ”Draghi put” (to stand by the euro at all cost) and the extremely loose monetarywas a combination of the ”Draghi put” (to stand by the euro at all cost) and the extremely loose monetarypolicy in the rest of the developed world. Now with the U.S. slowing quantitative easing and with Germanpolicy in the rest of the developed world. Now with the U.S. slowing quantitative easing and with Germanelections around the corner (September), the risk that sovereign yields will rise again is a real one. With theelections around the corner (September), the risk that sovereign yields will rise again is a real one. With thelarger EU economies like France and Italy still stagnant, the impact on these economies of even smalllarger EU economies like France and Italy still stagnant, the impact on these economies of even smallincreases in yields can be large. We already see a lot of volatility in markets with the decline in quantitativeincreases in yields can be large. We already see a lot of volatility in markets with the decline in quantitativeeasing in the U.S, so the next few months will be critical to the success of the euro project.easing in the U.S, so the next few months will be critical to the success of the euro project.
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ChristianChristianJun 25 2013Jun 25 2013
Gavin R.Gavin R.PutlandPutland(@grputland)(@grputland)Jul 14 2013Jul 14 2013
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Gavin R.Gavin R.PutlandPutland(@grputland)(@grputland)Sep 3 2013Sep 3 2013
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EXTENDING FISCAL DEVALUATION TO PAYG PERSONAL INCOME TAXEXTENDING FISCAL DEVALUATION TO PAYG PERSONAL INCOME TAX
Why merely REDUCE payroll tax? Why not ABOLISH it altogether? If the revenueWhy merely REDUCE payroll tax? Why not ABOLISH it altogether? If the revenuewere replaced by VAT, domestic retail prices of domestic products need not rise;were replaced by VAT, domestic retail prices of domestic products need not rise;embedded payroll tax would be replaced by embedded VAT. Of course retail prices ofembedded payroll tax would be replaced by embedded VAT. Of course retail prices ofIMPORTS would rise due to the higher VAT. But domestic consumers would beIMPORTS would rise due to the higher VAT. But domestic consumers would becompensated by better employment opportunities due to abolition of payroll tax.compensated by better employment opportunities due to abolition of payroll tax.
And why stop at payroll tax? The cost of labour for employers can be reduced furtherAnd why stop at payroll tax? The cost of labour for employers can be reduced further— without reducing employees’ “take-home” pay or widening after-tax wage— without reducing employees’ “take-home” pay or widening after-tax wageinequalities — by replacing Pay-As-You-Go personal income tax IN THE HANDS OFinequalities — by replacing Pay-As-You-Go personal income tax IN THE HANDS OFEMPLOYERS. Employees would continue to receive credit for the PAYG tax withheldEMPLOYERS. Employees would continue to receive credit for the PAYG tax withheldby their employers (calculated on their “grossed-up” wages). But businesses, insteadby their employers (calculated on their “grossed-up” wages). But businesses, insteadof forwarding the withheld PAYG tax to the government, would pay a higher VAT. In theof forwarding the withheld PAYG tax to the government, would pay a higher VAT. In theaggregate, the withheld PAYG tax would cover the additional VAT, with no need toaggregate, the withheld PAYG tax would cover the additional VAT, with no need toraise domestic retail prices of domestic products.raise domestic retail prices of domestic products.
Three advantages would follow from this combination. First, payroll tax and PAYGThree advantages would follow from this combination. First, payroll tax and PAYGpersonal income tax would be completely removed from the marginal cost of labour aspersonal income tax would be completely removed from the marginal cost of labour asseen by employers. That means more jobs, hence more domestic demand forseen by employers. That means more jobs, hence more domestic demand fordomestic products. Second, the additional VAT, unlike the tax component of the cost ofdomestic products. Second, the additional VAT, unlike the tax component of the cost oflabour, would not feed into export prices. That means more foreign demand forlabour, would not feed into export prices. That means more foreign demand fordomestic products. Third, because the extra jobs would reduce welfare spending, notdomestic products. Third, because the extra jobs would reduce welfare spending, notall of the lost revenue from PAYG tax would need to be replaced. That would allow aall of the lost revenue from PAYG tax would need to be replaced. That would allow aslight FALL in prices of domestic products.slight FALL in prices of domestic products.
I have suggested this replacement of payroll tax and PAYG tax as aI have suggested this replacement of payroll tax and PAYG tax as alifeline for indebted nations on the edge of the eurozone — inlifeline for indebted nations on the edge of the eurozone — inparticular, Ireland: particular, Ireland: http://t.co/u5BtJd5Nxihttp://t.co/u5BtJd5Nxi . .
P.S.: See “Fiscal devaluation on steroids” – P.S.: See “Fiscal devaluation on steroids” – http://t.cohttp://t.co/7WTLA9Bzq3/7WTLA9Bzq3 . .
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About Marco
Born in Milano and raised in Italy and the US, Marco has lived in five
different countries, speaks four languages and has conducted business in
every major region of the world. Marco currently leads EMC Corporation’s
GTM Equity Investments Group, executing investments and JVs, primarily in
the emerging markets.
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