Several writers point to the Allied occupation of Germany and Japan after World War II as examples of occupation being conducive to economic recovery. But the "economic miracles" in Germany and Japan did not really begin until occupation ended.
In Germany, Finance Minister Ludwig Erhard raised the income threshold at which the Occupation's 50 percent tax rate applied from $500 a year to $2,200 on June 22, 1948, and to $5,000 in the following year. The income level at which the occupation's top tax of 95 percent applied was immediately raised from $15,000 to $63,000. The top rate itself was brought to down to 63 percent at $250,000 by 1955 and to 53 percent by 1958. Overtime was even tax-exempt in the early years, which means the marginal tax on extra work was zero.
The occupation of Japan lasted from Aug. 30, 1945, to April 28, 1952. As in Germany, occupation tax rates were brutally punitive, with at top tax rate of 86 percent applying at middling incomes. As soon as the occupation ended, Japan cut taxes in every year but one from 1952 to 1974. The income needed to fall into the 60 percent tax bracket was raised from 300,000 yen in 1949 to 3,000,000 in 1953. A tax on wealth was abolished in the same year. The top tax rate was soon cut to 55 percent, and interest income and capital gains became tax free.
Like every other "economic miracle," the remarkably fast recoveries of post-occupation Germany and Japan were largely the result of replacing bureaucratic austerity with bold supply-side tax policies.
The American occupation in Iraq may be more enlightened today. Yet there is an almost unavoidable tendency of military people to over-organize everything. And there is an equally unavoidable tendency among diplomatic people to shun dramatic change and minimize risk. Big problems need big solutions, and the most seriously liberating reforms are most likely to come from local political entrepreneurs with a personal stake in success.
A month ago, Iraqi Finance Minister Kamel Al-Gailani announced that the maximum tax rate on individual and corporate income will be 15 percent next year, and the maximum tariff on imports will be 5 percent. Although Iraq might be better off skipping income taxes in favor of a simpler sales tax or value-added tax, it is hard to complain too much about tax rates below 15 percent. Sadqiq Jafar, a writer with ameinfo.com, notes that under Iraq's 1982 Tax Law, corporate and individual tax rates approached 60 percent. That steep tax raised very little revenue, but it repelled foreign investment and provoked emigration of skilled people and their capital.
Unfortunately, the provisional government is still counting on oil (indeed counting on somehow doubling oil production next year) for nearly all government revenue. That oil revenue should instead flow to the people of Iraq, through privatization. Once empowered with shares, citizens might choose to sell some of those shares to foreign investors who could quickly develop the terribly neglected socialist oil fields. Alternatively, the quasi-government could at least offer 50-year leases on oil properties to foreign oil companies, collecting revenues in that way while not wasting all the booty in salaries and subsidies, as is done today.
Because of Iraq's urbanization and strong regional loyalties, it would be smart for the new constitution to form a federal republic. That means limiting central government functions to providing for the common defense, a common currency and a common market, and facilitating the private development of modern interstate highway, rail, power and communication systems. Provincial and city governments would need their own revenue sources, such as property and sales taxes.
My advice is just advice, to take or to leave. Occupation forces, on the other hand, can easily become too pushy. Rather than "rebuilding the old Iraq," the Iraqis themselves are going to have to build a new Iraq -- a process that requires more wisdom and less dependence on foreign aid. The Iraqis are the only ones who have the knowledge and incentive to get it right.