Archives: July, 2011

CAP Leftists Have Accidental Encounter with the Laffer Curve, Learn Nothing

The big-government advocates at the Center for American Progress recently released a series of charts designed to prove America is a low-tax nation. I wish this was the case.

The United States does have a lower overall tax burden than Europe, which is shown in one of the CAP charts, but that doesn’t exactly demonstrate that taxes are low in America. Unless, of course, you think weighing less than an offensive lineman in the NFL is proof of being skinny.

But the one chart that jumped out at me was the one showing that the United States collects less corporate tax revenue than other developed nations. The CAP document states, with obvious disapproval, that “Corporate income tax revenue in the United States is about 25 percent below the OECD average.”

The obvious implication, at least for the uninformed reader, is that the United States should increase the corporate tax burden.

But here’s some information that CAP didn’t bother to include in the study. The U.S. corporate tax rate is more than 39 percent and the average corporate tax rate in Europe is less than 25 percent.

So let’s ponder these interesting facts. CAP is right that the U.S. collects less tax revenue from corporations, but even they would be forced to admit (though they omit the info from their report) that the U.S. corporate tax rate is much higher. Let’s see…higher tax rate-lower revenue…lower tax rate-higher revenue…this seems vaguely familiar.

Could this possibly be an example of that “crazy” concept of (gasp!) a Laffer Curve? To be sure, it is only in rare cases, when tax rates get very high, that researchers find that high tax rates lose revenue. In most cases, the Laffer Curve simply implies that higher tax rates won’t raise as much money as politicians want.

But have our friends at CAP inadvertently identified one of those cases where a tax cut (i.e., a lower corporate tax rate) would “pay for itself”?

There certainly is strong evidence for this proposition. In a 2007 study, Alex Brill and Kevin Hassett of the American Enterprise Institute found that the revenue-maximizing corporate tax rate is about 25 percent (click chart to enlarge).

Somehow, I suspect this wasn’t their intention, but I want to thank the statists at CAP for reminding us about the self-destructive impact of high tax rates. 

For those who want to learn more about the Laffer Curve, these three videos will make you more knowledgeable than 99 percent of people in Washington (not a big achievement, I realize, but the information is still useful).

 

Ideas Have Had Consequences — in the United States and in China

At the Britannica Blog I take a look at the founding ideas of the United States and the Communist Party of China, both of which are celebrating anniversaries this weekend:

The ideas of the Declaration, given legal form in the Constitution, took the United States of America from a small frontier outpost on the edge of the developed world to the richest country in the world in scarcely a century. The country failed in many ways to live up to the vision of the Declaration, notably in the institution of chattel slavery. But over the next two centuries that vision inspired Americans to extend the promises of the Declaration—life, liberty, and the pursuit of happiness—to more and more people.

China of course followed a different vision. Take the speech of Mao Zedong on July 1, 1949, as his Communist armies neared victory. The speech was titled, “On the People’s Democratic Dictatorship.” Instead of life, liberty, and the pursuit of happiness, it spoke of “the extinction of classes, state power and parties,” of “a socialist and communist society,” of the nationalization of private enterprise and the socialization of agriculture, of a “great and splendid socialist state” in Russia, and especially of “a powerful state apparatus” in the hands of a “people’s democratic dictatorship.”

Tragically, unbelievably, this vision appealed not only to many Chinese but even to Americans and Europeans, some of them prominent. But from the beginning it went terribly wrong, as really should have been predicted….What inspired many American and European leftists was that Mao really seemed to believe in the communist vision. And the attempt to actually implement communism leads to disaster and death.

Read the whole thing.

Deval Patrick’s Defense of Our $6 Trillion Government

In the apparent belief that the Tea Party movement and Americans’ general aversion to higher taxes are conjured out of thin air by master manipulator Grover Norquist, Massachusetts governor Deval Patrick offers this devastating riposte to Norquist’s support for limited government:

I remember sitting in the Dunster House dining hall at Harvard with Norquist when we were sophomores or juniors in college, while he explained his view of government, or lack thereof. It sounded logical — the notion that we could live independently of each other, making our own decisions in our own self-interest. But then who puts out the fires? Who answers the calls to 911? Who educates poor children? Who helps people with disabilities?

Good point. And we could go on. Without government, who would make shoes and ensure that they came in different sizes? Who would invent and build software programs? Who would supply us with home and automobile insurance to protect us from the risks of life? Who would feed and clothe and house us?

And then one might also wonder: Governor Patrick asks, “Who educates poor children?” in a society with limited government. Right now, government provides schooling for poor children, but all too few of them actually get educated. Check out the achievement gap for black students – in Massachusetts and elsewhere – in this Department of Education report. Perhaps Governor Patrick should make sure government is actually doing the things he worries about before he claims that a different system couldn’t do them.

Government Spending Isn’t Working

Over at the Daily Caller, I provide a primer on why government spending doesn’t “stimulate” the economy over the short-run or the long-run.

I look at the huge size of government spending in the United States, and I review the effects of recent stimulus efforts.

Then I describe the government’s “leaky bucket,” which explains why spending harms the economy in the long run, whether or not there are any short-run stimulus effects.

With America heading rapidly toward a spending-fueled debt crisis, these certainly are the times the try men’s souls. Nonetheless, please have a Happy Fourth!

Obama Backtracks on Marijuana Policy

President Obama is backing away from his campaign pledge to not interfere with the states that choose to adopt medical marijuana reforms.  Here’s an excerpt from the NORML blog on the new policy memorandum issued by the Department of Justice:

[T]he memorandum states that the recent flurry of intimidating US Attorney letters to state lawmakers are “entirely consistent” with the Obama administration’s position. In other words, the administration is now on record in support of claims made by US Attorneys in Rhode Island, Washington, and other states alleging that state employees could be targeted and federally prosecuted for simply registering and licensing medical cannabis patients or providers — a position that is even more extreme than that of the previous administration. (Notably to date, however, no state employee — or for that matter, no state sanctioned dispensary operator — has ever been prosecuted by the federal government.)

The memo goes on to state that the federal government distinguishes between individual medical cannabis patients and third party providers, indicating that it is a poor use of federal resources (rather than a poor use of judgment) to target the former, while indicating that the latter are fair game for federal prosecution.

Read the whole thing.  Well, at least Obama has ended the wars and got the United States back on a sound financial footing.

For a recent drug policy debate at Cato that went far beyond medical marijuana reform and reduced sentences for crack offenders, go here.

Beware of Greeks Demanding Gifts

Our friend Alberto Mingardi of the Bruno Leoni Institute in Italy writes about the Greek crisis:

In a way, the most surprising element of the Greek disaster is that taxpayers in other European countries aren’t outraged at being called to rescue an economy that has been marching towards disaster for so long.

The legitimate fear of contagion affecting other European countries is now being used to persuade the electorates outside Greece that: first, Greece has not manufactured its own fate, but is rather the victim of “locust-like” speculators and, second, a Greek bailout would be an indictment of the European social model, that is, the welfare state.

Where European public opinion is collapsing under its contradictions is in the attempt to reconcile the idea of the EU as the ultimate policeman of public finance with the ideological need to save the “European social model” no matter what. If the European Union has long been a major catalyst for reform in member states, it seems inappropriate that it now aims to artificially remove the ultimate incentive for fiscal wisdom: the possibility of a sovereign default. The problem of “moral hazard” should not be considered the exclusive preserve of too-big-to-fail banks; countries can suffer from it, too.

At two Cato forums last year Simeon Djankov, Steve Hanke, and Takis Michas discussed the background of the Greek crisis. Partial transcript here. Video here and here. Michas blamed the problems on “clientelism,” which he described as “a system in which political support is provided in exchange for benefits…. The largest part of public expenditure was directed, not to public works or infrastructure, but to the wages of public service workers and civil servants…. What makes the case of Greece interesting is that Greece can be said, in a certain sense, to provide the perfect realization of the left’s vision of putting people above markets. Greek politicians have always placed people (their clients) above markets, with results we can all see today.”

Dan Mitchell said “I told you so” about the failure of the previous Greek bailout. My thoughts on the Greek “anarchists” demanding a continuation of government subsidies here. And here’s a comparison between the Greek and U.S. debt problems.