Tag: decentralization

Study from German Economists Shows that Tax Competition and Fiscal Decentralization Limit Income Redistribution

If we want to avoid the kind of Greek-style fiscal collapse implied by this BIS and OECD data, we need some external force to limit the tendency of politicians to over-tax and over-spend.

That’s why I’m a big advocate of tax competition, fiscal sovereignty, and financial privacy (read Pierre Bessard and Allister Heath to understand why these issues are critical).

Simply stated, I want people to have the freedom to benefit from better tax policy in other jurisdictions, especially since that penalizes governments that get too greedy.

I’m currently surrounded by hundreds of people who share my views since I’m in Prague at a meeting of the Mont Pelerin Society. And I’m particularly happy since Professor Lars Feld of the University of Freiburg presented a paper yesterday on “Redistribution through public budgets: Who pays, who receives, and what effects do political institutions have?”

His research produced all sorts of interesting results, but I was drawn to his estimates on how tax competition and fiscal decentralization are an effective means of restraining bad fiscal policy.

Here are some findings from the study, which was co-authored with Jan Schnellenbach of the University of Heidelberg.

In line with the previous subsections, we find that countries with a higher GDP per employee, i.e. a higher overall labor productivity, have a more unequal primary income distribution. …fiscal competition within a country or trade openness as an indicator of globalization do not exacerbate, but reduce the gap between income classes. …expenditure and revenue decentralization restrict the government’s ability to redistribute income when fiscal decentralization also involves fiscal competition. …fiscal decentralization, when accompanied by high fiscal autonomy, involves significantly less fiscal redistribution. Please also note that fiscal competition induces a more equal distribution of primary income and, even though the distribution of disposable income is more unequal, it is open how the effect of fiscal competition on income distribution should be evaluated. Because measures of income redistribution usu-ally have adverse incentive effects which consequently affect economic growth negatively, fiscal competition might be favorable for countries which have strong egalitarian preferences. A rising tide lifts all boats and might in the long-run outperform countries with more moderate income redistribution even in distributional terms.

The paper includes a bunch of empirical results that are too arcane to reproduce here, but they basically show that the welfare state is difficult to maintain if taxpayers have the ability to vote with their feet.

Or perhaps the better way to interpret the data is that fiscal competition makes it difficult for governments to expand the welfare state to dangerous levels. In other words, it is a way of protecting governments from the worst impulses of their politicians.

I can’t resist sharing one additional bit of information from the Feld-Schnellenbach paper. They compare redistribution in several nations. As you can see in the table reproduced below, the United States and Switzerland benefit from having the lowest levels of overall redistribution (circled in red).

It’s no coincidence that the United States and Switzerland are also the two nations with the most decentralization (some argue that Canada may be more decentralized that the United States, but Canada also scores very well in this measure, so the point is strong regardless).

Interestingly, Switzerland definitely has significantly more genuine federalism than any other nation, so you won’t be surprised to see that Switzerland is far and away the nation with the lowest level of tax redistribution (circled in blue).

One clear example of Switzerland’s sensible approach is that voters overwhelmingly rejected a 2010 referendum that would have imposed a minimum federal tax rate of 22 percent on incomes above 250,000 Swiss Francs (about $262,000 U.S. dollars). And the Swiss also have a spending cap that has reduced the burden of government spending while most other nations have moved in the wrong direction.

While there are some things about Switzerland I don’t like, its political institutions are a good role model. And since good institutions promote good policy (one of the hypotheses in the Feld-Schnellenbach paper) and good policy leads to more prosperity, you won’t be surprised to learn that Swiss living standards now exceed those in the United States. And they’re the highest-ranked nation in the World Economic Forum’s Global Competitiveness Report.

Why Hayek Would Have Hated Software Patents

In his famous essay “The Use of Knowledge in Society,” Friedrich Hayek argued that the socialists of his day falsely assumed that knowledge about economy could be taken as “given” to central planners. In reality, information about the economy—about what products are needed and where the necessary resources can be found—is dispersed among a society’s population. Economic policies that implicitly depend on omniscient decision-makers are doomed to failure, because the decision-makers won’t have the information they need to make good decisions.

In a new paper to be published by the NYU Annual Survey of American Law, Christina Mulligan (who drafted a recent amicus brief for Cato) and I argue that the contemporary patent debate suffers from a similar blind spot. A patent is a demand that the world refrain from using a particular machine or process. To comply with this demand, third parties need an efficient way to discover which patents they are in danger of infringing. Yet we show that for some industries, including software, the costs of discovering which patents one is in danger of infringing are astronomical. As a consequence, most software firms don’t even try to avoid infringing peoples’ patents.

Patents are often described as “intellectual property,” and patent law provides for harsh property-like remedies against patent infringers. But a property system that is so convoluted that ordinary firms can’t figure out who owns what isn’t a property system at all. Genuine property rights enhance economic efficiency by bringing predictability to the allocation of scarce resources and thereby promoting decentralized decision-making. Software patents retard economic efficiency by subjecting software firms to a constant and unavoidable threat of litigation for accidentally infringing the patent rights of others. Hayek would not have approved.

Our paper is available from SSRN.

Welcoming a New Common Noun: ‘the Mubarak’

Officials in London are looking everywhere but the mirror for places to affix blame for the recent riots. Beyond the immediate-term answer, individual rioters themselves, the target of choice seems to be “social media.” Prime Minister David Cameron is considering banning Facebook, Twitter, and Blackberry Messenger to disable people from organizing themselves or reporting the locations and activity of the police.

Nevermind substantive grievance. Nevermind speech rights. We’ve got scapegoats to find!

[Events like this are nothing but a vessel into which analysts pour their ideological preconceptions, so here’s a sip of mine: Just like a spoiled child doesn’t grow up to be a gracious and kind adult, a population sugar-fed on entitlements doesn’t become a meek and thankful underclass. Also: people don’t like it when the police kill unarmed citizens. Which brings us to some domestic U.S. ineptitude…]

Two-and-a-half years ago, a (San Francisco) Bay Area Rapid Transit (BART) police officer shot and killed an unarmed man on a station platform in full view of a train full of riders (video). Sentenced to just two years for involuntary manslaughter, he was paroled in June. This week, upon learning of planned protests of the killing that may have disrupted service, BART officials cut off cell phone service in select stations, hoping to thwart the demonstrators.

[Update: A correspondent notes that the BART protest was in relation to another, more recent killing.]

The Electronic Frontier Foundation rightly criticized the tactic in a post called “BART Pulls a Mubarak in San Francisco.” It’s the same technique that deposed Eqyptian dictator Hosni Mubarak used to try to prevent the uprising that toppled him.

What’s true in Egypt is true in the U.K. is true in the United States. People will use the new communications infrastructures—cell phone networks, social media platforms, and such—to express grievance and to organize.

Western government officials may think that our lands are an idyll compared to the exotic savagery of the Middle East. In fact, we have people being killed by inept law enforcement in the U.S. and the U.K. just like they have people being killed by government thugs in the Middle East. What seems like a difference in kind is a difference in degree—and it’s no difference at all to the dead.

Among the prescriptions that flow from the London riots and BART’s communications censorship are the intense need for greater professionalism and reform of police practices. Wrongful killings precipitate (rightful) protest and (wrongful) violence and looting. Public policies in the area of entitlements and immigration that deny people a stake in their societies need a serious reassessment.

But we also need to keep in mind the propensity of government officials—in all governments—to seek control of communications infrastructure when it serves their goals. From the perspective of the free-speaking citizen, centralization of communications infrastructure is a key weakness. It gives fearful government authorities a place to go when they want to attack the public’s ability to organize and speak.

The Internet itself is a distributed, packet-switched network that generally resists censorship and manipulation. Internet service, however, is relatively centralized, with a small number of providers giving most Americans the bulk of their access. In the name of “net neutrality,” the U.S. government is working to bring Internet service providers under a regulatory umbrella that it could later use for censorship or protest suppression. Platforms like Facebook and Twitter are also relatively centralized. It is an important security to have many of them, and to have them insulated from government control. The best insulation is full decentralization, which is why I’m interested in the work of the Freedom Box Foundation and open source social networks like Diaspora.

The history of communications freedom is still being written. Here’s to hoping that “a Mubarak” is always a failure to control people through their access to media.

Tea Party Electees Might Get Early Chance to Prove Themselves on Education

Over the last couple days I’ve been arguing that the time might be ripe to start pushing the case in Congress to get Washington out of education. Educationally, fiscally, and constitutionally it is the right thing to do, and the negatives of being smeared as “anti-education” or “anti-child” could be countered by very powerful voter sentiments against big, wasteful government.

Well, it seems new Tea Party-type Congress members might get a chance to use education to prove their bona fides very early. In his post-pummeling presser yesterday, President Obama mentioned education as one area in which he could see bipartisan accomplishments being made, and several articles today — including on Politico and in The Washington Post — suggest that education might indeed be a Kumbaya issue.

That could be right, because presumptive House Speaker John Boehner (R-OH) was a lead force behind the No Child Left Behind Act, and the Obama administration has made a lot of noise (if just the opposite in terms of concrete action) about taking on teachers unions and fighting for charter schools. In other words, there seems to be some bipartisan convergence on education, with Republicans now favorable toward federal control and Dems willing to at least talk critically about mega-potent unions. That NCLB is far passed due for reauthorization only bolsters education’s chance of being used as a fence-mender.

That said, there are a lot of obstacles in the way of this happening, with the ideological fissures among congressional Republicans likely to be one of the biggest, as well as divisions among Democrats. But if the leadership in both parties see education as a place where they can all hold hands, the time to make the unapologetic, uncompromising case for getting Washington out of our schools will definitely be upon us.