Tag: revenues

More Fifth Column than Fourth Estate

Citing new Census figures, the New York Times claims that “public school districts spent an average of $10,499 per student on elementary and secondary education in the 2009 fiscal year.” But according to the most recent issue of the Digest of Education Statistics, expenditures haven’t been that low for over a decade. In the last year reported, 2007-08, total expenditures per pupil in average daily attendance were already $12,922 (in 2008-09 dollars). Adjusting for inflation, that’s about $13,500 in today’s dollars. (Looking at spending per student enrolled, rather than per student actually taught, lowers the total figure, but not by that much).

So what gives? How can the Times claim that public school “spending” is $3,000 lower than it actually is?

They simply exclude a huge swath of expenditures in the number that they call “spending,” without telling readers they have done so. Specifically, they ignore spending on things like… buildings. Correct me if I’m wrong, but I don’t think American public schools have returned to Plato’s practice of holding lessons in an olive grove. Until they do, they will use buildings. Buildings cost money. They aren’t erected, for free and fully furnished, from the mind of Zeus.

Not only does this arbitrary and unjustifiable exclusion of capital expenditures from the reported “spending” figures wildly mislead the public about what schools are really costing them, it also misleads the public about the trends in spending. As my colleague Adam Schaeffer reveals in the chart below, spending on physical facilities has increased at a far faster rate than other expenditures (remember those Taj Mahal schools?). So by channeling David Blaine and making capital spending disappear, the Times also misrepresents real spending growth. In so doing, they undermine the public’s and lawmakers’ ability to make sound policy decisions regarding education. If the Times prominently corrects this glaring error I will be utterly shocked.

The President’s Fiscal Commission: It’s a Start

Today POLITICO Arena asks

Will implementing President Obama’s Fiscal Commission recommendations require that everyone take a hit?

My response (with tax insights from Jagadeesh Gokhale):

President Obama’s Fiscal Commission Report offers a useful start in reducing our budget deficits and national debt, but it hardly goes far enough. As several of my Cato colleagues have just noted here, here, here, and here, the report recognizes, to its credit, that our corporate income tax structure puts U.S. corporations at a considerable competitive disadvantage against their foreign competitors. And the report keeps military spending cuts on the table, even if there is much more to be cut. Yet by proposing a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years – total federal spending as recently as 2000 was just 18.4 percent of GDP – it plays the old Washington game of calling a slower increase than previously projected a “cut.”

As for taxes, this report should be read in the context of a powerful argument in last Friday’s Wall Street Journal to the effect that over the past six decades, tax revenues as a percentage of GDP have averaged just under 19 percent, regardless of the top marginal personal income tax rate or whether taxes were cut or raised. What this suggests is that low tax rates spur income growth to leave the government’s revenues undiminished over the long-term. High tax rates do the opposite. It doesn’t take a large leap of faith to believe that this effect would be stronger for those who earn more and pay more in taxes. Indeed, among high earners are the nation’s business leaders – innovators who create new products and jobs – who would respond positively to the growth opportunity provided by a stable, low-tax-rate environment.  So those who believe that we help ourselves by more heavily taxing the rich need to ask themselves whether it might not be better to cut rates and keep them stable instead. Wouldn’t that promote a robust economy and lift all boats – with the government continuing to generate 19 percent in revenues?

None of this has anything to do, of course, with whether our current out-of-control federal government is constitutionally authorized to do all it is doing. But it’s a start toward returning the government to within its constitutional limits. Had those limits been respected – as the Framers understood, unlike New Deal progressives – we wouldn’t be in this mess.

An Australian Lesson about Capital Gains Tax Rates and Revenues

A decade ago, amid much controversy, I persuaded the Australian government to cut the capital gains tax rate in half.

Stephen Kirchner, an economist from Australia’s leading think tank, the Center for Independent Studies, reviewed the results last November.

This a brief summary:

The introduction of capital gains tax discounts for individuals and funds as part of the 1999 Ralph business tax reforms has received a lot of bad press, but much of this commentary is ill-informed… .

Those who called for reform of Australia’s capital gains tax regime 10 years ago argued that the Ralph reforms would likely raise more revenue because of the increased incentive they provided for taxpayers to realise capital gains that would otherwise go untaxed. Supply-side economist Alan Reynolds predicted that the reforms would raise twice as much revenue in the long run. He was right. The capital gains tax share of Commonwealth tax revenue nearly doubled between the introduction of the Ralph reforms and 2006–07. In absolute terms, CGT revenue rose from $4.6 billion in 1998–99 to $17.3 billion in 2006–07. CGT revenue growth has been strongest among individuals, who received the larger discount of 50%, followed by funds, which received a 33% discount. The slowest CGT revenue growth has been from companies, which received no discount.

The data suggest that the Ralph CGT reforms have resulted in more tax revenue through increased realisations of capital gains. They have thus strengthened rather than weakened the ability of the tax system to serve equity objectives. The Ralph reforms demonstrate the basic supply-side insight that lower effective tax rates lead to faster growth in the tax base and tax revenue.

New York State Should Cut Property Taxes

The New York Times editorialists are at it again.  June 12th’s lead editorial, “The Latest Work Dodge: A Shutdown,” frets over the specter of the New York state government being shut down because Albany’s legislators can’t agree on a budget.  Well, the Times must have breathed a collective sigh of relief late Monday (June 14th).  That’s when the State Senate passed Governor Paterson’s 11th temporary budget extender, which allowed state offices to hang out “open for business” signs on Tuesday.

But, the Times wants a final state budget and claims that more taxing and borrowing and maybe some cuts in school aid will do the trick.  One item that the Times wants off the table in Albany is property taxes.  According to the Times, Democratic state senators outside New York City should stop pushing for restrictions on the rate of growth of property taxes.  I agree.  Instead, the legislators should start pushing for sharp cuts in New York’s oppressive property taxes.  When every U.S. county is ranked according to its average property-tax bill, as a percent of home values, 14 of the highest 15 are in New York state.

As Prof. Steve Walters and I concluded in “A Property Tax Cut Could Help Save Buffalo” (Wall Street Journal, December 6, 2008),  New York should follow California and Massachusetts and cut property taxes.  Voters capped property taxes in California at 1% of market value with Proposition 13 in 1978. That forced San Francisco to cut its rate by 57% overnight and brought forth a tidal wave of investment, even amidst a recession. By 1982, inflation-adjusted city revenues were two-thirds higher than they had been before Prop. 13. Massachusetts voters passed Prop 2 ½ in 1980, forcing Boston’s property tax rate down by an estimated 75% within two years. Massive reinvestment, repopulation and urban renewal followed.

Federal Spending Limit

The nation is facing a fiscal emergency. Debt is exploding and federal spending exceeds revenues by more than $1 trillion a year. To fix the problem, policymakers should pursue reforms on two paths.

First, policymakers should start identifying programs for termination, privatization, and devolution to the states. If a business conglomerate overexpanded and its spending ran ahead of revenues, prudent managers would start shedding low-value operations and refocusing on core activities. The federal government should do the same.

Second, policymakers should adopt new rules to bring greater discipline to federal budgeting. Right now, it’s anarchy on Capitol Hill with every member and interest group pushing for more dollars. Very few members consistently defend restraint.

The solution is for Congress to pass a law limiting annual increases in overall federal spending. Rep. Lamar Smith (R-TX) recently introduced legislation to do just that. His SAFE Act (H.R. 5323) would cap annual growth in the federal budget to inflation plus population growth.

Smith’s bill, which has 34 co-sponsors, would cap growth in all spending including defense, nondefense, and entitlements. If spending this year was $3.70 trillion, inflation was 2 percent, and population growth was 1 percent, then federal spending next year would be limited to $3.81 trillion. If Congress failed to get spending under the limit by the end of the year, the president’s budget office would be required to apply an across-the-board cut, or sequester. I’ve discussed some of the details of such a spending limit in this congressional testimony.

Rep. Smith’s spending restraint legislation is exactly the type of budget process reform that Republicans should be championing. The idea of a cap on overall spending was supported by tea partiers in their Contract from America, and it’s easy for the average citizen to understand. The idea is simply that the government’s budget shouldn’t grow faster than the average family’s budget.

With a budget cap in place, it would be easy for voters and activists to know whether Congress was living up to a basic standard of fiscal prudence. If members of Congress tried to cheat on the legal spending limit, or tried to repeal it, citizens could impose political pressure on the spendthrifts. A simple and rigid budget limit would be a high-profile symbol of restraint for people to rally around and defend.

The chart below shows actual spending since 1990 and a budget limit of population growth plus inflation, with those variables averaged over the prior five years. In the 1990s, Congress generally kept spending under the limit. Over ten years, actual spending rose an average 4.2 percent annually, which was less than the 4.6 percent average growth of the limit. By contrast, spending growth during the 2000s has far exceeded the limit, illustrating where today’s huge deficits came from.

In sum, the nation can move back toward fiscal sanity by voting out the big spenders of both parties and voting in a reform-minded Congress to terminate programs and shrink the budget. Then, if Congress passed a law capping overall spending it would lock-in those cuts and make them harder to reverse later on. This two-part process could help ratchet-down the size of government over time.

Notes: Rep. Smith does not specify a five-year average for his spending limit variables, as I’ve assumed here. Also note that federal spending is calendar year data from the National Income and Product Accounts, Table 3.2.