Topic: General

Progress on the Laffer Curve*

The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.

Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).

But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.

That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.

And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.

UK Laffer CurveI don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.

 

The Wall Street Journal opines that this is a very worthwhile development.

Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.

By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.

I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.

Another Misguided Plan to Burden America with a Value-Added Tax

It’s no secret that I dislike the value-added tax.

But this isn’t because of its design. The VAT, after all, would be (presumably) a single-rate, consumption-based system, just like the flat tax and national sales tax. And that’s a much less destructive way of raising revenue compared to America’s corrupt and punitive internal revenue code.

But not all roads lead to Rome. Proponents of the flat tax and sales tax want to replace the income tax. That would be a very positive step.

Advocates of the VAT, by contrast, want to keep the income tax and give politicians another big source of revenue. That’s a catastrophically bad idea.

To understand what I mean, let’s look at a Bloomberg column by Al Hunt. He starts with a look at the political appetite for reform.

There is broad consensus that the U.S. tax system is inefficient, inequitable and hopelessly complex. …a 1986-style tax reform – broadening the base and lowering the rates – isn’t politically achievable today. …the conservative dream of starving government by slashing taxes and the liberal idea of paying for new initiatives by closing loopholes for the rich are nonstarters.

I agree with everything in those excerpts.

So does this mean Al Hunt and I are on the same wavelength?

Not exactly. I think we have to wait until 2017 to have any hope of tax reform (even then, only if we’re very lucky), whereas Hunt thinks the current logjam can be broken by adopting a VAT and modifying the income tax. More specifically, he’s talking about a proposal from a Columbia University Law Professor that would impose a 12.9 percent VAT while simultaneously creating a much bigger family allowance (sometimes referred to as the zero-bracket amount) so that millions of additional Americans no longer have to pay income tax.

The Core of Big Brother

Over at SeeThruEdu I’ve got a post responding – sort of – to a recent article on the Common Core by National Review’s Ramesh Ponnuru. It’s only “sort of” because for the most part Ponnuru is right on the money: Some of the allegations against the Core are highly dubious, but so are many of the arguments proffered for it. My only quibble is that Ponnuru says that the Core doesn’t represent “Big Brother in the classroom.” Narrowly that’s right – the Core itself is just the standards – but when you look at the data collection and overall federal policy of which the Core is an integral part, fears about Big Brother – or maybe Big Micromanager – coming to a school near you are reasonable.

Check it out!

Be Thankful for “Diminished Productivity” in Washington

Let’s do a simple thought experiment and answer the following question: Do you think that additional laws from Washington will give you more freedom and more prosperity?

I don’t know how you will answer, but I strongly suspect most Americans will say “no.” Indeed, they’ll probably augment their “no” answers with a few words that wouldn’t be appropriate to repeat in polite company.

That’s because taxpayers instinctively understand that more activity in Washington usually translates into bigger and more expensive government. And big government isn’t so fun for those who pay the bills and incur the costs.

So what’s the purpose of our thought experiment? Well, new numbers have been released showing that the current Congress is going to set a modern-era record for imposing the fewest new laws.

But while most of us think this is probably good news, Washington insiders are whining and complaining about “diminished productivity” in Congress. The Washington Post is very disappointed that lawmakers aren’t enacting more taxes, more spending, and more regulation.

…this Congress — which is set to adjourn for the year later this month — has enacted 52 public laws. By comparison, …90 laws were encated during the first year of the 113th Congress and 137 were put in place during the first year of the 111th Congress.

Just in case you don’t have a beltway mindset, another Washington Post report also tells you that fewer laws is a bad thing.

…whatever gets done in December will still be part of a year with record-low congressional accomplishment. …According to congressional records, there have been fewer than 60 public laws enacted in the first 11 months of this year, so below the previous low in legislative output that officials have already declared this first session of the 113th Congress the least productive ever.

Let’s actually look at some evidence. The first session of the current Congress may have been the “least productive” in history when it comes to imposing new laws, but what’s the actual result?

More Terrorism Isn’t Necessarily More Danger

Diane Feinstein (D-Calif.) and Mike Rogers (R-Mich) made news Sunday when they both insisted on CNN that the terrorist threat to Americans has grown in the last couple of years. Feinstein’s evidence: “The statistics indicate that, the fatalities are way up.” Rogers agrees and argues that al Qaeda has been “metastasizing” into more groups that engage in smaller attacks.

It’s true that global terror attacks and fatalities increased in 2011 and 2012, according to the National Consortium for the Study of Terrorism and Responses to Terrorism. And, several new jihadist groups have emerged of late. But, as Marian Tupy showed here Monday, the fact remains that terrorism has for decades been becoming less deadly.

We should also be skeptical that the recent increase in terrorism means more danger for Americans. The cause of terrorism’s recent increase is civil wars and political unrest in Africa, the Middle-East and South Asia, where the vast majority of recent terrorist attacks have occurred.

Meanwhile, terrorists killed fifteen, seventeen, and ten private U.S. citizens (that is, non-military) in 2010, 2011, 2012, respectively. That means the danger to Americans either did not grow or that they mostly avoided it.

The real problem then is not al Qaeda, but the fractured political order in Iraq, Syria, Afghanistan, Yemen, Pakistan, Somalia, Nigeria and the like. Feinstein is conflating those problems to frighten us. As John Mueller notes:

When terrorism becomes really extensive, we generally no longer call it terrorism, but war. But people are mainly concerned about random terror, not sustained warfare.

Rogers’ claim that the al Qaeda threat is “metastasizing” into smaller, deadlier cells resembles old arguments that al Qaeda was a hierarchical organization that cleverly decentralized when the gig was up in Afghanistan. But as I explained at greater length here, even in its 1990s heyday, al Qaeda was a fragmented and unmanageable movement.

Its scattered remnant in Pakistan controls little locally and less abroad. Its “affiliates” are either bunches of guys with little capability or Islamist insurgents trading on the name’s cachet to organize their corner of a rebellion. Most of those insurgents target local enemies, not Americans. Those tragic struggles do not necessarily threaten U.S. security.

The fact that the jihadists that do target Americans are now focused on small-scale attacks is a consequence of their limited ability to pull off complex plots. And even the simpler sorts have mostly failed. Given the devastation our leaders tell us to expect from al Qaeda, what Rogers calls metastasis seems like good news.

Leaning Too Hard on PISA

This morning the latest results from the Program for International Student Assessment – or PISA – are available, and already some are declaring that they show the United States needs national curriculum standards. Conveniently, we’ve got an effort to implant such standards right now: the Common Core. But do the latest PISA results really show that national standards are what make, in particular, East Asian nations excel, and their absence here is what sticks us in the doldrums?

Of course not. As Jay Greene so helpfully points out as everyone scrambles to cherry-pick data to press their agendas, just “eyeballing” countries’ results tells us basically nothing. There is far too much that affects outcomes to declare your favored reform the right one based on a glance at PISA results. To begin to get at root causes, analyses that allow one to control for numerous variables are needed.

The good news is, such analyses have been done. The bad news, at least for national standards fans, is that they do not support the idea that national standards lead to superior results. Indeed, there is good evidence that national culture – not standards or tests – might be the most important determinant of outcomes on international exams. You can read all about it in Behind the Curtain: Assessing the Case for National Curriculum Standards, a 2010 Cato report intended to weigh in on a debate about the merits of moving to national standards.  It’s a debate that, alas, we never really had thanks to the federal government telling states that they either adopt national standards right away, or lose out on federal dough.

With that in mind, maybe one good thing will come out of national standards aficionados declaring PISA vindication of their policies. It will open up the chance to have a serious national debate about how real that “vindication” is.

P.S.: Andrew Coulson will soon be furnishing a much broader analysis of the PISA results than I offer here. Stay tuned!

We’re On Instagram!

Are you on Instagram? The Cato Institute is!

We joined the popular image-sharing site in late October. Follow us at http://instagram.com/catoinstitute.

Wondering how YOU can spread the message of liberty on Instagram? Make sure to come to this month’s New Media Lunch. Join the Cato Institute this Thursday at noon for a lunchtime presentation, followed by a roundtable discussion. Allen Gannett of Trackmaven will highlight some interesting discoveries from TrackMaven’s recently released study of Fortune 500 companies on Instagram and share tips for translating their success to the nonprofit world. Make sure to register as space is limited.

Not in D.C.? We will be livestreaming Allen’s presentation. Just navigate to http://www.cato.org/live at noon Eastern Time this Thursday, November 21st. You can also join the conversation on Twitter using #NewMediaLunch.

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