Topic: Tax and Budget Policy

A Correction

In my post last week on the House farm bill, I quoted a Congressional Quarterly article that said that “[chairman of the Agriculture Committee, Representative Collin] Peterson also worked to stave off a last-minute revolt by Congressional Black Caucus (CBC) members by dedicating $1 million [sic] in extra funding for historically black universities and for black farmers.” (link requires subscription).

Further reporting has disclosed that the figure dedicated to those causes was $100 million (see here). Apologies.

State Government “Financial Implosion”

In prior posts, I noted the problems of rapidly rising state government debt and massive unfunded state health care promises.

I just came across a detailed study by an Illinois group that puts the problem in stark perspective. The report by the Commercial Club of Chicago begins: “Illinois is headed toward financial implosion–Illinois’ debt and unrecognized obligations have grown at an enormous rate.”

The study puts the state’s pension debt at $10 billion, its unfunded pension costs at $46 billion, its unfunded employee health care costs at $48 billion, and its unpaid Medicaid bills at $2 billion. The total costs that will be pushed onto tomorrow’s taxpayers without reforms is an enormous $106 billion, or $8,800 per every person in the state of Illinois.

As the report notes, the Illinois state constitution requires a balanced budget, but state policymakers are routinely abusing that requirement by financing spending with debt and imposing growing unfunded obligations on future generations.

The Commerical Club’s report is not libertarian by a long shot, and indeed calls for tax increases as part of a solution. But the report does a good job describing the excessive benefits received by state bureaucrats and the irresponsible growth in unfunded spending that has become the norm in legislatures across the nation in recent years.

For background see here [.pdf].  

Japanese Voters Send Anti-Tax Signal

Elections in Japan do not have much ideological or philosophical content, but the recent defeat for the Prime Minister’s party in upper-house elections was a clear sign that voters do not want higher taxes. As reported by Tax-news.com, Prime Minister Abe has been advocating a big hike in the value-added tax to finance more transfer spending, but the election results mean that Japanese voters may be spared this irresponsible outcome. The one distasteful element of the story is that the reporter refers to Abe’s commitment to reform. In the real world, raising taxes to finance more spending is a way of dodging reform:

Japanese Prime Minister Shinzo Abe’s plans for fiscal and tax reform have been dealt a blow after the opposition Democratic Party, which opposes a hike in consumption tax, won a substantial majority in Upper House parliamentary elections on Sunday. While the Democrat Party’s victory does not give it control over the government, analysts expect their influence in the upper house to raise a barrier to an early rise in consumption tax - thought to be central to the ruling Liberal Democrat’s plans to raise the revenue it needs to meet growing spending requirements and balance the budget. It was thought the government would legislate to increase the tax in 2008, with the hike going into effect in 2009, but this is now an increasingly distant prospect. … However, despite the electoral setback, Abe resolved to forge ahead with fiscal reforms.

Happy Birthday, Milton

Today is the 95th anniversary of the late Milton Friedman’s birth, and I’ll be celebrating his contribution to the school choice movement this evening in a presentation at the Evergreen Freedom Foundation in Washington state (to be available via live web-cast).

Here are some opening thoughts I have for that presentation:

In the spring of 1998, I was wrapping up four years of work on my book “Market Education: the Unknown History.” The publisher asked me come up with a list of prominent people who might be willing to write blurbs for the jacket, and so I sat down and mulled over the possibilities. The first name that came to mind was Milton Friedman.

I’d read Dr. Friedman’s 1954 essay on “the Role of Government in Education” and been deeply impressed by it. Of course, I didn’t seriously think that he would have the time to read a hefty manuscript by an author he’d never heard of, but, I thought, what’s the harm in trying?

In what still seems to me a minor miracle, Dr. Friedman decided to give the manuscript a read, and in doing so helped to launch my career in education policy. In fact, just weeks after I had contacted him, and before I knew what he thought of the book, I received a last-minute invitation to share the stage with him, along with his wife Rose and economist and columnist Thomas Sowell, at the gala launch event of the Milton and Rose Friedman foundation in San Francisco. Of course I was incredibly excited, not to mention moderately terrified, at the prospect.

Just as we were about to walk onto the stage at that event, Dr. Friedman leaned close to me and whispered “It’s a fine book,” but then added in a somber tone, “except where you run-down vouchers in Chapter 10.” He looked at me earnestly for a moment, and my heart nearly stopped. For a second I thought that my as-yet-unreleased manuscript was about to be carved up by a Nobel laureate economist in front of a live audience of several hundred people. Then he smiled and added, “but we can talk about that later.” And so we did, on and off, until his passing late last year.

Dr. Friedman was always quick to say that he was a monetary economist by profession, and that his interest in school choice was more avocation than vocation. But though he wrote only a few non-technical works in the field of education, he was a seminal force behind the modern American school choice movement.

To understand his impact on this field, you have to go back to the early 1950s. At that time, even more so than today, advocacy of limited government and individual liberty had been outside the philosophical mainstream. Not just outside it. Not just on the shore looking into the mainstream. But buried in the bushes entirely out of view of it.

Milton wrote of this period that “Those of us who were deeply concerned about the danger to freedom and prosperity from the growth of government, from the triumph of welfare-state and Keynesian ideas, were a small beleaguered minority regarded as eccentrics by the great majority of our fellow intellectuals.”

Consider that barely 20 years before Milton wrote his essay on “the Role of Government in Education,” the National Education Association had declared that the time had come for, quote, “the frank acceptance of the collective economy.” Not only did early 20th century education philosophers oppose the privatization of their own industry, they advocated nationalizing most of the others.

It was into this intellectual milieu that Milton ventured his modest suggestion: that the goals and ideals of “public education” would be best fulfilled though the private sector, with the government intervening, only if and as necessary, to ensure universal access to the independent educational marketplace.

Milton has passed, but that modest suggestion has become an international movement backed by an ever growing body of interdisciplinary empirical evidence.

Thank you, Milton, and happy birthday.

State Debt Cracks $2 Trillion

New Federal Reserve data show that state and local government debt has topped $2 trillion. At the end of first quarter 2007, state and local debt was $2.050 trillion, which is up 9.6 percent from first quarter 2006.

State and local debt growth has been explosive since 2001. In Table D.1 (see link), you can see that debt growth has soared in recent years, compared to the more moderate growth rates on the 1990s.

This is disturbing because current strong tax revenue growth in the states should be allowing governments to pay down debt in a prudent fashion before the next recession hits.

In Table D.3, you can see that state and local debt increased just 21 percent for the entire decade 1990-2000. Yet between 2000 and 2006, debt soared 68 percent.

For further discussion, see   

http://www.cato.org/pubs/tbb/tbb_0706-37.pdf

Bulgaria Announces 10 Percent Flat Tax

According to Bulgarian news sources, the coalition government in Bulgaria has agreed to implement a low-rate flat tax starting next January. This is good news for Bulgaria, but also good news for the rest of Europe since it means further pressure for tax-rate reductions and tax reforms. The global flat tax revolution is picking up so much steam that the time has come to propose a theme song. I realize I’m showing my age, but Another One Bites the Dust seems appropriate. Perhaps the song could be piped into the European Commission and the Organization for Economic Cooperation and Development, adding to their angst about the market-based reforms sweeping the world?

At an operative cabinet meeting Sunday attended by the top brass from the three parties it was decided to retire the current three-bracket personal income tax rate system and replace it with a flat rate of 10%. …The government also decided on a 10% pension increase from October 2007, enabled by a 20% budget revenue overperformance by end-July, and a 3% cut in the social security burden.