Topic: Tax and Budget Policy

Sub-Optimal Tax Cuts in France

Supporters of limited government often say that there is no such thing as a bad tax cut, but it also is true that some tax cuts are better than others (for instance, see here for a comparison of the sub-par 2001 tax cuts and the supply-side 2003 rate reductions). If policy makers want to boost economic performance, they should concentrate on reducing marginal tax rates on additional economic activity. By this standard, the tax cuts advocated by the new French President generally are not well designed. He is seeking to cap the total income tax burden at 50 percent rather than 60 percent, but this change affects the total tax bill and may not have much impact on the decision to engage in additional productive behavior. A better approach would be to lower the top tax rate. Likewise, Sarkozy wants to increase wealth tax exemptions, but this approach is inferior to a rate reduction (or, better yet, repeal of the tax). He also has a gimmicky plan for tax cuts on overtime and a scheme for mortgage payments. The good news is that there will be tax cuts in France. The bad news is that they could have been better designed. Tax-news.com reports

Chief among Sarkozy’s reforms are measures creating more exemptions to France’s wealth tax, which has often been cited as a key reason why France lags behind its competitors in terms of investment and economic growth, and a 50% cap on individual income tax, down from 60%. The reforms would also cut tax on overtime - encouraging more French workers to work beyond the previously politically sacred 35 hour week, part of plans to make the domestic labour market more flexible and business-friendly - and tax cuts on mortgage interest payments. …It is hoped that Sarkozy’s tax and economic reforms will tempt back the hundreds of thousands of French citizens who have left the country seeking less punitive tax regimes. Popular destinations for the estimated 500,000 French tax exiles include Belgium, Switzerland, the UK and the US. …studies show that it is not just the rich and famous who have seemingly grown weary with France’s high taxes, with families and investors fleeing in increasing numbers. Research by French Senator Philippe Marini, cited by Bloomberg, claims that households fleeing the fortune tax have climbed to a record 649 in 2005 from 370 in 1997. Another study by the Economic Analysis Council concluded that approximately 10,000 business directors have fled France in the past 15 years, taking as much as US$137 billion in capital to invest elsewhere.

New at Cato Unbound: Peter Leeson on Practical Anarchy

Everybody seems to know we need government … But pirates didn’t! How did they manage without the state? In this month’s thought-provoking Cato Unbound lead essay, Peter T. Leeson, the BB&T Professor for the Study of Capitalism at George Mason University, explores what pirate “constitutions,” credit institutions among 19th century African bandit traders, and the well-being of Somalians after the collapse of the Somalian state have to tell us about the possibility of practical anarchy. It works better than you think, Leeson concludes. “As long as there are unrealized gains to realize, people will find ways to realize them” — state or no state.

Can organizations really solve complex problems of coordination without government coercion? Can voluntary bands provide public goods? Are there conditions under which groups are better off stateless? Leeson will be joined in tackling these question by three eminent commentators: Florida State economics professor Bruce Benson, author of the seminal The Enterprise of the Law: Justice without the State; Dani Rodrik, professor of international political economy at Harvard’s Kennedy School of Government; and Randall Holcombe, another distinguished Seminole economist and current president of the Public Choice Society. Benson is on deck to reply this Wednesday. Stay tuned!  

Time for a (Most of) Government Shutdown

President Bush and congressional Democrats are fighting over many of the annual spending bills, leading some to predict a government shutdown when the new fiscal year starts October 1. This prospect horrifies the political class, but Investor’s Business Daily explains why it would be a good idea to close many government departments:

Here’s a suggestion: Many government departments, agencies and offices should be closed for good. …In 1800, the government needed a mere 3,000 employees and $1 million a year to do its job. In those days, lawmakers knew well the meaning of “limited.” Today, federal civilian employees number nearly 2 million. Another 10 million or more are federal contractors or grant recipients. The yearly budget of this runaway train is soaring toward $3 trillion. …Start with the Education Department, created in 1979 by the Carter administration despite the fact there is no constitutional authorization for its existence. In addition to its meddling, the department is spending nearly $70 billion a year in taxpayers’ dollars. By all accounts, public education in this country is worse off than it was when the Education Department opened. It’s hard to make an argument that those 5,000 employees are contributing anything. Next on the block should be the Energy Department, another monster wrought by Jimmy Carter, this one in 1977. There’s no real job this department… Like food, shelter and clothing, energy is a commodity that can and should be traded on an open market. There is no need to make a federal case out of it, particularly one that employees 17,000 people. All Cabinet-level departments — even Defense, which could cut waste — should at least have their budgets drained of excess. On a smaller scale, the National Endowment for the Arts and the National Endowment for the Humanities should go. Funding for the Corporation for Public Broadcasting should be zeroed out.

Brother, Can You Spare a Z$200,000 Note?

Hyperinflations would be almost comic if it were not for the misery they inflict on the people they affect. In the misruled African country of Zimbabwe, the inflation rate of the Zimbabwean dollar has reached an annualized rate of 13,000 percent. According to a story Thursday in the Financial Times, an IMF official predicts the annual rate could be heading towards an incredible 100,000 percent.

One sure sign of a hyperinflation is that the central bank must issue new currency notes in ever higher denominations so that people won’t have to carry bags or wheelbarrows of money around to make everyday purchases. Sure enough, the government of Zimbabwe is now wrestling with that very question. According to the FT story:

The launch yesterday of a new large-denomination bank note of Z$200,000—worth [US$13] at the official exchange rate and [US$1.30] at the more realistic parallel rate—underlines the disarray. The central bank had wanted to issue a Z$500,000 note, but a bank official said this was vetoed by the finance ministry because senior staff thought such a large denomination would have reinforced an impression that inflation was out of control.

At a 13,000 percent rate, that cat is probably already out of the bag.

Federal Pay: Shoot the Messenger

Fedsmith.com ran a commentary today about the new data I cited on average federal worker compensation.

Most of the 31 comments on my blog and the commentary so far are hostile, and many take a “shoot the messenger” approach. Folks, it’s not my data. I didn’t use “fuzzy math” or “twist” the data. The data comes straight from the U.S. Bureau of Economic Analysis.

Yes, averages are only one indicator of pay gaps. But is it justified that the federal average has grown so much more quickly than the private sector average? Why should fringe benefits in the government workforce be so much more generous than in the private workforce?

And shouldn’t we have a “government of the people” rather than a class of elite overlords increasingly separated from the realities of taking risks, being fired, facing salary cuts in downturns, and having to work hard to get pay raises?

Another Government Shutdown?

In Wednesday’s OpinionJournal.com Political Diary, John Fund writes that House minority whip Roy Blunt told reporters that he believes President Bush will deliver on his threat to veto the budget bills currently working their way through Congress. And with enough Republicans on record agreeing to uphold the veto, Blunt suggests we might end up witnessing a government shutdown later this year.

As you might recall from the mid-1990s, a federal government shutdown does not mean that every federal agency stops whatever it is they are doing. It’s only the non-essential ones that grind to a temporary halt – and, yes, there is an official definition of what constitutes essential government functions: mainly law enforcement and defense. That Congress continues to fund everything else is what keeps policy wonks like me busy.

Maybe Blunt’s statements are the opening gambit in a political game of chicken. There might be little interest in a government shutdown among the Democratic leaders in Congress. So the follow-up to an upheld Bush veto would likely be a compromise stop-gap measure (like a “continuing resolution” that puts the government on auto-pilot for the rest of the fiscal year) that results in much less spending than would otherwise occur in the course of an unimpeded appropriations cycle.

In either case, those of us who prefer divided government might have another example to add to our growing “Great Moments in Gridlock” list.

Is Federal Pay Too High?

Chris Edwards writes below that the gap between federal pay and private-sector pay continues to widen, with federal employees now making more than twice as much as private employees. Meanwhile, a congressional committee is holding hearings on whether federal employees are underpaid or overpaid. Do you think they’ll hear testimony about why federal employees make twice as much as private-sector workers? Or about the fact that federal quit rates are far lower than private-sector quit rates, suggesting that most federal employees are pretty satisfied?