Topic: Tax and Budget Policy

How Schooling Affects Culture

Cato’s Brink Lindsey has a good essay in today’s WSJ on how cultural differences between communities (from child-rearing to views and expectations on education) widen America’s socioeconomic gap. The one point where I diverge from Brink is that I am far more sanguine about the feasibility of reducing the cultural gaps that exacerbate the socioeconomic gap. The key is to understand that our educational institutions actually shape our culture.

Our monopoly school system has gradually marginalized parents, removing from them any significant responsibility for deciding where, what, how, when, and by whom their children are taught. This usurpation of traditional parental responsibilities has not only facilitated but fomented an unprecedented level of disengagement from their children’s education. Responsibilities breed responsibility. Powerlessness breeds apathy and disengagement.

When parents are actively involved in choosing their children’s schools, and when they have some measure of financial responsibility for their children’s education, they take a more active role, they are more satisfied with their children’s education, and their children’s achievement and attainment goes up. The most dramatic findings come from the areas most in need of improvement: our inner cities. University of Chicago economist Derek Neal has shown that urban black students attending Catholic schools are far more likely to graduate from high-school, be accepted to college, and graduate from college than similar students who attend government schools. That and other relevant research is digested and linked to here.

Replacing our dependency-producing school monopoly with a free education market that requires all parents to choose their children’s schools, and requires all parents to contribute something to the cost of their own children’s education (in kind rather than cash, where necessary), would not simply minimize the damage done by America’s culture gap. It would significantly shrink that gap, because it would compel parents to once again take a more active role in their children’s education. “Free” monopoly schooling isn’t merely inefficient, it is socially destructive.

Gordon Brown’s Finance Minister Defends UK’s Status as Tax-Haven

The United Kingdom has extremely favorable rules for “non-domiciled” residents, a policy that enables highly productive people to live in London while avoiding most taxes on capital income and foreign-source income. The left in Europe hates this policy, especially since entrepreneurs and investors are escaping high-tax nations to live in London, but the new Chancellor of the Exchequer seems content to leave well enough alone. The Observer reports:

London, the great global financial centre, has another claim to fame: it has become the fastest growing destination for international tax avoiders. The world’s super-rich and an elite cadre of financiers working in the Square Mile are increasingly using non-domicile tax status to sidestep paying tax on their fortunes. …Those benefiting from non-dom status have rocketed over the last five years. The Treasury…confirmed that 112,000 individuals indicated non-dom status in their self-assessment returns in the tax year to April 2005. This is a 74 per cent increase over 2002’s figures. …Unlike UK citizens, non-doms escape tax on income from property or capital gains. It is not only the international jet set who claim non-dom status; it is also available to some of the most powerful figures in the City. …Non-domicile status is self-assessed. Forms are easy to download from the web and there are just 19 questions. One tax expert says it is easy to convince the Revenue that a claimant is based overseas, whether it is through a relative or a series of overseas investments. In addition, the Revenue makes very few checks on status. Many senior City figures qualify for non-dom tax exemptions, including Dominic Murphy, the UK boss of private equity giant KKR. And it is widely thought that the Chancellor’s City adviser Sir Ronald Cohen and a large collection of Labour Party donors do too.  …Earlier this week, new Chancellor Alistair Darling made it clear that nothing must harm the international pre-eminence of the City and he warned against ‘knee jerk’ reactions to calls to amend the regulation.

The New Deal Was a Success — at Creating Dependency

Drawing from Amity Shlaes’ excellent new book The Forgotten Man, George Will notes that FDR’s policies were an economic failure but a political success.

It is particularly galling that Roosevelt’s statist policies were so harmful (as Chris Edwards has succinctly explained), yet he is portrayed as the man who saved the nation from unbridled capitalism:

Franklin Roosevelt’s success was in altering the practice of American politics. This transformation was actually assisted by the misguided policies — including government-created uncertainties that paralyzed investors — that prolonged the Depression. This seemed to validate the notion that the crisis was permanent, so government must be forever hyperactive.

…Roosevelt, however, made interest-group politics systematic and routine. New Deal policies were calculated to create many constituencies — labor, retirees, farmers, union members — to be dependent on government.

…Roosevelt implemented the theory that (in [Shlaes’] words) “spending promoted growth, if government was big enough to spend enough.” In only 12 months, just one Roosevelt improvisation, the National Recovery Administration, “generated more paper than the entire legislative output of the federal government since 1789.” Before Roosevelt, the federal government was unimpressive relative to the private sector. Under Calvin Coolidge, the last pre-Depression president, its revenue averaged 4 percent of gross domestic product, compared with 18.6 percent today. …In 1936, for the first time in peacetime history, federal spending exceeded that of the states and localities combined.

…[A]s Roosevelt demonstrated and Shlaes reminds us, compassion, understood as making the “insecure” securely dependent, also makes the state flourish.

The Germans Attack Tax Competition…Again

Germany’s finance minister Peer Steinbrueck wants to curtail tax competition by prohibiting countries from having corporate tax rates of less than 30 percent. Since German politicians have been whining about competition from low-tax nations in Eastern Europe for quite some time, this is hardly news.

But this new round of sour grapes is particularly amusing because Herr Steinbrueck is trying to close the barn door when the horses are galloping in the fields. The average corporate tax rate in the European Union already has fallen to about 24 percent and more corporate tax cuts are about to take effect — including a tax rate reduction in Germany.

Bloomberg reports:

The European Union needs a “level playing field” in areas including tax competition…if there is to be greater integration among member states, German Finance Minister Peer Steinbrueck said. A “race to the bottom” regarding…taxes, social and environmental standards risks discrediting the idea of a more united Europe among the continent’s citizens, Steinbrueck said in a speech prepared for delivery today in Frankfurt an der Oder, on the eastern German border with Poland.

…The average corporate tax rate in Europe shouldn’t fall below the threshold of just under 30 percent, which will go into effect in Germany next year, Steinbrueck said. Eastern European governments…can’t finance the infrastructure demanded by their citizens if taxes are lowered too much, he said.

Another Flat Tax Nation?

Moldova, a former Soviet Republic, is a poor and backwards nation with too much government. Seeking a brighter future, a part of Moldova has declared independence and is calling itself Pridnestrovie. Though this new country has not yet been recognized by the world, Pridnestrovie has wisely decided to implement free market reforms — including a flat tax that has been reduced from 15 percent to 10 percent according to a story from last year in the Tiraspol Times:

Parliament in Pridnestrovskaia Moldavskaia Respublica approved new lower tax rates for the emerging but unrecognized country. Previously, the nation taxed incomes for physical persons at 15%, but starting next month the rate will be just 10% flat.

…Since its declaration of independence on 2 September 1990, Pridnestrovie has gradually transformed itself from a post-Soviet system to a free, Western-style market based economy. In the process, it has found that a flat tax provides the best incentives for citizens and investors alike.

Hoover Institution political scientist Alvin Rabushka points to a number of different countries in the former Soviet bloc that have adopted some form of flat tax in recent years. In addition to Russia, Pridnestrovie and Slovakia, they are Romania, Georgia, Estonia, Latvia, Serbia and Ukraine.

Not surprisingly, the flat tax is having a positive impact. The Tiraspol Times now reports that tax revenues have more than tripled and lawmakers understand that lower tax rates can lead to more revenue — just as the Laffer Curve illustrates:

Thanks to reform in the tax code, and a lowering of rates, income from taxes has gone up three and a half times in Pridnestrovie, says the parliamentary press service. …Tax revenues went from 63.4 million dollars in 2001 to a whopping 221.6 million dollars in 2006, the last full year for which the numbers are available.

…Key to the reform package were measures which makes filing simpler, as well as a comprehensive program of tax relief. Five taxes which existed before 2001 have now been abolished and instead replaced with a single, simple tax.

…With both personal and corporate tax rates well below those of Ireland, the growth in Pridnestrovie’s tax income is even more impressive. As taxes have been simplified and rates have been lowered, revenues have gone up three and a half times.

Addendum: The good news about Pridnestrovie may not be so good after all. My Cato colleague Justin Logan rained on my flat tax parade by telling me that Pridnestrovie, AKA Tansnistria (I guess even the name of the place is in dispute), is not exactly the Hong Kong of Eastern Europe. The breakaway province has a very poor reputation for corruption. It also is not exactly a role model of democracy, since the boss of the country recently won 103 percent of the vote in one region (eat your heart out, Castro). Alas.

Why People Hate the IRS

My wife and I received a notice from the IRS yesterday regarding our 2006 income tax return. At first glance, I thought it said we underpaid by $107, which would be no big deal and I’d go ahead and pay.

Then I looked closer at the calculations the notice showed:

Total Tax On Return: $xx,242.00

Total Payments and Credits: $xx,241.63

Underpaid Tax: $0.37

Penalty: $106.65

Interest: $0.01

Total Amount You Owe: $107.03

You’ve got to be kidding–we underpaid our taxes by 37 cents and the IRS is dinging us with a $107 penalty?!

Page 22 of the 1040 instruction book clearly says that rounding to the nearest whole dollar is OK.  I think this needs more investigation. 

If You Build It, They Still Won’t Come

A report commissioned by the Maryland Stadium Authority and the Montgomery County Department of Economic Development tells the planners what they want to hear: that a new sports and entertainment arena in Montgomery County, Maryland, could generate revenue for the county and would give residents a place to hold events without having to leave the county. Based on the Washington Post story, it’s not clear just how strong the report’s argument is: by definition, building a new arena would provide a venue for events, so that’s not much of a claim; and the news story does not tell us if the revenue generated would make it economically viable.

But maybe the report did claim economic viability. Most studies commissioned by planners do. But independent studies never do. This short review of the academic literature finds that “not only are there theoretical reasons to believe that economic impact studies of large sporting events may overstate the true impact of the event, but in practice the ex ante estimates of economic benefits far exceed the ex post observed economic development of host communities following mega-events or stadium construction.”

Last year the Wall Street Journal reported

But while arenas with big-time tenants may bolster a city’s self-image and quality of life, evidence shows they have a minimal economic upside. Most operate at a loss.

In “The Economics of Sports Facilities and Their Communities,” published in 2000 in the Journal of Economic Perspectives, authors Andrew Zimbalist of Smith College and John Siegfried of Vanderbilt University argue that “independent work on the economic impact of stadiums and arenas has uniformly found that there is no statistically significant positive correlation between sports facility construction and economic development.”

The authors cite several studies, including one by sports economist Robert Baade that found “no significant difference in personal income growth from 1958 to 1987 between 36 metropolitan areas that hosted a team in one of the four premier professional sports leagues and 12 otherwise comparable areas that did not.” The authors’ conclusion: Arenas put a drag on the local economy by hurting spending on other activities in the city and boosting municipal costs such as security.

“It doesn’t make sense to build an arena for economic reasons, even if you have a team,” Mr. Zimbalist says.

Several Cato studies have reviewed the literature on stadiums and arenas, as noted here.