Topic: Tax and Budget Policy

Economics and Values

A recent NYT article has roiled the economics blogosphere by spotlighting several prominent economists who ostensibly challenge the “fundamental assumptions” of their field. A snippet:

“Economists can’t pretend that the consensus for free markets and free trade that existed 30 years ago is still here,” said Robert B. Reich, a public policy professor at Berkeley who served in President Bill Clinton’s cabinet.

Part of the reason is the growing income inequality and dislocation that global markets and a revolution in communications have helped create. Economists who question the free-market theories “want to speak to the reality of our time,” Mr. Reich said.

The article references some interesting material, including Alan Blinder’s criticism of offshoring and David Card’s provocative work ($) with Alan Krueger on employment and the minimum wage. However, contrary to its tone, the article is not (for the most part, anyway) about disagreements in economics — it’s about disagreements over values.

Consider, for instance, this bit from Blinder’s recent Washington Post op-ed:

And if the jobs do move offshore, displaced American workers may lose not only their jobs but also their pensions and health insurance. These people can be forgiven if they have doubts about the virtues of globalization.

We economists assure folks that things will be all right in the end. Both Americans and Indians will be better off. I think that’s right. The basic principles of free trade that Adam Smith and David Ricardo taught us two centuries ago remain valid today: Just like people, nations benefit by specializing in the tasks they do best and trading with other nations for the rest.

Blinder does not dispute (and indeed endorses) the economic orthodoxy that trade materially benefits participants. Instead, he notes that a change in trading partners produces both winners (the new trading partners) and losers (displaced partners), and that change can often be painful for the loser — a notion that most all economists would endorse.

Given this economic analysis, Blinder offers a values judgment: the United States should implement public policies to aid displaced workers caught in such change (but he expressly eschews protectionist measures that would prohibit change). Libertarians may disagree with Blinder’s policy proposals (perhaps on the grounds that such policies are not appropriate for limited government, or are economically inefficient, or would create perverse incentives and unintended consequences). But this disagreement is not about economics, it’s about competing values (e.g., limited government is preferable; economic inefficiency is undesirable, perverse incentives and unintended consequences are to be avoided).

Like “hard” science, economics is a non-normative field that attempts to determine certain types of relationships — in this case, economic ones (e.g., what is a minimum wage’s effect on employment; what market power effects result from industry regulation?) — and use those determinations to predict the future. Economic analysis often leads to policy recommendations, but those recommendations are the product of value judgments: Should the well-being of one group of workers (e.g., domestic, unionized, members of a particular group) be promoted over another? Should the harm experienced by displaced workers be mitigated, and if so, how?

From a policymaking perspective, it is useful to distinguish what part of economic policy is about economics and what part is about values. Economic analysis of U.S. farm subsidies and trade protections reveals their effect on farmer and consumer behavior, but good policy ultimately comes from answering such values questions as whether the tradeoff of higher consumer food prices for higher producer revenues is acceptable, or whether ag subsidies are a good use of the public fisc.  Or, concerning Prof. Reich’s comment above about income inequality, good policy would come from answering the values question of whether it is a problem that some people are rich or, instead, that some people are poor.

All of this is not to say that we should not question whether neat, simple economic theory plays out cleanly in this messy, complicated world. The debate ($) over Card & Krueger’s minimum wage findings is one of the most interesting in economics, and the burgeoning field of behavioral economics is reinvigorating long-simmering questions about the rationality of market actors — though those questions may not support the values judgments that the apostates and heterodoxoi presume. But I would argue that economics is not so different from the hard sciences — the core tenets are quite solid (though revolution does occur). What remains (appropriately) shaky is a pluralistic society’s attempts to apply its many values (as well as its hopes, fears, grievances, immediate concerns, and political aspirations), to economic phenomena.

Norway’s Hypocritical Statists

The socialist government of Norway is leading a new campaign against tax havens. Norwegian workers can be thankful, though, that the state pension fund is not consumed by the same big-government ideology. According to a Norwegian newspaper, the oil-enriched fund invests billions of dollars in tax haven companies, thus ensuring that more money actually winds up in the hands of retirees rather than politicians. But if the Norwegian government’s anti-tax competition campaign is successful, all workers will be hurt since politicians all around the world will be more likely to raise taxes if they think the geese that lay the golden eggs cannot fly away:

Norway’s center-left government coalition has made an issue of battling offshore tax havens. Both Finance Minister Kristin Halvorsen and the minister in charge of foreign aid, Erik Solheim, have harshly criticized companies, both Norwegian- and foreign-owned, that avoid taxes by registering themselves in countries with low or non-existent tax obligations. At the same time, however, the state’s massive pension fund that’s fueled by Norway’s oil revenues has been investing billions in companies that are registered in tax havens. This includes companies “based” in places like the Cayman Islands, Bermuda and Cyprus. … Finance Minister Halvorsen has characterized Norwegians who invest in tax havens as a “provocation against Norwegian taxpayers.” She’s not demanding, though, that the state pension fund blacklist tax haven investments.

America’s Anti-Competitive Corporate Income Tax

The Wall Street Journal editorializes about America’s corporate income tax, which now has the dubious honor of imposing the highest rate in the developed world. This punitive system is bad for workers, as the WSJ notes, but it is even counter-productive for politicians because the high tax rate probably results in less tax revenue:

At least 25 developed nations have adopted Reaganite corporate income tax rate cuts since 2001. The U.S. is conspicuously not one of them. …Even in France, of all places, new President Nicolas Sarkozy has proposed reducing the corporate tax rate to 25% from 34.4%.

What do politicians in these countries understand that the U.S. Congress doesn’t? Perhaps they’ve read “International Competitiveness for Dummies.” In each of the countries that have cut corporate tax rates this year, the motivation has been the same — to boost the nation’s attractiveness as a location for international investment.

Germany’s overall rate will fall to 29.8% by 2008 from 38.7%. Remarkably, at the start of this decade Germany’s corporate tax rate was 52%. All of which means that the U.S. now has the unflattering distinction of having the developed world’s highest corporate tax rate of 39.3% (35% federal plus a state average of 4.3%), according to the Tax Foundation.

…Lower corporate tax rates with fewer loopholes can lead to more, not less, tax revenue from business. …Tax receipts tend to fall below their optimum potential when corporate tax rates are so high that they lead to the creation of loopholes and the incentive to move income to countries with a lower tax rate.

Ireland is the classic case of a nation on the “correct side” of this curve. It has a 12.5% corporate rate, nearly the lowest in the world, and yet collects 3.6% of GDP in corporate revenues, well above the international average. The U.S., by contrast, with its near 40% rate, has been averaging less than 2.5% of GDP in corporate receipts. …[M]ost economists understand that corporations don’t ultimately pay any taxes. They merely serve as a collection agent, passing along the cost of those taxes in some combination of lower returns for shareholders, higher prices for customers, or lower compensation for employees. In other words, America’s high corporate tax rates are an indirect, but still damaging, tax on average American workers.

French Drivers Defy Speed Cameras

French politicians may be hopeless statists, but at least the French people still have a bit of laissez-faire spirit. Not only do they evade taxes at nearly twice the U.S. rate, they’ve also figured out a clever, market-based strategy for dodging part of the penalty when caught on the roads by speed cameras.

The UK-based Times reports:

It is the latest ruse on the roads of France: drivers are avoiding disqualification by trading licence points on the internet. Complete strangers are taking the rap for speeding offences in return for up to €1,500 (£1,000), and police admit they are powerless to intervene. Even pensioners who have not driven for many years are getting in on the act. The online scam is also popular in Spain and other European countries, and authorities believe it may soon be introduced in Britain. It threatens to make a mockery of a French crackdown on road safety and embarrass President Sarkozy….

The technique is simple. In return for money, the seller provides his or her name and licence number in response to the speed camera ticket. The notice that is automatically sent to the owner of the offending vehicle includes a form for identifying another driver. Checks are extremely rare. The black market, which the authorities admit they are unable to prevent, is an unintended consequence of stronger enforcement of the highway code and especially of an exploding number of speeding tickets since automatic radar was installed on French roads on 2003.

…It has become routine in families of all classes for repeat offenders to ask friends and relatives with clean licences to lend their names. This explains an apparently steep rise in bad driving by older citizens. The rate of offences by drivers over 65 jumped 38 per cent from 2003-05, when the speed cameras began to bite. 

…One internet user in Spain listed his grandmother’s licence points for €250 each, plus the cost of any traffic fines. “I have persuaded the poor woman to renew her licence, with the sole objective of having more points,” he said.

British “Fat Tax” Would Mean More Intrusive Government

According to a Reuters report, a new study from the United Kingdom estimates that more than 3,000 lives would be extended if the 17.5 percent value-added tax was imposed on supposedly unhealthy foods. Without endorsing the specific estimates, the underlying economic analysis is sound. Certain foods presumably are unhealthy (at least for people who already are overweight) and taxing those foods will change behavior (just like taxing work, saving, and investment changes behavior).

But this does not mean, as a matter of principle, that the government should use the tax code to dictate private choices. Once politicians wander down that path, what will stop them from taxing people at higher rates if they don’t jog at least three times a week? Or how about tax credits for eating green vegetables? Some might respond that taxpayers have a right to insist on healthy behavior since they are paying – via the government-run health care systems – the medical costs of unhealthy people. But this highlights the problem of a socialized health care system. If people are responsible for the consequences of their own choices, then there is less temptation for nanny-state policies. For what it’s worth, this does not mean that the U.K. should maintain a VAT exemption for food. But the exemption should be eliminated as part of a plan to reduce the general tax burden, not as a scheme to control people’s lives:

A “fat tax” on salty, sugary and fatty foods could save thousands of lives each year, according to a study published on Thursday. Researchers at Oxford University say that charging Value Added Tax (VAT) at 17.5 percent on foods deemed to be unhealthy would cut consumer demand and reduce the number of heart attacks and strokes. The purchase tax is already levied on a small number of products such as potato crisps, ice cream, confectionery and chocolate biscuits, but most food is exempt. The move could save an estimated 3,200 lives in Britain each year, according to the study in the Journal of Epidemiology and Community Health. …Any “fat tax” might be seen as an attack on personal freedom and would weigh more heavily on poorer families, the study warned. A food tax would raise average weekly household bills by 4.6 percent or 67 pence per person. Former Prime Minister Tony Blair has previously rejected the idea as an example of the “nanny state” that might push people away from healthy food.

Government Giveaways

Most Americans are appalled by pork spending, corporate welfare, and other congressional waste. But at least one man relishes federal giveaways. He extols the government freebee. The July 4 Falls Church (Virginia) News-Press notes:

“Mothers, lock up your daughters, because Matthew Lesko, the so-called ‘crazy Free Money Guy,’ will be camping out in front of the U.S. Capitol from August 14-17. Famous for his question-marked suit, Lesko will be answering questions during his campout as part of a program he calls: One Man, 72 Hours, 100,000 Government Freebies.”

So folks, don’t leave the taxpayer rip-offs to the expert Washington lobby firms such as Cassidy and Associates. If you are vacationing in D.C. this August, you can teach yourself how to drain the U.S. Treasury from the Free Money Guy.

(These days pilfering from federal taxpayers has been raised to a fine art form. Indeed, here’s Lesko immortalized in a D.C. art gallery.)

Takeover Accomplished!

Yesterday, Democrats made good on their promise to transform the U.S. House of Representatives from what they said had been a wholly-owned subsidiary of student lending companies under Republicans, into a wholly owned subsidiary of middle- and upper-middle-class freeloaders under them.

By a 273 to 149 vote, the House passed the College Cost Reduction Act of 2007. Its good side is that it would cut several subsidies to lenders in federal loan programs, supposedly saving about $19 billion. The bad part is how it would use those savings. If enacted, the bill would modestly increase Pell Grants – which is not good news if you dislike taxpayer-dollar giveaways, though at least Pell is somewhat geared toward the truly needy – but would focus most benefits on loan programs utilized much more by the financially able. (See table 5 of this report to see loan utilization by family income.)

Indeed, the bill would cut in half – to a tiny 3.4 percent in five years – interest rates on subsidized student loans, and offer $5,000 in loan forgiveness to public servants ranging from police all the way to – get this – prosecutors! That is, it would offer $5,000 until those people had been in their jobs for ten years, at which point the entire remainder of their loans would go bye-bye, eaten by taxpayers who themselves get, approximately, nothing out of this bill.

Needless to say, professional advocates for college kids with huge senses of entitlement – like these guys, these folks, and this gal – are ecstatic about this transfer from one group of thieves to another. As for me, I’m just sorry that it’s too late for poor, common-good-obsessed prosecutors like this guy to have his loans forgiven. Oh, and this famous public servant, too.