Topic: Tax and Budget Policy

Maryland to Boost Virginia’s Competitiveness

The geese that lay the golden eggs are about to fly south, but not because winter’s approaching. Instead, greedy politicians in Maryland are seeking to impose California-style income tax rates on the state’s most productive people. Even some local Democrats realize this is going to be a boon for Virginia, where the top income tax rate will be about four percentage points lower.

The Washington Post reports on Maryland Gov. Martin O’Malley’s unintentional campaign to boost Virginia’s economy:

Gov. Martin O’Malley yesterday proposed the first major overhaul of Maryland’s income tax brackets in 40 years, offering what he called a “more progressive” system in which high-end earners would pay more.…

“We must be very cautious that we’re not asking people to go live in other jurisdictions, where taxes are not as high,” said Sen. Rona E. Kramer (D), chairwoman of Montgomery [County]’s Senate delegation. “Northern Virginia is a very appealing place, and it’s right across the river.” …House Minority Leader Anthony J. O’Donnell (R-Calvert) called the plan “a historic beating up on Marylanders through the income tax,” noting that the top marginal rate would increase by nearly 37 percent.

…Under O’Malley’s plan, Montgomery residents in the highest bracket would pay a combined state-county rate of 9.7 percent, which County Executive Isiah Leggett (D) said yesterday is “not acceptable.” …The combined rate of 9.7 percent would also exceed the current top marginal rates in the region. In Washington, the top rate is 8.5 percent; in Virginia, 5.75 percent; and in Delaware, 5.95 percent. Maryland would not be alone in imposing higher rates on upper-income earners. California, for example, applies a rate of 10.3 percent on incomes of more than $1 million.

What if We Just Slashed Medical Spending in Half?

That’s the question Robin Hanson poses in the most recent issue of Cato Unbound.  His answer?  We’d probably be better off:

We could cut U.S. medical spending in half without substantial net health costs. This would give us the equivalent of an 8% pay raise.

Hanson entertains responses to his essay by distinguished health economists David Cutler, Dana Goldman, and Alan Garber – who are not as dismissive of Hanson’s thesis as you might expect.

Hanson was my health economics professor.  Only later did I learn he does not have a degree in economics.  (Insert your own credibility-shattering joke mcannon [at] cato.org (here).)  As he explains in his essay and elsewhere, “Most students in my eight years of teaching health economics have simply not believed me, even after a semester of reviewing the evidence.”

I was familiar with much of the evidence presented, and so I found Hanson’s argument plausible.  But I am not so familiar with the evidence to be confident that I could find the holes in Hanson’s argument.  So I did what any student would do: I put my professor on the hot seat with A-list economists from Harvard, Stanford, and Rand.

So far, the discussion has been everything I hoped.  But it hasn’t yet zeroed in on the heart of the contributors’ disagreement.  I hope they will all stay engaged. 

Will American Capitalism Be Surpassed?

Sallie James hit the nail on the head in her blog post today: ”business deals, and not formally negotiated trade agreements, are driving globalization.”

That made me think of this Deutsche Post webpage I came across. 

It sounds spectacular: The world’s largest shipping and logistics hub at the world’s largest airport, all in low-tax, freewheeling Dubai.

America used to do great stuff like this. But while we’ve still got a moribund and bloated government postal service, Germany’s privatized Deutsche Post seems to be at the leading edge in global shipping and business services.  We’ve got congested, government-owned, and union-dominated seaports, while Dubai will be host to a huge and efficient intermodal system.

America still has lots of world-beating companies such as FedEx and Intel. The problem is in Washington: federal policymakers sit on their hands doing little to improve economic productivity while ambitious upstarts such as Dubai and Ireland are providing more freedom and more opportunity for businesses to grow.

Misguided Tax Advice from National Review Editor

I have known Ramesh Ponnuru for years, and we have always had a friendly debate about tax policy. He generally thinks my ideas are economically sound, but politically misguided, a reasonable concern given the hybrid class-warfare/special-interest mentality in Washington. But Ramesh’s tax analysis certainly leaves something to be desired. His column in the New York Times asserts that America’s high corporate tax rate is not important for competitiveness – even though researchers have found that the corporate tax burden plays a key role in where jobs are created and how much workers are paid (see this video for more information). Ramesh also argues that present tax rates are not an impediment to “healthy long-term growth.”

Many of our trading partners have cut their corporate taxes, and more and more conservatives want the United States to follow suit. Apparently they haven’t been listening to their own speeches on free trade. Companies compete. Countries, however, are not engaged in a zero-sum contest where one nation’s gain is another’s loss. Cutting corporate tax rates may or may not be a good idea, but we don’t need to make it a priority to preserve our competitiveness. … The primary focus of the Romney and Giuliani tax plans remains high earners. What would be a serious middle-class tax cut? One answer is to expand the tax credit for children. But none of the candidates is proposing to do so, or any other big tax relief for regular folks. … True, an expanded tax credit for children wouldn’t increase economic growth. Growth is good, and more growth is better. But present tax rates are perfectly compatible with healthy long-term growth. There is no pressing need to bring them down to improve growth.

It is true that tax rates are much lower today than they were 30 years ago, and our economy is doing much better as a result, but that hardly is an argument for the status quo. Even if lower tax rates only boost annual growth by “just” two-tenths of one percent, the long-run impact is dramatic because of compounding. Last but not least, Ramesh thinks it is politically wise for Republicans to compete with Democrats by seeking targeted middle-class tax cuts. He admits that child credits and similar narrowly-focused tax cuts will not boost growth, but he argues they will be politically effective. But since when is it the job of Republicans do adopt suboptimal (or even bad) policies for short-term political reasons? And does Ramesh – or anyone else – think the Republicans can out-bid Democrats in offering favors to different constituencies? And if adopting Democratic ideas is the key to Republican political success, how can he explain the political success of Ronald Reagan and the political failure of Bush 41 and Bush 43?

What Could Possibly Be Better than “Public Policy Values?”

Last week, the New America Foundation’s Sara Mead took issue with a blog entry I wrote wondering how her group could tout student loan auctions because they use “market forces” while simultaneously advocating for “the gargantuan market distortion that is the overall student aid system.” Mead replied with a “there you libertarians go again” argument, writing that Cato:

holds that unrestrained markets always produce the best possible outcomes. But McCluskey is confusing means and ends here. Harnessing market forces is often the most efficient way of getting to a particular end. But we believe that public policy should use market forces to achieve desirable ends based on public policy values.

Now, let’s not get bogged down in some very important questions like who defines “desirable ends,” or what, exactly, “public policy values” are. No, let’s get right to a bottom line with which it seems Mead and I might be able to agree.

Toward the end of her argument, Mead says that it is important to “increase college affordability and access…because among other reasons, a better educated population produces broader social benefits—more civic engagement, innovation, economic growth, etc.” I agree with at least part of this. Economic growth is a good goal to shoot for, because it tends to reflect both the innovation Mead values, and an increasingly efficient and effective allocation of societal resources.

So it turns out a funny thing happens when the market is subverted to spend more money on higher education: It actually hinders economic growth. As economist Richard Vedder found in Going Broke By Degree: Why College Costs Too Much, controlling for other factors impacting economic growth, the more states invest in higher education, the lower their rates of economic growth. That’s right: letting “public policy values” force money out of taxpayers’ pockets and into colleges and universities actually has a dampening effect on economic growth.

Why is this? Because if left alone, individual taxpayers will produce better results in the aggregate than government can. Individuals know what they want and need better than any government, and even more importantly, in a truly free market they have to balance their needs and desires against those of all the other people in society, resulting in the fairest, most efficient, aggregate outcome. Not so with government, where politicians can’t possibly divine and balance the needs of everyone in our impossibly complex society, and the people with the most lobbying power often get what they want specifically because they don’t have to balance their needs against everyone else’s.

In the case of higher education, this plays itself out with relatively well-off students often getting aid; students spending large amounts of time partying rather than focusing on graduation; professors devoting much of their time to esoteric, often government-funded research instead of teaching; and universities using resources very inefficiently. Meanwhile, taxpayers are doing without money they might have used to buy food, or invest in innovative young companies, or any number of other uses that would have been much more beneficial to society, but which politicians ignore because – unlike kids taking subsidized loans or bigger Pell Grants – their absence is invisible.

Thankfully, sometimes there are crystal-clear signs of government failure. Case in point: all those lenders – especially the federally created Sallie Mae  – that Mead and others despise for making billions of dollars off of student loans. How’d they do it? Not through “unrestrained markets,” but government-subsidized loan programs designed to circumvent market forces in pursuit of – you guessed it – “public policy values.”

Obama’s “Tax Policy”

Presidential candidate Barack Obama introduced his tax plan in a speech yesterday. Unfortunately, it overflowed with bad ideas. First, Obama’s plan to increase dividend and capital gains taxes is out of step with global tax realities. Virtually all of the 30 major industrial nations provide relief for capital gains and dividend taxes. Indeed, a dozen major nations have capital gains tax rates of zero percent. And if the current dividend tax cut expires, the United States would have the highest dividend tax rate among major nations.

Second, Obama hasn’t got his math right. He claims that there is “$1 trillion worth of loopholes in the corporate tax code.” That is ridiculous. The entire corporate income tax collected only $372 billion in 2007.

Third, Obama proposed special tax breaks for seniors, which would take 7 million more elderly completely off the tax rolls. But that would inject a very unfair element of age discrimination into the tax code. Old folks are already taking young folks to the cleaners in terms of federal fiscal policy. Obama would make the injustice worse, yet he had the chutzpah to claim in his tax speech: “It’s time to stand up to the special interest carve outs.”

Fourth, Obama proposed a new payroll tax credit, but the tax code already has a huge program designed to offset the payroll tax—the Earned Income Tax Credit. Adding a new low-income tax “cut” on top would result in millions of people who already don’t pay any income tax getting an added $500 check from the government. That’s not tax policy, that’s simply looting from the people who do pay the federal tax bill.

I’m amazed Obama found two former Treasury officials who signed on to his plan because this isn’t tax policy in the sense of following any rational economic principles. It’s just crass political pandering using the tax code to bait votes.

Refereeing the Cheney-Greenspan Debate

In today’s Wall Street Journal, Vice President Cheney presents a friendly rejoinder to Alan Greenspan’s recent comments about the fiscal profligacy of the George W. Bush years. In it, Cheney notes:

On the spending side of the ledger, I can’t dispute Alan’s general notion that the federal government is too big and spends too much money–we’ve agreed on that point since we both worked in the Ford administration more than 30 years ago. President Bush feels the same way, and that’s why he has steadily reduced the annual rate of growth in non-security discretionary spending.

The key here is to notice that Cheney is only referring to “non-security discretionary spending.” What Cheney wrote isn’t necessarily wrong. But to make it true, you need to ignore all spending on entitlements (like Medicare and Social Security), everything the Pentagon does, and interest payments on the national debt.

What you’re left with is a very small slice of the budget. About 13%, actually. Asking Greenspan to grade the president using only this very narrow criterion is like asking your college to re-compute your graduation-day GPA using only four of the classes you took.

Why ignore the rest of the budget? After all, the Bush administration did have a hand in expanding many parts of it – the Medicare drug benefit is Exhibit A. Nor is everything the Pentagon does related to the operations in Iraq and Afghanistan. And the rising costs of the national debt are a result of the GOP’s unwillingness to cut spending in the face of deficits.

So, what if we put everything back into the mix except the money spent on the Department of Homeland Security, the security-related functions of other federal agencies, and the operations in Iraq and Afghanistan? (The last of these has been estimated by the Congressional Budget Office as recently as January of this year.)

Doing that, you’ll notice the growth rate has not declined steadily. In fact, as you can see in the chart below, the rate has jumped all over the place. It never went below 3% and, thanks to election-year spending sprees, sometimes went as high as 9%. The average annual growth rate since 2001 was 5.8% – faster than the average annual growth of GDP during that period (4.5%) and almost twice inflation (3%).

Looks to me like Alan Greenspan is on the right side of this fight.