Topic: Tax and Budget Policy

Tax Hike Will Accelerate Connecticut’s Decline

Prior to 1991, Connecticut did not have an income tax and the state was competitive and very prosperous. Since adopting the tax, however, the state has suffered the slowest job growth of any state. Now the Governor (who hid her plans while campaigning) wants to boost the tax even higher to fund an orgy of new spending. The Wall Street Journal opines on this self-destructive proposal: 

Connecticut Governor M. Jodi Rell wants to thank constituents for electing her with 63% of the vote by socking them with a 10% hike in the personal income tax rate. Fellow Republicans in the state legislature are understandably scratching their heads. But the proposal has no doubt also left many taxpayers wondering why they even bother to pull the lever for Republicans. Ms. Rell dropped this bombshell last week when she presented her biennial budget. In addition to the income tax increase, which would push the top marginal rate to 5.5% from the current 5% over two years, the Governor also proposes increasing cigarette taxes, hiking bus fares and phasing out a $500 property tax credit. Democrats, who control both houses of the legislature, welcome the plan. So does much of the state’s liberal media, who are hailing Ms. Rell as “brave” and “courageous.” But as Susan Kniep of the Federation of Connecticut Taxpayer Organizations put it to the Associated Press, “Gee, why didn’t we kind of hear about this before we went into the polls?” Governor Rell says a tax increase is necessary to fund more education spending. But Connecticut already spends more money per student on public schools than all but three states. According to the latest Census data, which is from the 2004 school year, Connecticut’s per-pupil spending is $10,788, or more than 30% above the national average of $8,287. …Connecticut adopted its income tax in 1991, and it has since ranked last nationally in employment growth while losing tens of thousands of people to other states. Increasing the income tax rate seems an odd way to reverse these trends. “When looking at states that have growing economies and are thriving,” said Republican state senator David Cappiello in an interview, “they’re the states that either have no income tax or are looking to phase down their income tax. Connecticut is moving in the opposite direction.” …By the way, it’s not as if Connecticut taxpayers haven’t been doing their part; the state will end the current fiscal year with a $600 million revenue surplus. The problem is that the politicians want to spend the money faster than it comes in. Governor Rell’s budget would grow government by nearly 13% over two years and bust constitutional spending caps approved by 81% of voters back in 1992. No wonder she kept her plans secret until after the election. 

Property Rights Promote Conservation

My daily visit to Marginal Revolution continues to pay dividends. Alex Tabarrok comments on a New York Times story that explains how giving people private ownership of trees has improved conservation and led to millions of additional trees: 

Recent studies of vegetation patterns, based on detailed satellite images and on-the-ground inventories of trees, have found that Niger, a place of persistent hunger and deprivation, has recently added millions of new trees and is now far greener than it was 30 years ago. These gains, moreover, have come at a time when the population of Niger has exploded, confounding the conventional wisdom that population growth leads to the loss of trees and accelerates land degradation, scientists studying Niger say. …Another change was the way trees were regarded by law. From colonial times, all trees in Niger had been regarded as the property of the state, which gave farmers little incentive to protect them. Trees were chopped for firewood or construction without regard to the environmental costs. Government foresters were supposed to make sure the trees were properly managed, but there were not enough of them to police a country nearly twice the size of Texas. But over time, farmers began to regard the trees in their fields as their property, and in recent years the government has recognized the benefits of that outlook by allowing individuals to own trees. Farmers make money from the trees by selling branches, pods, fruit and bark. Because those sales are more lucrative over time than simply chopping down the tree for firewood, the farmers preserve them.

Federal Bureaucrats: Same Old Story

The Washington Post reports on a new survey of 221,400 federal workers and their pay and performance.

Among the survey findings are that only 22 percent of federal workers agreed with the statement “pay raises depend on how well employees perform their jobs.”

Despite eight years of Al Gore’s “reinventing government” and six years of similar efforts under President Bush, the federal bureaucracy is still a very ill-functioning “bureaucracy.” Indeed, that will always be the case. Here are some reasons why:

  • Poorly performing federal agencies do not go bankrupt, and thus there is no built-in mechanism to eliminate failures;
  • Government managers face no profit incentive, giving them little reason to proactively reduce costs. Indeed, without profits to worry about, managers favor budget and staffing increases to boost their power and prestige;
  • Without the profit motive, there is little incentive for government workers to innovate and produce better services;
  • The output of much government work is hard to measure, making it difficult to set performance goals for managers and workers;
  • Even if performance could be measured, federal pay is generally tied to longevity, not performance;
  • Disciplining federal workers is difficult, and they are virtually never fired, resulting in agencies carrying heavy loads of poor performers;
  • To prevent corruption, governments need complex and costly regulations and paperwork to carry out routine functions such as procurement;
  • Because of the frequent turnover of political appointees, many agencies experience continual changes in their missions;
  • Congress imposes extra costs on agencies in carrying out their duties, such as resisting closure of unneeded offices in the districts of important members;
  • Agencies get influenced or “captured” by special interest groups that steer policies toward satisfying narrow goals, rather than broad public interest goals;
  • The large size and overlapping activities of federal agencies makes coordination of related functions very difficult. Sadly, we saw the results of this problem with the failures of U.S. intelligence agencies to effectively communicate with each other prior to 9/11.

For these reasons, and many more, the federal government ought to radically downsized with as many functions as possible left to the private sector. See http://www.downsizinggovernment.com/

European Commission Poised to Officially Attack Switzerland for the “Crime” of Low Tax Levels

In a move that is both remarkable and disturbing, the European Commission plans to file a complaint - and threaten protectionist trade barriers - because attractive Swiss tax policies are supposedly a violation of a free-trade accord. The bureaucrats in Brussels are not arguing that Switzerland is imposing barriers against EU products. Instead, the Commission actually is taking the position that low taxes are attracting businesses that might otherwise operate in high-tax nations. The implications of this radical assertion are breathtaking. It certainly is true that a nation with more laissez-faire policy will attract economic activity from neighbors with more burdensome levels of government. But if this migration of jobs and investment is a “distortion” or trade, then the only “solution” is complete and total harmonization of all taxes (and regulations, spending, etc). If the Euro-crats succeed with this argument at the European level, it will be just a matter of time before similar cases are filed at the World Trade Organization. Look at this story from the Neue Zuricher Zeitung, but insert “U.S.” for Switzerland and you may get a glimpse of the future:

The European Commission is expected next week to make an official complaint about the practice of Swiss cantonal tax authorities giving corporate tax breaks. But the reproach is considered dubious because the Commission cannot really prove there has been any infringement of free trade. Brussels and Bern have been at loggerheads for more than a year over low corporate taxes some of the cantons use to attract new companies, including firms from European Union countries. The Swiss government has made it clear in recent months that a low tax regime is not in breach of a 1972 free trade agreement. …There may be objections from some EU Commission members but a condemnation of non:EU member Switzerland is practically certain. …The draft claims that these tax practices distort trade between Switzerland and the EU, and therefore contravene the bilateral free trade agreement. …It is also claimed that there does not have to be cast:iron proof of trade distortion. According to article 23 of the free trade accord, it is enough if a privilege “threatens to distort” trade.v…the EU specifically mentions “protective measures” in the draft complaint. The indirect threat is aimed at making Switzerland negotiate over cantonal tax practices.

Pro-Business Does Not Mean Pro-Freedom or Pro-Market

Representatives of the business community frequently are the worst enemies of freedom. They often seek special subsidies and handouts, and commonly conspire with politicians to thwart competition (conveniently, they want competition among their suppliers, just not for their own products). Fortunately, most business organizations still tend to be - on balance - supporters of limited government. But as the Wall Street Journal notes, some state and local chambers of commerce have become relentless enemies of good policy: 

…many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. In Colorado, a coalition of property owners, conservative think tanks, anti-tax groups and small businesses fought against a ballot initiative in 2005 that was intended to gut the state’s Taxpayer Bill of Rights (Tabor). They lost, and as a result state spending will expand by $5 billion over the next five years, costing the average family several thousand dollars in higher taxes. It was not the teachers’ unions or class-warfare liberals who spearheaded the campaign against Tabor, however – it was the Denver Chamber of Commerce. …In Virginia, the state and local chambers, along with big-business allies, have spent more than $4 million in recent years on ballot initiatives and legislative lobbying to raise $2 billion in taxes for roads, rails, buses and schools. This year they want a billion more for transportation, despite the state’s multibillion-dollar surplus, and have even threatened to run candidates against fiscal conservatives in the legislature who take a “no new taxes” pledge. …In New Jersey – home of some of the worst schools in the nation – the state chamber took out an ad with the teachers’ unions opposing a school-voucher initiative for families in inner cities. The ad was withdrawn only after pro-school reform business members hollered in protest. Last summer taxpayers revolted when Democratic Gov. Jon Corzine called for a $1.5 billion hike in the sales tax; but “the chamber and other business groups sat on their hands in order to avoid making enemies with the legislature,” notes Frayda Levin, New Jersey director of Americans for Prosperity. In Oklahoma the state chamber filed a petition with the state Supreme Court to block eminent domain reform, and vowed to fight a taxpayer-led movement to enact a Colorado-style Tabor. Massachusetts? The state chamber and allied business groups oppose an income tax cut.

Proposed Hedge Fund Regulations Would Limit Options for All but the Rich

The nanny-state mentality of the Bush Administration and its appointees shows no sign of abating. The latest farce comes from the Securities and Exchange Commission, which want to prohibit all but the very wealthy from taking advantage of successful hedge fund investing. Richard Rahn comments in the Washington Times:

Financial regulation is most often justified by arguing it is needed to protect all participants from those who would engage in fraud or theft, and to protect unsophisticated investors from losing money in investments they do not understand. The U.S. Securities and Exchange Commission (SEC) has just proposed that the amount of liquid net worth an individual must have before investing in hedge funds and other so-called risky investments be raised to as much as $2.5 million. People meeting a net liquid worth requirement are considered “accredited investors.” …Even though most people would agree it is important to try to protect “widows and orphans” from unscrupulous and/or incompetent financial promoters, there is a fine line between protecting those who need protection and denying freedom to those who don’t. Does it make sense to prohibit a person who has recently obtained a graduate degree in finance from a leading business school from buying and selling hedge funds, because he or she has not yet accumulated some arbitrary amount of wealth – while legally allowing any adult man or woman to take all of his or her wealth and go to Las Vegas and blow it at the gambling tables?