Low Taxes Aren’t a Subsidy

Economist Dean Baker thinks that Amazon owes its profits to the fact that it doesn’t have to collect sales taxes for customers in states where it doesn’t have a physical presence. The absence of sales taxes on Internet purchases, he says, is a “subsidy that Amazon gets from taxpayers.” As I point out over at Techdirt, this is silly. Some states don’t have sales taxes at all, but no one would consider that a taxpayer subsidy. My local Wal-Mart benefits from a variety of state and local government services here in the St. Louis area, such as police and fire protection, and roads and other infrastructure. At least in part, sales taxes go to cover the costs of providing those services. Amazon uses few if any services from state or local governments in Missouri, so it’s hard to see anything unfair about the fact that it doesn’t have to collect sales taxes here.

On the other side of the ledger, sales tax collection would be far more burdensome to Internet-based businesses than to their brick-and-mortar competitors. A mom-and-pop retail store only has to learn about the tax rules in one jurisdiction. Most likely, there’s just one tax rate, one set of rules about which goods are taxable at that rate, and one set of reporting requirements. In contrast, a small e-commerce site would have to familiarize itself with the rules in thousands of different jurisdictions. The state of Missouri, for example, allows municipal governments to tack a variety of local taxes onto the state sales tax. As a result, the tax rate varies from city to city. Even worse, different states have different rules about which goods and services are taxable. Missouri, for example, exempts custom software (but not boxed software), farm equipment, and medical grade oxygen, among other things. Colorado has exemptions for bingo equipment, cigarettes, food, fuel and oil, machinery and machine tools, newsprint, precious metal bullion and coins, and more. Each of the other 40-some states with sales taxes have their own lists of what’s taxable. Many states exempt food and clothing from taxes, but the precise definitions of “food” and “clothing” varies from state to state. For example, in Wyoming, bagels are considered tax-exempt food unless they’re sold with cream cheese and a knife, in which case they become taxable “prepared foods.”

Not surprisingly, small online retailers are worried about the administrative burden of complying with so many different requirements. Some states have banded together to create a unified, “streamlined” sales tax system, but e-tailers are skeptical about how much the system can be simplified. Unless states first radically simplify and harmonize their sales tax rules (which might be a good idea anyway), I don’t think it’s going to be feasible to “streamline” the system enough to make it affordable for small e-tailers.

Bush IS a Big Spender, Pt. 2

Further to Dan’s post below, here’s the McClatchy story arguing that President Bush is the biggest spending president since LBJ. The article got lots of notice — probably because it was linked on the Drudge Report for most of Wednesday. 

The story is mostly old news — I’ve been making the same point for years. But, because it is based on updated data that I provided to the reporter, I’m happy to see the message ripple through the news cycle.

Clearly, the folks at IBD aren’t happy with the McClatchy story. They describe the notion that Bush can be called the biggest spender since LBJ as a “dishonest argument.” Their editorial in today’s edition points out that this claim is based on annual growth rates. That’s true, but the authors go on to say that a better measure of whether a president is a big spender or not should be based on how large government is as a share of GDP.

Funny thing is, I agree with them, and I’ve made that point before. But the argument the IBD editorial makes is misguided. (I won’t stoop to calling it “dishonest.” I don’t allege they deliberately falsified data, something that would obviously be dishonest in every sense. But calling the argument I’m making “dishonest” — well, them’s fightin’ words!)

To illustrate their point, the IBD editors published a chart detailing the average burden of government spending as a percentage of GDP by president. By this measure, George W. Bush has presided over an average spending burden of 20% of GDP during his time in office to date. That puts him around the middle of the presidential pack over the past 40 years.

That may not seem so bad. But a president who reduced government spending from 30% of GDP to 10% over his term in office would get the same ranking as Bush. So would a president who increased spending from 10% to 30%. Wouldn’t we call the latter a big spender and praise the former? Yes, we would and should.

What really matters here is the direction of the change. George W. Bush will likely leave office with a government spending burden higher (around 20%) than it was when he came to office (18.5%). That’s the way things trended in his first six years. Presidents Reagan and Clinton, on the other hand, presided over drops in the spending burden by this measure.

What’s stunning is how much smaller the federal spending burden would be if Bush and the Republican-controlled Congress had not drastically expanded all variety of domestic programs. If non-defense discretionary spending had simply increased at the rate of inflation and the Medicare drug benefit hadn’t been adopted, the spending burden would be around 18.5% today, just about where it was when President Bush assumed office in 2001. It would have been even lower if the president and Congress had cut some spending when they had the chance.

If signing into law every appropriations bill that crossed your desk in the first six years of your presidency — thereby allowing the federal budget to grow faster than the U.S. economy during those years — still doesn’t make you a big-spending president, I don’t know what would.

Bush IS a Big Spender

Investor’s Business Daily, responding to an article appearing in several McClatchy Company newspapers, argues that President Bush isn’t a big spender because outlays as a share of GDP are not that different today that they were during the Clinton years. But this analysis has two shortcomings:

First, it looks at average spending as a share of GDP over an administration’s total tenure. What matters more is that federal spending was down to just a bit more than 18 percent of GDP when President Clinton left office. It’s now more than 20 percent of GDP today.

More important, spending as a share of GDP involves both a numerator (government outlays) and a denominator (economic output). But consider what has happened to federal spending: by that measure, Bush unambiguously has been fiscally irresponsible.

This doesn’t mean that spending as a share of GDP is not an important measure. Indeed, IBD is correct to explain that it is the most appropriate measure of the overall burden of government relative to activity in the productive sector of the economy.

What does this say about the Bush years? Well, the good news is that the American economy has enjoyed strong growth since the supply-side 2003 tax rate reductions. The bad news is that a significant chunk of that new output has been diverted to government coffers.

The McClatchy piece says discretionary spending under Bush has risen an inflation-adjusted 5.3% in his first six years, outstripping the 4.6% under Johnson — and way above President Reagan’s meager 1.9%. By “almost any yardstick,” the article continues, Bush “generally exceeds the spending of his predecessors.” Any yardstick,” that is, except the most important of all — spending as a share of GDP. On this, Bush is actually lower than most of his predecessors. Spending as a share of GDP is the most important measure of the size of government, since it measures what government actually takes from the national economy.

More Laffer Curve Straw-Man Arguments

A column at the New Yorker’s website regurgitates the silly argument that the Laffer Curve is a myth unless every tax cut yields more revenue to the government:

The supply-side argument [is] that, in the United States, tax-rate cuts pay for themselves — that, after cutting taxes, the government actually ends up with more revenue.

As I’ve already explained (here and here), the Laffer Curve only implies more revenue in certain circumstances.

Unfortunately, a lot of Republican politicians don’t fully understand the issue, so they overstate the case and give fodder to those who want to prop up the existing revenue-estimating system (which is based on the even more absurd notion that changes in tax policy never have any impact on economic performance).

Ironically, the author admits later in the article that the Laffer Curve does exist:

[T]he absurd idea that tax cuts pay for themselves is based on an idea that is not at all absurd, which is that tax rates can have an impact on people’s behavior. Increase taxes too much, and people may work less (since they get to keep less of the income they earn) and invest less (since their gains will be taxed more heavily), and so the economy will grow more slowly. The opposite can happen if you cut taxes. (How much of an impact tax rates have — and how high taxes have to get before they have an impact — is a subject of much debate in economics, but it’s inarguable that they do matter.) What supply-siders have done is start with that reasonable idea and extrapolate it to unreasonable lengths.

SCHIP: Weak Arguments Beget Bad Poll Results

The Kaiser Family Foundation has released the results of a poll on the State Children’s Health Insurance Program that it sponsored with National Public Radio and the Harvard School of Public Health. According to a summary:

[One question] provided proponents’ and opponents’ strongest arguments. Even when presented with these pros and cons, support [for expanding SCHIP] stays at 65 percent.

And just what were the “opponents’ strongest arguments”?

Opponents say the expansion would encourage some families who have private health insurance to drop it in favor of government-funded coverage. They also say the expansion will wind up covering some children in middle-class families.

Not exactly what I would call the strongest arguments against SCHIP.

The fault, however, lies not with the poll’s sponsors. If opponents of SCHIP expansion use weak arguments, that’s what the pollsters will test.

Brito on E-Government Transparency

One of the most important tools for limited government is transparency. Transparency keeps government accountable by giving citizens the ability to monitor what government officials are doing and publicize instances where government officials abuse their authority.

Of course, government officials dislike transparency for precisely that reason, and they have often worked hard to limit the amount of information they make available. The Freedom of Information Act, which was passed in 1966 and given teeth in 1974, required government agencies to disclose information upon request from voters.

Some government officials have taken the opposite tack: instead of withholding information, they’ve released enormous quantities of poorly organized information, making it difficult for voters to sift through the material and find what they’re looking for.

Former Catoite Jerry Brito, now at the Mercatus Center, has written a fantastic paper describing the remedy for this tactic of government obfuscation. Jerry argues that government agencies should be required to release their data in structured formats suitable for easy manipulation by software tools. That would allow computer geeks to use software tools to organize the information and make it easily searchable. And that, in turn, would make it much easier for citizen-activists to sift through the available information and unearth relevant information about government activities.

Jerry points to several excellent examples of how structured data can improve government accountability. One is Washington Watch, a side project of our own Jim Harper, which gives voters a user-friendly way to keep track of what Congress is doing and discuss pending legislation with other voters. Another is opensecrets.org, a project of the Center for Responsive Politics, that provides well-organized, searchable access to the FEC’s campaign contributions database. Creating opensecrets.org would have been prohibitively expensive if the FEC hadn’t made the raw information available in a reasonable electronic format.

Many more projects like this would be possible if government agencies made more public data available. I encourage you to check out Jerry’s paper to learn how it can be done.

When Protectionists Meet Welfare Kings

Yesterday the House Ways and Means Committee approved by a margin of 26-14 a bill (H.R. 3920) to expand and extend (until 2012) the Trade Adjustment Assistance Program, which provides extra welfare and training to workers who lose their jobs as a consequence of import competition or outsourcing. The new bill would expand trade adjustment assistance to cover more workers beside those who work in the manufacturing industry, including service employees, who currently cannot get benefits under TAA if their jobs are moved overseas. It also increases the benefits and training available to trade-displaced workers, and the “incentives” for states to increase unemployment insurance coverage. It is still unclear just when this bill will face the full House, or what any alternatives will be.

I have a trade briefing paper, forthcoming soon, on this topic and I wrote an op-ed yesterday, arguing that TAA should be cancelled rather than extended. Here’s why: first, fewer than 1 in 30 unemployed people can point to import competition or outsourcing as the reason for their unemployment. Changes in consumers’ tastes, changes in technology and increasing productivity is far more likely to be a cause of unemployment (more from my colleague Dan Griswold here). So TAA is yet another example of special interests receiving special treatment.

Second, while TAA for workers cost a “mere” $800 million or so in 2006, we can expect that cost to rise as more workers are included (more than 80 percent of American workers work in the services sectors, although many of those are non-tradeable) and Congress sees fit to spend more of your money on wage insurance, training and the like.

Third, although hints have been made that the preferential trade agreement with Peru is predicated on passage of TAA extention, the historical bargain between free-trade advocates and workers–that any trade liberalization would be accompanied by extra welfare benefits for those who lose their jobs– is no longer certain. For sure the bilateral deal with the most to offer economically, that with South Korea, looks all but doomed.

The moral case for TAA is dubious at best. A lack of prospects for commercially meaningful trade liberalization tips the balance.