Maine Moving in Right Direction While Michigan Considers Tax Hikes

Tax competition helps discipline profligate state governments. States that raise taxes cause jobs, capital, and entrepreneurial talent to escape to better fiscal environments. The Detroit News understands this relationship, which is why the paper is strongly condemning the governor for pushing irresponsible tax rate increases:

Gov. Jennifer Granholm and state House Democrats are pushing for an increase in the state’s income tax rate to erase the budget deficit. The income tax is the most easily comparable of taxes. At a 3.9 percent flat tax rate, Michigan’s income tax compares extremely well with other states and gives it a rare advantage. Pushing it to near 5 percent would throw that small edge away, particularly since fast-growing and highly attractive states like Florida, Texas and Tennessee have no income tax, and more than a dozen states across the country have either cut their income tax this year or are considering doing so. For Michigan to head in the opposite direction will give potential employers and residents yet one more reason to pass by the state. Even worse, the governor and House Democrats reportedly want to place a graduated income tax on the ballot for the fall of 2008. A graduated tax would mimic the federal tax in creating different tax rates for different income levels. This soak-the-rich approach by the Democrats will lessen Michigan’s chances of attracting the high-tech entrepreneurs Granholm says she is counting on to turn around the state’s economy. Why come here and give the state a greater percentage of the profits from their risk taking when they can locate in other states that don’t punish success?

Politicians in Maine, by contrast, may finally be learning that high tax rates have hurt state competitiveness. Lawmakers are considering a couple of proposals to significantly reduce the state’s onerous income tax rates in hope of luring new business. The Times Record reports:

The Taxation Committee is considering two competing tax reform plans — one that would lower the income tax to a flat 6 percent and another that would drop that rate to a flat 4.9 percent by adding a penny to the sales tax. …The committee has been working on its tax reform proposal for months. The goal is to replace the state’s graduated income tax system with a flat tax and bring down Maine’s top income tax rate of 8.5 percent. That high rate kicks in at a low level — $18,250 of taxable income for individuals — and adds to Maine’s reputation as one of the most overtaxed state’s in the county. … The plans are based on the same logic, said Rep. Dick Woodbury, an independent from Yarmouth, who is pushing the bolder version. He believes the lower income tax would help attract more businesses to the state. … The proposal to decrease the income tax rate to 6 percent by expanding the sales tax base appeared to have the most support Monday among committee members, although the 4.9 percent plan was picking up steam. “I like the 4.9 percent. It really does change the perception of Maine’s income tax,” said Sen. Joe Perry, D-Penobscot, the Senate chairman of the Taxation Committee. … Rep. Scott Lansley, R-Sabattus, picked up on Woodbury”s theme that the lower income tax rate would attract more business here because it would make the state more attractive to higher-paid professionals. “If the CEO moves here, the company’s going to move here,” Lansley said. “Aren’t we trying to attract more business? Aren’t we trying to keep our young people here?”

A Bit of Education Accounting

The U.S. Census Bureau just released Public Education Finances, 2005, and news stories are focusing on a national per-pupil expenditure average of $8,701, as well as state highs of $14,119 in New York and $13,800 in New Jersey.

Unfortunately, some major items such as capital costs are left out of these expenditure figures, so they understate pretty significantly total amounts spent on public education. Thankfully, the census folks also offer per-pupil “finance amounts” (they’re on table 11 of the report for those playing along at home) that are much more inclusive than the constrained “current spending” figures (table 8 ) cited in the media.

Using these more comprehensive stats, we see that in the 2004-05 academic year public school systems nationwide had average per-pupil revenue of $10,159, and the top spenders shifted a bit. Washington, D.C., took the first place position with a per-pupil haul of $17,809, New Jersey came in second at $16,213, and New York dropped all the way to third place at $15,791.

Poor New York. How can they possibly expect to educate anyone on that kind of money?

Rizzo versus Thaler on “Libertarian Paternalism”

Earlier this month, a few of us at Cato had the opportunity to hear NYU economics professor Mario Rizzo discuss a paper he has been working on with Glen Whitman on the so-called “new paternalism.” Their conclusion is that there is nothing “new” about it, and that it collapses into plain old paternalism. Today, over at the Wall Street Journal’s Econoblog, Mario takes on Richard Thaler, who along with his University of Chicago colleague Cass Sunstein, is responsible for the notorious ”libertarian paternalism” pseudo-concept.

Mario, gets the best of Thaler, I think, despite the fact that Thaler is incredibly evasive and slippery in this exchange, basically refusing to address a number of Mario’s rather deep objections head on. He wants to keep the “libertarian paternalism” terminology while denying that he is offering a set of ideas that are in the same line of semantic business as either “libertarian” or “paternalism.” It’s hard to see the point of this, other than to rhetorically “nudge” people into thinking that paternalism is sometimes okay because it is sometimes “libertarian,” and to get people to think that even libertarianism can sometimes be “paternalistic.” 

It is surely true, as “behavioral economists” like Thaler have shown, that we have a tendency to make certain kinds of cognitive “mistakes” (relative to some impossible blackboard standard of economic rationality, at least) and suffer from certain weaknesses of will. And it may also be true that many workers will be glad to accept labor contracts that provide for work and compensation arrangements that help them structure their time or manage their money in light of these foibles. I guess if one insisted on abusing words, one could say that voluntary labor agreements are “libertarian” in the sense that they are uncoerced. (By the same standard, choosing to eat pistachio instead of rocky road ice cream is “libertarian.”) But if there is no coercion, there is no paternalism, since “paternalism” already means something. 

Here is how Thaler motivates “libertarian paternalism”:

People make mistakes, so sometimes they can be helped. It is possible to help without coercion. That is libertarian paternalism. The concept can be and is used in both the public and private sectors. For example, in London, pedestrians from abroad are reminded by signs on the pavement to “look right” because their instincts from back home are to expect traffic to approach from the left. No one is forced to look right, but fewer pedestrians are hit by trucks.

This is so broad as to be completely intellectually useless. If your kid is misspelling a lot of words, and then you teach them the “ ‘I’ before ’E’ except after ‘C’ ” rule, you’ve helped them correct mistakes non-coercively. Is that libertarian paternalism? A “watch your step” sign in restaurant? An instructional DVD that helps your golf swing? 

Mario, I think, gets it just right:

Libertarianism is a political philosophy that seeks to reduce the activities of the state to a very low level. It is very much about less government. Paternalism is a political or moral philosophy that seeks to override the actual or operative preferences of individuals for their own benefit, however defined, according to Donald VanDeVeer’s 1986 book on the subject. When applied to the actions of government, paternalism cannot be libertarian. It can only be more or less intrusive.

Does Richard wish to reduce his “libertarian paternalism” to the appropriate management of government-owned streets or other enterprises? In the London case, what people want is obvious: They don’t want to get hit by cars. London is doing what entrepreneurs generally do: satisfying actual preferences. London is mimicking the market.

[…]

Richard wants to use the word “libertarian” to differentiate his paternalism from the traditional variants. Yet he uses the word in a fuzzy way. He wants to define libertarian along a continuous variable – the cost of exercising the exit option. However, libertarianism, as every libertarian understands it, uses a bright-line test – who imposes the cost? The authors of the concept of “libertarian paternalism” have said that clearly intrusive/coercive interventions are consistent with it. See my previous post. And they have also said, explicitly, that there is no sharp line between libertarian and non-libertarian paternalism. Thus, Richard cannot claim that his standard creates a bright-line rule that would help us resist the slippery slope.

As Mario and Glen have titled the paper they’re writing: “Meet the New Boss, Same as the Old Boss.”

If you missed it, be sure to check out Glen’s Cato paper, “Against the New Paternalism: Internalities and the Economics of Self-Control.”

Sicko or Wacko?

Michael Moore’s new film, Sicko, which premiered at Cannes last week, is receiving the expected rave reviews. In one particularly interesting review Time Magazine reporter Richard Corliss rejoices that “the upside of this populist documentary is that there are no policy wonks crunching numbers….”

Yes, we wouldn’t want anyone who knows something about health care reform to point out that:

  • Moore frequently refers to the 47 million Americans without health insurance, but fails to point out that most of those are uninsured for only brief periods, or that millions are already eligible for government programs like Medicaid but fail to apply. Moreover, he implies that people without health insurance don’t receive health care. In reality, as Michael Cannon and I have pointed out, most do. Hospitals are legally obligated to provide care regardless of ability to pay, and while physicians do not face the same legal requirements, few are willing to deny treatment because a patient lacks insurance. Treatment for the uninsured may well mean financial hardship, but by and large they do receive care.
  • Moore talks a lot about life expectancy, suggesting that people in Canada, Britain, France, and even Cuba live longer than Americans because of their health care systems. But most experts agree that life expectancies are a poor measure of health care, because they are affected by too many exogenous factors like violent crime, poverty, obesity, tobacco and drug use, and other issues unrelated to a country’s health system. Americans in Utah live longer than Americans in New York City, despite having essentially the same health care.
  • Moore downplays waiting lists in Canada, suggesting they are no more than inconveniences. He interviews apparently healthy Canadians who claim they have no problem getting care. Yet nearly 800,000 Canadians are not so lucky. No less than the Canadian Supreme Court has said that many Canadians waiting for treatment suffer chronic pain and that “patients die while on the waiting list.”
  • Moore shows happy Britons who don’t have to pay for their prescription drugs. But he didn’t talk to any of the 850,000 Britons waiting for admission to National Health Service hospitals. Every year, shortages force the NHS to cancel as many as 50,000 operations. In a Cato Policy Analysis, John Goodman noted that roughly 40 percent of cancer patients never get to see an oncology specialist. Delays in receiving treatment are often so long that nearly 20 percent of colon cancer cases considered treatable when first diagnosed are incurable by the time treatment is finally offered.
  • Moore calls the French system “free,” convieniently ignoring the 13.55 percent payroll tax, a 5.25 percent income tax, and additional taxes on tobacco, alcohol, and pharmaceutical company revenues that fund the system. (Despite the high taxes, the system is running an €11.6 billion annual deficit.) The French system is not even free in terms of what patients pay. Its patients pay high copayments and other out-of-pocket expenses, and physicians are able to bill patients for charges over and above what the government reimburses. As a result, 92 percent of French citizens have private health insurance to complement the government system. Yet there remain shortages of modern health care technology and a lack of access to the most advanced care.

I’ve invited Moore to come to Cato and debate the issue. Of course, he is probably too busy to talk with a mere policy wonk…

Bravo, Sarko

Some more disappointing rhetoric from the mouth of Nicolas Sarkozy, the new French president. Once lauded as the great hope for a new France, he has revealed his protectionist instincts in Brussels.

In an article today in the Financial Times, Sarkozy mounts what the FT calls a “passionate defence of French farmers,” apparently calling for the EU to be even tougher in its defense of European agriculture in world trade talks and to “protect” its citizens from globalization. I wonder how Europe’s citizens feel about being protected from lower prices for food?

In a stunning display of perverse priorities, Sarkozy was quoted as saying, “I’m not going to sell agriculture to get a better opening for services.” But a quick glance in my Economist Pocket World in Figures 2006 suggests that Sarkozy has it all wrong: the contribution to services in the French economy in 2003 was 71.4 percent of GDP, and 74 percent of employment. Agriculture’s contribution? Just 2.8 percent (and 2 percent of employment).

Certainly many services are by definition non-tradeable (ever flown to Paris to catch a taxi?), but according to the World Trade Organization, France was the world’s fourth largest exporter of commercial services in 2004. You’d think Mr Sarkozy would want to do everything in his power to promote their growth, non?

Announcing: Harper’s Law

Mine is a simple — dumb, even — adaptation of Metcalfe’s Law.

“The security and privacy risks increase proportionally to the square of the number of users of the data.”

— First quoted in this eWeek article about the electronic employment verification system included in the current immigration bill.

(I actually suspect that Briscoe’s et al’s refinement of Metcalfe’s law is more accurate, but that’s just so complicated.)