More Evidence that 2003 Tax-Rate Reductions Boosted Growth

Some politicians want higher tax rates because they resent success and think it is okay to base public policy on emotions like hate and envy, but most pro-tax lawmakers presumably are interested solely in getting more money to spend. These “practical” lawmakers may want to consider becoming supply-side tax cutters. After all, the Treasury has received a gusher of additional tax revenue since the 2003 reductions in capital gains tax rates, dividend tax rates, and personal income tax rates. The real lesson, of course, is that pro-growth tax policy leads to faster growth – and faster growth translates into more taxpayers and more taxable income. As the Wall Street Journal opines, the key question is whether politicians can control the impulse to over-spend:

Americans are sending more money than ever to Washington; revenues for the first seven months of fiscal 2007 are up 11.3%, or $153 billion. This Beltway bonanza has helped to slash the projected federal budget deficit by more than half from the same point last year. Across the past three Aprils, federal red ink has sunk by nearly $300 billion. The deficit this year could tumble to $150 billion, or an economically trivial 1% of GDP. This revenue boom certainly casts doubt on the political wails about tax loopholes for the rich. So far this year, the taxes paid on so-called nonwithheld income, which are dollars that don’t come from normal wages and salaries, have climbed by nearly 30%. This is income largely derived from capital gains, dividends and other investment sources – i.e., the tax rates that President Bush cut in 2003. Individual income taxes are also up by 17.5% – a handsome fiscal dividend from rising wages and low unemployment. In other good news, the pace of federal spending, which was pedal-to-the-metal in Mr. Bush’s first term, has finally decelerated. So far this year federal outlays have climbed by 3%, and, save for Medicare and Medicaid, federal expenditures are nearly flat from 2006.

Don’t Expect Much from Sarkozy

A Financial Times column neatly summarizes the economic views of Nicolas Sarkozy. His opposition to “fiscal dumping” really means that he opposes tax competition and wants to insulate the French welfare state from global competition:

He wants the EU to move in a French direction, offering citizens “protection” from the outside world. …During the campaign, he called on the EU to protect its citizens from unfair competition from abroad, particularly
Asia, and from fiscal, social and environmental “dumping” from poorer EU members in eastern Europe. That approach is at odds with the “open
Europe” model being promoted by most northern, central and eastern European countries.

Do You Hear the Footsteps? School Choice is Coming …

Politicians are risk-averse – so risk-averse that they often create risk for themselves by not getting ahead of issues that are building to the tipping point.

Education tax credits are supported by overwhelming majorities, and some recent polls add to the evidence. Politicians should take note before it’s too late for them.

A poll by the Show-Me Institute reveals that in Missouri, support outweighs opposition by almost 2.5 to 1 for both personal-use and business donation tax credits. A poll by the Bluegrass Institute shows that in Kentucky, support for donation tax credits outweighs opposition by 3 to 1.

These numbers are not new, and they are not going away. Critics of these polls have legitimate concerns regarding question order and wording. But tax credits are very popular with the general public no matter how you frame the question.

Even the Phi Delta Kappa/Gallup polls on education, which are notoriously pro-government education, show this kind of lopsided support for education tax credits. PDK mysteriously dropped the tax credit question after their 1998 and 1999 polls showed 2 to 1 support for education tax credits.

My own polling research shows support ranging from 2.5 to 1 up to 4 to 1 depending on the specific proposal. And that dominant support holds across party ID – Republicans, Democrats, and Independents.

Education tax credits are popular because people want control over their child’s education and control over how their education dollars are spent.

The school choice movement needs to start talking to and mobilizing the broad middle class that so overwhelmingly supports school choice. Politicians beware … the support is there.

The Heckler’s Veto in France

Two days before the French presidential election, Socialist candidate Segolene Royal warned that there would be riots if her opponent, conservative Nicolas Sarkozy, was elected. She told a radio interviewer:

“Choosing Nicolas Sarkozy would be a dangerous choice,” Royal told RTL radio.

“It is my responsibility today to alert people to the risk of (his) candidature with regards to the violence and brutality that would be unleashed in the country (if he won),” she said.

Pressed on whether there would actually be violence, Royal said: “I think so, I think so,” referring specifically to France’s volatile suburbs hit by widespread rioting in 2005.

Then the Washington Post casually reported, in an article on Sarkozy’s plans, that “While he seeks the strong majority that will be crucial for pursuing the ambitious agenda he has promised, it is unlikely he will risk tackling any tough issues that could spark social unrest or street protests.”

“The question he will have to ask himself first is: What are the reforms he should implement to show politically that he sticks to what he announced?” said Dominique Reynié, a political analyst at the Institute for Political Sciences’ Political Research Center. “And the second question is: What are the reforms he can implement without creating riots?”

And indeed, according to Time, there have been riots since the election. But the rioters aren’t the disaffected immigrant youth of the suburbs. Instead, “the participants are mostly white, educated and relatively comfortable middle class adherents of extreme-left and anti-globalization ideologies.” Some 500 cars were burned each night, up from the routine 100 cars set afire in la belle France every night.

It was outrageous for Royal to suggest that the French people should choose their leader on the basis of fear and threats. We talk about a “heckler’s veto” in which the government prevents someone from speaking in order in order to avoid a violent reaction from his critics. How much worse it would be for a great nation to choose its president because of a “rioters’ veto.” How appalling for the leader of a French political party ostensibly committed to the Declaration of the Rights of Man and of the Citizen to encourage a rioters’ veto. Journalists should think twice about casually reporting that elected leaders will make their decisions out of fear of rioters.

And people on the left who are committed to democracy and peace should speak up against the use of such political violence by others on the left. Nobody warned that the French bourgeoisie would riot if Royal was elected. And they wouldn’t have, so no journalist would be reporting that President-elect Royal would have to avoid “tackling tough issues that could spark social unrest.”

Is The Economist Right about Vouchers?

The latest issue of The Economist notes that a mounting body of empirical evidence now favors school voucher programs over government school monopolies. This is eminently true, and it’s delightful to see some of the existing school choice evidence getting a hearing in a mainstream publication. So: jolly good show, wot.

That said, a magazine called The Economist should be held to a very high standard for accuracy, incisiveness, and perspective when it weighs in on the subject of market effects in education – to a higher standard than if the subject were taken up by, say, Vogue, Cat Fancy, or the New York Times.

With that in mind, a few corrections and clarifications are in order. Though Milton Friedman can justly be credited with kindling the modern, U.S. interest in vouchers, the idea was not “first suggested” by him in the mid 1950s. Perhaps the earliest explicit description of the idea is in Adam Smith’s Wealth of Nations, and it figured in the writings of other notable economists and liberal (in the classical sense) philosophers in the 18th and 19th centuries. Vouchers have, in fact, been in nationwide use in the Netherlands since 1917. This is a useful point to note because it shows that vouchers are not a recent concoction, or exclusively the brainchild of a libertarian economist.

Next, the Economist states that voucher programs “are running in several different countries without ill-effects for social cohesion.” It does seem that vouchers are more conducive to social cohesion than state monopoly schooling. Under vouchers, families can pursue both their common educational goals and their unique cultural and religious traditions, all without having to foist their preferences on their neighbors. This is quite different from the endless “school wars” that result whenever there is only one official school system (viz., U.S. battles over sex ed., school prayer, the teaching of history or reading or math, and the current favorite of pedagogical pugilists: the teaching of evolution vs. “intelligent design”).

But to say that voucher programs have no social ill-effects whatsoever is, perhaps, an overstatement. After the murder of Dutch filmmaker Theo Van Gogh in the fall of 2004 at the hands of a militant Islamist, one Dutch Muslim voucher school was bombed and another set ablaze. This is only the most violent and extreme manifestation of a broader unease among some Dutch citizens with the government funding of conservative Islamic schools. Over the past decade, there have been periodic efforts to either cap the number of such schools that can be opened, or to craft regulations so as to make their creation unlikely. This, of course, is a zero-sum game. Either law abiding Dutch Muslims can enjoy the benefits of their country’s voucher program, or they cannot. If they can, taxpayers who object to their teachings but are forced to pay for them anyway become frustrated and social tension results. If they cannot, the Muslim minority suffers second-class status and social tension results.

The reason for this lose-lose situation is that while vouchers lessen the amount of compulsion in education (as compared to government monopoly school systems) they do not eliminate compulsion altogether. Taxpayers can still be compelled to support schooling that violates their convictions. It is possible to promote universal access to the education marketplace with even less compulsion than is associated with vouchers, by means of a universal education tax credit program. I describe such a system here.

The Economist’s portrayal of the Swedish voucher program is also overly kind. “The only real restrictions imposed on private schools,” the magazine claims, “were that they must run their admissions on a first-come-first-served basis and promise not to charge top-up fees.” In reality, the regulations are much more onerous. Most notably, voucher schools must follow a state curriculum and are forbidden to charge tuition fees larger than the voucher amount (this is also true of the Dutch program). These restrictions all but destroy the prospects for specialization and the division of labor, and prevent free floating, market-determined prices from arising. These, as The Economist’s editors must well know, are essential components of free markets. Without them, no genuine market can exist.

Late last year, the Cato Institute published an Education Market Index, which measures roughly 100 characteristics of education systems (or education policies) and rates them on the extent to which a free market currently exists (or on the compatibility of a policy with the rise of a free education market). While the Swedish voucher policy does indeed outscore the Dutch one on this metric, as The Economist’s editors would have predicted, it does so by scoring 40 out of 100 as compared to the Netherlands’ score of 31 out of 100. As currently designed, neither program is conducive to the rise of a genuine education market.

Popularizing the theory and evidence on education markets is an area in which The Economist could well lead the way. If true to its name, the magazine could hold scholars’ and pundits’ feet to the fire when they mischaracterize existing weak school choice programs as markets. The magazine could also continue to draw attention to regions and niches where true free markets in education already thrive – India’s private schools serving the poor, for instance, or the growing worldwide, for-profit, largely unregulated market for after-school tutoring services. Such a rigorous approach to the subject in a mainstream magazine would be a unique and welcome contribution to the debate, and no-one is better equipped to tackle it.

What’s So Special About a Steel Cage Match?

I don’t know how many people reading this are professional wrestling fans – I’m not one – but I would imagine even people who hate wrestling are familiar with the vaunted “steel cage match,” in which the combatants are not only put in the ring together, but the ring is encased in a cage of steel. Wrestling fans love these things. Why?

This description from WWE Bloodbath: Wrestling’s Most Incredible Steel Cage Matches might make it clear:

The steel cage: It’s used as a barrier and as a weapon. It keeps the competitors inside and the interference outside. The Steel Cage Match is the most brutal form of confrontation.

So why’s a steel cage match such a big deal? Because without the cage the Hulkster or Rowdy Roddy might choose not to fight. With it, they have no choice.

OK, so what does any of this have to do with public policy, you ask?

Well, yesterday Sara Mead over at The Quick and the Ed wrote about the Khalil Gibran International Academy, a public school focusing on Arabic language and culture that the New York City Department of Education is trying to put in the same building as P.S. 282, a traditional public school. Opposition to the plan has been fierce, with objections ranging from concerns by P.S. 282 parents about losing space and services if they’re forced to share room with Khalil Gibran, to accusations that the academy will be a madrassa.

Here’s the passage in Mead’s post that really troubled me:

The most radical and evangelistic school choice supporters like to argue that choice will reduce social conflict around education because people who want schools to serve different social purposes can send their kids to different schools. But this ignores the fact that the mere existence of certain types of schools is offensive to some people, all the more so if those schools get public funding (and, yes, vouchers or tax expenditures in the form of tax credits are public funding). To the extent that greater choice leads to a greater diversity of educational options, we’re going to be seeing more controversy and conflict over these issues–at least in the near term–not less.

Mead’s conclusion makes little sense. For one thing, the history of education, which I lay out in the paper to which Mead links, makes clear that when choice has been allowed to work, it has helped to cool conflict where it has existed, and avoid it where it hasn’t. Government schooling, in contrast, has forced - and continues to force - regular confrontation. Moreover, logic suggests that defusing conflict would be by far the most likely outcome of choice, because with it no one has to fight. Sure, with choice people might fight more about specific schools because there will be a much greater variety of schools in existence, but the overall conflict will greatly decrease. Making this latter point clear is where wrestling comes in.

You see, the difference between education with choice and education without it is like the difference between a regular wrestling ring and a steel cage. With the former, people who have different values, educational goals, etc., might grapple over their differences – in a free society we are, after all, allowed to tell people that we don’t like them or what they are doing – but groups that are at odds with each other can get out of the ring. With the latter, in contrast, there’s no escape. People have to fight.

Of course, how choice is delivered will dictate how high or inflexible the ropes are on the non-cage ring. For instance, a voucher would still force one person to pay for part of another’s educational choices, making it hard for the two to get completely away from each other. A tax credit letting people choose whose education they’d support, however, would offer much more separation.

Unfortunately, Mead uses a situation that involves almost no choice to tar even the freest choice forms, which might explain her irrational conclusion that choice will, at least in the short run, create more conflict than the status quo. The Khalil Gibran Academy is, after all, a public school established by the New York City Department of Education, not a private school. Moreover, the department is trying to jam the academy into the same building as a pre-existing public elementary school. Clearly the problem here is the absence of choice for taxpayers and parents, not too much freedom.

Which brings us back to wrestling. Whenever you find your thinking getting fuzzy about whether school choice will produce less conflict than uniform government schooling, remember the difference between a regular professional wrestling ring and one in a steel cage. With the former, one can always avoid a fight. With the latter, there’s nowhere you can run.