Local Laffer Curve

A recent newspaper item shows the Laffer curve at the local government level. The Laffer curve illustrates the idea that when tax rates go up, revenues might go down if the tax base shrinks enough.

From the Falls Church News-Press:

“With another big hike, 75 cents a pack, in its cigarette tax put into effect last July 1, the City of Falls Church City Council asked for a spot check on the impact from the City’s Chief Financial Officer John Tuohy after the first quarter of the fiscal year, and he reported this Monday that July-September net revenues were down from the previous three years. He attributed the drop to “the national trend of decreased smoking.” Annual revenues peaked at $520,000 in the 2005-6 fiscal year, dropping to $464,000 last year. Packs sold in the July-September time frame dropped from 69,000 in 2004 to 58,000 this year.”

Thus, the number of packs sold is down 16% in one year. The CFO says that the cause is a “national trend.” In fact, government data show that the smoking rate has been pretty flat in recent years.

The CFO is being disingenuous. He must know that local taxpayers are responding to the city’s sharp increases in the cigarette tax rate in recent years.

For cigarette tax background, see here.

Zakaria on Iran

Fareed Zakaria has a terrific column on Iran today. A snip:

The American discussion about Iran has lost all connection to reality. Norman Podhoretz, the neoconservative ideologist whom Bush has consulted on this topic, has written that Iran’s President Mahmoud Ahmadinejad is “like Hitler … a revolutionary whose objective is to overturn the going international system and to replace it in the fullness of time with a new order dominated by Iran and ruled by the religio-political culture of Islamofascism.” For this staggering proposition Podhoretz provides not a scintilla of evidence.

Here is the reality. Iran has an economy the size of Finland’s and an annual defense budget of around $4.8 billion. It has not invaded a country since the late 18th century. The United States has a GDP that is 68 times larger and defense expenditures that are 110 times greater. Israel and every Arab country (except Syria and Iraq) are quietly or actively allied against Iran. And yet we are to believe that Tehran is about to overturn the international system and replace it with an Islamo-fascist order? What planet are we on?

The American people seem to have different sensibilities than do political elites. In a recent CNN/Opinion Research Poll, 68 percent of respondents to the question “If the U.S. government decides to take military action in Iran, would you favor or oppose it?” said they would oppose it, a 5 percent increase since 5 months ago.

At the same time, watching the Frontline special called “Cheney’s Law” the other night, I discovered that then-SecDef Cheney had urged Bush the Elder not to go to Congress to get authorization for Gulf War 1, believing that the president had the inherent authority to do whatever he wants with the American military. Further, Cheney told Frontline in 1996 that if Congress had failed to authorize the war, he would have advised the president to attack anyway. It’s pretty clear that the veep, at least, doesn’t much concern himself with the Constitution on these matters. Meanwhile, both Bush and Cheney are ratcheting up the rhetoric on Iran, increasingly painting themselves into a rhetorical corner. In a detached political science sense, this is all fascinating. As an American patriot, it’s scary as hell.

Grand Old Party of Immigrants?

Move over, Arnold Schwarzenegger. America has a new political star.

Bobby Jindal, the 36-year-old son of Indian immigrants, was elected governor of Louisiana on Saturday. He’s the first non-white governor of a Deep South state, and one of very few non-whites to achieve political success in a majority-white constituency.

Talk about assimilation—Jindal is so American that when he was four years old he told his parents he wanted to be called Bobby, like the youngest of “The Brady Bunch,” rather than his given name of Piyush.

Although he’s a conservative Catholic who lives far from the bright lights of Hollywood, Jindal has a lot in common with Schwarzenegger. Both reflect America’s historic promise as the land of opportunity. Arnold’s election four years ago was improbable enough to impress even the French: “American democracy has tremendous resilience,” said Nicolas Sarkozy, then the French interior minister. “Someone who’s a foreigner in his country, who has an unpronounceable name and can become governor of the biggest American state – that’s not nothing.”

Around the world, especially in Asia, people may be even more impressed with the slight young Jindal, a whiz kid Rhodes Scholar who became Louisiana’s state health secretary at 24, head of the University of Louisiana system at 27, and assistant secretary for health care in the Bush administration at 29. When he first ran for governor, no one thought a dark-skinned 32-year-old with no electoral experience could be elected. But he led the first round handily and then narrowly lost to lieutenant governor Kathleen Blanco in the runoff. After he got elected to Congress and Blanco botched the Katrina disaster, she chose not to run for reelection and Jindal waltzed to a 54 percent victory against 11 opponents in an open primary. With more than 50 percent, he avoids a runoff and is governor-elect.

Jindal’s future could be even more promising than Schwarzenegger’s. His mother was pregnant when his parents arrived in Baton Rouge from India, so he’s a natural-born citizen and eligible to run for president–if he can achieve success as governor of what is arguably the nation’s poorest and most corrupt state, which is still suffering badly from the hurricane. But watch for him to be featured by the Republican Party as a symbol of America and of the GOP’s welcoming approach to minorities.

Schwarzenegger and Jindal both campaigned as fiscal conservatives, but they part company on social issues. Jindal, a convert to Catholicism, ran radio ads attacking abortion, gay marriage, and Hollywood and supported the teaching of “intelligent design.” The pro-choice Schwarzenegger vetoed a gay marriage bill but has supported domestic partnerships.

In American politics, immigration is usually discussed as an issue for Hispanic voters, the largest group of recent immigrants. Republicans will hope that the combination of the Terminator and an Indian-American Republican governor in the Deep South can counter the party’s increasingly tough line on immigration and shake up immigrant voting patterns. Jindal and Schwarzenegger may play some role in improving the image of the Republican Party in America, and the image of America—land of freedom and opportunity—in Europe, Asia, and the rest of the world.

EU Subsidies Were Not Key to Irish Economic Miracle

An article posted at AEI’s American.com discusses Ireland’s economic boom and explains that smaller government and lower tax rates are the key reasons the nation’s explosive growth. Bureaucrats in Brussels and opponents of limited government sometimes claim that subsidies from Brussels deserve the credit, but advocates of this position are unable to explain why Greece and Portugal (which received similar subsidies) have remained poor:

Some Europeans, particularly European Union officials in Brussels, praise significant EU structural subsidies—in the tens of billions—for planting the seeds of Irish prosperity. …But EU structural funds alone would not have helped Ireland escape its economic predicament. Many nations receive outside financial aid without any appreciable increase in their economic prosperity. The real credit belongs to Irish fiscal policy. Beginning in the late 1980s, successive Irish governments pursued vital spending cuts and tax relief. …Ireland has a 12.5 percent corporate tax rate, which has made it a magnet for powerhouse firms.

Putin, Another FDR?

The Washington Post reports:

President Vladimir Putin, Kremlin political consultants and state-controlled news media have found an American to admire: Franklin Delano Roosevelt.

FDR, according to a consistent story line here, tamed power-hungry tycoons to save his country from the Great Depression. He restored his people’s spirits while leading the United States for 12 years and spearheaded the struggle against “outside enemies,” as the mass-circulation tabloid Komsomolskaya Pravda put it….

And Roosevelt ran for a third and fourth term because his country needed him. Translation: Putin, too, should stay.

Putin used the Roosevelt analogy Thursday when he spoke to reporters after a televised question-and-answer session with citizens….

In a glowing 90-minute documentary on FDR that aired Sunday on RTR, a state TV channel usually given to growling at Washington, a narrator said that America’s 32nd president “came to the conclusion that he was the only person in the country who could lead America in the right direction through the most difficult period in the country’s history.”

“He became the only president of the United States elected for a third time. Americans trusted him,” the narrator said. “They believed that at a turning point in history he would not make a mistake.”

Which seems an appropriate time to mention my review in the October issue of Reason of the book Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933–1939, by Wolfgang Schivelbusch. It’s in the actual print magazine; go out and buy a copy. But committed devotees of the online experience can find it here. I noted that Schivelbusch found surprising similarities in the ideas, style, programs, and even architecture of the three charismatic collectivists.

“To compare,” Schivelbusch stresses, “is not the same as to equate. America during Roosevelt’s New Deal did not become a one-party state; it had no secret police; the Constitution remained in force, and there were no concentration camps; the New Deal preserved the institutions of the liberal-democratic system that National Socialism abolished.” But throughout the ’30s, intellectuals and journalists noted “areas of convergence among the New Deal, Fascism, and National Socialism.” All three were seen as transcending “classic Anglo-French liberalism”—individualism, free markets, decentralized power….

In Rome, Berlin, and D.C., there was an affinity for military metaphors and military structures. Fascists, National Socialists, and New Dealers had all been young during World War I, and they looked back with longing at the experiments in wartime planning. In his first inaugural address, Roosevelt summoned the nation: “If we are to go forward, we must move as a trained and loyal army willing to sacrifice for the good of a common discipline. We are, I know, ready and willing to submit our lives and property to such discipline, because it makes possible a leadership which aims at a larger good. I assume unhesitatingly the leadership of this great army.…I shall ask the Congress for the one remaining instrument to meet the crisis—broad executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”

The Laffer Curve Straw Man

I’ve already addressed this issue, but here we go again. Commenting on the “totemic appeal” of the Laffer Curve for conservatives, Kevin Drum of Washington Monthly asserts that the concept is no longer relevant because:

…the current top marginal rate in the United States is 35%, and no one in their right mind thinks that’s anywhere near high enough to have a serious Laffer effect. When top rates are that low, lowering them further just reduces tax revenue.

Mr. Drum may know how (fairly) to mock politicians who exaggerate, but his critique of the Laffer Curve is based on the straw-man proposition that tax cuts are self-financing. Notwithstanding some of the political rhetoric, the Laffer Curve does not imply — and never has implied — that all “tax cuts pay for themselves.” That only happens if rates become sufficiently punitive to put the taxing jurisdiction on the downward-sloping portion of the curve.

The real issue is whether certain changes in tax policy will have some impact on economic activity. If an increase (decrease) in tax rates changes behavior and causes a reduction (increase) in taxable income, then revenues will not rise (fall) as much as “static” revenue-estimating models would predict. This is hardly a radical concept, and evidence of Laffer-Curve effects is very well established in the academic literature.

The reason there is a debate is that the government’s revenue-estimating bodies (the Joint Committee on Taxation on the Hill and the Office of Tax Analysis at Treasury) assume that tax policy changes have zero impact on economic performance. That’s right, zero.

For example, if the entire tax code was scrapped and replaced by a low-rate flat tax, JCT and OTA would assume no effect on macroeconomic aggregates. If tax rates were doubled, JCT and OTA would plug new numbers into their simplistic (yet totally nontransparent) models and estimate that tax revenues would double (to be fair, the government’s revenue estimators assume some microeconomic dynamic effects, such as higher tax rates causing people to shift the timing and/or composition of income, but this is akin to measuring the tail and ignoring the dog).

So what does all this mean? Two points are worth highlighting:

First, the current system is rigged against good tax policy by over-estimating the revenues that can be obtained by raising tax rates and exaggerating the revenues foregone when tax rates are reduced. This is why some of us advocate “dynamic scoring.”

Second, not all tax cuts (or tax increases) are created equal. An increase in the personal exemption or the child credit will have very little, if any, impact on incentives to work, save, and invest. As such, the “static” estimate of revenue losses will be reasonably accurate. A reduction in the tax rate on capital income, by contrast, will substantially alter incentives for taxpayers who have considerable ability to adjust their behavior. This will result in a Laffer-Curve response, though it is an empirical question whether the revenue feedback will offset 20 percent, 50 percent, or 75 percent of the static revenue loss (timing is also important since a tax rate reduction that yields a revenue feedback of 20 percent in the first year may generate a much larger revenue feedback five years in the future).

The left is very clever. Defenders of the status quo have created a straw man, and they find quotes from politicians and others with little knowledge to create the impression that advocates of lower tax rates believe in the fiscal version of a perpetual-motion machine. This tactic is then used to prop up the existing system of revenue estimating, which is based on assumptions that would earn an F if put forth by a student in an undergraduate public finance course.

Eminent Domain Abuse Still Rampant in Missouri

I’ve written a new study for the Show-Me Institute examining the problem of eminent domain abuse in Missouri. In the wake of the 2005 Kelo decision, a few state legislatures took decisive action to protect property rights, but many failed to enact comprehensive reforms. Unfortunately, Missouri was in the latter category. The legislature here passed a very timid eminent domain bill in 2006 that made some minor procedural changes and increased compensation for some property owners. But as I document in the study, the legislation has had little or no impact on the frequency of eminent domain projects that primarily benefit politically-connected private developers.

I make two major points in the study that are relevant across the country. First, the moment cities start to threaten the use of eminent domain by designating an area “blighted,” it casts a shadow over the affected area that retards economic development. After all, what home or business owner is going to invest in property that is likely to be demolished in a few years? As a result, “blight” often becomes a self-fulfilling prophesy; properties deteriorate as politicians draw up a new “master plan” for the area.

Second, I point out that eminent domain is most harmful to small business owners and low-income residents who lack the political clout or the deep pockets required to fight the seizure of their properties. As I argue in a new article in The American, “redevelopment” projects punish small business owners who choose to open up shop in struggling neighborhoods. And in McRee Town, the redevelopment project I studied in the most detail, the city demolished apartments that had rents between $275 and $550/month, and replaced them with single-family homes costing more than $200,000. Obviously, the previous occupants were forced to move to other parts of the city, presumably into neighborhoods that are just as slum-like.