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Cato Policy Report, July/August 1997

Cato Studies:

Ads Show Rent Control Raises Prices

Rent control policies are being reconsidered in major cities throughout the country. The state of Massachusetts eliminated rent controls in Boston and two of its suburbs, Cambridge and Brookline, on January 1, 1997, and some legislators have proposed phasing out controls on more than 1 million apartments in New York City. In the new Cato Institute paper "How Rent Control Drives Out Affordable Housing" (Policy Analysis no. 274), William Tucker, author of The Excluded Americans: Homelessness and Housing Policies, argues that rent control has stifled new housing construction and driven up the price of existing apartments. Tucker analyzed data on all available apartments advertised in 18 major North American cities. Rents in cities with unregulated housing markets followed a standard bell curve pattern: between 33 and 40 percent of rental prices fell below the census median. Moreover, the most common advertised rent in those cities was relatively low--between $450 and $500. In contrast, in New York City and San Francisco, where rent regulations are strict, there were very few rental units available at the low end of the market. The median advertised rent in New York City was $1,350; in San Francisco it was $1,400. Tucker argues that those living in regulated apartments tend to vacate very infrequently, and thus virtually all the demand is funneled into the unregulated sector. Eventually the competition for those apartments creates highly inflated prices.

Replacing the Income Tax

Nearly everyone agrees that the current tax system needs to be reformed, but there is much disagreement about what reform ought to be implemented. In the new Cato study "Emancipating America from the Income Tax: How a National Sales Tax Would Work" (Policy Analysis no. 272), David R. Burton and Dan R. Mastromarco of the Argus Group, a Washington-based law and public policy firm, argue that a national retail sales tax is the answer and outline how such a plan would work. They maintain that replacing the income tax with a national sales tax would increase economic growth by dramatically reducing the tax bias against work, savings, and investment; they also contend that it would reduce economically inefficient distortions in the patterns of investments. Burton and Mastromarco propose a 15 percent sales tax on the final purchase of goods and services at the retail level; a universal rebate for every household, exempting all consumption up to $18,588 each year; and reimbursement to states and retailers of the costs of collecting the national sales tax. Under their plan, the Internal Revenue Service would be abolished and the states would bear primary responsibility for administering the sales tax.

The Folly of Foreign Aid

It is widely recognized that state-run foreign aid programs have produced negligible benefits and imposed great costs. The failure of those programs has led to new justifications for aid. A current favorite is that foreign aid can help prevent social catastrophe. In the new Cato paper "Help or Hindrance: Can Foreign Aid Prevent International Crises?" (Policy Analysis no. 273), Doug Bandow, senior fellow at the Cato Institute, debunks that claim. He argues that nearly every country that has suffered catastrophe collected abundant foreign aid beforehand. Indeed, 70 developing nations are poorer today than they were in 1980, and 43 are worse off than they were in 1970. To truly help poor nations, Bandow maintains, Washington should end government-to-government assistance, which has often buttressed brutal regimes, and drop its trade barriers, which now impede the participation of poor nations in the international marketplace.

 

Two Plans for Privatizing Social Security

Without endorsing any specific proposal, the Cato Project on Social Security Privatization is publishing a number of possible privatization plans. The first one is presented in the new Cato paper "A Plan for Privatizing Social Security" (Social Security Paper no. 8) by Peter J. Ferrara, general counsel and chief economist at Americans for Tax Reform and associate policy analyst at the Cato Institute. Ferrara's plan is based on the following elements. First, current workers would be free to choose either the private option or Social Security. For those who chose the private plan, workers and employees would each pay 5 percent of wages (the current Social Security payroll tax is 6.2 percent for both workers and employers) into private investment accounts. In addition to supporting retirement benefits, the accounts would finance private life and disability insurance. Second, workers who opted out of the current Social Security system would receive recognition bonds from the federal government that would pay them a proportion of future Social Security benefits equal to the proportion of lifetime taxes they had already paid. Third, benefits promised to current retirees would be paid in full.

The second proposal in the series is "Social Security Privatization: One Proposal" (Social Security Paper no. 9) by David Altig and Jagadeesh Gokhale of the Federal Reserve Bank of Cleveland. The Altig and Gokhale proposal would allow workers to divert up to 46 percent of their payroll taxes to private accounts. Those entering the private system would be responsible for using a portion of their returns to purchase private life and disability insurance and would receive no benefits based on past payroll taxes paid. The government would issue new debt to help finance the transition, but no new taxes would be levied.

 

Big Business Fleeces the Taxpayer

When Bill Clinton campaigned for the White House he promised to "end welfare as we know it." But according to a new Cato paper, "Federal Aid to Dependent Corporations: Clinton and Congress Fail to Eliminate Business Subsidies" (Cato Briefing Paper no. 28), he has done much to perpetuate welfare programs for business. Dean Stansel and Stephen Moore, fiscal policy analyst and director of fiscal policy studies at the Cato Institute, examine the funding levels for 55 of the most easily identifiable corporate subsidy programs in the federal budget. They find that in 1996 Congress increased spending for those programs by 1.3 percent and that, in this year's budget request, the president has called for further increases. Sixteen programs would receive an increase of 10 percent or more and eight would see their budgets go up by at least 20 percent. Stansel and Moore argue that most corporate welfare programs benefit one of four industries--agriculture, exports, high technology, and energy--and that if those subsidies were eliminated, the budget deficit could be cut in half.

This article originally appeared in the July/August 1997 edition of Cato Policy Report.