Critics of pro-growth tax policy are perpetually vigilant for opportunities to condemn the Laffer Curve as a free-lunch scheme pushed by political hacks who want to claim that all tax cuts pay for themselves. And while it is true that some tax-cut advocates are too aggressive in their assertions, the critics often are guilty of knocking down straw men (while dodging the real issue, which is whether the right kind of tax rate reductions lead to growth and the degree to which that higher growth leads to revenue feedback).
The latest skirmish in this long-running battle revolves around a Wall Street Journal editorial on corporate tax rates. The WSJ’s editorial included a graph showing corporate tax rates and corporate tax revenue and included a line purporting to show that the revenue-maximizing corporate tax rate is somewhere between 25 percent and 30 percent, a bit of artwork that has been criticized by Brad DeLong and Mark Thoma.
But if the Laffer Curve is an absurd notion, why did the World Bank (hardly a bastion of supply-side thinking) report that “high tax rates do not always lead to high tax revenues. Between 1982 and 1999 the average corporate income tax rate worldwide fell from 46% to 33%, while corporate income tax collection rose from 2.1% to 2.4% of national income. … A better way to meet revenue targets is to encourage tax compliance by keeping rates moderate.” And if the Laffer Curve is discredited, someone needs to tell the European Commission (a bureaucracy infamous for trying to harmonize corporate rates at high levels), which recently admitted that “it is quite striking that the decline in the corporate income tax rates has not resulted, so far, in marked reductions in tax revenue, both the euro area and the EU-25 average actually increasing slightly from the 1995 level.”
Or, shifting from corporate taxes to broader measures, how about new research from two German economists (neither of whom are known as supply-siders), which reported that, “We find that for the US model of a labor tax cut and of a capital tax cut are self-financing in the steady state. In the EU-15 economy of a labor tax cut and 85% of a capital tax cut are self-financing.”
Or what about the experience of Ireland? Would critics deny that that there has been a Laffer Curve effect in Ireland, where corporate tax revenues have jumped from less than 2 percent of GDP to more than 3 percent of GDP (a result that is all the more impressive considering the rapid growth of GDP in the Emerald Isle)? And are they really willing to categorically deny any supply-side response following the Reagan tax rate reductions? The 1997 capital gains tax cut? The 2003 tax rate reductions?
Queues in Massachusetts! A fascinating article [$] in today’s Wall Street Journal reveals that Massachusetts residents wait an average of seven weeks for an appointment with a primary‐care physician. The queues apparantly have nothing to do with the new Massachusetts health plan — aside from illustrating that a paper guarantee of “health coverage” does not necessarily translate into health care:
“Health reform won’t mean anything for the state’s poor if they can’t get a doctor’s appointment,” says Elmer Freeman, director of the Center for Community Health, Education, Research and Service in Boston…
“Health‐care coverage without access is meaningless,” Gov. Deval Patrick said in March…
“I thought insurance was supposed to be some kind of great thing, but it hasn’t changed” anything, [newly insured hairdresser Tamar Lewis] says.
No, the big question that article raises is, why is the market not resolving the shortage of primary‐care physicians?
One hint can be found in the first two sentences of the article:
“Tamar Lewis runs a makeshift hair salon out of her one‐bedroom apartment in Roxbury, a low‐income neighborhood [in Boston]. She’s 24 years old and has been cutting hair since she dropped out of high school in 2002.”
There’s a good chance that Ms. Lewis is breaking the law. Massachusetts requires hairdressers — yes, hairdressers — to be licensed by the government. Asipiring hairdressers must (a) complete “a course of at least six months, which course must have included 1000 hours of professional training in a cosmetology school approved by the Board,” (b) pass an examination, and © pay a fee before they may become an apprentice hairdresser. After completing two years as an apprentice, the aspiring hairdresser must pass another exam and pay another fee to become a licensed hairdresser. Licensing a salon requires paying a fee, having an approved floor plan, and other restrictions that make it unlikely that Ms. Lewis’ salon is up to code. In all likelihood, the enlightened Commonwealth of Massachusetts could nail young Ms. Lewis for cutting people’s hair without a license, operating an unlicensed salon, and employing an unlicensed hairdresser (herself).
Too subtle? Another, much bigger hint can be found in an oped titled “Our Soviet Health System” [$] that the Wall Street Journal ran last month:
The limited number of endocrine specialists is a not a consequence of limited demand — everyone is aware of the epidemic of diabetes we are facing. There are also shortages of generalists and other specialists, and the reason is the absence of market signals — i.e., market‐based prices — for influencing the supply of physicians in various specialties…
The essential problem is this. The pricing of medical care in this country is either directly or indirectly dictated by Medicare; and Medicare uses an administrative formula which calculates “appropriate” prices based upon imperfect estimates and fudge factors. Rather than independently calculate prices, private insurers in this country almost universally use Medicare prices as a framework to negotiate payments, generally setting payments for services as a percentage of the Medicare fee structure.
Many if not most administratively determined prices fail to take into consideration supply and demand. Unlike prices set on the market, errors are not self‐correcting. That is why, despite an expanding cohort of patients with diabetes, thyroid disease and other endocrine disorders, the number of people entering this field is actually dropping. Young physicians are accurately reading inappropriate price signals.
Darn those stubborn market failures.
A headline in the Washington Post (the actual newspaper, not the online version) reads:
Montgomery Still Lacking Consensus on Growth Policy
The article explains that officials in Montgomery County, Maryland, are having trouble agreeing on rules for limiting economic growth while leaving room for development. “I don’t think there is consensus on much of anything at this point,” said County Council member Nancy Floreen.
One reason that there’s no consensus, of course, is that there’s no consensus. The county’s 900,000 residents don’t all agree on who should be allowed to build new homes and businesses, who should have their property rights limited, who should pay the bills, and so on. This is why Hayek said that planning was not compatible with liberal values. The only values we can agree on in a big diverse society, he wrote, are “common abstract rules of conduct that secured the constant maintenance of an equally abstract order which merely assured to the individual better prospects of achieving his individual ends but gave him no claims to particular things.” That is, you set up property rights and the rule of law, and you let people run their own lives without being allowed to run other people’s lives. Try to go beyond that, and you’re going to infringe on freedom.
As I wrote a few months ago, another newspaper story reported
“As a consensus builds that the Washington region needs to concentrate job growth, there are signs that the exact opposite is happening.
Over the past five years, the number of new jobs in the region’s outer suburbs exceeded those created in the District and inner suburbs such as Fairfax and Montgomery counties … contradicting planners’ ‘smart growth’ visions of communities where people live, work and play without having to drive long distances.”
Maybe if tens — hundreds — of thousands of people aren’t abiding by the “consensus,” there is no consensus: there is just a bunch of government‐funded planners attending conferences and deciding where people ought to live. It’s like, “Our community doesn’t want Wal‐Mart.” Hey, if the community really doesn’t Wal‐Mart, then a Wal‐Mart store will fail. What that sentence means is: “Some organised interests in our community don’t want Wal‐Mart here because we know our neighbours will shop there (and so will we).”
In her book It Takes a Village, Hillary Clinton calls for “a consensus of values and a common vision of what we can do today, individually and collectively, to build strong families and communities.” But there can be no such collective consensus. In any free society, millions of people will have different ideas about how to form families, how to rear children, and how to associate voluntarily with others. Those differences are not just a result of a lack of understanding each other; no matter how many Harvard seminars and National Conversations funded by the National Endowment for the Humanities we have, we will never come to a national consensus on such intimate moral matters. Clinton implicitly recognizes that when she insists that there will be times when “the village itself [read: the federal government] must act in place of parents” and accept “those responsibilities in all our names through the authority we vest in government.”
Governments would do better to set a few rules of the game and let market enterprises respond to what people really rather than try to push people into conforming to planners’ visions and phony consensuses.
An AP story on the minimum wage begins, all too typically:
The nation’s lowest‐paid workers will soon find extra money in their pockets as the minimum wage rises 70 cents to $5.85 an hour today, the first increase in a decade.
Some versions of the AP story, though not the ones that ran in the Washington Post and the New York Times, did acknowledge the possibility that some low‐paid jobs might disappear. But most of the news stories this week focus more on criticism of the increase for being too low than on the consensus of economists that minimum wage laws reduce employment for low‐skilled workers. It’s enough to make you think Bryan Caplan’s right about the irrationality of the political process. But it’s really just an example of the tendency to look at market processes with a “snapshot view” rather than a dynamic understanding of costs and consequences.
On an unrelated note, unions are outsourcing the arduous job of picket lines to non‐union workers. Apparently the carpenters and construction workers are too busy working in our booming economy to have time to picket non‐union contractors. The picketers aren’t paid union wages, but they are paid above the minimum wage.
In the latest issue of Health Care News, John Dale Dunn reviews Arnold Kling’s book Crisis of Abundance. Dunn is a professor of emergency medicine at CR Darnall Army Medical Center in Fort Hood, Texas. He writes:
Arnold Kling is a lucid writer and down‐to‐earth Ph.D. economist from the Massachusetts Institute of Technology. Really.
…Kling concludes with policy ideas born of intelligent analysis and economic expertise…He suggests consumer‐oriented, market‐based, rational solutions that deal with the limits and benefits of both public policy and free‐market health insurance and health care…
Not bad for a professor from MIT. When dealing with those, I usually need a translator by my side. Not this time.
The International Herald Tribune reports on the tax‐cut battle in France. The President and his Finance Minister are seeking to cut taxes and change the French attitude about wealth creation. In another sign that tax competition is a valuable tool for better policy, the articles explains that a key selling point is the need to make the country attractive once again to the numerous French tax exiles living and working in nations with lower tax rates:
In proposing a tax‐cut law last week, Finance Minister Christine Lagarde bluntly advised the French people to abandon their “old national habit.” …Citing Alexis de Tocqueville’s “Democracy in America,” she said the French should work harder, earn more and be rewarded with lower taxes if they get rich. …The government’s call to work is key to its ambitious campaign to revitalize the French economy by increasing both employment and consumer buying power. Somehow it hopes to persuade the French that it is in their interest to abandon what some commentators call a nationwide “laziness” and to work longer and harder, and maybe even get rich.
France’s legally mandated 35‐hour workweek gives workers a lot of leisure time but not necessarily the means to enjoy it. Taxes on high‐wage earners are so burdensome that hordes have fled abroad. (Sarkozy cites the case of one of his stepdaughters, who works in an investment banking firm in
London.) In her National Assembly speech, Lagarde said that there should be no shame in personal wealth and that the country needed tax breaks to lure back the rich. “All these French bankers” working in London and “all these fiscal exiles” taking refuge from French taxes in Belgium “want one thing: to come back to France,” she said. “To them, as well as to all our compatriots who are looking for the keys to fiscal paradise, we open our doors.”
I can finally report that I am driving a legal automobile.
As readers will recall, this was my third trip (see here and here for previous installments in the saga). Actually, it was my third and fourth trip. When I got to the DMV this morning, happily clutching the Fairfax County tax receipt to my chest, I was told that I also needed an emissions test. It would have been nice of the bureaucrats to tell me that on my first trip, but why expect miracles.
So I had to exit the line, go back out to my car, and drive (illegally, once again) to a nearby service station. This interaction with the private sector was predicatably brief, so I was back at the DMV in less than 30 minutes. Unfortunately, Dan Griswold must have been hard at work in the interim since there was now a long line of people, none of whom appeared to be native‐born Americans.
But after a 90‐minute wait, I got up to the counter, and was able to get registered — but only after dealing with a libertarian quandary. While twiddling my thumbs, I noticed that I could request a vanity plate. Wouldn’t it be nice, I thought, to have a license plate reading “anti gov.” But getting a special plate also involved paying more money — funds that presumably would help finance the sloth‐like bureaucracy that I despise. After wrestling with my conscience (which usually comes out on the short end), I decided that the cause of freedom would be best served by having the vanity plate.
I feel guilty about giving government more money, but I somewhat compensated by paying for my registration and vanity plate with a credit card, which means at least some small slice of the $103 gets diverted to the financial services industry. It ain’t easy being libertarian, but I somehow muddled through.