November 19, 2012 5:27PM

In World Bank’s New Tax Report Card, ‘High Effort’ Is a Very Bad Thing

Remember when you were a kid and your parents would either be happy or angry depending on whether your report card said you were trying hard or being a slacker? No matter whether your grades were good or bad, it helped to get an "A for Effort."

But sometimes a high level of effort isn't a good thing.

The World Bank has a new study that measures national tax burdens. But instead of using conventional measures, such as top tax rates or tax collections as a share of GDP, the international bureaucracy has developed an index that measures "tax effort" and "tax capacity" after adjusting for variables such as per-capita GDP, corruption, and demographics.

One goal of the study is to develop an apples-to-apples way of comparing tax burdens for nations at various levels of development. Poor nations, for instance, tend to have low levels of tax revenue even though they often have high tax rates. This is partly because of Laffer Curve reasons, but perhaps even more so because of corruption and incompetence. Rich nations, by contrast, usually have much greater ability to enforce their tax codes. So if you want to compare the tax system of Paraguay with the tax system of Sweden, you need to take these factors into account.

Here's a description of how the authors addressed this issue.

Measuring taxation performance of countries is both theoretically and practically challenging. ...tax economists have attempted to deal with this problem by applying an empirical approach to estimate the determinants of tax collection and identify the impact of such variables on each country’s taxable capacity. The development of a tax effort index, relating the actual tax revenues of a country to its estimated taxable capacity, provides us with a tempting measure which considers country specific fiscal, demographic, and institutional characteristics. ...Tax effort is defined as an index of the ratio between the share of the actual tax collection in GDP and the taxable capacity.

This is a worthwhile project. There sometimes are big differences between nations and those should be part of the equation when comparing tax policies. Indeed, this is why my recent post on the rising burden of the value-added tax looked at data for nations at different levels of development.

But I'm irked by the World Bank study because it's really measuring "tax onerousness." I'm not even sure onerousness is a word, but I sure don't like the term "tax effort" because it implies that a higher tax burden is a good thing. After all, we learned from our report cards that it's good to demonstrate high effort and not be a slacker.

Read the rest of this post »
November 19, 2012 12:52PM

Nostalgianomics, again

The apparent demise of iconic edible kitsch producer Hostess Brands sends Paul Krugman into a wistful reverie in his most recent column. Ah, the good old days of the 1950s — when Krugman was young and Wonder Bread was building his body eight different ways, unions were strong, and the top marginal income tax rate was 91 percent.

Krugman recognizes, in a dig at conservative ’50s nostalgia, that the days of his boyhood were also “the days when minorities and women knew their place, gays stayed firmly in the closet and congressmen asked, ‘Are you now or have you ever been?’ ” But then he serves up some ’50s nostalgia of his own. “America in the 1950s made the rich pay their fair share; it gave workers the power to bargain for decent wages and benefits; yet contrary to right‐​wing propaganda then and now, it prospered. And we can do that again.”

This is nothing new from Krugman. Indeed, a few years back I wrote a paper entitled “Paul Krugman’s Nostalgianomics.”  It’s true that the quarter‐​century after World War II was a kind of Golden Age for the American economy, with rapid productivity growth matched by strong income gains across the socioeconomic spectrum. But it doesn’t follow that the economic policies of that era are a good model for us now — any more than China’s spectacular growth in recent decades means that we would grow faster if we just instituted rampant corruption and oppressive autocracy.

As I noted in that earlier paper:

Krugman’s analysis here rests on a crude conflation of correlation and causation. It is true that, all thing being equal, we should expect better economic policies to generate better economic performance. But in the real world, all things are seldom equal; thus strong performance is not always reliable evidence of good policies.

Economic performance is a function of both economic policies and the underlying conditions for growth. When conditions are highly favorable (as, in China’s case, when relative backwardness creates the possibility for rapid catch‐​up growth), even fairly bad policies (like China’s) can produce good results. And it turns out that the conditions in the United States during the early post‐​WWII decades were highly favorable indeed.

Here again, from my earlier paper:

But several factors were especially conducive to strong performance at that time. There was a pent‐​up demand for goods and services after the privations of the Great Depression and the mobilization of World War II. There was also a pent‐​up supply of new products that couldn’t be brought to market during the depression and war years. That pent‐​up supply was augmented by technological and organizational breakthroughs accelerated by the imperatives of total war. Big advances in transportation, communications, and air conditioning stimulated catch‐​up growth in the underdeveloped South and underpopulated West. And rapid upgrades in human capital (first explosive growth in high school graduates, then explosive growth in college graduates) doubtless helped to spur productivity gains.

When conditions for growth become less favorable, performance deteriorates and pressure builds for new policies. Which is exactly what we saw in the 1970s: stagflation, followed by the dismantling of price and entry controls in the transportation, energy, financial, and communications sectors and a steep drop in marginal tax rates. Together with disinflationary monetary policy, those reforms helped to unleash the Long Boom of the ’80s and ’90s.

In the sluggish aftermath of the Great Recession, we may well be at another inflection point. There are good reasons to believe that growth is getting harder, in which case only another big round of pro‐​market reforms will suffice to revitalize America’s economic dynamism.

Sorry Paul, you can’t go home again.

November 19, 2012 12:48PM

Taking Education Policy from Quackery to Science

I recently bewailed the peddling of education policy snake‐​oil — advocacy based on non‐​sequiturs and false/​misleading/​incomplete data. At the end of it, I teased a forthcoming piece suggesting how the field could be kicked up a notch in seriousness and value. It ran today on the Washington Post’s Answer Sheet blog.

Feel free to ping me on Twitter or Facebook if you have comments.


November 19, 2012 12:02PM

Where Should Libertarians and Conservatives Be on Copyright? (Event 12/6)

Last week, an influential House Republican group made a feint toward supporting revamp of copyright law. On Friday, the Republican Study Committee issued a paper harshly criticizing copyright law as it stands today and calling for a variety of reforms. Then it quickly retracted the paper. On Saturday, the paper came down from the RSC site, and RSC Executive Director Paul Teller issued a statement saying that the paper had been issued “without adequate review.”

Today, it’s hard to find a source on the tech policy beat that isn’t writing about it: Politico, Hillicon Valley, C|Net, TechDirt, Ars Technica, and TechCrunch, for example. The American Conservative was on the story early, coming out with a highly laudatory comments on the RSC policy brief.

That was the beginning of the conversation. It continues on Thursday, December 6th when we’ll be hosting a book forum on the topic of copyright here at Cato.

The Mercatus Center’s Jerry Brito has edited a volume the thesis of which is evident in the title: Copyright Unbalanced: From Incentive to Excess. In addition to Brito, contributor (and Cato alum) Tom W. Bell will speak. And we’ll have able response and counterpoint given by Mitch Glazier, Senior Executive Vice President at the Recording Industry Association of America.

Jerry Brito has written more about the book in a Tech Liberation Front blog post this morning. Our book forum is on December 6th here at Cato. Register now.

November 19, 2012 11:40AM

Statutes of Limitations Apply Especially to Government Agencies

Statutes of limitations exist for good reason: Over time, evidence can be corrupted or disappear, memories fade, and companies dispose of records. Moreover, people want to get on with their lives and not have legal battles from their past come up unexpectedly. Plaintiffs thus have a responsibility to bring charges within a reasonable time of injury so that the justice system can operate efficiently and effectively — and that’s doubly so when the would‐​be plaintiff is the government, with all its tools for investigation and enforcement.

There’s a general federal statute of limitations, therefore, 28 U.S.C. § 2462, which protects liberty by prohibiting government actions “for the enforcement of any civil fine, penalty, or forfeiture … unless commenced within five years from the date when the claim first accrued.” In April 2008, however, the Securities & Exchange Commission sued the managers of Gabelli Funds LLC, a mutual fund, for civil penalties relating to conduct that ceased in August 2002, more than five years earlier. The SEC alleged that Gabelli Funds defrauded investors by failing to disclose that the fund was allowing a favored investor to engage in “market timing” — buying and selling mutual fund shares in a manner designed to exploit short‐​term price swings.

The U.S. Court of Appeals for the Second Circuit ruled that the SEC’s claim was nevertheless valid because courts should read into § 2462 an implicit “discovery rule” — a common exception to statutes of limitations that prevents fraud‐​based claims from accruing (“stops the clock” on the limitations period) until the plaintiff discovers, or with reasonable diligence should have discovered, the basis for the claim. Because of the allegedly fraudulent nature of the defendants’ actions, the court found that the government’s claim accrued not when their conduct ceased but a year later, when the violation was actually discovered.

The Supreme Court decided to review the case, and Cato filed an amicus brief supporting the defendants. We make three points:

First, Congress could not have intended a discovery rule to be implicit here because at the time the operative language in § 2462 was enacted, case law explicitly rejected a discovery rule — and since then Congress enacted numerous statutes with explicit discovery rules that would be superfluous if a discovery rule had already existed implicitly.

Second, reading a discovery rule into § 2462 violates the principle of separation of powers by judicially changing the statute’s meaning: When judges rewrite laws, those laws fail to meet the constitutional requirement of bicameralism and presentment (“how a bill becomes a law”).

Third, even if courts could alter rather than merely interpret the meaning of statutes, there’s no basis for creating a discovery rule for government enforcement actions. Government agencies with broad investigatory powers — indeed, whose purpose is to monitor regulatory compliance — don’t face the same difficulty as private plaintiffs in identifying causes of action which give rise to the discovery rule. Adding a discovery rule to § 2462 would create an indefinite threat of government lawsuits and invite agencies to review decades of past conduct of selectively disfavored companies and individuals — inevitably chilling innocent and valuable economic activity.

To preserve individual liberty in the face of an ever‐​burgeoning regulatory state and ensure constitutional separation of powers, we urge the Court to reverse the Second Circuit’s decision and hold that no discovery rule applies in Gabelli v. SEC. The case will be argued at the Supreme Court on January 8.

November 19, 2012 11:37AM

Could Che Guevara Inspire Peaceful Revolutionaries in Burma?

In a profile of Myat Thu, a Burmese dissident forced to flee the country after “the 1988 nationwide protests that were brutally crushed by the Burmese military,” who now runs a cafe across the border in Thailand, NPR blandly notes that he has portraits on his walls of Aung San Suu Kyi — and Che Guevara.

Does Myat Thu know that Che was a brutal murderer who helped establish a Stalinist, military‐​backed dictatorship in Cuba that has lasted longer than the junta in Burma? Maybe he doesn’t. But surely Jason Beaubien of NPR does.

November 19, 2012 9:45AM

What’s So Great about a Heavy Footprint?

I generally like David Sanger’s reporting. His recent books (The Inheritance and Confront and Conceal) provide an excellent overview of U.S. foreign policy, and his analysis of Barack Obama and Mitt Romney’s approach to world affairs, filed just before the two men faced off in their third and final debate, was one of the best that I had seen.

But I’m confused by this passage from his story in yesterday’s New York Times:

Mr. Obama’s reluctance to put American forces on the ground during the fight, and his decision to keep America’s diplomatic and C.I.A. presence minimal in post‐​Qaddafi Libya, may have helped lead the United States to miss signals and get caught unaware in the attack on the American mission in Benghazi.

We have had many tens of thousands of U.S. troops, and a sizable CIA presence, on the ground in Afghanistan for years, and that hasn’t stopped attacks on Americans. Ditto for the massive troop presence in Iraq, when we had one there. We have been caught unaware in other places where we have had a massive and long‐​standing presence on the ground; meanwhile, some places that boast no U.S. presence at all have been quiescent for decades.

In short, what happened in Benghazi is certainly a tragedy, and possibly an avoidable one, but that one instance hardly proves that a heavy footprint (i.e. sending U.S. ground troops into the middle of distant civil wars) should be the preferred option going forward.

The American people’s opposition to the wars in Iraq and Afghanistan, and a broad, bipartisan desire to avoid future such wars, constrains the president’s options. And that is a good thing. If policymakers understand that they can’t accomplish ambitious goals with small numbers of troops on the ground—or with none at all—that should compel them to focus on more limited objectives, missions that advance U.S. security, and avoid those that do not.