Topic: Tax and Budget Policy

California Speaker Confuses Taxation with Wealth Creation

California is facing a budget shortfall, and one of its most powerful lawmakers thinks the state legislature can meet that shortfall by creating wealth. According to the Los Angeles Times:

Assembly Speaker Fabian Nuñez (D-Los Angeles) said lawmakers would have to consider raising a host of taxes, including those on Internet purchases and on foreign companies that do business in California.

“We’ve got to close those tax loopholes,” Nuñez told reporters at a news conference. “We can generate billions by doing that.”

According to Dictionary.com, the first three definitions of “generate” are:

  1. to bring into existence; cause to be; produce.
  2. to create by a vital or natural process.
  3. to create and distribute vitally and profusely.

No doubt the speaker wants to distribute those billions vitally and profusely. But raising taxes won’t create billions of dollars. 

Taxes find wealth that others have already created and take it. As in pilfer.  Lift.  Ransack.  Plunder.  Loot.  Steal.  Jack.  Nab.  Grab.  Purloin.  Swipe.  Snag.  Extract.  Nick.  Confiscate.  Seize.  Pinch.  Usurp.  Arrogate.  Dispossess.  Expropriate.  (Yoink.)

This Post Won’t Treat Bob Frank Like a Piñata

The New York Times’ Sunday column “Economic View” is a must-read for anyone who cares about economic issues. Four academics (one of whom is Cato adjunct scholar Tyler Cowen) take turns writing the column, and they often use the academic literature to shed light on current issues.

But readers of this blog probably won’t like last weekend’s column, penned by Cornell economist Robert Frank. Frank argues that “realistic proposals for solving our budget problems must include higher revenue,” i.e., new taxes or tax increases. Those proposals, he says, are being blocked by “powerful anti-tax rhetoric [that] has made legislators at every level of government afraid to talk publicly about a need to raise taxes.” 

(I’m not sure how big that phobia is, given the numerous tax increases on the state level in recent years.  But let’s put that aside.)

Frank has spent much of his academic career arguing for raising taxes on wealthier people so as to create greater income equality (some of his work can be found here, here, and here). It would thus be expected that a Cato analyst would bash Frank’s column like a piñata. But I believe there’s merit to what he writes.

Whatever the political power of anti-tax rhetoric, it’s clear from the last seven years that it doesn’t have much effect on government spending. Despite the tax cuts of 2001–2003, Congress and the White House have found all sorts of hyper-expensive programs and actions on which to spend money, from the Iraq War and expanded overall defense spending to the new Medicare Part D, the proposed farm bill, the latest round of energy subsidies, more and more corporate welfareNo Child Left Behind, and a whole new, giant federal agency — (forget the relative spare change of all those wacky transportation earmarks). Whatever criticisms can be lobbed against the 2001–2003 tax cuts (and lower taxes in general), it can’t be said that they’ve hamstrung the government’s ability to spend

Why have the tax cuts not slowed government growth? Because Uncle Sam is quite happy to borrow money. Frank points out that the national debt has increased $3 trillion since 2002, and it will likely rise an additional $5 trillion over the next decade. As NYU law professor Dan Shaviro notes in this 2004 Regulation cover story, that debt is future taxes.

This borrow-and-spend spree means that America has been getting bigger government while (so far) paying the price of smaller government. As Cato chairman Bill Niskanen points out, this dynamic drives the growth of even-bigger government. The First Law of Demand postulates that, ceteris paribus, if the price of a product declines, demand for the product will rise. The apparent price of government has declined — and we’re getting more and more government all the time.

This leads to the core problem of borrow-and-spend public finance: Because today’s taxpayers receive government services without paying the full cost, they (and their political leaders) are not forced to consider:

  • Is this service worth its cost?
  • Would we be better off if government spent its money differently?
  • Would we be better off if government did not tax that money away from us, but we instead spent it privately?

Instead, borrow-and-spend lets both the Big Government crowd and the Anti-Taxes crowd get what they want: the Big Government folks can keep expanding government and the Anti-Taxes folks pay lower taxes — for now.

That’s why there’s merit to Frank’s column — if we were to pay, today, the full cost of government, we’d give much more thought to the opportunity cost of government spending. I strongly suspect there’d be much less demand for government services and much stronger outcry against current spending and spending proposals.

Frank, in the column, appears not to consider that possibility. Instead, he seems to assume that government activity would continue at its current pace, or even expand, under the justification that government must “provide a variety of public goods and services that would be impractical for private citizens to provide for themselves.” But let’s be real here: government spending  is far, far, far beyond anything that could be justified by a public goods problem.

Much public spending — and most all new public spending — is nothing more than government-mandated consumption. Because people don’t value a good or service enough to spend a lot of money on it privately, government forces them to buy the good publicly. That type of public finance is neither welfare-enhancing nor financially responsible — but it certainly earns the love of special interests. That’s how we end up with (pardon the cut-n-paste) Medicare Part D, the proposed farm bill, the latest round of energy subsidies, more and more corporate welfareNo Child Left Behind, and all those wacky transportation earmarks.

So, Prof. Frank, I say bully for you! If we follow your proposal, I think we’ll move several steps closer to limited government.

Stranger in a Strange Land

A few days ago, I was quoted in an AP story as saying that scientists as scientists are in no position to dictate federal policy to address global warming. A rather predictable outcry followed, prompting my defense here.

Amazingly enough, that somewhat provocatively titled post did not soothe the savage environmental beasts. Michael Tobis, a climate scientist at the University of Texas Institute for Geophysics, posted a rather angry shot over at Grist (the preeminent gathering place for environmentalists on the web) arguing that economists and economic analysis have absolutely nothing to add to the policy conversation about global warming. An editor over at Grist kindly invited me to respond, so I Fisked the man and responded to the commentary about two-thirds of the way down the page in a post titled “Taylor Defends Taylor.”

What exactly informs this “economists are a plague upon mankind” view of the environmental Left? My guess is that it is a combination of things. First, environmentalists deeply resent the fact that anyone would presume to put a price tag on things they value. Second, many environmentalists do not understand economics very well and thus fall for all sorts of cartoonish depictions about what economists do and what they think. Third, economic analysis does not support many environmental fantasies about the future of humankind under either the “business as usual” scenario or under the environmentalists’ vision of the Book of (Environmental) Revelation.

Of course, speaking of “economists” generically — as if all economists are alike — is as dubious as speaking of “environmentalists” generically. If the environmental Left really wants an informed criticism of economics, they would do well to pick up Robert Nelson’s Economics As Religion: From Samuelson to Chicago and Beyond.

Cult Kidney Donations

Today’s Wall Street Journal has an article on live kidney donation as a form of charity. Half the members of a Christian sect have gone through the surgical operation of donating a kidney to a stranger. The article questions whether pressure from “cult” members creates undue influence. Social and government pressure to donate both at death and while living is mounting. See Cato’s recent Policy Analysis “A Gift of Life Deserves Compensation.”

I Hope You Like Asparagus

Further to Dan’s post today, some more depressing news today on the farm bill process. A couple of amendments that would have trimmed some excess fat also failed.

Sen. Judd Gregg (R., N.H) has proposed a number of amendments to the farm bill. The two that failed today were designed to strike a couple of almost comic provisions of the farm bill that emerged from the Senate Agriculture Committee. The first, to strike language that establishes a “Farm and Ranch Stress Assistance Network,” a mental health program for farmers, failed 37-58. The other, to strike a new program to provide subsidies for asparagus producers, failed 39-56. (Roll call records are not yet available)

Now, I am willing to concede that farming might be stressful at times (although Mencken would disagree). I certainly wouldn’t like getting out of bed at dawn to milk cows. And I am sure it is a tough business, rearing asparagus. But I once saw a stockbroker outside the NYSE smoking two cigarettes at once, and looking decidedly harried. And I bet he earned less than some farmers. Where’s his taxpayer-funded “stress assistance network?”

This is a further sign of the truly staggering resistance to reform U.S. agricultural policy. Tom Harkin (D., IA), Chairman of the Senate Agriculture Committee, said that the proposed reforms of the Lugar-Lautenberg amendment were “too far too fast.”

Too fast? These programs have been with us for over 70 years, Senator.

CBO’s Orszag on Waste in Medicine

In today’s Wall Street Journal, Congressional Budget Office Director Peter Orszag writes [$]:

Some academic research suggests that national costs for health care can be reduced by perhaps 30% without harming quality.

In the September 2007 issue of Cato Unbound, Robin Hanson sees Orszag’s 30 percent and raises him another 20 percent.

Who Pays

The Congressional Budget Office released new data yesterday on the burden of federal taxes. The data answers the question: What share of earnings do households at different income levels pay in federal taxes?

The CBO data is useful because it not only includes individual income taxes, but also corporate income taxes, payroll taxes, and excise taxes. Those four taxes account for virtually all federal revenues. The data is for 2005 and is based on a definition of “income” that is broader than AGI reported on income tax returns.

The chart shows that households with higher incomes pay a much larger share of their income in federal taxes, on average, than do households with middle and lower incomes. Clearly, there are gross inequities in federal taxation. But few people will find out because none of the major newspapers reported on the CBO data, as far as I could tell.