It’s the End of the World as We Know it & I Feel Fine

In Florida, land of sunshine, oranges and signs of the apocalypse, a local teachers’ union and public school district have banded together to help make professional development programs available to… private school teachers.

Are you still there? I heard a thud….

This and other shockers have been brought to you by the Florida tax credit scholarship program. The credits give businesses a dollar for dollar tax cut if they donate money to k-12 scholarship granting organizations. The SGOs then help low-income families afford private schooling.

If chambers of commerce around the country want to know how to make real progress in education, they might want to have a look at the Sunshine state.

What Recovery?

Despite the ballyhooed cash-for-clunkers program, retail sales dipped in July. Initial claims for unemployment also rose. Housing continues to be plagued by foreclosures. And many banks are still operating under the burden of toxic assets, which inhibits their ability to provide credit. These are not the recipe for an economic recovery. Yet the Federal Reserve is signalling it thinks a recovery is on the way. And President Obama is making happy talk on the economy.

A recovery may very well technically begin in the 3rd quarter of 2009, as signalled by rising GDP. But it is shaping up to be a jobless and joyless recovery. Firms are finding ever new ways of producing and earning some profits without hiring workers. The prospect of higher taxes for health care and to fund all the bailouts understandably makes businessmen cautious about taking on the liability of new workers.

The administration’s economic policy has been behind the curve. The idea of initiating new federal mandates, like health care and cap-and-trade with the attendant higher taxes, is a sure way to derail an economic recovery. What is needed is less spending and broad-based tax cuts. The administration’s economic policy is the real clunker and it is time to trade it in.

Arrogant Judges

Item:  Judge sends a man to jail for yawning in court.   A six month jail sentence, if you can believe it.  The Cambridge arrest of the Harvard professor was an example of how the police can abuse their power by arresting people for annoying or obnoxious conduct (not real crimes!). 

This is an example of how judges abuse their power in a similar fashion.  Judges do need to maintain order in court, but this judge did not order the man to leave and did not mete out a fine.  If judges are  going to go so far as to jail a spectator, the prisoner ought to be released (in almost all cases) on his/her own recognizance, and the case should be decided by a jury, not the judge (who is now a witness). 

Item:  Judge says his conduct — deflating the tires of someone’s vehicle — wasn’t a “big deal.”  Compared to what sir?  A person who smokes a  marijuana cigarette in her home to alleviate back pain?  Seems to me that we’re lucky this judge was found out on this.  Not the type of thing we should expect or tolerate from a judge (to say the least).

But there is some good news today: When a local cop was speeding through stop signs and red lights without using a siren or flashing lights, and then broadsided a car,  killing Ashley McIntosh, the officer tried to argue that she was immune from a lawsuit because she was on official state business.  Judge Terrence Ney ruled that the cop’s belief that she was acting under special emergency circumstances did not make it so.   This judge understands that in a free society, state agents do not have carte blanche.  Good judging in action.

Consequential Trade Decision Looms

By September 17, President Obama will decide whether to reject, adopt, or modify recommendations from the U.S. International Trade Commission to impose duties of 55 percent on tires imported from China.  As I’ve stated before, imposition of duties could be the most consequential trade policy decision in several years, since it is rare that the president is tied so directly to a decision to impose barriers.  Trade restraints would be perceived by the Chinese as the direct wishes of the U.S. president, which would not be taken lightly in Beijing.

Although I elaborate further in a forthcoming paper, here is some smart analysis from trade lawyer and Cato coauthor Scott Lincicome.


The Price We All Pay for High Tax Rates

Politicians tend to like high tax rates because they believe it yields more revenue for them to redistribute.  Yet the perverse incentive effects of high rates tend to limit the increase in revenue, since the higher the rates, the more worthwhile are tax avoidance activities.  At some point it becomes better to consume than invest and play than work, since the rate of return is so low.

Reports Robert Carroll for the Tax Foundation:

Economic Effects of High Tax Rates
High tax rates discourage work, saving and entrepreneurship. They also encourage taxpayers to rearrange their tax affairs to receive more of their compensation in less heavily taxed forms and to take greater advantage of the myriad tax preferences in today’s tax code. For example, taxpayers can reduce their tax bill by financing more of a home purchase, receiving more of their compensation as tax-free fringe benefits, or rebalancing their investment portfolios towards tax-exempt state and local government bonds.

It’s important to remember that every time a taxpayer makes a decision based on tax considerations rather than economic merit, we all lose. It wastes resources by redirecting them to less productive uses. The cost of high tax rates is not trivial. Research on the major changes in tax rates over the last several decades—the lower tax rates enacted in 1981, 1986 and 2001 or the higher tax rates enacted in 1993—finds that the behavioral responses can be large. This research generally finds that for every 1 percent decrease in the after-tax reward from earning income, taxpayers reduce their reported income by about 0.4 percent.

This does not mean that tax cuts pay for themselves. Rather, tax rate changes can have a profound effect on the size of the tax base, with lower tax rates increasing the size of the tax base and higher tax rates, such as those proposed by President Obama, shrinking the tax base. A shrinking tax base is not only suggestive of the economic costs of high tax rates, but also means that the government will take in less revenue than the casual observer might assume.

High Tax Rates Will Shrink the Federal Income Tax Base
Consider the combined effect of President Obama’s proposal to raise the top tax rate from 35 percent to 39.6 percent and the new surtax. This means high-income households will receive 54 cents rather than 65 cents from every dollar they earn; that is, the after-tax reward from earning income falls by 17 percent. Based on the research mentioned above, with such large increases in tax rates, we can expect taxpayers facing the top tax rates to reduce their reported incomes by nearly 7 percent.

What is critically important from the government’s perspective is that while it collects an extra 10 cents for every dollar subject to the higher rates, it loses over 45 cents for every dollar by which reported income falls due to taxpayers working less or otherwise reporting less income.

Overall, simulating the effect of the higher tax rates in 2011 shows that the federal government can expect to raise at most only 60 cents on the dollar. While “large” is always in the eye of the beholder, losing 40 cents on a dollar should cause us all to question this policy. Moreover, this is a cautious estimate. It is based on the behavioral response estimated for the overall taxpaying population, even though high-income households are likely to be much more responsive. Thus, we might expect an even faster shrinkage of the federal tax base from these tax increases.

President Barack Obama wants Americans to believe that they can enjoy all of his proposed programs without paying for them because “the rich” will cover the cost.  Alas, this is a dangerous political fantasy.  Taxing “the rich” will only be the start.  To get real money, the big spenders are going to have to tax the middle class as well.  There ain’t no such thing as a free lunch–or a free government program!

Measuring Policy Success

NPR reported this morning that “Cash for Clunkers” style programs in Germany and France are “popular and successful.” Successful by what standard? I see that the Wall Street Journal has reported that in Europe “’cash for clunker’ programs have breathed fresh life into a battered auto industry.”

Yes, by that standard, no doubt subsidies for buying cars are successful in encouraging the sale of cars. Certainly subsidies to homebuying encouraged the buying of homes. A “Cash for Computers” program would “breathe fresh life” into computer sales. Make it “Cash for Compaq” or “Cash for Windows,” and you could direct purchasers to particular companies.

But to declare a policy successful, shouldn’t you mean that it makes the country better off? And that means that the subsidies produced more economic growth or more overall consumer satisfaction than a policy of nonintervention would have. That’s a much harder standard to meet. Subsidies by definition divert consumer choices from their natural outcome. Economists generally agree that subsidies create deadweight losses for society. And sometimes, by distorting consumer decisions and encouraging decisions that don’t make real economic sense – as in the long effort to channel consumer resources into housing – subsidies eventually prove unsustainable and unstable.

Indeed, it seems likely that another part of the Wall Street Journal was correct when it described “Cash for Clunkers” as “crackpot economics.”