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Archive for May 20th, 2010

TARP was awful and the GM-Chrysler bailout was terrible, but those wretched pieces of legislation would be surpassed by something even more reprehensible if politicians sign on to this terrible idea to bail out the bloated pension plans of state and local government bureaucrats. If this happens, I hope taxpayers respond with massive civil disobedience when it comes to paying taxes. Here is an excerpt from the Financial Times:

Illinois used to have a plan to pay off the gaping shortfall in the pension funds that pay retired teachers, university employees, state workers, judges and politicians, Dan Long recalls. Mr Long, director of the Commission on Government Forecasting and Accountability, the non-partisan auditing arm of the Illinois state legislature, remembers that, back in 1994, the state laid out a proposal that would have paid off most of what was then a $17bn gap by 2011. …Illinois is the poster child of unfunded pensions in the US. But state retirement systems could become a national concern, new research shows. Joshua Rauh, associate professor of finance at the Kellogg School of Management at Northwestern University said that, without reform, some state pensions might run out within the decade. …if these funds exhaust their assets, the size of payments for the benefits they have promised will be too large to cover through taxes, putting pressure on the federal government for a bail-out that could potentially cost more than $1,000bn, he says. “It is more than a local problem,” Mr Rauh said. “The federal government could be on the hook.” Estimates put the unfunded liabilities at between $1,000bn and $3,000bn after years of states promising benefits but not contributing enough in both good times and bad to cover them. …States have begun reforms, with some lowering return expectations and raising employee contributions and retirement ages. Mr Rauh said such measures were cosmetic and states needed comprehensive, federally sponsored reform that would require closing the systems to new members, shifting state workers to Social Security and individual plans similar to those that are used by the private sector in order to obtain incentives to borrow to bridge the gaps.

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British healthcare is often criticized for long waiting lines and slovenly conditions, but that’s just part of the story. Here’s a frightening story about a women who actually got treated – and died as a result. To be fair, this presumably is a tragic exception and most people in the United Kingdom surely receive adequate care. That being said, how can medical professionals miss a six-inch handle stuck in someone’s butt?!? Here’s an excerpt from the Sun newspaper:

A young mum died after a series of blunders by doctors who failed to spot a six-inch long toilet brush handle embedded in her buttock, an inquest was told today. Cindy Corton, 35, was left with the bizarre injury after a drunken fall in a friend’s bathroom in 2005 but “serious errors” by doctors then led to her death. It was two years before Cindy, who was in constant pain, was able to convince doctors that the thin serrated plastic handle was stuck in the flesh of her bottom. By then what should have been a routine procedure to remove it had become much more dangerous because the handle had become embedded in her pelvis. After two unsuccessful operations in 2007 the mother-of-one was in such agony that she agreed to undergo further surgery in June last year despite being told it could prove fatal. Cindy of Sleaford, Lincs, spent more than ten hours in surgery at Nottingham’s Queens Medical Centre but died from massive blood loss. …Cindy’s husband, a construction manager, is now taking legal action against United Lincolnshire Hospitals Trust. …He added: “Cindy got a very poor service from the NHS. I’m sure she would have got better treatment in foreign countries.”

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David Ranson had a good column earlier this week in the Wall Street Journal explaining that federal tax revenues historically have hovered around 19 percent of gross domestic product, regardless whether tax rates are high or low. One reason for this relationship, as he explains, is that the Laffer Curve is a real-world constraint on class warfare tax policy. When politicians boost tax rates, that motivates taxpayers to earn and/or report less income to the IRS:

The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth. …tax revenue has grown over the past eight decades along with the size of the economy. It illustrates the empirical relationship first introduced on this page 20 years ago by the Hoover Institution’s W. Kurt Hauser—a close proportionality between revenue and GDP since World War II, despite big changes in marginal tax rates in both directions. “Hauser’s Law,” as I call this formula, reveals a kind of capacity ceiling for federal tax receipts at about 19% of GDP. …he tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect.

Several people have asked my opinion about the piece. I like the column, of course, but I’m not nearly so optimistic that 19 percent of GDP represents some sort of limit on the federal government’s taxing power. There are many nations in Europe with tax burdens closer to 50 percent, for instance, so governments obviously have figured how to extract much higher shares of national output. Part of the difference is because America has a federal system, and state and local governments collect taxes of about 10 percent of GDP. That still leaves a significant gap in total tax collections, though, so the real question is why American politicians are not as proficient as their European cousins at confiscating money from the private sector?

One reason is that European countries have value-added taxes, which are a disturbingly efficient way of generating more revenue. So does this mean that “Hauser’s Law” will protect us if politicians are too scared to impose a nationwide sales tax? That’s certainly a necessary condition for restraining government, but probably not a sufficient condition. If you look at the table, which is excerpted from the OECD’s annual Revenue Statistics publication, you can see that nations such as New Zealand and Denmark have figured out how to extract huge amounts of money using the personal and corporate income tax.

In some cases, tax rates are higher in other nations, but the main factor seems to be that the top tax rates in other nations are imposed at much lower levels of income. Americans don’t get hit with the maximum tax rate until our incomes are nine times the national average. In other nations, by contrast, the top tax rates take effect much faster, in some cases when taxpayers have just average incomes. In other words, European nations collect a lot more money because they impose much higher tax rates on ordinary people. Here’s a chart I put together a few years ago for a paper I wrote for Heritage (you can find updated numbers in Table 1.7 of this OECD website, but the chart will still look the same).

Europeans also sometimes impose high tax rates on rich people, but this is not the reason that tax receipts consume nearly 50 percent of GDP in some nations. Rich people in Europe, like their counterparts in America, have much greater ability to control the amount of taxable income that is earned and/or reported. These “Laffer Curve” responses limit the degree to which politicians can finance big government on the backs of a small minority.

But class-warfare tax rates on the rich do serve a very important political goal. Politicians understand that ordinary people will be less likely to resist oppressive tax rates if they think that those with larger incomes are being treated even worse. Simply stated, higher tax rates on the rich are a necessary precondition for higher tax rates on average taxpayers.

For “Hauser’s Law” to be effective, this means proponents of limited government need to fight two battles. First, they need to stop a VAT. Second, they need to block higher tax rates on the so-called rich in order to prevent higher tax rates on the middle class.

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