Archive for July 21st, 2010

While it will be nice to say “I told you so” when Obamacare leads to bad results in America, I would much prefer to avoid having stories like this appear in the American press. But in the United Kingdom, where government controls more than 90 percent of the healthcare system (as opposed to my rough guess of less than 70 percent in America), these kinds of disasters are becoming increasingly common. Here’s a blurb from a story in the UK-based Telegraph.

Women in labour have been forced to wait while epidural equipment was borrowed from other hospitals, while other patients have been denied chest drains and radiology supplies, according to doctors at South London Healthcare Trust. Minutes of a meeting between medical staff and the trust’s chief executive say “cash flow” problems at the trust which has a £50 million deficit, mean vital equipment is regularly not ordered. A separate letter sent to managers of the trust, one of the largest in the country, says consultants have been misled into carrying out operations when it was not safe to go ahead because of bed shortages. …Doctors told managers “again and again” that consultants were unable to know that equipment was missing until the last item had been used, when their patient was already lying on the table, according to the minutes of June 16 meeting. The document states that Chris Streather, the trust’s chief executive said the situation had improved to the extent that the trust could now pay some of its bills, but that he could not promise that the problem would not recur. It describes “significant risks” to patient safety because of shortages of beds, and “chaotic” failures dealing with such crises at the trust, which also runs Queen Mary’s Hospital in Sidcup, in Kent, and Queen Elizabeth Hospital in Woolwich, London, and NHS units in Orpington and Beckenham, in Kent. Patients affected include a woman who had undergone major cancer surgery who could not be found a bed.

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With apologies to Dr. Seuss, maybe that will be the name of a future book I’ll write about the anti-competitive impact of high tax rates. And one of my chapters will be about what we can learn from the states. Richard Rahn’s column in the Washington Times reviews some of the key evidence on this issue, noting that states without income taxes are enjoying better economic performance than states with income taxes. Not surprisingly, he also finds states with the highest tax rates are the ones in the most trouble.
Why is it that some of the states with the biggest fiscal problems have the highest individual state income tax rates, such as New York and California, while some of the states with the least fiscal problems have no state income tax at all? High-tax advocates will argue that the high-tax states provide much more and better state services, but the empirical evidence does not support the assertion. On average, schools, health and safety, roads, etc. are no better in states with income taxes than those without income taxes. More importantly, the evidence is very strong that people are moving from high-tax states to lower-tax-rate states – the migration from California to Texas and from New York to Florida being prime examples. …It is interesting that the high-tax-rate states also, on average, have much higher per capita debt levels than states without income taxes. …There have been a number of both empirical and theoretical studies showing the negative impacts of state income taxes and particularly those with high marginal rates on economic growth within the state. A recent study published in the Cato Journal by professors Barry W. Poulson and Jules Gordon Kaplan, which was carefully controlled for the effects of regressivity, convergence and regional influences in isolating the effect of taxes on economic growth in the states concluded: “Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue.” …Income taxes, as contrasted with consumption (i.e., sales) taxes and modest property tax rates, are far more costly to administer and do far more economic damage (by discouraging work, saving and investment) and are far more intrusive on individual liberty. The states without state income taxes overall have had far better economic performance for most of the past several decades than have the income tax states – particularly those with high marginal taxes.

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The Wall Street Journal has an excellent editorial this morning on the obscure – but critically important – issue of measuring what happens to tax revenue in response to changes in tax policy. This is sometimes known as the dynamic scoring vs static scoring debate and sometimes referred to as the Laffer Curve controversy. The key thing to understand is that the Joint Committee on Taxation (which produces revenue estimates) assumes that even big changes in tax policy have zero macroeconomic impact. Adopt a flat tax? The JCT assumes no effect on the economic performance. Double tax rates? The JCT assumes no impact on growth. The JCT does include a few microeconomic effects into its revenue-estimating models (an increase in gas taxes, for instance, would reduce gasoline consumption), but it is quite likely that they underestimate the impact of high tax rates on incentives to work, save, and invest. We don’t know for sure, though, because the JCT refuses to make its methodology public. This raises a rather obvious question: Why is the JCT so afraid of transparency? Here’s some of what the WSJ had to say about the issue, including some comparisons of what the JCT predicted and what happened in the real world.
…it’s worth reviewing whether Joint Tax estimates are accurate. This is especially important now, because President Obama and Democrats in Congress want to allow the 2003 tax cuts to expire on January 1 for individuals earning more than $200,000. The JCT calculates that increasing the tax rates on capital gains, dividends and personal income will raise nearly $100 billion a year. …we are not saying that every tax cut “pays for itself.” Some tax cuts—such as temporary rebates—have little impact on growth and thus they may lose revenue more or less as Joint Tax predicts. Cuts in marginal rates, on the other hand, have substantial revenue effects, as economic studies have shown. In a 2005 paper “Dynamic Scoring: A Back-of-the-Envelope Guide,” Harvard economists Greg Mankiw and Matthew Weinzierl looked at the revenue feedback effects of tax cuts. They concluded that in all of the models they considered “the dynamic response of the economy to tax changes is too large to be ignored. In almost all cases, tax cuts are partly self-financing. This is especially true for cuts in capital income taxes.” We could cite other evidence that squares with what happened after tax cuts in the 1960s, 1980s and in 2003. So how well did Joint Tax do when it predicted a giant revenue decline from the 2003 investment tax cuts? Not too well. We compared the combined Congressional Budget Office and Joint Tax estimate of revenues after the 2003 tax cuts were enacted with the actual revenues collected from 2003-2007. In each year total federal revenues came in substantially higher than Joint Tax predicted—$434 billion higher than forecast over the five years. …As for capital gains tax receipts, they nearly tripled from 2003 to 2007, even though the capital gains tax rate fell to 15% from 20%. Yet the behavioral models that Mr. Barthold celebrates predicted that the capital gains cuts would cost the government just under $10 billion from 2003-07 when the actual capital gains revenues over five years were $221 billion higher than JCT and CBO predicted. …Estimating future federal tax revenues is an inexact science to be sure. Our complaint is that Joint Tax typically overestimates the revenue gains from raising tax rates, while overestimating the revenue losses from tax rate cuts. This leads to a policy bias in favor of higher tax rates, which is precisely what liberal Democrats wanted when they created the Joint Tax Committee.
All of the revenue-estimating issues are explained in greater detail in my three-part video series on the Laffer Curve. Part I looks at the theory. Part II looks at the evidence. Part III, which can be watched below, analyzes the role of the Joint Committee on Taxation and speculates on why the JCT refuses to be transparent.

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