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Posts Tagged ‘Incentives’

Obamacare was put together by people who don’t understand economics.

This is probably the understatement of the year since I could be referring to many features of the bad law.

The higher tax burden on saving and investment, making an anti-growth tax system even worse.

The exacerbation of the third-party payer problem, which is the nation’s biggest healthcare problem.

The increased burden of government spending, worsening America’s entitlement crisis.

Those are all significant problems, but today I want to focus on how Obamacare encourages people to be less productive. And I’m going to use a rather unexpected source. The left-leaning San Francisco Chronicle has a financial advice column that inadvertently show how Obamacare discourages people from earning income.

The article nonchalantly explains that people may want to reduce their income so they can get more goodies from the government.

People whose 2014 income will be a little too high to get subsidized health insurance from Covered California next year should start thinking now about ways to lower it to increase their odds of getting the valuable tax subsidy. “If they can adjust (their income), they should,” says Karen Pollitz, a senior fellow with the Kaiser Family Foundation. “It’s not cheating, it’s allowed.” Under the Affordable Care Act, if your 2014 income is between 138 and 400 percent of poverty level for your household size, you can purchase health insurance on a state-run exchange (such as Covered California) and receive a federal tax subsidy to offset all or part of your premium. …getting below the 400 percent poverty limit could save many thousands of dollars per year.

You may be thinking that this is just a theoretical problem, but the article cites a very real example.

To get a subsidy, the couple’s modified adjusted gross income for 2014 income would need to fall below $62,040, which is 400 percent of poverty for a family of two. …Proctor estimates that her 2014 household income will be $64,000, about $2,000 over the limit. If she and her husband could reduce their income to $62,000, they could get a tax subsidy of $1,207 per month to offset the purchase of health care on Covered California. That would reduce the price of a Kaiser Permanente bronze-level plan, similar to the replacement policy she was quoted, to $94 per month from $1,302 per month. Instead of paying more than $15,000 per year, the couple would pay about $1,100.

To put it in even simpler terms, this couple has figured out that they can get almost $14,000 of other people’s money by reducing how much they earn by just $2,000.

That, in a nutshell, is the perfect illustration of the welfare state. It tells people that they can get more by producing less. And the system is based on the theory that there will always be some suckers who work hard to provide the subsidies.

But as we’ve seen in Greece, Italy, Spain, and elsewhere, this system eventually breaks down as more and more people learn that it’s easier to ride in the wagon than it is to pull the wagon (as powerfully illustrated by these two cartoons).

And remember that the United States isn’t too far behind Europe’s welfare states.

Thanks to the plethora of welfare programs and income-redistribution schemes that already exist, millions of Americans have an incentive to earn less money and get trapped in government dependency. This graph, for instance, shows that various handouts mean that a single mom with $29,000 of income can be better off than a self-reliant person with $69,000 of income.

And a local CBS station discovered that a low-income household could be eligible for more than $80,000 of goodies from the government. Earning more money, though, would mean fewer handouts.

The same problem exists, by the way, in other nations such as Denmark and the the United Kingdom.

Remember Julia, the mythical moocher created by the Obama campaign to show the joys of government dependency? As illustrated by this Ramirez cartoon, Julia symbolizes the entitlement mentality. But the cartoon doesn’t go far enough. It should show how Julia decides to lead a less productive and less fulfilling life because she gets hooked on the heroin of handouts.

P.S. Some honest liberals recognize that redistribution can trap people in poverty.

P.P.S. Unsurprisingly, Thomas Sowell explains this issue with blunt and powerful logic.

P.P.P.S. To close with some humor, here’s a new Declaration of Dependency put together for our leftist friends. Though they may want to think twice before asking for a divorce from Red State America.

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I’m a big fan of Chuck Asay’s political cartoons. My favorite is his nothing-left-to-steal masterpiece.

And his tractor cartoon and his regime-uncertainty cartoon are brilliant indictments of Obamanomics.

Here’s another classic. It shows the impact of the welfare state on incentives for work, self reliance, and independence.

Asay Welfare CartoonIn six cartoon frames, he cleverly explains the economics of labor supply in a welfare state. Heck, there are many economists who could learn something from Asay’s work.

With gems like this, no wonder he came in second place in my political cartoonist contest.

This unsigned Wizard-of-Id parody has the same basic message about labor supply and handouts, and here’s a chart with some staggering real-world evidence of how the welfare state discourages people from productive behavior.

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Back in 2011, I linked to a simple chart that illustrated how handouts and subsidies create very high implicit marginal tax rates for low-income people and explained how “generosity” from the government leads to a tar-paper effect that limits upward mobility.

Earlier this year, I shared an amazing chart that specifically measured how the welfare state imposes these high implicit tax rates. Unbelievably, some people would be better off earning $29,000 rather than $69,000.

Simply stated, the multitude of redistribution programs are worth a lot of money, but you begin to lose those goodies if you begin to live a productive and independent life.

And since we know that rich people respond to high tax rates by declaring less income to the government, we shouldn’t be surprised that poor people also respond to incentives.

We also shouldn’t be surprised to learn that other nations have these same perverse policies. Here are some excerpts from a powerful piece for the UK-based Spectator.

…today’s Sunday Times magazine has a long piece asking whether there is a “fundamental difference in our attitudes to work”. It’s still one of the most important questions in Britain today: what’s the use of economic growth if it doesn’t shorten British dole queues? And should we blame these industrious immigrants; aren’t the Brits just lazy? …The quality of the British debate is so poor that we almost never look at this from the point of view of the low-wage worker. Every budget, the IFS will dutifully work out if it has been “fair” – ie, gives the most to the poorest. The LibDems will judge a budget by this metric. That’s a nice, easy, simple graph. But what about destroying the work incentive? Each budget and each change to tax should be judged on how many people are then ensnared in the welfare trap. I adapted the below (nasty, complex) graphs from an internal government presentation, which still make the case powerfully. The bottom axis is money earned from employer and the side axis is income retained. The graphs are complex but worth studying, if only to get a feel for the horrific system confronting millions of the lowest-paid in Britain today.

Here are the two charts. the author is correct. They are quite complex. But they show that there’s no much incentive to work harder, whether you’re a young person or a single parent.

After showing these amazing charts, the author makes some very powerful additional observations.

…if I was in a position of a British single mother I have not the slightest doubt that I would choose welfare. Why break your back on the minimum wage for longer than you have to, if it doesn’t pay? Some people do have the resolve to do it. I know I wouldn’t. …So let’s not talk about “lazy” Brits. The problem is a cruel and purblind welfare system which still, to this day, strengthens the welfare trap with budgets passed without the slightest regard for its effect on the work incentives on the poorest. …Meanwhile, the cash-strapped British government is still creating still the most expensive poverty in the world.

The final sentence in the excerpt really sums it up, noting that the government is “creating the most expensive poverty in the world.” Sort of like a turbo-charged version of Mitchell’s Law. The politicians create a few redistribution programs. Poverty begins to get worse. So then they add a few more handouts to address the problems caused by the first set of programs. Lather, rinse, repeat.

In other words, this poster applies in all nations.

P.S. If you want some real-world examples of the horrible impact of the British welfare state, you can see how the welfare state destroys lives, creates perverse incentives, and turns people into despicable moochers.

P.P.S. We have the same problems in America, and even leftists are beginning to admit this is bad for poor people. Heck, just look at this chart showing that the poverty rate was falling until the War on Poverty began.

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In my explanations of the Laffer Curve, I’ve shown evidence that high tax rates discourage productive behavior and boost the underground economy.

And if higher tax rates are sufficiently onerous, the resulting reductions in taxable income can completely offset the revenue-generating impact of higher tax rates. Indeed, this is what’s already happened with the “Snooki tax.”

And the same thing happens in reverse. If lower tax rates lead to a big enough increase in taxable income, the government actually collects more revenue – which is exactly what happened when the top tax rate was lowered in the 1980s.

I’ve also tried to explain, shifting from economics to philosophy, that confiscatory tax rates are unfair and immoral. And I’m glad to see that most Americans agree, with 75 percent of all people saying that nobody should ever face a tax rate of more than 30 percent.

Notwithstanding that polling data, though, I fear that many people don’t really understand the economics of taxation. So I’m happy to share this little story that periodically winds up in my inbox.

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Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this…

  • The first four men (the poorest) would pay nothing
  • The fifth would pay $1
  • The sixth would pay $3
  • The seventh would pay $7
  • The eighth would pay $12
  • The ninth would pay $18
  • The tenth man (the richest) would pay $59

So, that’s what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball.

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily beer by $20″. Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

The bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

  • And so the fifth man, like the first four, now paid nothing (100% saving).
  • The sixth now paid $2 instead of $3 (33% saving).
  • The seventh now paid $5 instead of $7 (28% saving).
  • The eighth now paid $9 instead of $12 (25% saving).
  • The ninth now paid $14 instead of $18 (22% saving).
  • The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”

“That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

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Very well done. Reminds me of the PC version of the story about the ant and the grasshopper, or perhaps the joke about using two cows to explain various economic and political systems.

And if you like those, you’ll appreciate this modern fable about bureaucracy, featuring an ant and a lion.

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I’ve written periodically about the perverse incentives of the unemployment insurance system. Simply stated, there will be fewer jobs if the government subsidizes joblessness, and I even showed that this is a consensus position by citing the academic writings of left-leaning economists such as Larry Summers and Paul Krugman.

The San Francisco Federal Reserve also has produced research measuring the negative impact of unemployment insurance on the job market.

Now we have some additional academic research on the topic, and the results once again show that the unemployment insurance program causes a significant increase in unemployment.

The Emergency Unemployment Compensation program created in the summer of 2008 provided for unprecedented extensions in the duration of unemployment insurance (UI) benefits. Combined with persistent high unemployment and historically long durations of unemployment during the 2008 and 2009 recession, this extension of UI has prompted renewed interest in the impact of UI benefits on job search, the duration of unemployment, and the unemployment rate. …This paper uses multiple regression analysis to estimate the impact of extended UI benefits on the unemployment rate after controlling for the severity of the recent recession. The extension of UI is found to have a positive and significant impact on the national unemployment rate… The UI benefit extensions that have occurred between the summer of 2008 and the end of 2010 are estimated to have had a cumulative effect of raising the unemployment rate by .77 to 1.54 percentage points.

If you’re trying to educate a statist friend or colleague about the relationship between unemployment insurance and joblessness, this research should help. But you may also want to share this real-world story. And here’s another powerful anecdote.

Last but not least, this cartoon does a very effective job of showing the consequences of paying people not to work.

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Even though there is a wealth of evidence for the Laffer Curve, statists and other big-government advocates routinely claim that incentives don’t matter.

So I wonder how they’ll react to this new research showing that incentives have an impact on sexual choices. Here are some blurbs from The Economist.

…if you are a poor African teenager, having a sugar daddy is not such a bad deal. Eventually, Mr Right may come along and in the meantime life is, as the term suggests, a lot sweeter than it might otherwise be. Except for one thing. In many parts of Africa, relationships between older men and younger women are one of the main transmitters of HIV. With that in mind, it has often been hypothesised that if teenage girls were given an alternative income—one that might, for instance, allow them to stay on at school—they would be less likely to get infected. It is a plausible hypothesis but one that has not, until now, actually been tested. That lack has just been remedied by Berk Özler, of the World Bank, and his colleagues. In a paper just published by the Lancet, they describe how they conducted a randomised clinical trial of the idea that money, and money alone, can stop the spread of HIV. …In some they and their parents were given small amounts of money each month (between $1 and $5 for the women, and between $4 and $10 for the parents), again decided at random by the computer. In a third set of areas money was doled out in a similar way, but only in exchange for a promise by the woman to attend school. If she failed to do so, no money was forthcoming. …the team found that the unpaid women had suffered more than twice the HIV infection rate experienced by the paid women over the course of the 18 months of the experiment, and four times the infection rate of genital herpes. Intriguingly, there was no difference between the infection rate suffered by those required to go to school and those who received the money unconditionally. …What is abundantly clear, however, was that the money did make women behave differently. They had younger boyfriends than those in the control group, and had sex less frequently. Liberated from the need to find a sugar daddy, they could behave in a safer way. Those attempting to stop the spread of AIDS have, in the past, tried many ways of getting people to change their behaviour in order to reduce the risk of infection. They have extolled, exhorted and even threatened, all to little avail. They have not, though, previously, resorted to bribery. But it seems to work.

Upon reading this, I had several reactions.

  • I first thought being a sugar daddy would be a nice gig, but then I realized that I don’t have nearly enough sugar in my bank account. Life obviously isn’t fair.
  • I then thought that I’m not a fan of the World Bank, but I must admit that this seems to be a reasonably good way for them to spend money.
  • I also wondered why nobody is arresting, harassing, or otherwise going after these SOBs that are infecting the young girls. If I was the father of one of these girls, it definitely would be time for some vigilante justice.
  • Finally, being a policy geek, I wondered whether this powerful example of incentives might get some leftists to draw some obvious conclusions about the need for better tax policy.

But then I came to my senses. It seems that many of the statists I debate and deal with support punitive taxation for reasons of spite and envy. As such, they don’t really care about the impact on either the economy or tax revenues.

And if you’re wondering why they would come to such a crazy conclusion, watch this video – especially beginning about the 4:30 mark.

It’s enough to make you wonder whether they realize that this strategy is self defeating. Heck, even a former socialist President of Brazil noted that there’s nothing to redistribute if some people don’t first produce.

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Alan Blinder has a distinguished resume. He’s a professor at Princeton and he served as Vice Chairman of the Federal Reserve.

So I was interested to see he authored an attack on the flat tax – and I was happy after I read his column. Why? Well, because his arguments are rather weak. So anemic that it makes me think there’s actually a chance to get rid of America’s corrupt internal revenue code.

There are two glaring flaws in his argument. First, he demonstrates a complete lack of familiarity with the flat tax and seemingly assumes that tax reform simply means imposing one rate on the current system.

Here’s some of what he wrote in a Wall Street Journal column.

Many useful steps could be taken to simplify the personal income tax. But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them. The truth is that 100% of the complexity inheres in the definition of taxable income, which takes up millions of words in the tax laws. None inheres in the progressive rate structure. If you don’t believe that, consider the fact that the corporate income tax is virtually flat once a corporation passes a paltry $75,000 in taxable income. Is it simple? Back to the personal tax. Figuring out your taxable income can be quite an effort. But once that is done, most taxpayers just look up their tax bill on an IRS-provided table. Those with incomes above $100,000 must perform a simple calculation that involves multiplying two numbers together and adding a third. A flat tax with an exemption would require precisely the same sort of calculation. The net reduction in complexity? Zero.

I can understand how an average person might think the flat tax is nothing more than applying a single tax rate to the current system, but any public finance economist must know that the plan devised by Professors Hall and Rabushka completely rips up the current tax system and implements a new system based on one tax rate with no double taxation and no loopholes.

Heck, the Hall/Rabushka book is online and free of charge. But Blinder obviously could not be bothered to understand the proposal before launching his attack.

What about his second mistake? This one’s a doozy. He actually assumes that taxable income is fixed, which is a remarkable error for anyone who supposedly understands economics.

…flattening the rate structure won’t make the tax code any simpler. It would, however, make the tax system far less progressive. Do the math. …Someone with $20 million in taxable income pays nearly $7 million in taxes under the current rate structure, with its 35% top rate. Replace that with a 23% flat tax, and the bill drops to just under $4.6 million.

In other words, he assumes that people won’t change their behavior even though incentives to engage in productive behavior are significantly altered.

In a previous post, I showed how rich people dramatically increased the amount of income they were willing to earn and report after Reagan lowered the top tax rate from 70 percent to 28 percent.

To Blinder, this real-world evidence doesn’t matter – even though the rich paid much more tax to the IRS after Reagan slashed tax rates.

For more information, here’s my flat tax video.

And here’s the video on the global flat tax revolution. Interestingly, there are now about five more flat tax jurisdictions since this video was made – though Iceland abandoned its flat tax, so there are some steps in the wrong direction.

Makes you wonder. If the flat tax is such a bad idea, why are so many nations doing so well using this simple and fair approach?

But be careful, as this cartoon demonstrates, simplicity can mean bad things if the wrong people are in charge.

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One of my frustrating missions in life is to educate policy makers on the Laffer Curve.

This means teaching folks on the left that tax policy affects incentives to earn and report taxable income. As such, I try to explain, this means it is wrong to assume a simplistic linear relationship between tax rates and tax revenue. If you double tax rates, for instance, you won’t double tax revenue.

But it also means teaching folks on the right that it is wildly wrong to claim that “all tax cuts pay for themselves” or that “tax increases always mean less revenue.” Those results occur in rare circumstances, but the real lesson of the Laffer Curve is that some types of tax policy changes will result in changes to taxable income, and those shifts in taxable income will partially offset the impact of changes in tax rates.

However, even though both sides may need some education, it seems that the folks on the left are harder to teach – probably because the Laffer Curve is more of a threat to their core beliefs.

If you explain to a conservative politician that a goofy tax cut (such as a new loophole to help housing) won’t boost the economy and that the static revenue estimate from the bureaucrats at the Joint Committee on Taxation is probably right, they usually understand.

But liberal politicians get very agitated if you tell them that higher marginal tax rates on investors, entrepreneurs, and small business owners probably won’t generate much tax revenue because of incentives (and ability) to reduce taxable income.

To be fair, though, some folks on the left are open to real-world evidence. And this IRS data from the 1980s is particularly effective at helping them understand the high cost of class-warfare taxation.

There’s lots of data here, but pay close attention to the columns on the right and see how much income tax was collected from the rich in 1980, when the top tax rate was 70 percent, and how much was collected from the rich in 1988, when the top tax rate was 28 percent.

The key takeaway is that the IRS collected fives times as much income tax from the rich when the tax rate was far lower. This isn’t just an example of the Laffer Curve. It’s the Laffer Curve on steroids and it’s one of those rare examples of a tax cut paying for itself.

Folks on the right, however, should be careful about over-interpreting this data. There were lots of factors that presumably helped generate these results, including inflation, population growth, and some of Reagan’s other policies. So we don’t know whether the lower tax rates on the rich caused revenues to double, triple, or quadruple. Ask five economists and you’ll get nine answers.

But we do know that the rich paid much more when the tax rate was much lower.

This is an important lesson because Obama wants to run this experiment in reverse. He hasn’t proposed to push the top tax rate up to 70 percent, thank goodness, but the combined effect of his class-warfare policies would mean a substantial increase in marginal tax rates.

We don’t know the revenue-maximizing point of the Laffer Curve, but Obama seems determined to push tax rates so high that the government collects less revenue. Not that we should be surprised. During the 2008 campaign, he actually said he would like higher tax rates even if the government collected less revenue.

That’s class warfare on steroids, and it definitely belong on the list of the worst things Obama has ever said.

But I don’t care about the revenue-maximizing point of the Laffer Curve. Policy makers should set tax rates so we’re at the growth-maximizing level instead.

To broaden the understanding of the Laffer Curve, share these three videos with your friends and colleagues.

This first video explains the theory of the Laffer Curve.

This second video reviews some of the real-world evidence.

And this video exposes the biased an inaccurate “static scoring” of the Joint Committee on Taxation.

And once we educate everybody about the Laffer Curve, we can then concentrate on teaching them about the equivalent relationship on the spending side of the fiscal ledger, the Rahn Curve.

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I posted a joke about this last year, but this video makes the point much more effectively. When you tax and redistribute income or grades, you penalize those who achieve and work hard.

Kudos to the college kids who put this together. The volume sometimes is inadequate, but the overall message comes through loud and clear.

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Since it is tax-filing season and we all want to honor our wonderful tax system, let’s go into the archives and show this video from last year about the onerous compliance costs of the internal revenue code.

The mini-documentary explains how needless complexity creates an added burden – sort of like a hidden tax that we pay for the supposed privilege of paying taxes.

Two things from the video are worth highlighting.

First, we should make sure to put most of the blame on Congress. The IRS is in the unenviable position of trying to enforce Byzantine tax laws. Yes, there are examples of grotesque IRS abuse, but even the most angelic group of bureaucrats would have a hard time overseeing 70,000-plus pages of laws and regulations (by contrast, the Hong Kong flat tax, which has been in place for more than 60 years, requires less than 200 pages).

Second, we should remember that compliance costs are just the tip of the iceberg. The video also briefly mentions three other costs.

1. The money we send to Washington, which is a direct cost to our pocketbooks and also an indirect cost since the money often is used to finance counterproductive programs that further damage the economy.

2. The budgetary burden of the IRS, which is a staggering $12.5 billion. This is the money we spend to employ an army of tax bureaucrats that is larger than the CIA and FBI combined.

3. The economic burden of the tax system, which measures the lost economic output from a tax system that penalizes productive behavior.

The way to fix this mess, needless to say, is to junk the entire tax code and start all over.

I’ve been a big proponent of the flat tax, which would mean one low tax rate, no double taxation of savings, and no corrupt loopholes. But I’m also a big fan of national sales tax proposals such as the Fair Tax, assuming we can amend the Constitution so that greedy politicians don’t pull a bait and switch and impose both an income tax and a sales tax.

But the most important thing we need to understand is that bloated government is our main problem. If we had a limited federal government, as our Founding Fathers envisioned, it would be almost impossible to have a bad tax system. But if we continue to move in the direction of becoming a European-style welfare state, it will be impossible to have a good tax system.

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Greetings from frigid Minnesota. I’m in this misplaced part of the North Pole to testify before both the Senate and House Tax Committees today on issues related to the Laffer Curve.

In other words, I will be discussing how governments should measure the revenue impact of changes in tax policy – what is sometimes known as the dynamic scoring vs static scoring debate.

Most governments, including the folks in Washington, assume that tax policy has no impact on the economy. As such, it is relatively easy to measure how much revenue will rise or fall when tax policy is altered. After all, there are only two moving parts – tax rates and tax revenue.

So if tax rates double, revenues climb by 100 percent. If tax rates are reduced by 50 percent, tax revenues drop by one-half.

This is a slight over-simplification, but it does capture the basics of conventional revenue estimating. And it also shows why “static scoring” is deeply flawed. In the real world, people respond to incentives. When tax rates rise and fall, people change their behavior.

When tax rates are punitive, for instance, people earn and/or declare less income to the government. And when tax rates are reasonable, by contrast, people earn and/or declare more income to the government. In other words, there are actually three moving parts – tax rates, tax revenue, and taxable income.

Figuring out the relationship of these three variables is known as “dynamic scoring” and it is much more challenging that static scoring, but it is much more likely to give lawmakers correct information.

It does not mean, by the way, that “tax cuts pay for themselves” or that “tax increases lose revenue,” as GOPers sometimes claim. That only happens in rare circumstances.

If you want to understand this issue and be more knowledgeable than 99 percent of the people in government (not very difficult, so don’t let it go to your head), watch this three-part series on the Laffer Curve.

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The Wall Street Journal uses the clash between the Steelers and Packers as an opportunity to make a much-need point about taxes. Because of Pennsylvania’s flat tax, Ben Roethlisberger keeps a greater percentage of his salary than Aaron Rodgers, who gets raped by Wisconsin’s “progressive” tax system. Packers fans shouldn’t worry about this, though, since even I’m not willing to claim that the negative impact of high tax rates on incentives will have any effect on the outcome of the game.

We won’t predict the winner of this Sunday’s Super Bowl between the Pittsburgh Steelers and Green Bay Packers. But we can report this much: The Steelers will get to keep a lot more of their season earnings, though both team’s players would be a lot richer if they played all of their home games in Dallas. Take the Packers’ fleet-footed quarterback Aaron Rodgers. He made $8.6 million in 2009, according to USA Today’s database of player salaries. Of that, we calculate he paid roughly $680,000 in state and $3.1 million in federal income and payroll taxes. Steeler quarterback Ben Roethlisberger didn’t earn as much, but he got to keep a relatively larger chunk of his haul—$4.6 million of his $7.7 million salary. (This excludes taxes paid to states that tax players visiting on away games.) Unlike Wisconsin, which has a graduated income tax that charges top earners 7.75% on earnings over $220,000, Pennsylvania has a 3% flat rate. Even football players can behold the merit of a flat tax. Of course, both players would keep a lot more of their earnings if like quarterback Tony Romo (salary: $625,000) they played for the Cowboys since Texas levies no state income tax. On the other hand, Packer and Steeler fans will pay if they travel to Texas for the game since Texas’s beer tax is more than twice as high as their home state’s.

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I write about the Laffer Curve so often that I’m surprised people don’t run away screaming. But I’ll continue to be a pest because I want people to understand that you can’t just look at changes in tax rates when predicting changes in tax revenue. You also have to consider changes in taxable income.

Simply stated, my goal is for people to recognize that higher tax rates lower incentives to earn and report income and lower tax rates increase incentives to earn and report income. However, I also want people to understand that this doesn’t mean “all tax cuts pay for themselves.” That only happens in very rare cases. Moreover, it would be good if people recognized that there are lots of factors that influence the economy’s performance, and it’s therefore important to be cautious when making claims about the relationships between tax rates, taxable income, and tax revenue.

So we many not be able to precisely measure the impact of the Laffer Curve, we know it’s there and we know it can be very significant. We also know that economic incentives are not constrained by national borders. The Laffer Curve exists even in nations where politicians generally are not sympathetic to good tax policy. France naturally comes to mind, and here are some excerpts from a new report from Pierre Garello. He examines recent changes in tax rates and the tax base, and finds that better tax policy is having a positive impact.

In 2006 a major change was implemented in France regarding the income tax. Not only the top marginal rate was lowered (from 48.09% to 40.00%), but the same treatment was applied to the other rates. Also, the number of brackets was reduced from 7 to 5. As a result, whatever the level of taxable income, the rate applied was lower after the changes took place than before. …the tax base was also enlarged. In particular, while 20% of gross income from salaries was until then automatically deduced to compute the level taxable income, this was no longer the case with income earned in 2006 and after. …Based on data from the French Public Finances General Directorate (DGFiP) we can see that the impact was a minor drop in tax revenues from the 2006 personal income followed by a slightly higher increase in PIT revenues from 2007 earnings. As illustrated by the graph below, the successive cuts in marginal tax rates between 1995 and 2007 have resulted in higher tax revenues.

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Alex Tabarrok has a fascinating article in the Wilson Quarterly about the history of bail bondsmen and their role in this privatized segment of the criminal justice system. Let’s start by excerpting some history of the system.

Bail began in medieval England as a progressive measure to help defendants get out of jail while they waited, sometimes for many months, for a roving judge to show up to conduct a trial. If the local sheriff knew the accused, he might release him on the defendant’s promise to return for the hearing. More often, however, the sheriff would release the accused to the custody of a surety, usually a brother or friend, who guaranteed that the defendant would present himself when the time came. So, in the common law, custody of the accused was never relinquished but instead was transferred to the surety—the brother became the keeper—which explains the origin of the strong rights bail bondsmen have to pursue and capture escaped defendants. Initially, the surety’s guarantee to the sheriff was simple: If the accused failed to show, the surety would take his place and be judged as if he were the offender. The English system provided lots of incentives for sureties to make certain that the accused showed up for trial, but not a lot of incentive to be a surety. The risk to sureties was lessened when courts began to accept pledges of cash rather than of one’s person, but the system was not perfected until personal surety was slowly replaced by a commercial surety system in the United States. That system put incentives on both sides of the equation. Bondsmen had an incentive both to bail defendants out of jail and to chase them down should they flee. By the end of the 19th century, commercial sureties were the norm in the United States. (The Philippines is the only other country with a similar system.)

In recent decades, however, some states have begun to restrict or ban the use of private bail bondsmen. Not surprisingly, this hasn’t been good news. The cost to taxpayers rises and the effectiveness of the criminal justice system falls. Here’s another excerpt.

Every state now has some kind of pretrial services program, and four (Illinois, Kentucky, Oregon, and Wisconsin) have outlawed commercial bail altogether. …Today, when a defendant fails to appear, an arrest warrant is issued. But if the defendant was released on his own recognizance or on government bail, very little else happens. In many states and cities, the police are overwhelmed with outstanding arrest warrants. In California, about two million warrants have gone unserved. Many are for minor offenses, but hundreds of thousands are for felonies, including thousands of homicides. In Philadelphia, where commercial bail has been regulated out of existence, The Philadelphia Inquirer recently found that “fugitives jump bail . . . with virtual impunity.” At the end of 2009, the City of Brotherly Love had more than 47,000 unserved arrest warrants. About the only time the city’s bail jumpers are recaptured is when they are arrested for some other crime. …Unserved warrants tend not to pile up in jurisdictions with commercial bondsmen. In those places, the bail bond agent is on the hook for the bond and thus has a strong incentive to bring those who jump bail to justice. My interest in commercial bail and bounty hunting began when economist Eric Helland and I used data on 36,231 felony defendants released between 1988 and 1996 to investigate the differences between the public and private systems of bail and fugitive recovery. Our study, published in TheJournal of Law and Economics in 2004, is the largest and most comprehensive ever written on the bail system. Our research backs up what I found on the street: Bail bondsmen and bounty hunters get their charges to show up for trial, and they recapture them quickly when they do flee. Nationally, the failure-to-appear rate for defendants released on commercial bail is 28 percent lower than the rate for defendants released on their own recognizance, and 18 percent lower than the rate for those released on government bond. Even more important, when a defendant does skip town, the bounty hunters are the ones who pursue justice with the greatest determination and energy. Defendants sought by bounty hunters are a whopping 50 percent less likely to be on the loose after one year than other bail jumpers. In addition to being effective, bail bondsmen and bounty hunters work at no cost to the taxpayers. The public reaps a double benefit, because when a bounty hunter fails to find his man, the bond is forfeit to the government.

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I don’t now why I bothered spending all that time perusing the writings of Paul Krugman and Larry Summers in order to produce my previous blog post when this Michael Ramirez cartoon makes the same point in a much simpler way.

Michael Ramirez

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The two main political parties are sniping at each other about the just-concluded tax deal, largely because Republicans are happy and Democrats are displeased that all of the 2001/2003 tax cuts are being extended for all taxpayers.

Almost nobody is paying attention to the new spending that is in the agreement, however, most notably the 13-month extension of unemployment benefits. And to the extent anybody is paying attention, a small handful of fiscal conservatives wanted to offset that new spending by reducing spending someplace else.

That sentiment is laudable, but somebody should be pointing out that this policy actually is bad news for workers. Here are some excerpts from a Wall Street Journal story, which reports on a study from the San Francisco Federal Reserve Bank.

A recent study by the Federal Reserve Bank of San Francisco found the unemployment rate at the end of 2009 would have been nearly half a percentage point lower—9.6%, instead of 10%—if jobless benefits hadn’t been extended beyond their usual 26 weeks to as much as 99 weeks. …The extension of jobless benefits is likely to worsen that trend for at least several months. For one, individuals not actively searching for work or willing to take available jobs may claim they are unemployed in order to receive benefits. That could artificially boost the size of the labor force, which is used to determine the unemployment rate. Another concern, as the San Francisco Fed notes, is that the extension of jobless benefits may “reduce the intensity” with which the unemployed search for work. Longer term, this could lead to a higher level of structural unemployment in the economy as workers’ skills erode.

Some leftists may think this is propaganda from free-market purists, yet the San Francisco Fed certainly does not have a reputation for libertarian views. Nonetheless, perhaps it would be a good idea to see what some other people have to say. Here’s what one well-known economist wrote in a textbook.

Public policy designed to help workers who lose their jobs can lead to structural unemployment as an unintended side effect. . . . In other countries, particularly in Europe, benefits are more generous and last longer. The drawback to this generosity is that it reduces a worker’s incentive to quickly find a new job. Generous unemployment benefits in some European countries are widely believed to be one of the main causes of “Eurosclerosis,” the persistent high unemployment that affects a number of European countries.

Was this Milton Friedman? Ludwig von Mises? Nope, the author of this mean-spirited right-wing bile is Paul Krugman. And here’s something else written by an economist about the impact of unemployment benefits.

Empirical evidence shows that two causes are welfare payments and unemployment insurance. …unemployment insurance increases the measure of unemployment by inducing people to say that they are job hunting in order to collect benefits. The second way government assistance programs contribute to long-term unemployment is by providing an incentive, and the means, not to work. Each unemployed person has a “reservation wage”—the minimum wage he or she insists on getting before accepting a job. Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer. …Unemployment insurance also extends the time a person stays off the job. Clark and I estimated that the existence of unemployment insurance almost doubles the number of unemployment spells lasting more than three months. If unemployment insurance were eliminated, the unemployment rate would drop by more than half a percentage point, which means that the number of unemployed people would fall by about 750,000. This is all the more significant in light of the fact that less than half of the unemployed receive insurance benefits, largely because many have not worked enough to qualify.

Who wrote this? A Tea Party fanatic? A knuckle-dragging GOP Congressman? Hardly, this passage was penned by Larry Summers, the outgoing Chairman of Barack Obama’s National Economic Council.

Given their partisan leanings, you won’t be surprised that Krugman and Summers now semi-disavow their academic writings on this issue, claiming that somehow their analysis does not apply in the current situation. But the bottom line is that incentives matter. If you pay people to remain unemployed, they will have less reason to find a job. The only real issue is the degree to which unemployment benefits increase joblessness.

This doesn’t imply that lawmakers should do nothing about unemployment, but it does suggest that their focus should be on pro-growth policies that will facilitate job creation. Permanently lower tax rates would help, as would reduction in government spending so that more resources would be available for the economy’s productive sector. Trade liberalization and deregulation also would be a good idea.

Unfortunately, all these ideas reduce the power of the political elite, so they are not nearly as popular in Washington as unemployment benefits.

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There were lots of interesting comments on my previous post about the “eye-for-an-eye” punishment.

Now we have another interesting case. Who thinks this guy went too far?

As a father of a beautiful 21-year old daughter, part of me thinks this is rough justice.

But as a single guy who sometimes flirts with women that are a bit younger, I’m horrified.

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Too Severe?

Assuming that we’re talking about punishing real crimes (in other words, we’re seeking to uphold legitimate laws that protect people and property), I’m a firm believer in harsh punishment, but even I’m a little squeamish about this.

It is a real crime, so that’s not the issue. Who knows, maybe I’m becoming a soft-headed liberal in my old age.

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Here’s a passage from a speech by a well-known political figure, but it wasn’t Ronald Reagan, Ron Paul, or Milton Friedman.

The lessons of history, confirmed by the evidence immediately before me, show conclusively that continued dependence upon relief induces a spiritual and moral disintegration fundamentally destructive to the national fibre. To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit. It is inimical to the dictates of sound policy. It is in violation of the traditions of America. …The Federal Government must and shall quit this business of relief.

Interestingly, it was Franklin Delano Roosevelt, in his 1935 State of the Union address. FDR recognized that welfare was akin to a drug that sapped people’s independence. (Or he at least was politically astute enough to realize he should pretend to be concerned about the impact of government-induced dependency.)

Here’s a more recent example, which was cited in a National Review Online column by my Cato colleague Mike Tanner. A prominent politician in DC said that welfare leads to “a cycle of generational poverty, government dependency, and economic disparity.”

But the person who said this wasn’t Jim DeMint, Barry Goldwater, or Friedrich Hayek. It was the former Mayor of Washington, DC, Marion Barry.

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There’s an odd debate in the blogosphere. As happens every Thanksgiving, libertarians and conservatives take joy in pointing out that there was mass starvation and suffering during the early years of the Plymouth Colony because of a socialist economic model. Here’s what John Stossel recently wrote.

Long before the failure of modern socialism, the earliest European settlers gave us a dramatic demonstration of the fatal flaws of collectivism. Unfortunately, few Americans today know it. The Pilgrims at Plymouth Colony organized their farm economy along communal lines. The goal was to share the work and produce equally. That’s why they nearly all starved. When people can get the same return with less effort, most people make less effort. Plymouth settlers faked illness rather than working the common property. Some even stole, despite their Puritan convictions. Total production was too meager to support the population, and famine resulted. This went on for two years. “So as it well appeared that famine must still ensue the next year also, if not some way prevented,” wrote Gov. William Bradford in his diary. The colonists, he said, “began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, (I) (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. And so assigned to every family a parcel of land.” In other words, the people of Plymouth moved from socialism to private farming. The results were dramatic. “This had very good success,” Bradford wrote, “for it made all hands very industrious, so as much more corn was planted than otherwise would have been. By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many.”

My colleague Dan Griswold has a blog post making the same point. And here’s a new video from the prolific folks at Reason TV.

This story must bother the statists. For the first time I can remember, they tried to push back this year. A blogger called Liberal Curmudgeon attempted to puncture the supposed myth, blaming the Colony’s woes on lazy Englishmen.

The real problem, though, was that the men recruited for Jamestown and Plymouth were expecting quick and easy riches without having to work at all.

That’s an interesting theory, and Andrew Sullivan swallows it, hook, line, and sinker (apparently any criticism of Rush Limbaugh and Glenn Beck must be true).

But this argument suffers from a couple of flaws. Don Boudreaux deals with one of the problems in his post, but I have a much simpler criticism for Andrew Sullivan, the Liberal Curmudgeon, et al.

If the Plymouth Colony initially was failing because of the wrong type of people, why did those wrong people suddenly succeed once communalism was replaced with private property?

Maybe statists have a good answer to this question, but I won’t be holding my breath.

So the real lesson of Thanksgiving (at least from an economics perspective), is that incentives matter. The Pilgrims figured this out and changed course. Nearly four hundred years later, the question for today is whether Obama is similarly capable of learning from his mistakes.

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The death tax is a punitive levy that discourages saving and investment and causes substantial economic inefficiency. But it’s also an immoral tax that seizes assets from grieving families solely because someone dies. The good news is that this odious tax no longer exists. It disappeared on January 1, 2010, thanks to the 2001 tax cut legislation. The bad news is that the death tax comes back with a vengeance on January 1, 2011, ready to confiscate as much as 55 percent of the assets of unfortunate families.

I’ve criticized the death tax on many occasions, including one column in USA Today explaining the economic damage caused by this perverse form of double taxation, and I highlighted a few of the nations around the world that have eliminated this odious tax in another column for the same paper.

Politicians don’t seem persuaded by these arguments, in part because they feel class warfare is a winning political formula. President Obama, House Ways & Means Committee Chairman Charlie Rangel, and Senate Finance Committee Chairman Max Baucus have been successful in thwarting efforts to permanently kill the death tax. But I wonder what they’ll say if their obstinate approach results in death?

Congresswoman Cynthia Lummis of Wyoming is getting a bit of attention (including a link on the Drudge Report) for her recent comments that some people may choose to die in the next two months in order to protect family assets from the death tax. For successful entrepreneurs, investors, and small business owners who might already be old (especially if they have a serious illness), there is a perverse incentive to die quickly. 

U.S. Rep. Cynthia Lummis says some of her Wyoming constituents are so worried about the reinstatement of federal estate taxes that they plan to discontinue dialysis and other life-extending medical treatments so they can die before Dec. 31. Lummis…said many ranchers and farmers in the state would rather pass along their businesses — “their life’s work” — to their children and grandchildren than see the federal government take a large chunk. “If you have spent your whole life building a ranch, and you wanted to pass your estate on to your children, and you were 88 years old and on dialysis, and the only thing that was keeping you alive was that dialysis, you might make that same decision,” Lummis told reporters.

The class-warfare crowd doubtlessly will dismiss these concerns, but they should set aside their ideology and do some research. Four years ago, two Australian scholars published an article on this issue in Topics in Economic Analysis & Policy, which is published by the Berkeley Electronic Press. Entitled “Did the Death of Australian Inheritance Taxes Affect Deaths?”, their paper looked at the roles of tax, incentives, and death rates. The abstract has an excellent summary.

In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after. This amounts to over half of those who would have been eligible to pay the tax. …our results imply that over the very short run, the death rate may be highly elastic with respect to the inheritance tax rate.

And here’s a graph from the article, which shows how many affected taxpayers managed to delay death until the tax went away.

Obama and other class-warfare politicians now want to run this experiment in reverse. I already noted in another blog post that there are Americans who are acutely aware of the hugely beneficial tax implications if they die in 2010. In other words, Congresswoman Lummis almost certainly is right.

I don’t actually think that Obama, Rangel, Baucus and the rest of the big-government crowd should be blamed for any premature deaths that occur. But I definitely think that they should be asked if they feel any sense of guilt, remorse, and/or indirect responsibility.

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Thanks to the Obamacare legislation, we already know there will be a new 3.9 percent payroll tax on all investment income earned by so-called rich taxpayers beginning in 2013. And the capital gains tax rate will jump to 20 percent next year if the President gets his way. This sounds bad (and it is), but the news is even worse than you think. Here’s a new video from the Center for Freedom and Prosperity that exposes the atrociously unfair practice of imposing this levy on inflationary gains.

The mini-documentary uses a simple but powerful example of what happens to an investor who bought an asset 10 years ago for $5,000 and sold it this year for $6,000. The IRS will want 15 percent of the $1,000 gain (Obama wants the tax burden on capital gains to climb to 23.9 percent, but that’s a separate issue). Some people may think that a 15 percent tax is reasonable, but how many of those people understand that inflation during the past 10 years was more than 27 percent, and $6,000 today is actually worth only about $4,700 after adjusting for the falling value of the dollar? I’m not a math genius, but if the government imposes a $150 tax (15 percent of $1,000) on an investor who lost nearly $300 ($5,000 became $4,700), that translates into an infinite tax rate. And if Obama pushed the tax rate to almost 24 percent, that infinite tax rate gets…um…even more infinite.

The right capital gains tax, of course, is zero.

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The Census Bureau will be releasing new poverty-rate numbers on Thursday and the numbers are expected to show a big move in the wrong direction. Much of the coverage will be on how much the poverty rate increases, with 15 percent being a likely amount according to some estimate. There also will be lots of discussion about the political implications, as this Associated Press story illustrates.

The number of people in the U.S. who are in poverty is on track for a record increase on President Barack Obama’s watch, with the ranks of working-age poor approaching 1960s levels that led to the national war on poverty. Census figures for 2009 — the recession-ravaged first year of the Democrat’s presidency — are to be released in the coming week, and demographers expect grim findings. It’s unfortunate timing for Obama and his party just seven weeks before important elections when control of Congress is at stake. The anticipated poverty rate increase — from 13.2 percent to about 15 percent — would be another blow to Democrats struggling to persuade voters to keep them in power.

But the real story should be the degree to which the federal government’s War on Poverty has been a complete failure. Taxpayers have poured trillions of dollars into means-tested programs, yet the data show no positive results. Indeed, it’s quite likely that the programs have backfired. As shown in the chart, Census Bureau data reveal that the poverty rate was steadily falling in the 1950s and early 1960s, but then stagnated once the War on Poverty began. It’s possible that there are alternative and/or additional explanations for this shocking development, but government intervention may be encouraging poverty by making indolence more attractive than work.

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In the private sector, no business owner would be dumb enough to assume that higher prices automatically translate into proportionately higher revenues. If McDonald’s boosted hamburger prices by 30 percent, for instance, the experts at the company would fully expect that sales would decline. Depending on the magnitude of the drop, total revenue might still climb, but by far less than 30 percent. And it’s quite possible that the company would lose revenue. In the public sector, however, there is very little understanding of how the real world works. Here’s a Reuters story I saw on Tim Worstall’s blog, which reveals that Bulgaria and Romania both are losing revenue after increasing tobacco taxes.

Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead. Criminal gangs and impoverished Roma communities near borders with countries where prices are lower — Serbia, Macedonia, Moldova and Ukraine — have taken to smuggling which has wiped out gains from higher excise duties. Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third. …Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy. While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. “However, this (too) looks unlikely at present,” Bezlov added. Romania, desperately trying to keep a 20 billion-euro International Monetary Fund-led bailout deal on track, has a similar problem after nearly doubling cigarette prices in 2009 then hiking value added tax. Romania’s top three cigarette makers — units of British American Tobacco, Japan Tobacco International and Philip Morris — contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP. They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

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The Economist has an excellent article about criminal justice in America, including valuable observations about the over-abundance of victimless crimes and incomprehensible laws that result in prison time for failing to understand the intricacies of government regulations. My only quibble is that the article could have paid more attention to the potential value of locking up people who commit real crimes such as rape, murder, burglary, and assault. I realize I’m nit-picking, and I’m fully aware that prosecutors can engage in abuse even when targeting genuine criminals, but there are some people who belong in jail.

Three pickup trucks pulled up outside George Norris’s home in Spring, Texas. Six armed police in flak jackets jumped out. Thinking they must have come to the wrong place, Mr Norris opened his front door, and was startled to be shoved against a wall and frisked for weapons. He was forced into a chair for four hours while officers ransacked his house. They pulled out drawers, rifled through papers, dumped things on the floor and eventually loaded 37 boxes of Mr Norris’s possessions onto their pickups. They refused to tell him what he had done wrong. “It wasn’t fun, I can tell you that,” he recalls. Mr Norris was 65 years old at the time, and a collector of orchids. He eventually discovered that he was suspected of smuggling the flowers into America, an offence under the Convention on International Trade in Endangered Species. This came as a shock. He did indeed import flowers and sell them to other orchid-lovers. And it was true that his suppliers in Latin America were sometimes sloppy about their paperwork. In a shipment of many similar-looking plants, it was rare for each permit to match each orchid precisely. In March 2004, five months after the raid, Mr Norris was indicted, handcuffed and thrown into a cell with a suspected murderer and two suspected drug-dealers. When told why he was there, “they thought it hilarious.” One asked: “What do you do with these things? Smoke ’em?” Prosecutors described Mr Norris as the “kingpin” of an international smuggling ring. He was dumbfounded: his annual profits were never more than about $20,000. When prosecutors suggested that he should inform on other smugglers in return for a lighter sentence, he refused, insisting he knew nothing beyond hearsay. He pleaded innocent. But an undercover federal agent had ordered some orchids from him, a few of which arrived without the correct papers. For this, he was charged with making a false statement to a government official, a federal crime punishable by up to five years in prison. Since he had communicated with his suppliers, he was charged with conspiracy, which also carries a potential five-year term. As his legal bills exploded, Mr Norris reluctantly changed his plea to guilty, though he still protests his innocence. He was sentenced to 17 months in prison. …Justice is harsher in America than in any other rich country. Between 2.3m and 2.4m Americans are behind bars, roughly one in every 100 adults. …As a proportion of its total population, America incarcerates five times more people than Britain, nine times more than Germany and 12 times more than Japan. …The system has three big flaws, say criminologists. First, it puts too many people away for too long. Second, it criminalises acts that need not be criminalised. Third, it is unpredictable. Many laws, especially federal ones, are so vaguely written that people cannot easily tell whether they have broken them. …Badly drafted laws create traps for the unwary. In 2006 Georgia Thompson, a civil servant in Wisconsin, was sentenced to 18 months in prison for depriving the public of “the intangible right of honest services”. Her crime was to award a contract (for travel services) to the best bidder. A firm called Adelman Travel scored the most points (on an official scale) for price and quality, so Ms Thompson picked it. She ignored a rule that required her to penalise Adelman for a slapdash presentation when bidding. For this act of common sense, she served four months. (An appeals court freed her.) …There are over 4,000 federal crimes, and many times that number of regulations that carry criminal penalties. When analysts at the Congressional Research Service tried to count the number of separate offences on the books, they were forced to give up, exhausted. Rules concerning corporate governance or the environment are often impossible to understand, yet breaking them can land you in prison. In many criminal cases, the common-law requirement that a defendant must have a mens rea (ie, he must or should know that he is doing wrong) has been weakened or erased. “The founders viewed the criminal sanction as a last resort, reserved for serious offences, clearly defined, so ordinary citizens would know whether they were violating the law. Yet over the last 40 years, an unholy alliance of big-business-hating liberals and tough-on-crime conservatives has made criminalisation the first line of attack—a way to demonstrate seriousness about the social problem of the month, whether it’s corporate scandals or e-mail spam,” writes Gene Healy, a libertarian scholar. “You can serve federal time for interstate transport of water hyacinths, trafficking in unlicensed dentures, or misappropriating the likeness of Woodsy Owl.” “You’re (probably) a federal criminal,” declares Alex Kozinski, an appeals-court judge, in a provocative essay of that title. Making a false statement to a federal official is an offence. So is lying to someone who then repeats your lie to a federal official. Failing to prevent your employees from breaking regulations you have never heard of can be a crime. A boss got six months in prison because one of his workers accidentally broke a pipe, causing oil to spill into a river. “It didn’t matter that he had no reason to learn about the [Clean Water Act’s] labyrinth of regulations, since he was merely a railroad-construction supervisor,” laments Judge Kozinski. …Some prosecutors, such as Eliot Spitzer, the disgraced ex-governor of New York, have built political careers by nailing people whom voters don’t like, such as financiers.

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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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I’m sure a lot of statist will be horrified by this story from the west coast, but they’ve probably never had to deal with aggressive bums that make a career out of mooching. The economics in this story are rather straightforward: If you make it easier for people to be bums, more people will be bums. There are separate, and much more challenging issues about people on the streets who are mentally unbalanced, but I strong suspect a strong majority of bums are not in that category.

A sticker with the phrase “Please don’t feed our bums” is stuck on storefronts around Ocean Beach and is based on satire of The National Park Service’s “Please don’t feed the bears” sticker. The sticker is also bringing a serious message. “People who live and work in the area know how it feels to be harassed by these people,” said Chaz Lomack, who works at an Ocean Beach business. The stickers are targeting a new group of homeless — young aggressive panhandlers who choose not to work and ask for money instead. …An employee at an Ocean Beach store called The Black started carrying the stickers two weeks ago. Ken Anderson, who did not want to be interviewed on camera, said the stickers were meant to make the community realize the homeless population has become out of control. “A lot of these kids have cell phones and they come from well-off families,” said Lomack. There have even been reports of violence against people who do not give the homeless money. “We don’t want them to do that because it is just enabling them to do their thing,” said Lomack.

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I’m normally not a big fan of the Paris-based Organization for Economic Cooperation and Development since it is an international bureaucracy that persecutes low-tax jurisdictions. But the economists at the OECD sometimes do good work (the same can be said of the IMF and World Bank, not that this justifies taxpayers subsidies for any international bureaucracy). Here’s a good example. While researching tax rates in different nations, I came across this description of how welfare programs and other income-redistribution schemes result in punitively-high implicit tax rates on productive behavior for low-income people. The result, of course, is that many people are discouraged from working and lured into lives of dependency. The article is not recent, so the specific examples may no longer be accurate, but the economic analysis is spot on and still applies. The economic damage described in the article, by the way, is in addition to the harm caused by high explicit tax rates on taxpayers who finance the income redistribution and the harm caused by government spending diverting resources from the productive sector of the economy.

Another rather curious situation which does not show up when studying headline rates is that low earners can find themselves confronted with very high marginal tax rates, in some rare cases exceeding 100%. The reason for this is that lower earners not only pay more tax when their income goes up, but in many cases they lose part of their means-tested tax relief, subsidies and benefits as well. The loss of this income acts as an “implicit” tax at the margin. The rational response of workers who find themselves in this situation is to reduce the number of hours they work. Their gross wage would of course be lower if they did, but in return they would pay less tax and receive more means-tested subsidies and benefits. As a result, their net disposable income would increase despite putting in fewer hours. This type of situation occurs to varying degrees in different OECD countries, depending on the peculiarities of various social protection programmes. Take the example of an unemployed couple with two young children. Suppose that after five years’ unemployment, one of them takes up a lowly paid job. In Finland or Sweden net income in and out of work would be the same in that case, since each unit of income earned is cancelled out by a unit of benefits foregone once employment is taken up. In other words, there is an implicit tax rate of 100%. In the case of Denmark and the Czech Republic, the implicit rate in a similar case would be almost 100%, and in Germany and the United Kingdom it would be around 80%. In France and the United States the implicit rate would be about 50%, since half the increase in earnings is wiped out by a loss of benefits. In Japan, the implicit tax actually exceeds 140%, meaning our one-earner couple would be worse off with the new job than without it. What’s more, they may have to be wary when it comes to staying in the job itself, since small wage increases can expose low-wage earners to high implicit tax rates as their means-tested benefits get cut further.

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Art Laffer has a compelling column in yesterday’s Wall Street Journal, where he makes the case that future tax rate increases will cause considerable economic damage because people have an incentive to maximize income this year to take advantage of current tax rates – resulting in an artificial drop in economic activity next year. In effect, this will be a reverse version of the experiment in the early 1980s, when entrepreneurs and investors had an incentive to postpone economic activity since Reagan’s tax rate reductions were phased in over several years. I am reluctant to endorse Art’s prediction that the “economy will collapse,” since even good economists are lousy forecasters. But we certainly will see a large degree of tax planning, which will lead to less revenue than expected next year. And the higher tax rates will inhibit growth, though it is impossible to predict whether this means 2.1 percent growth instead of 2.3 percent growth, for instance, or 0.5 percent growth instead of 0.6 percent growth.

On or about Jan. 1, 2011, federal, state and local tax rates are scheduled to rise quite sharply. …the highest federal personal income tax rate will go 39.6% from 35%, the highest federal dividend tax rate pops up to 39.6% from 15%, the capital gains tax rate to 20% from 15%, and the estate tax rate to 55% from zero. …Tax rates have been and will be raised on income earned from off-shore investments. Payroll taxes are already scheduled to rise in 2013 and the Alternative Minimum Tax (AMT) will be digging deeper and deeper into middle-income taxpayers. And there’s always the celebrated tax increase on Cadillac health care plans. State and local tax rates are also going up in 2011 as they did in 2010. Tax rate increases next year are everywhere. …if people know tax rates will be higher next year than they are this year, what will those people do this year? They will shift production and income out of next year into this year to the extent possible. As a result, income this year has already been inflated above where it otherwise should be and next year, 2011, income will be lower than it otherwise should be. …In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%. But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011. …The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

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I suspect this is a marketing gimmick, but this story I saw linked on Marginal Revolution will be a good test of incentives. A hotel is offering meal vouchers for people who “produce at least 10 watt hours of electricity” by riding an exercise bicycle. There is a 99 percent chance that I would cycle for 15 minutes in exchange for free meal, but mostly because I’m cheap rather than susceptible to faux environmentalism (indeed, I’m sometimes tempted to throw towels on the floor because I get nauseated by hotels trying to mask cost-saving strategies in environmentally-sensitive rhetoric).

The Crowne Plaza Hotel in Copenhagen says the idea is to get people fit and reduce their carbon footprint. Guests will have to produce at least 10 watt hours of electricity – roughly 15 minutes of cycling for someone of average fitness. The hotel already produces renewable energy with solar panels on its facade. Guests staying at Plaza Hotel will be given meal vouchers worth $36 (26 euros; £23) once they have produced 10 watt hours of electricity, hotel spokeswoman Frederikke Toemmergaard told the BBC News website. “Many of our visitors are business people who enjoy going to the gym. There might be the odd person who will cycle just to get a free meal, but I don’t think people will exploit the initiative overall,” she added.

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