Adverse Consequences of California’s Class-Warfare Tax Policy

California is suffering a slow but steady decline.

Bad economic policy has made the Golden State less attractive for entrepreneurs, investors, and business owners.

Punitive tax laws deserve much of the blame, particularly the 2012 decision to impose a top tax rate of 13.3 percent.

I’ve already shared some anecdotal evidence that this tax increase backfired.

But now we have some scholarly evidence from two Stanford Professors. Here’s what they investigated.

In this paper we study the question of the elasticity of the tax base with respect to taxation using microdata from the California Franchise Tax Board on the universe of California taxpayers around the implementation of Proposition 30 in 2012. This ballot initiative increased marginal income tax rates… These increases came on top of the 9.3% rate that applied to income over $48,942 for singles and $97,884 for married couples, and also in addition to the 1% mental health tax that since 2004 had applied to incomes of over $1 million. The reform therefore brought the top marginal tax rate in California to 13.3% for incomes of over $1 million.

For those not familiar with economic jargon, “elasticity” is simply a term to describe how sensitive taxpayers are when there are changes in tax policy.

A high measure of elasticity means a large “deadweight loss” since taxpayers are choosing to earn and/or report less income.

And that’s what the two scholars discovered.

Some high-income taxpayers responded to the big tax increase by moving.

We first study the extensive margin response to taxation, and document a substantial one-time outflow of high-earning taxpayers from California in response to Proposition 30. Defining a departure as a taxpayer who went from resident to non-resident filing status, the rate of departures in 2013 over 2012 spiked from 1.5% after the 2011 tax year to 2.125% for those primary taxpayers earning over $5 million in 2012, with a similar effect among taxpayers earning $2-5 million in 2012.

By the way, you won’t be surprised to learn that California taxpayers increasingly opted to move to states with no income tax, such as Florida, Nevada, and Texas.

Other taxpayers stayed in California but they chose to earn and/or report less income.

We combine these results on the extensive margin behavioral response with conclusions of analysis of the intensive margin response to Proposition 30. …we use a differences-in-differences design in which we compare upper-income California resident taxpayers to a matched sample of non-resident California filers, for which there is relatively rich data… Our estimates show a substantial intensive margin response to Proposition 30, which appears in 2012 and persists… We find that California top-earners on average report $522,000 less in taxable income than their counterfactuals in 2012, $357,000 less in 2013, and $599,000 less in 2014; this is relative to a baseline mean income of $4.15 million amongst our defined group of California top-earners in 2011. …the estimates imply an elasticity of taxable income with respect to the marginal net of tax rate of 2.5-3.3.

In the world of public finance, that’s a very high measure of elasticity.

Wonky readers may be interested in these charts showing changes in income.

By the way, guess what happens when taxpayers move, or when they decide to earn less income?

The obvious answer is that politicians don’t collect as much revenue. Which is exactly what the study discovered.

A back of the envelope calculation based on our econometric estimates finds that the intensive and extensive margin responses to taxation combined to undo 45.2% of the revenue gains from taxation that otherwise would have accrued to California in the absence of behavioral responses. The intensive margin accounts for the majority of this effect, but the extensive margin comprises a non-trivial 9.5% of this total response.

We can call this the revenge of the Laffer Curve.

By the way, it’s quite likely that there has been a resurgence of both the “extensive” and “intensive” responses to California’s punitive tax regime because the 2017 tax reform restricted the deductibility of state and local taxes. This means that the federal government – for all intents and purposes – is no longer subsidizing California’s backwards fiscal system.

P.S. Makes me wonder if California politicians will turn Walter Williams’ joke into reality.

The Libertarian Paradise of…Germany?

Every so often, I share quirky examples of libertarian policy in places that generally are not associated with a laissez-faire approach to governance.

• Argentina
• Mexico
• Nigeria

Today, we’re going to add Germany to our list.

According to a report by Car and Driver, the German Parliament voted – by an overwhelming margin – against a proposal by the Green Party to impose speed limits on the autobahn.

Auto enthusiasts in Germany scored a major victory yesterday as the country’s federal parliament, the Bundestag, overwhelmingly voted to to defy a motion by the Green Party that would have asked the government to install a speed limit on the famous autobahn. The 80-mph limit suggested by the Greens would have effectively closed down one of the last roads where drivers can freely select their preferred speed. The autobahn is a defining factor in the perception of Germany abroad, but the topic is highly contested and politically charged at home. …The vote was 126 for a speed limit, 498 against, with seven abstentions.

The vote basically reflected a right-left split, though the Social Democrats tried to have their cake and eat it too.

…Green Party big shot Cem Özdemir claimed that roads would be safer with a speed limit, and he asked for German’s “special way” to be ended. …The post-communist Left Party volunteered that “electric mobility” should mean more “trains and trams,” while the Social Democrats, who are in a ruling coalition with the Christian Democrats, argued that they would support a speed limit were it not for their obligations to the coalition. The centrist CDU, the center-liberal FDP, and the conservative AfD all argued against a speed limit.

For what it’s worth, the autobahn is actually quite safe.

The autobahn road system, situated in one of the most traveled places on earth, is extremely safe. Accident rates have fallen dramatically over the past few decades, and many of the remaining deaths can be attributed to factors other than speed. Today, the fatality rate is one of the lowest in the world. Those opposed to a speed limit argue that this could be due to the fact that due to the differences in velocity, drivers are alert, generally stay to the right when not passing, and tend to stay aware of their surroundings.

Having driven many times in Europe, I can state with confidence that they are better (and more polite) drivers.

Slow cars don’t loiter in the left lane on highways, and that’s true in France and Italy as well as Germany.

I’ll close with some good news.

…speed limits have gradually eased all over the globe. Austria’s limit has been provisionally raised to 87 mph on select stretches; Abu Dhabi allows 100 mph on sections of the road system, and many U.S. states are raising limits as well.

I’m old enough to remember the horror of a nationwide 55-mph speed limit (one of the many awful policies adopted during the Nixon years).

The limit was increased in 1987 and then – in a rare moment of federalism – the nationwide speed limit was repealed in the mid-1990s (among the many good policies of the Reagan and Clinton years).

Let’s hope Germany holds firm so they don’t ever have to worry about repealing bad policy.

P.S. The article also noted that, “It has been reported that in the summer of 1995, Germany chancellor Angela Merkel, then minister for environmental affairs, broke out in tears over Helmut Kohl’s refusal to mandate a speed limit on the autobahn.” Given Merkel’s statism, I’m not surprised.

P.P.S. Enviro-zealots want onerous speed limits because of their quasi-religious opposition to energy consumption. Politicians, by contrast, view speed limits as a tool for generating tax revenue (which is why I’ve applauded civil disobedience in Washington, DC, and Arizona).

Mises vs. Marx

John Papola has done it again. His video showing a Keynes v. Hayek rap contest was superb, and was followed by an equally enjoyable sequel featuring a boxing match between Keynes and Hayek.

Now he has a rap contest about capitalism and socialism featuring Ludwig von Mises and Karl Marx.

The video touches on three economic topics.

The obvious focus is the track record of capitalism vs. socialism. Given the wealth of evidence, that’s a slam-dunk victory for free markets.

But there are also two wonky issues referenced in the video.

• The socialist calculation debate – As I’ve repeatedly noted, genuine socialism involves government ownership, central planning, and price controls. Economists from the Austrian school, such as Mises, were the ones who explained that governments were incapable of having either the information or knowledge to make such a system work.
• The labor theory of value – Marxism is based on the strange notion that the value of a product is a function of the hours it took to produce. This overlooks the role of capital and entrepreneurship. Moreover, as explained in the video, value is subjective, determined by the preferences of consumers.

Let’s close with a nice compare-and-contrast image a reader sent to me.

P.S. John Papola also did a great satirical commercial for left-wing toys.

P.P.S. Even though it’s not the right time of year, here’s his satirical commercial for Keynesian Christmas carols.

P.P.P.S. If you want to learn about the Austrian macroeconomics, click here and here.

Economics and Election Predictions

There’s an entire field of economics called “public choice” that analyzes the (largely perverse) incentive structures of politicians and bureaucrats.

But is economic analysis also helpful to understand voting and elections?

In the past, I’ve suggested that political betting markets are a useful place to start since “you are seeing estimates based on people defending their views with cold, hard cash.”

In his Bloomberg column, Professor Tyler Cowen takes a more rigorous look at the potential insights of political betting markets.

Prediction markets…are a quick way to get an overview of the state of the campaign. President Donald Trump is currently at about 0.40 to be re-elected… Under normal assumptions about the uncertainty of future economic growth, the markets rate Trump’s chances of winning at 40%. …it is a useful corrective to the argument that Trump is toast — or, alternatively, that he is a shoo-in.  The market incorporates the relevant uncertainties in both directions. (Interestingly, Trump’s re-election odds have stayed pretty steady over the last week or so of negative news.) In many cases, prediction markets…“see through” the day-to-day volatility that may buffet the polls but not affect the final outcome. …Prediction markets…also made me think that a possible Hillary Clinton candidacy…is perhaps an undercovered story. …It is not a valid criticism of prediction markets to say that they didn’t predict Trump, say, or Brexit. The purpose of prediction markets is not to foresee particular upsets. They can, however, tell you in advance what would be an upset — much like probability theory can tell you that getting three heads in a row is unlikely but is of no help in predicting exactly when it will happen.

There are also people who build models that predict elections based largely on economic factors.

The Washington Post just published a very interesting review of how three of these models show Trump comfortably winning.

President Trump is on a fast track to an easy reelection. That’s the conclusion reached by economic forecasters… Moody’s Analytics projects the president will win handily next year if the economy doesn’t badly stumble — and in fact, rack up a greater margin in the electoral college than the 304-to-227 victory he secured against Hillary Clinton in 2016. …The finding jibes with those of other forecasting models that rely on measures of the economy’s strength to predict which major party’s candidate will win the White House next. Oxford Economics sees Trump winning 55 percent of the popular vote next year barring a “significant downturn” in the economy. …by the reckoning of the firm’s model, three key economic indicators — unemployment, inflation and real disposable income growth — all favor Trump’s reelection. They outweigh a “negative exhaustion factor” with Trump that dents his support in the projection. …Another model, assembled by Trend Macrolytics, accurately predicts every presidential victor back to 1952 by focusing on the effects of the economy and incumbency on the electoral college, according to Donald Luskin, the firm’s chief investment officer. It projects Trump will win reelection next year with 354 electoral votes — a margin that seems staggering on its face.

Here’s the Moody’s electoral map, which doubtlessly will cause sleepless nights for the anti-Trump crowd.

Wow, not only do they show Trump winning every state he won in 2016, but they show him picking up New Hampshire, Virginia, and Minnesota.

So which approach is more accurate, betting markets of election models?

Given my inaccurate 2016 predictions, I’m probably not the right person to ask.

I’ll simply observe that both approaches have erred in the past.

And if you believe in guilt by association, some of the people who put together political prediction models also put together deeply flawed Keynesian economic models.

Three Cheers for (Liberty-Minded) Rogue Jurors

I wrote a three-part series (here, here, and here) about “jury nullification,” which is the notion that jurors can declare defendants not guilty if they think the underlying law is unjust or immoral.

We have an example of this happening in New Orleans, though it occurred even before a trial.

All New Orleans prosecutors had to do was convince six people that a waiter at a famed French Quarter restaurant was guilty of a felony marijuana charge. But as it turned out, there weren’t enough people willing to consider that possibility on Tuesday. Potential jurors who said they don’t think marijuana should be illegal helped scotch the planned trial of Antoine’s server Jabar Kensey before he could face the music. …Call it a sign of the times. Ad hoc Criminal District Court Judge Dennis Waldron halted the selection process after 20 of 25 potential jurors were dropped and no more jurors remained in the day’s pool. …The right of jurors to voice their objections to criminal laws stretches back centuries, according to Texas defense attorney Clay Conrad. He said the courts have upheld the power of jurors to “nullify” charges with acquittals, despite overwhelming evidence of a defendant’s guilt, if they object to the underlying law.

It’s also been happening in Georgia, as J.D. Tuccille explains for Reason.

On July 12, a jury in Laurens County, Georgia, found Bernard’s client, Javonnie Mondrea McCoy, “not guilty” of the manufacture of marijuana and of possession of drug-related objects, despite his open admission that he had, in fact, grown the much-demonized plant. That follows on a similar victory last year in the case of Antonio Willis, who was lured into selling the equivalent of a few joints by an undercover cop. In both cases, Bernard emphasized the humanity of the defendants, of their roles as fallible, but decent people who didn’t deserve to be ground up by the wheels of the penal system. …”Hey, what’s going on here?” she wants jurors to ask themselves. “Does it reflect my values?” What Bernard doesn’t do is explicitly ask jurors to “nullify” the laws under which her clients are charged. …Instead, she emphasizes the role of the juror, which she describes as a “powerful and awesome position.” She insists that the very idea of jurors implicitly contains the idea of nullification, and she tries to help them realize how empowered they are.

In a column for the Foundation for Economic Education, Brittany Hunter cites the same heroic Georgia lawyer and examines some broader implications.

Jury Nullification has deep roots in our American legal system and allows jurors to “nullify” a law if they believe it to be unjust. While it is protected under the United States Constitution, it is also explicitly protected under Georgia law as well. Under Article 1, Section 1, Paragraph XI of the Georgia State Constitution, it reads, “the jury shall be the judges of the law and the facts.” …At the heart of jury nullification rests the belief that individuals and their unique circumstances should be taken into account before one is sentenced under an arbitrary or unjust law. And given the state of our criminal justice system, this right is absolutely important. …jury nullification would go on to be used in several important cases in American history. It was used when jurors refused to convict those charged with violating the Fugitive Slave Act and it was also responsible for bringing justice to Vietnam War protesters in the case of United States v. Moylan. Jury nullification was also largely responsible for ending alcohol prohibition.

To conclude, Kirsten Tynan of the Fully Informed Jury Association opines on the issue and highlights America’s long tradition of liberty-minded jurors.

Each year on September 5, we celebrate Jury Rights Day as our signature day of education. Jury Rights Day commemorates the 1670 trial of William Penn, which helped lay a solid foundation for jurors’ right of conscience acquittal by jury nullification. We also celebrate Constitution Day on September 17. …Though conscientious acquittal has roots in civil liberties such as freedoms of religion, speech, and association, did you know that it is also closely tied, in the history of the United States, to economic liberty? …British colonists in America did not simply grumble and then capitulate by paying their taxes. Often they actively resisted by breaking laws in order to evade taxes. It was difficult for the Crown to secure convictions when resisters were judged by juries composed of their sympathetic and similarly oppressed neighbors—many willing to vote not guilty despite the law having been broken.

In an ideal world, of course, we wouldn’t need rogue jurors.

There would be very few laws, and they would be designed to protect life, liberty, and property. And cops and prosecutors would all be fair and honest.

Needless to say, we don’t live in that world.

And since I doubt that ideal scenario will ever materialize, I’m glad many Americans still have a rebellious streak.

So the next time you get called for jury duty, you know what to do if the government is persecuting someone for owning a gun, doing drugs, selling sex, gambling, or anything else that doesn’t involve an actual victim.

If all of us stop convicting people for victimless crimes, maybe politicians will jettison bad laws (yes, I’m fantasizing, but let me enjoy the moment).

More Child Abuse at Government Schools

I’ve shared examples of brain-dead behavior by bureaucrats at the Transportation Security Agency.

But the folks at the TSA may be paragons of wisdom and judgement compared to administrators at government schools.

Those bureaucrats seem incapable of improving test scores, even when they get showered with tax dollars, but they’re always ready to go overboard when kids…gasp…play with toy guns.

Or even when they pretend a stick is a gun. Or when they pretend their fingers are a gun.

Here’s a crazy example that just happened.

A 12-year-old Overland Park girl formed a gun with her fingers, pointed at four of her Westridge Middle School classmates one at a time, and then turned the pretend weapon toward herself. Police hauled her out of school in handcuffs, arrested her and charged the child with a felony for threatening. …according to Johnson County District Court documents, on Sept. 18, the girl “unlawfully and feloniously communicated a threat to commit violence, with the intent to place another, in fear, or with the intent to cause the evacuation, lock down or disruption in regular, ongoing activities …” or created just the risk of causing such fear. …“I think that this is something that probably could have been handled in the principal’s office and got completely out of hand,” said Jon Cavanaugh, the girl’s grandfather in California, where the girl is now living. He said his granddaughter has no access to a real gun and she had no intent of harming anyone. “She was just mouthing off,” he said.

School bureaucrats also over-react if students like a picture of a toy gun.

Here’s a story from two years ago.

An Edgewood Middle School student was handed a 10-day suspension for “liking” a picture of a gun on Instagram with the caption “ready.” The parents of Zachary Bowlin posted a picture of the intended suspension notice which read, “The reason for the intended suspension is as follows: Liking a post on social media that indicated potential school violence.” “I was livid, I mean, I’m sitting here thinking ‘you just suspended him for ten days for liking a picture of a gun on a social media site,” father Marty Bowlin said. “He never shared, he never commented, he never made a threatening post… anything on the site, just liked it.” The picture in question is of an airsoft gun, and according to the students’ parents, their child didn’t comment on the post but simply liked the picture.

We’ll wrap up with another bizarre case from this year.

School bureaucrats also don’t approve if students engage in legal behavior when they’re not at school.

Two male students at Lacey Township High School in New Jersey posted photos of guns on Snapchat. One of the boys captioned his photo with “hot stuff” and “if there’s ever a zombie apocalypse, you know where to go.” The photos were not taken at school. They were not taken during school hours. They did not reference a school. They auto-deleted after 24 hours, which was well before the school became aware of them. And yet, administrators at Lacey Township High School suspended the boys for three days, and also gave them weekend detention. This was a clear violation of the students’ First Amendment rights, and the American Civil Liberties Union has now filed suit. …The two students had visited a gun range owned by an older brother on Saturday, March 10, 2018. They practiced shooting with “legally purchased and properly permitted” guns, according to the lawsuit. They also took a few photos and posted them on Snapchat. None of the snaps were threatening, and none of them referenced a school. Nevertheless, a parent of another student heard about the photos and contacted school authorities. On Monday, the boys were forced to meet with an assistant principal and an anti-bullying specialist, who quickly decided to punish them for clearly constitutionally-protected speech.

Kudos to the ACLU for getting involved on the right side.

I wish it was because they supported the 2nd Amendment as well as the 1st Amendment, but their involvement is a plus regardless.

But that’s a separate issue.

For today, our topic is misbehavior by school bureaucrats. Is there a way of discouraging these ridiculous suspensions?

The good news is that schools often back down when these episodes of political correctness get exposed. And maybe legal action also could help.

But I suspect the only effective answer is busting up a hopelessly bad government school monopoly.

Attractiveness, Income, Sex, and Inequality

Last year, I wrote a column that investigated why the left is fixated on the unequal distribution of income and wealth, yet doesn’t seem to care at all about unequal distribution of attractiveness.

The question becomes even more intriguing when you consider that attractiveness is oftentimes nothing more than luck, simply a matter of winning the genetic lottery.

People with lots of income and wealth, by contrast, generally work very hard to offer goods and services of value to society, so they actually earn their riches.

Let’s review some additional evidence about good luck for people with good looks.

The Economist shares data from a new book about the advantages enjoyed by attractive people.

Just why are pedestrians likelier (three times as likely, according to one study) to defy traffic laws to follow a man across the road when he is wearing a suit than the same man dressed in denim? Similarly motorists stuck at a traffic light are slower to honk their horn if the car in front has a prestige brand. …A further piece of research cited by the authors involved undergraduates who were shown photos of 50 chief executives from the Fortune 1000 list of big firms. Half of these bosses were from the most profitable groups and half from the least profitable. The undergraduates were asked to judge, on looks alone, which executives had qualities such as competence and dominance. Remarkably, the students tended to pick out those executives who led the most successful companies. …it seems more probable that people with a certain type of appearance are likely to get promoted than it is to believe they are innately more competent than everyone else. …When participants in a study were shown pictures of male employees of a business consultancy, with similar clothes and masked faces, they perceived the taller men more positively in terms of team leadership skills. Indeed, research has shown that taller and more attractive men earn more than their shorter and plainer colleagues. …Physical characteristics also affect recruitment at lower levels. A group of Italian researchers sent CVs to a range of employers, some with photos and some without. Applicants deemed attractive by independent scorers were 20% more likely to get an interview than the same application without a photo.

Being attractive doesn’t just help people get better jobs and earn more income.

Here’s some data that may be even more important to a lot of people.

This study was conducted to quantify the Tinder socio-economic prospects for males based on the percentage of females that will “like” them. Female Tinder usage data was collected and statistically analyzed to determine the inequality in the Tinder economy. It was determined that the bottom 80% of men (in terms of attractiveness) are competing for the bottom 22% of women and the top 78% of women are competing for the top 20% of men. The Gini coefficient for the Tinder economy based on “like” percentages was calculated to be 0.58. This means that the Tinder economy has more inequality than 95.1% of all the world’s national economies. In addition, it was determined that a man of average attractiveness would be “liked” by approximately 0.87% (1 in 115) of women on Tinder.

Here’s a chart showing that only the most attractive men have an advantage on the hook-up site.

Here’s an explanation of the chart, as well as some discussion of how the system is wildly unequal.

The area in blue represents the situations where women are more likely to “like” the men. The area in pink represents the situations where men are more likely to “like” women. The curve doesn’t go down linearly, but instead drops quickly after the top 20% of men. Comparing the blue area and the pink area we can see that for a random female/male Tinder interaction the male is likely to “like” the female 6.2 times more often than the female “likes” the male. …the wealth distribution for males in the Tinder economy is quite large. Most females only “like” the most attractive guys. …Figure 3 compares the income Gini coefficient distribution for 162 nations and adds the Tinder economy to the list. …The Tinder economy has a higher Gini coefficient than 95.1% of the countries in the world.

And here’s the chart from the article showing how Tinder inequality compares to economic inequality among nations.

Regular guys don’t do very well and unattractive guys get the short end of the stick.

…the most attractive men will be liked by only approximately 20% of all the females on Tinder. …Unfortunately, this percentage decreases rapidly as you go down the attractiveness scale. According to this analysis a man of average attractiveness can only expect to be liked by slightly less than 1% of females (0.87%). This equates to 1 “like” for every 115 females. …The bad news is that if you aren’t in the very upper echelons of Tinder wealth (i.e. attractiveness) you aren’t likely to have much success.

Whether your goal is income/wealth or sex/relationships, the bottom line is that it helps to be attractive.

And being attractive is largely the result of luck. Which brings us back to the issue of why leftists don’t try to address this very meaningful form of inequality. Where are their plans to prevent discrimination against those of us who didn’t win the looks lottery? And to imposes taxes on those who wound up with favorable genes?

P.S. Libertarians are sometimes accused of being autistic dorks, and you don’t find many females at libertarian events, all of which presumably means male libertarians might benefit from government redistribution of dating partners. But we are moral and don’t favor government coercion and intervention, even when we might gain an advantage.

P.P.S. Here’s what would happen if Elizabeth Warren applied her class-warfare approach to dating.