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Posts Tagged ‘New York’

Identifying the worst government policy would be a challenge. Would it be minimum wage laws, which deprive low-skilled workers of a chance for employment and upward mobility? Would it be class-warfare tax rates that generate large amounts of economic damage compared to potential (if any) revenue?

Those are tempting choices, but there’s a strong case that nothing is as foolish as rent control.

Here’s a map showing which states impose or allow this destructive form of intervention.

California politicians are very susceptible to bad ideas.

True to form, as reported by the New York Times, they actually want to impose statewide rent control.

California lawmakers approved a statewide rent cap on Wednesday covering millions of tenants, the biggest step yet in a surge of initiatives to address an affordable-housing crunch nationwide. The bill limits annual rent increases to 5 percent after inflation and offers new barriers to eviction… a momentous political swing. For a quarter-century, California law has sharply curbed the ability of localities to impose rent control. Now, the state itself has taken that step. …Economists from both the left and the right have a well-established aversion to rent control, arguing that such policies ignore the message of rising prices, which is to build more housing. Studies in San Francisco and elsewhere show that price caps often prompt landlords to abandon the rental business by converting their units to owner-occupied homes. And since rent controls typically have no income threshold, they have been faulted for benefiting high-income tenants.

I’m glad the article included the evidence from economists, especially since the headline is grossly inaccurate. If we care about evidence, it’s far more accurate to say that rent control will exacerbate the state’s housing problems.

Which is why the Wall Street Journal opined that this type of intervention is especially destructive.

California already boasts the highest housing costs in the country, and even liberals have come around to acknowledging that not enough homes are built to meet demand. The state has added about half as many housing units as needed to accommodate population growth, and more than half of Californians spend 30% of their income on rent.Blame a thousand regulatory burdens. Local governments limit what housing developers can build and where. They layer on permitting fees, and then there are the state’s high labor costs and expensive green-energy mandates and restrictions that opponents can exploit to block projects for years. …The upshot is that an “affordable” housing unit in California costs $332,000 to build and nearly $600,000 in San Francisco, according to state budget figures. Developers can’t turn a profit on low- and middle-income homes… And now Democrats want to constrain housing prices by fiat. Mr. Newsom and Democratic legislators are pushing a law to limit annual rent increases across the state to 5% plus inflation. …Building permits in the first seven months this year have fallen 17% compared to 2018 despite an increase in state subsidies. …California’s progressive regulatory complex is contributing to this housing slowdown by driving businesses and people from the state. More than 700,000 residents have left since 2010.

By the way, the politicians in Albany already made the same mistake.

And, as you might expect, the Wall Street Journal‘s editorial page had the correct response.

Law by law, Gov. Andrew Cuomo and Democrats are chipping away at the policies that made New York City livable after decades of decline… Democrats this week are ramming through rent-control bills that…effectively dictates rents for one million or so rent-regulated apartments and restricts landlords’ ability to evict tenants who don’t pay. …Once a tenant moves out—which doesn’t happen often since folks can pass on the entitlement to friends and relatives—landlords would be required to offer the unit to another tenant at restricted rates. …Nor could they raise rates by more than 2% annually to pay for improvements or evict a nonpaying tenant who “cannot find a similar suitable dwelling in the same neighborhood.” Since landlords would have less incentive to make fixes, more apartments will deteriorate and come to resemble New York City’s squalid public housing. …One result will be less housing investment… Progressives are vindicating CEO Jeff Bezos ’s decision to pull Amazon’s second headquarters out of New York. Don’t be surprised if other businesses follow.

You won’t be surprised to learn that politicians in other nations sometimes make the same mistake.

The U.K.-based Guardian wrote about how rent control has backfired in Sweden.

Half a million are on the waiting list for rent-controlled flats in Stockholm, meaning a two-tier system, bribes and a thriving parallel market… the system is experiencing acute pressures. Building of rental homes almost dried up after a financial crisis in the early 1990s, and there is a dire shortage of properties. Demand is such that it is almost impossible to get a direct contract. With nearly half of all Stockholmers – about 500,000 people – in the queue, it can take 20 or 30 years to get to the top of the pile. …The result is a thriving rental property black market, with bribes of as much as 100,000 kronor per room to obtain a direct contract, McCormac says. Many people sublet space in their rental apartments. …“Rent controls were supposed to enable people to live in central locations, but now it is having the opposite effect,” McCormac says. “People without social connections will have a very hard time finding a flat,” says Kleberg.

And Germany is making the same mistake – even though it should have learned from the mistakes under Hitler’s national socialism and East Germany’s communism.

…the kinds of ideas traditionally associated with planned economies are gaining more and more support all over Germany. …Substantial numbers of people have moved to Germany’s major cities…the supply of housing has failed to keep pace with these significant developments, and this is largely because construction approval processes are so long-winded and the latest environmental regulations have made building prohibitively expensive. …In Germany’s capital, Berlin, …it now takes 12 years to draft and approve a zoning plan, which in many cases is a prerequisite for the development of new dwellings. …An initiative in Berlin calling for the expropriation of private real estate companies has collected three times as many signatures as it needed to initiate a petition for a referendum. …Kevin Kühnert, chairman of the youth organization of the center-left SPD…has gone as far as calling for a complete ban on private property owners renting out their apartments. …Berlin’s Senate approved the main components of a rent freeze in the German capital. …Advocates of such central economic planning react sensitively when they are reminded that it has already been tried… An earlier rent freeze was approved in Germany on April 20, 1936, as a gift from the National Socialist Party to the citizens of Germany on Adolf Hitler’s 47th birthday. The National Socialists’ rent cap was adopted into the GDR’s socialist law by Price Regulation No. 415 of May 6, 1955, and it remained in force until the collapse of the GDR in 1989.

Now let’s review some economic research.

Three Stanford professors researched the issue, looking specifically as San Francisco’s local rent control rules.

Using a 1994 law change, we exploit quasi-experimental variation in the assignment of rent control in San Francisco to study its impacts on tenants and landlords. Leveraging new data tracking individuals’ migration, we find rent control limits renters’ mobility by 20% and lowers displacement from San Francisco. Landlords treated by rent control reduce rental housing supplies by 15% by selling to owner-occupants and redeveloping buildings. Thus, while rent control prevents displacement of incumbent renters in the short run, the lost rental housing supply likely drove up market rents in the long run, ultimately undermining the goals of the law. …In the long run, landlords’ substitution toward owner-occupied and newly constructed rental housing not only lowered the supply of rental housing in the city, but also shifted the city’s housing supply towards less affordable types of housing that likely cater to the tastes of higher income individuals. Ultimately, these endogenous shifts in the housing supply likely drove up citywide rents, damaging housing affordability for future renters…it appears rent control has actually contributed to the gentrification of San Francisco, the exact opposite of the policy’s intended goal. …rent control has contributed to widening income inequality of the city.

To be fair, rent control is just one of several bad policies that mess up the city’s housing market.

Now let’s shift to the other side of the country.

Jeff Jacoby of the Boston Globe shared evidence from a disastrous experiment in Massachusetts.

…a handful of Democratic lawmakers want to bring the horror of rent control… This isn’t happening only in Massachusetts. …Oregon’s governor just signed a statewide rent-control law and efforts to overturn rent-control bans are underway in Illinois, Colorado, and Washington state. …the folly of rent control is so well-established that to deny it requires, as Hillary Clinton might say, a willing suspension of disbelief. Massachusetts and most other states have banned rent control because the harm it causes far outweighs any benefit it confers. When politicians impose a ceiling on rent, the results are invariable: housing shortages, depressed real estate values, increased decay, less new construction. …The longer rent control persists, and the more harshly it is enforced, the worse the problem grows. …in New York City, where strict rent controls date back to World War II, the annual rate at which apartments turn over is less than half the national average, while the share of tenants who haven’t moved in more than 20 years is more than double the national average. …Acknowledging the damage caused by rent control is neither a right- nor left-wing issue. …the communist foreign minister of Vietnam…made…the…point in 1989: “The Americans couldn’t destroy Hanoi,” Nguyen Co Thach remarked, “but we have destroyed our city by very low rents.” …When Massachusetts voters struck down rent control in 1994, it was in the teeth of preposterous fearmongering by hardline tenant activists… What happened in reality was that tens of thousands of apartments were decontrolled with no ill effects… When tenants were analyzed by occupation, it was high-earning professionals and managers who predominated among the beneficiaries of rent control; semi-skilled and unskilled workers lagged far behind. Rent control always ends up benefiting the young, strong, and well-to-do at the expense of the old, weak, and poor.

Meanwhile, Meghan McArdle opined in the Washington Post about the perverse economic consequences of rent control.

…there are a few questions where there’s near unanimity, and rent control is one of them. Pretty much every economist agrees that rent controls are bad. …the policy appears to be making a comeback. …City governments may have to relearn why their predecessors pruned back rent-control policies. Rent control is supposed to protect poor, deserving tenants from the depredations of greedy landlords. And it does, up to a point. …The problem is that rent control doesn’t do anything about the reason that rents are rising, which is that there are more people who want to live in desirable areas than there are homes for them to live in. Housing follows the same basic laws of economics as other goods that consumers need… rent control also reduces the incentive to supply rental housing. …an actual solution to skyrocketing rents: Build more housing, so that the rent controls won’t be necessary… To do that, cities would need to ease the costly land-use regulations that make it so difficult for developers to fill the unmet demand. …Alas, that’s not going to happen… Declining housing stock is just one of the many potential costs of rent controls; others include a deteriorating housing stock as landlords stop investing in their properties, and higher rents. Yes, higher, because rent control creates a two-tier housing market. There are cheap, price-stabilized apartments that rarely turn over, because why would you give up such a great deal? Then there are the uncontrolled apartments, which everyone else in the city has to fight over, bidding up the price. …the people getting the biggest benefit are white, affluent Manhattanites.

By the way, you hopefully have noticed a pattern.

Rich people generally get the biggest benefits under rent control.

Let’s close with a look at how economists from across the philosophical spectrum view rent control

Here’s some survey data from the University of Chicago.

Incidentally, there’s an obvious reason why politicians persist in pushing bad policy. In the case of rent control, it’s because tenants outnumber landlords.

So even if politicians understand that the policy will backfire, their desire to get votes will trump common sense. Especially if they assume they can blame “greedy landlords” for the inevitable housing shortages and then push for government housing subsidies as an ostensible solution.

Another example of Mitchell’s Law.

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I used to think Texas vs. California was the most interesting and revealing rivalry among states. It was even the source of some clever jokes and cartoons.

But the growing battle between Florida vs. New York may now be even more newsworthy.

I wrote last month about how many entrepreneurs, investors and business owners are escaping bad tax policy by moving from the Empire State to the Sunshine State.

Not that we should be surprised.

Florida ranks #1 for economic freedom while New York languishes in last place.

A big reason for the difference is that Florida has no state income tax, which compares very favorably to the punitive system in New York.

And because the federal tax code no longer provides an unlimited deduction for state and local taxes, I expect the exodus from New York to Florida to accelerate.

What’s especially amusing is that Alexandria Ocasio-Cortez’s mother is one of the tax refugees.

Here are some excerpts from a report in the New York Post.

The mother of soak-the-rich Congresswoman Alexandria Ocasio-Cortez said she was forced to flee the Big Apple and move to Florida because the property taxes were so high. “I was paying $10,000 a year in real estate taxes up north. I’m paying $600 a year in Florida. It’s stress-free down here,” Blanca Ocasio-Cortez told the Daily Mail… Her daughter raised eyebrows with her pitch to hike the top marginal tax rate on income earned above $10 million to 70 percent. She has also gotten behind the so-called Green New Deal, which would see a massive and costly government effort.

The former Governor of Florida (and new Senator from the state) obviously is enjoying the fact that New York politicians are upset.

Here’s some of what Rick Scott wrote in today’s Wall Street Journal.

America is a marketplace where states are competing with each other, and New York is losing. Their loss is Florida’s gain… I would like to tell New Yorkers on behalf of the rest of America that our hearts go out to you for your sagging luxury real-estate market. But you did this to yourself, and you can fix it yourself. If you cut taxes and make state and local government efficient, maybe you can compete… I made more than 20 trips to high-tax states like California, Connecticut, Illinois, New York and Pennsylvania to lure businesses to Florida. The tax-happy leaders of those states were furious, which made the visits all the more enjoyable for me. They called me every name in the book. But they were the ones who raised taxes, and bad decisions have consequences. The elites in New York and Washington should commission a study of Florida to see what happens when conservative ideas are put into practice. …Florida’s economy is thriving, expanding at a record pace. …There’s a reason Rep. Alexandria Ocasio-Cortez’s mom left New York for Florida. And there’s a reason companies are fleeing high-tax states, bringing jobs with them to Florida.

I mentioned above that having no state income tax gives Florida a big advantage over New York.

Courtesy of Mark Perry, here a comprehensive comparison of the two states.

Wow. If this was a tennis tournament, the announcers would be saying “game, set, and match.” And if it was a boxing contest, it would be a knock-out.

The bottom line is that we should expect more rich people to escape New York and move to Florida because they’ll get to keep more of their money.

And we should expect more lower-income and middle-class people to also make the same move because Florida’s better policy means more jobs and more opportunity (sadly, Rep. Ocasio-Cortez has learned nothing from her mother’s move).

P.S. New York actually doesn’t do terribly in nationwide rankings for pension debt, though it is still below Florida.

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I shared data a couple of weeks ago showing that Florida is the freest state in America (for both overall freedom and economic freedom) while New York is in last place (in both categories).

Well, it seems that freedom has consequences when people can “vote with their feet.”

We’ll start with an op-ed in the Miami Herald by Ed Pozzuoli.

In a recent press conference, New York Gov. Andrew Cuomo…mentioned Florida as an attractive option for New Yorkers who are unhappy… a Census Bureau report late last year detailing the states that lost residents because of high taxes, overregulation and dwindling opportunities. Leading the list? New York. …what jurisdiction did the Census folks say benefits the most from domestic “in-migration? You guessed it — Florida… our low-tax, business-friendly welcome to asylum seekers from Big Government states like New York… It’s Florida’s low taxes and reasonable regulatory environment that attract businesses here. Florida ranks sixth among states for new business creation. …Unlike the federal government, Florida balances its budget and does so without an income tax. New York can keep its big progressive government.

And that “big progressive government” means onerous and punitive taxes, as the Wall Street Journal opined.

New York City’s combined state and local top rate of 12.7% hits taxpayers earning more than $1 million and is the second highest in the country after California. The deduction limit raised New York’s top rate by an effective 5%, though this was partially offset by the tax reform’s 2.6 percentage-point reduction in the federal top rate. …According to IRS data we’ve examined, New York state lost $8.4 billion in income to other states in 2016 (the latest available data), up from $4.6 billion annually on average during the prior four years. Florida raked in the most New York wealth. Mr. Cuomo says that “a taxpayer in Florida would see no increase, or a decrease” under the GOP tax reform and “Florida also has no estate tax.” New York’s 16% estate tax hits assets over $10.1 million. …Mr. Cuomo promised to let New York’s tax surcharge on millionaires expire. But he has extended it again and again and now wants to renew it through 2024 because he says the state needs the money. Meantime, he warns that a wealth exodus could force spending cuts for education and higher taxes on middle-income earners. All of this was inevitable, as we and others warned. Yet rather than propose to make the state’s tax burden more competitive, Mr. Cuomo rages against a tax reform that has helped the overall U.S. economy, even in New York.

I especially enjoy how Governor Cuomo is irked because his state’s profligacy is no longer subsidized by an unlimited federal deduction for state and local taxes.

Investor’s Business Daily shares a similar perspective.

New York Gov. Andrew Cuomo…we appreciate his recent frankness on taxes. …”I don’t believe raising taxes on the rich,” Cuomo said. “That would be the worst thing to do. You would just expand the shortfall. God forbid if the rich leave.” …In support of his comments, Cuomo cited “anecdotal” evidence that showed high-income earners are leaving the high-tax Empire State for other low-tax states. But the evidence isn’t merely anecdotal. It’s a fact. …From 2010 to mid-2017, New York had a net outmigration of over 1 million people, more than any other state. No, they’re not all rich. But many are. …the wealthy have choices that others don’t. One of those choices is to move if taxes become not merely burdensome, but punitive. That’s what’s happening in New York. …Many high-income taxpayers are leaving New York for low-tax states, tired of paying the state’s bills and then being demonized leftist activists for being “rich” and told they must give more.

Let’s close with some excerpts from a column in the Washington Times by Richard Rahn. He compares New York, Virginia, and Florida.

…many high-income New Yorkers have been moving their tax homes to Florida, undermining the New York tax base. …Florida imposes no state and local income taxes… Florida is booming, with a budget surplus, while New York is mired in debt. Only 50 years ago, New York had four times the population of Florida, and now Florida is larger than New York. …the state of Florida…created an environment where businesses could flourish without undue tax burdens and government interference. It went from being a poor state to a prosperous one. …citizens of New York should be asking: Why they are required to pay such high state and local income tax rates while the citizens of Florida get by perfectly well without any state income tax; Why they have three times more per capita debt than Floridians, and infrastructure that is in far worse shape; …Why it takes a third more of their citizens’ personal income to run the government than in Virginia or Florida; Why their state takes twice the percentage of per capita income in taxes than Virginia and Florida; …When it comes to taxes and government services, people’s feet tell more about how they feel than their mouths.

And if you want to know why so many people are traveling down I-95 from New York to Florida, this table from Richard’s column tells you everything you need to know.

For what it’s worth, there are people who are willing to pay extra tax to live in certain high-tax states. New York City has an allure for some people, as does California’s climate and scenery.

But are those factors enough to compensate for awful tax systems? Will they save those states from economic decay?

At best, they’ll delay the day of reckoning. For what it’s worth, I actually think New Jersey or Illinois will be the first state to fiscally self-destruct.

You can cast your vote by clicking here.

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I shared a very amusing column last year about “a modest proposal” to reduce income inequality.

Written tongue-in-cheek by David Azerrad of the Heritage Foundation, the premise was that society could be made more “fair” by exiling – or perhaps even selling to the highest bidder – America’s richest people.

David’s piece cleverly made the point that such a policy would dramatically lower inequality, but would do nothing to boost the living standards of poor people. Indeed, when you consider all the damage that would be caused if America lost its top entrepreneurs, investors, and business owners, lower-income people obviously would suffer immense hardship as the economy shrank.

Unfortunately, there’s no evidence that Hillary Clinton read his article. Or, if she did, she obviously didn’t learn anything. Her agenda, which is echoed by almost all leftists, is endlessly higher taxes to fight the supposed scourge of inequality.

I’ve always thought inequality was the wrong target. If politicians really cared about the less fortunate, they would instead focus on growth in order the reduce poverty.

But our friends on the left apparently believe (or, if they’re familiar with historical data, they pretend to believe) that the economy is a fixed pie. So if someone in the top-1 percent, top-5 percent, top-10 percent, or top-20 percent gets more money, then the rest of us must have less money.

Heck, they don’t even understand the data that they like to cite. Writing for National Review, Thomas Sowell debunks many of the left’s most-cherished talking points about inequality.

When we hear about how much more income the top 20 percent of households make, compared with the bottom 20 percent of households, one key fact is usually left out. There are millions more people in the top 20 percent of households than in the bottom 20 percent of households. …In 2002, there were 40 million people in the bottom 20 percent of households and 69 million people in the top 20 percent. A little over half of the households in the bottom 20 percent have nobody working. You don’t usually get a lot of income for doing nothing. In 2010, there were more people working full-time in the top 5 percent of households than in the bottom 20 percent. …Household income statistics can be very misleading in other ways. …The number of people per American household has declined over the years. When you compare household incomes from a year when there were 6 people per household with a later year when there were 4 people per household, you are comparing apples and oranges. Even if income per person increased 25 percent between those two years, average household income statistics will nevertheless show a decline.  …household income statistics can show an economic decline, even when per capita income has risen.

My Cato Institute colleague, Mike Tanner, has a must-read comprehensive study on inequality that was just released today. Here are some of the parts I found especially enlightening, starting with a very important passage from his introduction.

…contrary to stereotypes, the wealthy tend to earn rather than inherit their wealth… Most rich people got that way by providing us with goods and services that improve our lives. Income mobility may be smaller than we would like, but people continue to move up and down the income ladder. Few fortunes survive for multiple generations, while the poor are still able to rise out of poverty. More important, there is little relationship between inequality and poverty. The fact that some people become wealthy does not mean that others will become poor.

Mike then spends a few pages debunking Thomas Piketty (granted, an easy target, but still a necessary task) and pointing out that some folks overstate inequality.

But more importantly, he then points out that there is still considerable income mobility in the United States. Rich people often don’t stay rich and poor people frequently don’t stay poor.

…wealth often dissipates across generations; research shows that the wealth accumulated by some intrepid entrepreneur or businessperson rarely survives long. In many cases, as much as 70 percent has evaporated by the end of the second generation and as much as 90 percent by the end of the third. Even over the shorter term, the composition of the top 1 percent often changes dramatically. If history is any guide, roughly 56 percent of those in the top income quintile can expect to drop out of it within 20 years. …of those on the first edition of the Forbes 400 in 1982, only 34 remain on the 2014 list, and only 24 have appeared on every list. …At the same time, it remains possible for the poor to become rich, or, if not rich, at least not poor. Studies show that roughly half of those who begin in the bottom quintile move up to a higher quintile within 10 years. …And their children can expect to rise even further. One out of every five children born to parents in the bottom income quintile will reach one of the top two quintiles in adulthood.

Here’s his graph with the relevant data.

Mike also debunks that notion that poor people are poor because rich people are rich.

…it is important to note that poverty and inequality are not the same thing. Indeed, if we were to double everyone’s income tomorrow, we would do much to reduce poverty, but the gap between rich and poor would grow larger. Would this be a bad thing? …The idea that gains by one person necessarily mean losses by another reflects a zero-sum view of the economy that is simply untethered to history or economics. The economy is not fixed in size, with the only question being one of distribution. Rather, the entire pie can grow, with more resources available to all.

His study is filled with all sorts of data, but this graph may be the most important tidbit.

It shows that the poverty rate has remained relatively constant, oscillating around 14 percent, during the period when the so-called top-1 percent were generating large amounts of additional income.

Mike then spends some time agreeing that inequality can be bad if it is the result of subsidies, bailouts, protectionism, and handouts.

Amen. Rich people deserve their money if they earn it in the marketplace. But if they get rich via TARP bailouts, Ex-Im Bank subsidies, protectionist barriers, green-energy boondoggles, or some other form of cronyism, that’s reprehensible and unjustified.

Most important of all, he closes by explaining that inequality isn’t what’s important. Policy should be focused on reducing poverty, which means more economic growth.

There are…two ways to reduce inequality. One can attempt to bring the bottom up by reducing poverty, or one can bring the top down by, in effect, punishing the rich. Traditionally, we have tried to reduce inequality by taxing the rich and redistributing that money to the poor. …Despite the United States spending roughly a trillion dollars each year on antipoverty programs at all levels of government, by the official poverty measure we have done little to reduce poverty. …we are unlikely to see significant reductions in poverty without strong economic growth. Punishing the segment of society that most contributes to such growth therefore seems a poor policy for serious poverty reduction. …While inequality per se may not be a problem, poverty is. …policies designed to reduce inequality by imposing new burdens on the wealthy may perversely harm the poor by slowing economic growth and reducing job opportunities.

Exactly. The notion that we can help the poor by making America more like a high-tax European-style welfare state is laughable.

By every possible standard, the United States is out-pacing Europe in terms of jobs and growth. And what’s really remarkable is that this is happening even though Obamanomics has given us the weakest recovery since the Great Depression. Imagine how big the gap would be if we has the kind of market-oriented policies that dominated the Reagan and Clinton years!

Let’s close with a very amusing bit of data about inequality from a report in the New York Times.

The author looked at income changes in each state between 1990 and 2014 at all levels of income distribution.

By looking at the state level, we’re delineating the rich and poor within that state. Which is to say that the 90th percentile of personal income in Arkansas will not be the same as the 90th percentile of personal income in New York. This calculation helps us avoid making unfair comparisons of income between places with different costs of living.

Since I wrote just two days ago about the importance of adjusting state income data to reflect the cost of living, I obviously view this as a useful exercise.

But here’s the part that grabbed my attention. As I was reviewing the various charts for all the states, I noticed that inequality has expanded dramatically in the most infamous left-wing states. And usually not simply because rich people got richer faster than poor people got richer. In New York, Illinois, and California, rich people were the only winners.

Yet if you look at Kansas (which is the favorite whipping boy of the left because of Gov. Brownback’s big tax cuts) or the stereotypical red state of Texas, you’ll notice the lower-income and middle-income people did much better.

I guess we can use this data as additional evidence of how statist policies cause inequality.

Best of all, it was in the New York Times, so our leftist friends will have a hard time reflexively dismissing the data. It’s always good when the other side scores an “own goal.”

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Just like with nations, there are many factors that determine whether a state is hindering or enabling economic growth.

But I’m very drawn to one variable, which is whether there’s a state income tax. If the answer is no, then it’s quite likely that it will enjoy better-than-average economic performance (and if a state makes the mistake of having an income tax, then a flat tax will be considerably less destructive than a so-called progressive tax).

Which explains my two main lessons for state tax policy.

Anyhow, I’ve always included Tennessee in the list of no-income-tax states, but that’s not completely accurate because (like New Hampshire) there is a tax on capital income.

That’s the bad news. The good news is that the Associated Press reports that Tennessee is getting rid of this last vestige of  income taxation.

The Tennessee Legislature has passed a measure that would reduce and eventually eliminate the Hall tax on investment income. The Hall tax imposes a general levy of 6 percent on investment income, with some exceptions. Lawmakers agreed to reduce it down to 5 percent before eliminating it completely by 2022.

It’s not completely clear if the GOP Governor of the state will allow the measure to become law, so this isn’t a done deal.

That being said, it’s a very positive sign that the state legislature wants to get rid of this invidious tax, which is a punitive form of double taxation.

Advocates are right that this will make the Volunteer State more attractive to investors, entrepreneurs, and business owners.

Keep in mind that this positive step follows the recent repeal of the state’s death tax, as noted in a column for the Chattanooga Times Free Press.

Following a four-year phase out, Tennessee’s inheritance tax finally expires on Jan. 1 and one advocacy group is hailing the demise of what it calls the “death tax.” “Tennessee taxpayers can finally breath a sigh of relief,” said Justin Owen, head of the free-market group, the Beacon Center of Tennessee, which successfully advocated for the taxes abolishment in 2012.

On the other hand, New York seems determined to make itself even less attractive. Diana Furchtgott-Roth of the Manhattan Institute writes for Market Watch about legislation that would make the state prohibitively unappealing for many investors.

New York, home to many investment partnerships, now wants to increase state taxes on capital gains… New York already taxes capital gains and ordinary income equally, but apparently that’s not good enough. …The New York legislators want to raise the taxes on carried interest to federal ordinary income tax rates, not just for New York residents, but for everyone all over the world who get returns from partnerships with a business connection to the Empire State. Bills in the New York State Assembly and Senate would increase taxes on profits earned by venture capital, private equity and other investment partnerships by imposing a 19% additional tax.

Diana correctly explains this would be a monumentally foolish step.

If the bill became law, New York would likely see part of its financial sector leave for other states, because many investors nationwide would become subject to taxes that were 19 percentage points higher….No one is going to pick an investment that is taxed at 43% when they could choose one that is taxed at 24%.

Interestingly, even the state’s grasping politicians recognize this reality. The legislation wouldn’t take effect until certain other states made the same mistake.

The sponsors of the legislation appear to acknowledge that by delaying the implementation of the provisions until Connecticut, New Jersey and Massachusetts enact “legislation having an identical effect.”

Given this condition, hopefully this bad idea will never get beyond the stage of being a feel-good gesture for the hate-n-envy crowd.

But it’s always important to reinforce why it would be economically misguided since those other states are not exactly strongholds for economic liberty. This video has everything you need to know about the taxation of carried interest in particular and this video has the key facts about capital gains taxation in general

Not let’s take a look at the big picture. Moody’s just released a “stress test” to see which states were well positioned to deal with an economic downturn.

Is anybody surprised, as reported by the Sacramento Bee, that low-tax Texas ranked at the top and high-tax California and Illinois were at the bottom of the heap?

California, whose state budget is highly dependent on volatile income taxes, is the least able big state to withstand a recession, according to a “stress test” conducted by Moody’s Investor Service. Arch-rival Texas, meanwhile, scores the highest on the test because of “lower revenue volatility, healthier reserves relative to a potential revenue decline scenario and greater revenue and spending flexibility,” Moody’s, a major credit rating organization, says. …California not only suffers in comparison to the other large states, but in a broader survey of the 20 most populous states. Missouri, Texas and Washington score highest, while California and Illinois are at the bottom in their ability to withstand a recession.

Of course, an ability to survive a fiscal stress test is actually a proxy for having decent policies.

And having decent policies leads to something even more important, which is faster growth, increased competitiveness, and more job creation.

Though perhaps this coyote joke does an even better job of capturing the difference between the two states.

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If you owned a restaurant and wanted to generate more income and boost your bottom line, would you double your prices thinking that this would double your revenue?

Of course not. You would understand that a lot of your patrons would simply dine elsewhere. And if they didn’t have other restaurants available, many of them would simply eat at home.

But now imagine you’re a politicians and you want more tax revenue so you can try to buy more votes and redistribute more money to the special interests that fund your campaign.

Would you assume that doubling a tax rate would lead to twice as much revenue?

Based on the shoddy methodology of the Joint Committee on Taxation (JCT), which is in charge of the revenue-estimating process on Capitol Hill, the answer is yes.

To be fair, the bureaucrats at the JCT probably wouldn’t say that tax revenue would double, but their model basically assumes that tax policy doesn’t affect the economy’s overall performance. So even if there’s a huge increase in the tax burden, they assume overall economic output won’t be affected.

This obviously is an absurd assumption. You don’t have to be a rocket scientist to realize that taxes impact economic performance. Low-tax economies like Hong Kong and Singapore, for instance, routinely outperform medium-tax economies like the United States. Similarly, differences in tax policy are one of the reasons why the United States generally grows faster than (or doesn’t grow as slowly as) Europe’s high-tax welfare states.

The lesson that should be learned is that the JCT should not estimate the revenue impact of a change in tax policy simply by looking at the change in the tax rate and the current trendline for taxable income. To get a more accurate answer, the bureaucrats also should try to estimate the degree to which taxable income will change.

This is the essential insight of the Laffer Curve. You can’t calculate changes in tax revenue simply by looking at changes in tax rates. You also have to consider the resulting changes in taxable income.

So it’s an empirical question whether a shift in a tax rate will cause revenues to change a little or a lot, just as it’s an empirical issue whether revenues will go up or down.

It depends on how sensitive taxpayers are to changes in tax rates. Some types of taxpayers are very responsive, while other aren’t.

Now let’s consider two implications.

First, you presumably shouldn’t want to be at the revenue-maximizing point of the Laffer Curve. Unless, of course, you think giving politicians an extra $1 to spend is worth destroying $5 or $10 of income for households.

Second, you definitely don’t want to be on the revenue-losing side of the Laffer Curve. That means households are losing so much income that politicians actually have less money to spend, a lose-lose scenario.

Politicians, though, often can’t resist the temptation to raise tax burdens all the way to the short-run revenue-maximizing point.

Many of them simply don’t care if the private economy suffers several dollars of lost output per dollar of additional tax revenue. All that matters is that they have the ability to buy more votes with other people’s money.

But what’s really amazing is that some of them are so short-sighted and greedy that they raise the tax burden by so much that revenues actually fall.

And that’s what is happening in New York, where the tax burden on cigarettes has become so high that tax revenues are falling. Here are some excerpts from a story in the Syracuse newspaper.

The number of state-taxed cigarette packs sold in New York has plummeted by 54 percent in the past decade. …more smokers are buying cigarettes in ways that avoid New York’s $4.35 per pack tax, the highest in the nation. They cross state lines, shop from black market vendors and travel to Native American outlets to save $6 per pack or more, experts say. New York is losing big. In the past five years, the state’s cigarette tax collections have dropped by about $400 million…off-the-tax-grid shopping options add up to as much as $1.3 billion in uncollected state cigarette taxes each year, according to a study by the National Academies of Sciences, Engineering, and Medicine.

It’s not just happening in New York.

I’ve already written about massive Laffer Curve effects from excessive tobacco taxation in Michigan, Ireland, Bulgaria, and Quebec, and Washington.

And the article notes that Oklahoma’s non-compliance rate is even higher.

About 35 percent of smokers in Oklahoma buy cigarettes in ways that avoid state taxes, compared with about one-third of smokers in New York who do the same, experts said.

Needless to say, politicians hate it when the sheep don’t willingly line up to be fleeced. So they’re trying to change policy in ways that divert more money into their greedy hands.

That’s the bad news. The good news is that they’re not very successful.

a federal court in 2011 ruled in the state’s favor and paved the way for Gov. Andrew Cuomo to try to collect the state tax from Native American nations by making their wholesalers pick up the cost. Instead, many nations abandoned the wholesale route and stopped selling name-brand cigarettes. They began stocking their stores with significantly cheaper ones made by Indian-owned manufacturers, experts said, like Seneca-brand cigarettes.

And even when policy changes are “successful,” that doesn’t necessarily translate into more loot that politicians can use to buy votes.

When taxes become extortion, people will evade when they can’t avoid.

…the illegal trade of cigarettes has grown, especially in New York City where smokers are supposed to pay an extra $1.50 per pack on top of the state tax. A recent study by New York University estimated as many as 15 percent of New York City cigarettes sales avoided the state tax.

The Germans call it Schadenfreude when you take pleasure from another person’s misfortune. Normally, I would think people who feel this way have a character flaw.

But not in this case. I confess that get a certain joy from this story because politicians are being punished for their greed. I like the fact that they have less money to waste.

We can call it the revenge of the Laffer Curve!

P.S. Years ago, the JCT actually estimated that a 100 percent tax rate would generate more tax revenue. I realize it’s only a small sign of progress, but I don’t think the bureaucrats would make that assertion today.

P.P.S. Here’s my as-yet-unheeded Laffer Curve lesson for President Obama, based on the fact that rich taxpayers paid five times as much tax after Reagan reduced the top tax rate from 70 percent to 28 percent.

P.P.P.S. And here’s something that’s downright depressing. Some leftists are so resentful of successful people that they want higher tax rates even if the result is less revenue. And you’ll notice at the 4:20 mark of this video that President Obama is one of those people.

P.P.P.P.S. Speaking of leftists, here’s my response when one of them argued against the Laffer Curve.

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Here’s a quiz for readers.

When politicians increase taxes, the result is:

This is a trick question because the answer is (j), all of the above.

But let’s look at some of the evidence for (d), which deals with the fact that the geese with the golden eggs sometimes choose to fly away when they’re mistreated.

The Internal Revenue Service has a web page where you can look at how many taxpayers have left or entered a state, as well as where they went or where they came from.

And the recently updated results unsurprisingly show that taxpayers migrate from high-tax states to low-tax states.

Let’s look at some examples, beginning with Maryland. Here are some excerpts from a report in the Daily Caller.

Wealthy taxpayers and job-creating businesses fled Maryland at an accelerating rate as then-Gov. Martin O’Malley implemented a long list of tax hikes during his first five years in the state capital. More than 18,600 tax filers left Maryland with $4.2 billion in adjusted gross income from 2007 – O’Malley’s first year as governor — through 2012, according to a Daily Caller News Foundation analysis of the most recently available Internal Revenue Service state-level income and migration data. …Nearly 5,600 state-tax filers left Maryland in 2012 and took $1.6 billion with them, more than double the 2,300 who departed with $732 million in 2011. The fleeing 5,600 filers had average incomes of nearly $291,900. …Most of 2012’s departing residents moved to the more business-friendly Virginia, according to the data. …Florida was the third most common destination for Marylanders.

Here’s a chart looking at the income that moved into the state (green) compared to the much greater amount of income that left the state (red).

The story then makes a political observation.

O’Malley’s economic record may partially explain why his campaign for the 2016 Democratic presidential nomination has yet to gain traction among voters outside of Maryland.

Though I wonder whether this assertion is true. Given the popularity of Bernie Sanders, I can’t imagine many Democrat voters object to politicians who impose foolish tax policies.

Now let’s shift to California.

A column in the Sacramento Bee (h/t: Kevin Williamson) explores the same IRS data and doesn’t reach happy conclusions.

An unprecedented number of Californians left for other states during the last decade, according to new tax return data from the Internal Revenue Service. About 5 million Californians left between 2004 and 2013. Roughly 3.9 million people came here from other states during that period, for a net population loss of more than 1 million people. The trend resulted in a net loss of about $26 billion in annual income.

And where did they go?

Many of them went to zero-income tax states.

About 600,000 California residents left for Texas, which drew more Californians than any other state.

Here’s a map from the article and you can see other no-income tax states such as Nevada, Washington, Tennessee and Florida also enjoyed net migration from California.

Last but not least, let’s look at what happened with New York.

We’ll turn again to an article published by the Daily Caller.

More taxpaying residents left New York than any other state in the nation, IRS migration data from 2013 shows. During that year, around 115,000 New Yorkers left the state and packed up $5.65 billion in adjusted gross income (AGI) as well. …Although Democrat Governor Andrew Cuomo acknowledged that New York is the “highest tax state in the nation” and it has “cost us dearly,” he continues to put forth policies that economically cripple New York residents and businesses.

Once again, much of the shift went to state with no income taxes.

New York lost most of its population in 2013 to Florida — 20,465  residents ($1.35 billion loss), New Jersey — 16,223 residents ($1.1 billion loss), Texas — 10,784 residents ($354 million loss).

Though you have to wonder why anybody would move from New York to New Jersey. That’s like jumping out of the high-tax frying pan into the high-tax fire.

At this point, you may be wondering why the title of this column refers to lessons for Hillary when I’m writing about state tax policy.

The answer is that she wants to do for America what Jerry Brown is doing for California.

Check out these passages from a column in the Wall Street Journal by Alan Reynolds, my colleague at the Cato Institute.

Hillary Clinton’s most memorable economic proposal, debuted this summer, is her plan to impose a punishing 43.4% top tax rate on capital gains that are cashed in within a two-year holding period. The rate would drift down to 23.8%, but only for investors that sat on investments for six years. This is known as a “tapered” capital-gains tax, and it isn’t new. Mrs. Clinton is borrowing a page from Franklin D. Roosevelt, who trotted out this policy during the severe 1937-38 economic downturn, dubbed the Roosevelt Recession.

FDR had so many bad policies that it’s difficult to pinpoint the negative impact of any specific idea.

But there’s certainly some evidence that his malicious treatment of capital gains was spectacularly unsuccessful.

In the 12 months between February 1937 and 1938, the Dow Jones Industrial stock average fell 41%—to 111 from 188.4. That crash presaged one of the nation’s worst recessions, from May 1937 to June 1938, with GDP falling 10% and industrial production 32%. Unemployment swelled to 19% from 14%. Harvard economist Joseph Schumpeter, in his 1939 opus “Business Cycles,” noted that “the so-called capital gains tax has been held responsible for having accentuated, if not caused, the slump.” The steep tax on short-term gains, he argued, made it hard for small or new firms to issue stock. And the surtax on undistributed profits, Schumpeter wrote, “may well have had a paralyzing influence on enterprise and investment in general.” …A 2011 study from the Federal Reserve Bank of St. Louis reported…“The 1936 tax rate increases,” they concluded, “seem more likely culprits in causing the recession.” …A 2012 study in the Quarterly Journal of Economics attributes much of the 26% decline in business investment in the 1937-38 recession to higher taxes on capital.

So what’s Alan’s takeaway?

Hillary Clinton’s fix for an economy suffering under 2% growth is resuscitating a tax scheme with a history of ushering in recessions. The economy would be better off if the idea remained buried.

Maybe we should ask the same policy about her that we asked about FDR: Is she misguided or malicious?

P.S. Some folks may argue that Hillary has more leeway than governors to impose class-warfare tax policy because it’s harder to emigrate from America than it is to move across state borders.

That’s true.

The United States has odious exit taxes that restrict freedom of movement. And even though record numbers of Americans already have given up their passports, it’s still a tiny share of the population.

Likewise, not that many rich Americans have taken advantage of Puerto Rico’s status as a completely legal tax haven.

But while it’s true that it’s not easy for an American to escape the jurisdiction of the IRS, that doesn’t mean they’re helpless.

There are very simple steps that almost all rich people can take to dramatically lower their tax liabilities. So Hillary and the rest of the class-warfare crowd should think twice before repeating FDR’s horrible tax mistakes.

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