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This post will illustrate how users can customize the freedom index according to their own judgments about how various policies affect freedom. In particular, it will show how the weighting for tax burden can be significantly reduced and explores the consequences of this choice. It will also discuss briefly how abortion policies might be included in a customized index. Readers interested in customizing the freedom index should download the weighting spreadsheet at freedominthe50states.org.

Weighting Taxation

The freedom index “weights” each policy variable by the dollar-terms amount of benefit received by victims of government intervention from a one-standard-deviation, nationwide shift in the variable in a freer direction. So the weight for taxation is simply the number of dollars represented by a one-standard-deviation shift in state and local tax burden as a percentage of personal income. The mean of tax burden is 0.095 (9.5% of personal income). The standard deviation is 0.0124. Therefore, the weight of the variable in the index is 0.0124 times national personal income, which was $12.357 trillion in 2010: $153.1 billion. That ends up being worth 28.6% of the total weights for all variables in the index.

That’s a lot. The numbers don’t lie, but we do note in the text one reason why this number may actually overestimate the true “loss of freedom” caused by taxation:

This index’s weight for tax burden assumes that all taxes take away freedom. But in fact some taxpayers consent to at least some of the taxes that they pay, as long as the taxes are legal and generally paid by others. Therefore, taxation is not wholly a violation of their freedom, as “freedom” is defined above. However, most criminal justice policies do not operate along these lines. For instance, an imprisoned drug possessor is no more likely to consent to being confined if others are as well, and a driver fined for not wearing a seat belt does not usually consent to being fined if others are, and so on.

Rather than trying to figure out how much of the observed taxation truly represents a diminution of freedom, this study uses aggressive estimates of the value of freedom from taxation and other fiscal policy measures, and then boosts the weighting of certain personal freedoms and economic regulations, as explained in the relevant sections below. The point is to make sure that the index is using an equally aggressive method for estimating the values of all the different freedoms it covers.

Now, one might believe that we have not gone far enough to adjust for this problem, and indeed that is the whole point of putting the spreadsheet online and encouraging reader customization. The freedom index as it currently stands is in some ways a libertarian’s index. If you think that all taxation diminishes freedom, you will like the weight it enjoys in the published study.

But what if you are a philosophically sophisticated progressive or “liberaltarian,” who does not have any personal issue with taxation, but who nevertheless thinks that negative liberty is part of justice, and that the costs that others associate with taxation are worth taking into account. What weight should you put on tax burden?

Let’s assume that the current tax burden in each state represents the ideal point of the median voter. Positive theories of democracy would suggest that this is as good a guess about where public opinion lies as any. Then 50% of voters would prefer a higher tax burden (and the services it would finance), and 50% would prefer a lower tax burden. Right away, we can slash the tax burden weight in half, because 50% of voters nationally would not see the taxes they currently pay as any diminution of their freedom at all. Now, this move assumes that the median-dollar taxpayer is the same as the median voter. That is unlikely to be the case. In fact, the median-dollar taxpayer is likely to be somewhat wealthier than the median voter and thus more ideologically conservative and more hostile to taxation. Thus, if anything, slashing tax burden in half on these grounds is somewhat too aggressive.

But we’re not done yet. Of the 50% of voters/taxpayers who would prefer a lower tax burden, most of them would not see all of the taxes they pay as a diminution of their freedom. That is, they would be fully willing to pay a lower tax burden that is greater than zero. To illustrate the logic, assume a normal probability density function over possible tax burdens, as follows:
normal
On the X axis is tax burden, and on the Y axis is the proportion of the population corresponding to a particular view on tax burden. Fifty percent of the curve lies to the left or right of the mean of the tax burden distribution, which is 9.5, the actual national mean of state and local tax burden. (I have drawn the curve under the assumption of a standard deviation of 2.375, a fourth of the mean, but nothing that follows hinges on this assumption. Note that the standard deviation of voters’ views on taxation should be significantly greater than the standard deviation of actual state tax burdens, because each state tax burden roughly represents a median of a distribution.)

Now, what are the losses experienced by those who prefer a lower tax burden than what currently exists in their state? The loss curve will look like a mirror image of the left side of the normal density function. Those who want zero taxation will see all 9.5% of income taxed away as a loss of freedom. Those who want taxation of 2.5% of income will see 7% of income taxed away as a loss of freedom. And so on. Because the loss function is a mirror image of the probability density function, the area under the loss curve is also 0.5. So only 4.75% of personal income, in total, is a loss to those who prefer lower taxation. We can divide tax burden’s weight by two again, or by four in total.

The way to do this in the weighting spreadsheet is as follows. On the 2001-2011 worksheet, you can find all the standard deviations and weights of the variables in column GW. The weight for tax burden (“ainctot3″) is in cell GW10. You can divide the value there by four to create a new weight. All the other weighting cells automatically recalculate, and you now see in cell GV10 that tax burden is now worth just 9.19% of the index. (Why not one-fourth of 28%? Because reducing taxation’s weight also reduces the sum of all weights.) Fiscal policy as a whole is now worth just 17% of overall freedom, while personal freedom is 42%, and regulatory policy is 41%.

Note that all of the measures we took to boost personal freedom in the study remain in place, so this approach really does aggressively reduce the importance of taxation. I’ll call this new, nerfed-taxation index “Sandals,” as contrasted with the published index, which I’ll call “Suits.” How do the rankings of states differ between “Suits” and “Sandals”? See the table below.

“Suits” “Sandals”
1. North Dakota 1. North Dakota
2. South Dakota 2. Indiana
3. Tennessee 3. New Hampshire
4. New Hampshire 4. Tennessee
5. Oklahoma 5. Nevada
6. Idaho 6. South Dakota
7. Missouri 7. Utah
8. Virginia 8. Iowa
9. Georgia 9. Delaware
10. Utah 10. Georgia
11. Arizona 11. Idaho
12. Montana 12. Nebraska
13. Alaska 13. Virginia
14. Texas 14. Missouri
15. South Carolina 15. Kansas
16. Indiana 16. Arizona
17. Delaware 17. Colorado
18. Alabama 18. Oklahoma
19. Colorado 19. North Carolina
20. Nevada 20. Alaska
21. New Mexico 21. Maine
22. Nebraska 22. Texas
23. Florida 23. South Carolina
24. North Carolina 24. Minnesota
25. Iowa 25. Wyoming
26. Kansas 26. Massachusetts
27. Kentucky 27. Oregon
28. Oregon 28. Montana
29. Washington 29. Florida
30. Massachusetts 30. Ohio
31. Pennsylvania 31. Pennsylvania
32. Arkansas 32. Wisconsin
33. Ohio 33. New Mexico
34. Minnesota 34. Kentucky
35. Michigan 35. Vermont
36. Wyoming 36. Washington
37. Louisiana 37. Michigan
38. Wisconsin 38. Connecticut
39. Maine 39. Arkansas
40. Connecticut 40. Alabama
41. Mississippi 41. Rhode Island
42. West Virginia 42. Louisiana
43. Vermont 43. Maryland
44. Maryland 44. West Virginia
45. Illinois 45. Hawaii
46. Rhode Island 46. Illinois
47. Hawaii 47. Mississippi
48. New Jersey 48. New Jersey
49. California 49. California
50. New York 50. New York

The two rankings still look pretty similar! Three of the same states are in the top five in both indices, and the bottom three are identical as well. Indiana moves up from #16 to #2 between “Suits” and “Sandals,” and Nevada moves up from #20 to #5. Meanwhile, Oklahoma falls from #5 to #18, and Alabama falls from #18 to #40. But those are some of the biggest changes in rank; most states stay in a pretty similar location. It turns out that even a left-leaning index of negative liberty puts red and purple states at the top and deep blue states at the bottom.

Including Abortion

Abortion policies have to be imported from another spreadsheet in order to be included in the freedom index. A little more Excel mastery is helpful here. The abortion policy spreadsheet is available at statepolicyindex.com (p_abor_11.xls).

Now, there are a few things to note about state abortion laws. Most state abortion laws that are actually enforced do not do much to limit first- and second-trimester abortions. Because of Roe v. Wade, states do not have the right to prohibit abortions before fetal viability. However, some abortion policies we code, like requiring that only licensed physicians perform abortions, requiring that abortions be performed in a hospital, restricting private insurance coverage of abortions, and imposing waiting periods for abortions, can raise the effective cost of getting even an early abortion. Some pro-choicers, particularly libertarians, might well see certain state restrictions, such as prohibiting Medicaid funding for abortions, restricting partial-birth and late-term abortions, and requiring parental notification for minors’ abortions, as justifiable.

The variable “pabor” gives a summary indicator of state abortion laws based on principal component analysis. It is available only for 2006-2010 because one of the constituent variables is unavailable for 2000. States scoring higher on “pabor” have more abortion restrictions, including limits on public funding. To insert the variable into the freedom index, simply create two new rows in the freedom index spreadsheet and paste the “pabor” values into the first row (values/transpose). Since abortion laws affect personal freedoms on any interpretation, you may wish to include abortion policies with the personal freedoms, for instance on rows 139 and 140. You may wish to carry 2006/7 values back to 2001.

Next, you need to adjust the raw values of “pabor” to put them on a standardized scale with other variables. Every other row of the spreadsheet consists of these adjusted values. The adjusted values lie right below the raw values of each policy variable. If you think fewer abortion restrictions enhance freedom, then you think that higher values on “pabor” are worse. Find another variable like that — “tpubfin” is an example on rows 125-126. You can copy and paste the formula for adjusted “tpubfin” values to adjust the “pabor” values. If you think fewer abortion restrictions threaten freedom, then you think that higher values on “pabor” are better. Find another variable like that — “tgprp” on rows 133-134 is an example. Copy and paste the “adjusted” row.

Next, make sure that the mean and standard deviation of the variable are calculated in columns GV and GW. Below the mean and standard deviation are the weights. For the purposes of this exercise, I’ll give abortion a weight equal to same-sex partnerships, about $10.4 billion. Make sure that the percentage weight is calculated in column GV by copying and pasting one of the bolded percentage weights from another variable (it doesn’t matter which). Also make sure that the summed weights is updated by changing the formula at the bottom of column GW (row 243 after inserting two rows for abortion). Make sure that the dollar weight for abortion laws is included.

Finally, update the personal freedom scores. For instance, go into GU143 and type at the end of the parenthetical expression: “+GU140*$GV140″ (without quotes). That updates Wyoming’s score. Then just drag the formula all the way to the left. Personal freedom scores are all updated, and overall freedom updates automatically.

Now what does the freedom ranking look like? I’ve taken the steps to create a pro-choice ranking that also nerfs taxation. Here it is:

Pro-Choice Sandals
1. New Hampshire
2. North Dakota
3. Indiana
4. Tennessee
5. Nevada
6. Delaware
7. South Dakota
8. Iowa
9. Utah
10. Nebraska
11. Georgia
12. Idaho
13. Virginia
14. Colorado
15. Kansas
16. Arizona
17. Alaska
18. Missouri
19. North Carolina
20. Oklahoma
21. Maine
22. Texas
23. Oregon
24. South Carolina
25. Wyoming
26. Minnesota
27. Montana
28. Massachusetts
29. New Mexico
30. Florida
31. Vermont
32. Ohio
33. Pennsylvania
34. Wisconsin
35. Washington
36. Kentucky
37. Michigan
38. Connecticut
39. Arkansas
40. Alabama
41. Rhode Island
42. West Virginia
43. Maryland
44. Hawaii
45. Louisiana
46. Illinois
47. Mississippi
48. New Jersey
49. California
50. New York

Not all that different. I’ve taken all the assumptions most favorable to a “liberaltarian” conception of negative liberty, and most states do not jump or fall very many places in the ranking. I don’t say this to tweak liberaltarians, but to point out how robust the freedom ranking is to even drastic changes of assumptions. It’s such a big dataset that seemingly big changes have small effects on the end result. New York, California, and New Jersey really are the most regulated states, no matter how you slice it. The Dakotas, Tennessee, and New Hampshire really are among the least regulated states. “Conservatarians” may be distressed by the low placement of states like Mississippi, West Virginia, and Louisiana in the published index. My guess is that the freedom ranking will be equally robust to changes in more right-wing direction, such as by nerfing many of the bonuses we gave to personal freedom variables, including abortion restrictions as a plus for freedom, and so on.

Although the freedom index is reasonably robust to changing assumptions about which freedoms matter how much, we still encourage readers to tinker with customizing the index. For one thing, very radical changes may well have radical effects. If you are interested in marijuana laws and business regulations but not at all in taxation, gun laws, or tobacco laws, your freedom index might look quite different after all. Our freedom index is tailored to the “average American” adversely affected by government intervention, but the “average American” is a statistical construct that probably corresponds to no actual person.

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Which public policies make an economy better for business? One way to answer this question is to ask businesspeople. Two recent surveys ask businesspeople to rank the American states on their friendliness toward business.

Now, libertarians often remind us that friendliness toward business is not the same as friendliness toward markets. Indeed, libertarians believe that many of their favored policies, such as abolishing trade protection, corporate welfare, and regulations that privilege big business, will redound to the benefit of workers and small business owners. What’s so interesting about these two surveys is that they are of different types of business owners: CEOs of large companies and small businesspeople. The first survey was conducted by Chief Executive magazine and the second by thumbtack.com in partnership with the Kauffman Foundation. By relating respondents’ views about the friendliness of their states to those states’ actual policies, we can see where big and small businesses agree and disagree about which policies are most important for their success.

My first step was to draw out of these survey data those numbers that relate specifically to different states’ policy environments, as opposed to other aspects of the economic climate. From the CEO survey, therefore, I took the taxation/regulation score given for each state (higher is better). From the small business survey, I took the “Regulations” component grades. Unfortunately, the small business survey does not include raw scores for each state, so I simply quantified the grades as follows: A+ = 0, A = 1, A- = 2, and so on, up to F = 11. The small business survey only covers 45 states, but for these states, the correlation between CEO and small business scores was -0.76. Since higher is better in the CEO survey and lower is better in the small business survey, that high correlation indicates a surprising degree of agreement between large and small businesses about states’ friendliness toward their businesses.

Nevertheless, there may remain some important differences in which policies large and small businesses prioritize. To get a handle on this question, (more…)

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While the U.S. economy has been officially out of recession for a while and growing at a decent clip (1.8% at a seasonally adjusted annual rate in the first quarter of this year, 3.1% in the last quarter of 2010 – see chart), unemployment remains very unusually high, 9.0% in April 2011 (seasonally adjusted), compared to just 4.5% five years ago. The Economist wonders whether the U.S. has caught the European disease of “structural unemployment.” What can be done to get unemployment down fast?

Click “Continue Reading” to view the Sorens Deficit-Neutral Plan to Slash Unemployment (SDNPSU – catchy acronym, right? Try pronouncing it like “sudden Sue”): (more…)

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The recent recession cut deeply into state treasuries, forcing legislatures to raise taxes or cut spending or both to eliminate budget deficits. It is interesting to note which states opted for big tax hikes over big spending cuts. USNews Money blogger Rick Newman has compiled a list of the 10 states with the largest enacted and “proposed” tax increases per capita over the 2009-2011 years, based on figures from the Association of State Budget Officers.

Almost all the states on the list either had unified Democratic control for most of the period of analysis (New York, Delaware, Connecticut, Wisconsin, Washington, Oregon, Massachusetts, New Hampshire) or are ideologically liberal (Connecticut, California). Arizona is one of two exceptions; they had a particularly large real estate bust. Kansas I can’t explain – but they only show up because of “proposed” increases. I will go out on a limb and predict that most of those increases will never be enacted.

By the way, the two-thirds requirement for raising taxes in California, which effectively gives veto power to moderate Republicans, does not seem to have had the ill consequences attributed to it – California is #2 on the list.

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At The Monkey Cage, Andrew Gelman takes issue with my post on union density and tax collections by state. I argued that states with higher percentages of workers covered by collective-bargaining contracts have higher tax collections as a percentage of personal income, and that the relationship is probably causal. Gelman argues that it is inappropriate to infer causation from a correlation among observational data. My UB colleague Phil Arena offers a qualified defense of my post.

I more or less agree with the points Phil makes, as well as Gelman’s main point. Yes, correlation does not automatically mean causation, and in my original post I moved very quickly between the two without acknowledging the difference – not the sort of thing I would do in a journal article. Nevertheless, the most natural interpretation of my results is indeed causal. It does not seem plausible that higher taxes cause higher union densities (I can think of no reason why this should be the case). On the other hand, it is quite plausible that higher union densities cause higher taxes: in my state the education unions have been lobbying heavily against spending cuts and a proposed property tax cap. What about endogeneity due to omitted variables? Well, the most plausible one would be ideology: liberal states have higher unionization rates and higher taxes. But I controlled for ideology, and indeed even “overfitted” taxation to ideology with a squared term.

Finally, the dynamic analysis showed a correlation between unionization rates in 2000 and change in tax burdens over the next eight years, although it was not quite statistically significant. But because it’s a short time period, we shouldn’t expect taxes to change all that much. Most of the dependent variable is going to be statistical noise. The effect found is also substantively impressive, even if not statistically significant, and as Ziliak and McCloskey remind us, that’s often what we really want to know.

So yes, Gelman is right that correlation doesn’t automatically imply causation, but I nevertheless contend that the most plausible interpretation of the relationship between union densities and tax levels in the states is that the former are affecting the latter.

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One of the purposes of “right to work” legislation, currently being debated in Indiana, New Hampshire, and other states, is to reduce the percentage of the workforce covered by collective bargaining agreements. Leaving aside the ethics of collective bargaining as practiced in the U.S. today, what are the political and economic consequences? Since unions donate almost exclusively to Democratic candidates and lobby heavily for more government regulation and spending, it would be unsurprising if more unionized states ended up with bigger state governments.

To examine the evidence, I ran statistical models of unionization and taxation over the 2000-2008 period. The dependent variable in the first analysis is state and local tax collections as a percentage of state personal income, excluding mineral severance and gas taxes (since large and resource-abundant states will otherwise look like states with large tax burdens), in Fiscal Year 2007-8, the latest year for which data are available. The main independent variable is (more…)

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The New Obamanomics?

Interesting and encouraging suggestions in the news today that President Obama wants to embark on significant tax reforms largely along the lines recommended by the Commission on Fiscal Responsibility and Reform. As noted in today’s NYT:

President Obama is considering whether to push early next year for an overhaul of the income tax code to lower rates and raise revenues in what would be his first major effort to begin addressing the long-term growth of the national debt.

The piece continues:

The objective is to rid the code of its complex buildup of deductions, credits and exemptions, thereby broadening the base of taxes collected and allowing for lower rates — much like a bipartisan majority on Mr. Obama’s debt-reduction commission recommended last week in its final blueprint for reducing the debt through 2020.

Doing so would offer not only an opportunity to begin confronting the growth in the national debt but also a way to address warnings by American business that corporate tax rates and the costs of complying with the tax code are cutting into their global competitiveness.

This marks an interesting turn of events, one that will likely cause much disquiet for the Left while bringing a smile to the face of Arthur Laffer. Obviously, it is far too early to make predictions on whether such reforms are likely to be initiated. Undoubtedly, the politics will be quite complicated (recall the events surrounding the Tax Reform Act of 1986, which combined simplification of the tax code with a reduction of rates). For those interested in how this was accomplished a quarter century ago, the best account remains Alan Murray and Jeffrey Birnbaum, Showdown at Gucci Gulch.

 

 

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I was ever so briefly at a conference on pricing carbon this weekend at Wesleyan (I was a moderator for a session). The panelists were committed to the same goal (reduced CO2 emissions) so the discussion focused on the issue of regulatory design and policy instruments. Of the competing approaches—cap-and-trade, cap-and-dividend, and a straight carbon tax—the carbon tax, in my opinion, makes the most sense.

By way of background, I find the data on global climate change pretty persuasive even if we accept that there is a fair amount of uncertainty.  Given the benefits of reducing CO2 emissions, reducing dependency of foreign oil, etc., a transition to less carbon-intensive fuels and processes makes sense even if we determine at some point in the future that the environmental risks of climate change were less than we currently believe them to be.

Given the impossibility of establishing property rights over climate stability, the kinds of free-market environmentalist approaches that many find appealing would seem inapplicable. Thus we turn to other kinds of policy interventions.

Cap-and-trade worked quite well for acid rain. There is little question that Title IV of the Clean Air Act Amendments of 1990 created an amazingly cost-beneficial approach to the problem. But CO2 is far more complicated for a number of reasons and it is questionable that caps could function without offsets, which open the door to endless gaming.  The carbon tax, in contrast, is a simple and transparent means of managing a negative externality.

A carbon tax would gradually increase the tax per ton of CO2, thereby making less carbon-intensive forms of fuel and processes more price competitive.  Current proposals require revenue neutrality. Some suggest returning 100% of the revenues on a per capita basis via electronic transfers, thereby limiting the opportunities for transfer seeking and gaming the system (both of which would be ubiquitous in a cap scheme with offsets or any efforts to divert some of the funds to a green industrial policy). Others make the case for “tax shifting” (e.g., using the projected $500 billion in carbon revenues to eliminate those that create disincentives to investment or are overly regressive).  Obviously, one could combine dividends and tax shifting. It would be prudent to combine the carbon tax with the immediate elimination of all subsidies for fossil fuel production. Of course, it would be a major innovation for US government to stop subsidizing the very activities we are trying to regulate….but I digress.

Regardless of how one uses the resources, there is a major hurdle: taxes are taxes (even if we call them “fees”) and in this political environment one might suppose that any proposal for new taxes would be DOA.

But not necessarily.

There is growing recognition of the huge fiscal crisis on the horizon. There is literally no hope of avoiding it through attacks on “waste, fraud and abuse,” earmarks, and domestic discretionary spending.  Yes, any of us could make the intellectual case for massive entitlement cuts or restructuring. But there is little evidence that a majority of either party will ever make the case and endure the political costs associated with substantial revisions in Social Security and Medicare.  So we turn, necessarily, to revenues.  Why not frame a carbon tax as a means of shoring up the unfunded portion of Social Security and Medicare without significant cuts—and thereby avoiding an eminent fiscal collapse.

We know that existing federal trust funds are not a store of wealth. The trick would be to assure that 100% of the revenues were placed in a real trust fund with real assets until the unfunded liabilities were reduced to manageable levels.  At that point—assuming that point ever arrived—decisions could be make to pay down the debt. None of this would preclude future reforms (indeed, they would likely remain necessary given the magnitude of the gap).

As a means of protecting existing entitlements, it might be attractive to the AARP and members of both parties who would like to find some means of avoiding the difficult decisions before us. As a means of reducing CO2 emissions, it would be attractive to environmentalists and younger voters (who would also be attracted by the beneficial impacts on entitlements they may never see under current conditions)?

Could the carbon tax provide a foundation for a potent grey-green coalition committed to fiscal and environmental sustainability?

 

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The World Economic Forum’s  Global Competitiveness Report has been released. You can read a summary in the Washington Post or go directly to download the report and the fascinating data tables here. As one might expect, the US has slipped from first to fourth (of 139 nations) over the past several years. Some of the data on how the US is doing relative to its competitors is disturbing. For example,

  • Government budget balance relative to GDP (117th), placing the US between the UK and Romania
  • Size of the government debt relative to GDP (122nd ), placing the US between Côte d’Ivoire and Hungary.
  • National savings rate (130th ), placing the US between Burundi and Serbia

These are based on official data sources. What I find far most interesting  are some of the data tables that speak to corporate perceptions of the government. The data is collected as part of the World Economic Forum’s Executive Opinion Survey.

  • Protection of property rights (40th), placing the US between Gambia and Malaysia
  • Diversion of public funds to companies, individuals, or groups due to corruption (34th), placing the US between Botswana and Chile
  • Public trust of politicians (54th), placing the US between Estonia and the UK
  • Favoritism in decisions of public officials (55th), placing the US between Lithuania and Tajikistan.
  • Irregular Payments and bribes to public officials (40th), placing the US between Spain and Poland
  • Wastefulness of government spending (68th), placing the US between Ghana and El Salvador
  • Burden of regulation (49th), placing the US between Guyana and Jordan
  • Efficiency of  legal framework in settling business disputes (33rd), placing the US between Botswana and Ireland
  • Efficiency of legal framework in challenging regulations (35th), between Uruguay and Gambia
  • Transparency of government policymaking (41st), placing the US between Saudi Arabia and India
  • Taxation: Data table 6.04 presents the rank ordering of nations based on the question: “What impact does the level of taxes in your country have on incentives to work or invest?” The US falls 71st out of 139 nations (the better the ranking, the less the perceived impact of taxation).  Data table 6.05 rank orders nations based on the total tax rate on businesses. The US, with a total tax rate of 46.3 percent has a higher rate than 88 of the 139 nations.

The US has long had an anti-statist culture and there has long been an adversarial relationship between business and the state. But I must admit, I find these figures striking. If we assume that economic recovery depends on corporate investment decisions, and these decisions are influenced by perceptions of the larger political-institutional environment, none of this can be good news.

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Albert R. Hunt defends the administration against the charge made by Verizon chairman Ivan Seidenberg. (Part of the reason for Seidenberg’s charge is the FCC’s aggressive push to regulate the Internet without apparent statutory authority.) Hunt’s defenses of Obama are as follows:

President Barack Obama rejected calls last year to nationalize the big banks, opting instead for market-based stress tests and injecting more private capital; he disappointed liberals by turning down a government-run national health-care program, and assists the struggling U.S. automobile industry to survive as a private enterprise.

In the face of the worst economic crisis since the Depression, corporate profits since Obama took office have soared 40 percent, and the stock market, despite the recent slump, has risen more than 27 percent.

The U.S. corporate tax rate is the second-highest among major industrial countries, the Verizon CEO correctly noted. He neglected to point out that the effective marginal rate paid by corporations, according to a study by the administration of President George W. Bush, is within the average of these countries because of all the loopholes championed by business interests.

So almost all of Hunt’s defenses of Obama’s record have to do with the fact that his administration (and to be fair, the one before as well) is willing to use the power of the federal government to pick winners in the marketplace. That’s certainly “pro-particular businesses,” but one can see how those overlooked for special treatment might be miffed. The final point left is the rise in corporate profits. Given that Obama took office at the nadir of the worst postwar recession, I hardly think this trend can be credited to his account. Finally, we would do well to remember the distinction between being pro-business and pro-market. No, Obama’s not a socialist ideologue, but his administration is reintroducing old-fashioned industrial policy to the American political economy in a big way.

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For those who followed the neo-Marxist debates on state theory in the 1970s (or were forced to learn about them by one’s professors), one of the more interesting contributions came from James O’Connor’s book, The Fiscal Crisis of the State. In essence, O’Connor argued that the state must simultaneously execute two conflicting functions: an accumulation function (creating the conditions for capital accumulation or corporate profitability) and a legitimation function (responding to the demands of voters and mobilized groups).  As elected officials meet the demands for social provision, they embrace higher levels of taxation, ultimately reaching a point where capital accumulation collapses. They can try to put off the day of reckoning (e.g., through incurring debt) but ultimately, the crisis would occur, perhaps as a result of an exogenous shock. Of course, some of what O’Connor argued could also be extracted from public choice arguments that were emerging at the same time (see Buchanan) and the work of Mancur Olson (see The Rise and Decline of Nations).

With this in mind, the press is increasingly full of pieces detailing the fiscal crisis of in Europe, which has come to a head as a result of the sovereign debt crisis.  I find these pieces interesting, in part, because they may foreshadow what will be occurring in the US in the next few decades.

As Michael Weissenstein reports, “the welfare state—cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism—is coming under its most serious threat in decades.”

Peggy Hollinger (Financial Times) reports that France is seriously contemplating an increase in the retirement age, “as it embarks on a contentious reform of its debt-laden pension system and brings public finances back into line.”  The unions are (insert shocked expression here) strongly opposed to any cuts and are planning a national strike on Thursday.

There was an interesting “debate” at the New York Times on whether we are witnessing the twilight of the welfare state and whether the sovereign debt crisis holds any important lessons for the United States.

It is my take (corrections are welcome) that the extent of the crisis in Europe is a bit overstated. First, the coverage of the crisis seems to suffer at times from what logicians call the fallacy of false dilemma (dismantle the welfare state or suffer collapse). There is often a failure to acknowledge that there is much room for reform and viable models within Europe (e.g., , flexicurity in Denmark).  Second, the European welfare states have been far more generous than the US welfare state. In France, for example, the debate focuses on whether to increase the retirement age from 60. And as one 92 year old Spanish pensioner said (in the Weissenstein piece above) “he was unlikely to live long enough to see the worst of the pension freeze, but had no doubts he would have to start relying on savings to maintain his lifestyle.” My guess is very few 92 year old retired civil servants in the US are starting to contemplate dipping into savings.

Yet, one must ask: to what extent is the current crisis in Europe a harbinger of what will occur in the United States (2030, or 2040)?  We are incurring ever-greater debt (and I know this may not strike a chord with Sven, but it certainly does with me) and this is only the beginning given the problem of long-term unfunded liabilities. Our demographic profile, while not nearly as bad as Europe’s, is nonetheless going to place ever-greater stress on a smaller proportion of the population, mandating levels of taxation that will have negative implications for growth and social cohesion.

The end result may not take the form of crisis, but a painful state of sclerosis and a moribund economy.  O’Connor may have gotten the basic story right, but in the end, Mancur Olson may have been far better in teasing out the implications.

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by Marcus Cole.

This week, as I and hundreds of other travelers in Europe remain stranded under clear blue skies full of invisible volcanic ash, a different, more ominous cloud is gathering all over Europe. The weekly current affairs magazine, Elsevier, (the Dutch equivalent of the Economist or U.S. News & World Report) ran a cover story on the increasing pressure to raise tax rates on Europeans earning the highest incomes. With national income tax rates already exceeding 50 per cent on income over € 52,000, Nederlanders already bear the third highest tax burden in Europe, just behind Sweden and Denmark. Now the left in the Tweede Kamer (the Dutch equivalent of the House of Commons) is pushing for more, as well as elimination of the home mortgage interest deduction, largely seen as a loophole for the middle and upper classes.

In the U.K., observers were startled by the results of the first televised Leaders Debate last week, where by all accounts Liberal Democrat Nick Clegg won by a landslide. Clegg now harbors increasingly realistic ambitions of becoming the first Prime Minister from outside either the Tory or Labour parties since David Lloyd George left office in 1922. Clegg’s Liberal Democrats lead in a recent poll by the Sun with 33%, compared to 32% for the Tories and 26% for Labour. Clegg promises to cut taxes for the working classes while dramatically increasing taxes on capital gains. The only response that Conservative leader David Cameron could muster was a warning that votes for the Liberal Democrats would allow Labour’s Gordon Brown to “limp on” in power, assuming that the desire for “change” will translate into a vote for the Conservatives.

These movements in Europe are not isolated. They reflect an increasing mood to attack the higher income classes as the source of the current economic woes sweeping across the continent. In the past, educated and ambitious Europeans could escape class warfare by fleeing to the United States. But with an American administration seemingly sympathetic to European social welfare sensibilities, where will European talent turn for shelter from the gathering storm?

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An Oversized Hero

In an era when many Republicans are trying to gain political traction by complaining that Democrats want to cut Medicare, it warms my soul to see a blue-state Republican, Gov. Chris Christie, actually making inroads into fixing the financial chaos of one of our great states.  Like California, New York and other problematic states, New Jersey is being eaten alive from within by its public employees and by a tax and regulatory structure hostile to business.  As many of you have heard, the NJEA has (quite literally) been praying for Christie’s death (they have apologized but, of course, no one got fired).

The WSJ has a nice piece on Christie’s efforts to cut taxes and reduce spending.  The story gives some illuminating details.  I particularly like Christie’s candor on the difficulty of trying to return sanity to the state budget:

“We’re such a long way away from a message,” Mr. Christie says, “because, you know, the message might be, ‘Look at that poor SOB. There he is lying dead on State Street in Trenton. It’s over. OK, everybody back to our corners and let’s go back to the normal game.’ . . . I hope, that if we’re successful, [the message] can be . . . that you can do this.”

As a former Garden State resident (as well as being BMI-challenged myself), I tip my pileus to Governor Christie.  He might end up being a one-termer, but its fun to see him putting feet to the fire.

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This year—and predictably, most years around April 15—a number of stories popped up on the topic of who pays the taxes (or more correctly, given the laziness of the media, the same story reprinted with minor modifications in many different venues).

The take home point: 47 percent of Americans have no income tax liabilities whatsoever.

This gives rise to great concerns about fairness and the perversity of any system in which, within the foreseeable future, a majority of the population not paying taxes will be able to dictate policies and tax rates imposed on the minority that pays taxes.

Taxes should be a source of concern, but not necessarily for the precise reasons cited above. To begin with, the transition from (1) 47 percent of the population pays no income taxes to (2) 47 percent of the population pays no taxes, requires that we assume that there are no taxes other than income taxes. In fact, nearly everyone pays payroll taxes (around 99 percent of the lowest quintile) and sales taxes, and the latter are particularly regressive.

While it may be true that we will soon be a nation in which a majority do not pay income taxes, it will never be the case that the majority will pay no taxes. Indeed, one would expect payroll taxes to increase overtime insofar as they constitute the life blood of the big entitlement programs (social security and Medicare).  This has been the historical trend for the past few decades.

Although the arguments about half the nation not paying taxes is empirically false and overstated, the issue of fairness receives far too little attention.  Here I am not concerned with the percentage of the income tax paid by the top quintile. I will assume if you are smart enough (or lucky enough) to be in the top income quintile, you are smart enough to fend for yourself or rich enough to hire someone to do it for you. Rather, we must focus on the real source of unfairness: the decision to impose high taxes on those yet to be born.

Broadly speaking, there are only two kinds of taxes: those we pay now, and those we force on future generations through the assumption of debt.

Let us consider the past three decades. On the revenue side, receipts averaged 18.3 percent of GDP in the 1980s, 18.5 percent in the 1990s, and 17.6 percent in the past decade. On the spending side, we have gone from an average of 22.2 percent GDP in the 1980s to 20.7 percent in the 1990s, ending at 20 percent for the past decade. The current year is something of an anomaly (one hopes) with spending at 25.4 percent of GDP (all figures drawn from the OMB’s historical tables)

During this same period, gross federal debt has increased from 33.4 percent of GDP (1980) to 69.2 percent of GDP by the end of the George W. Bush presidency, and it is projected to break the 100 percent threshold by 2012 (although it might come sooner). Take this debt and add the costs of covering future unfunded liabilities and you have a sense of the kinds of tax burdens we are passing on to those who have yet to be born. This, my friends, is the true unfairness in the tax system.

Let us stipulate arguendo that people have a right to be stupid. Any survey of public policy will provide evidence that voters and elected officials have exercised this right routinely, regardless of party affiliation or historical epoch. But I refuse to accept the argument that these same folks have a right to pass the bill to future generations without first mounting a rather convincing justification.

The big question: Short of an economic constitution, is there any means to prevent this intergenerational transfer-seeking?

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World’s Strangest Tax Laws according to Foreign Policy Magazine: http://www.foreignpolicy.com/articles/2010/03/26/the_worlds_strangest_tax_laws?page=full

I’m guessing they don’t even come close to finding the world’s strangest.  Heck, Maine’s blueberry tax is pretty strange.

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