The Economic Way of Thinking

The Carbon Tax vs Cap-and-Trade

Ted Gayer's December 2nd testimony to the U.S. Senate.

A Simple Public Finance Rule

Here's the rule: When the revenue on a tax is negative, repeal the tax!  (Or, at minimum, reduce the outlays!). 

Radical reactions seem especially appropriate when your state is in the red zone or near the red zone; according to this new Pew Report of states, Georgia is close to that point.   

Due to a number of year-end refunds, the state of Georgia's corporate income tax was negative for the month of October.  Lawmakers expect this to turn-around and, unfortunately, don't appear to be considering a repeal or cut in refunds any time soon. 

To quote my friend, Art Laffer, "Yikes!" 

Onward And Upward

In one of the few notes I ever received from one of "my" professors, Jim Buchanan, he ended it by writing, "Onward and upward!" 

I know the following graph, which tracks average marginal tax rates over time, was NOT what Professor Buchanan had in mind when writing the above words to me:

HT: Greg Mankiw

Feeding the Beast

Last weekend I attended a great Liberty Fund conference in Santa Fe, NM.  The conference was on the theme of "Deficits, War, and Liberty," and my pals, Chris Coyne (co-director of conference with Gerald O'Driscoll) and Pete Boettke were there.

The first reading assigned for the conference was the final chapter of Smith's Wealth of Nations on public debt.  In the chapter Smith tells us politicians won't raise taxes in the present to finance spending on wars and crises, so they instead push burdens off into the future.  Time and again, however, these burdens turn into large debts, which get debased; Smith tells us he'd prefer debt repudiation, but the State resorts to financial "juggling tricks" instead.  The end result is the "deficits, debts, debasement" problem Pete Boettke frequently brings up in posts about the current financial crisis on The Austrian Economists blog. 

During this session I raised the question of whether expanding R (tax revenue) is really as difficult as Smith and politicians suggest.  Couldn't simple tax reforms, such as the flat or "fair" tax, promise higher revenue for the state?  Couldn't auctioning off of state resources, such as interstate highways and the military, raise tremendous wealth in the here and now?

While Dave is correct that drug legalization probably isn't especially stimulative, legalizing drugs and other victimless crimes could be a small source of tax revenue as well.  And, finally,why not go ahead and raise revenue by allowing seats in government and rights to citizenship to be auctioned off?  In sum, there are creative ways to increase R without inflicting much harm on people in the present.   

To be clear in concluding: I view starving the beast and letting the State die as the first-best solution.  But, if we're in the world of second-best, I'd rather have a State raising revenue by pursuing reforms like the above versus taxing us a lot more later and/or monetizing in the future.  

Why I (Sometimes) Love Conservatives

My friend, Erick Erickson, who is one of the principal instigators of the popular blog Redstate.com and a voice of reason on Macon City Council has a great op-ed in this morning's Macon Telegraph.  In it, Erick explains that tax revolts in the early 1970s, which were similar to modern day tea parties, preceded the supply-side revolution.  In defense of the tea party movement he writes:

We should not look at the tea party movement and the voices surrounding it as shrieking voices of populist sentiment devoid of substance. They give voice to the instinctual level, or gut, of the conservative conscience. What we see across the country are more and more people standing up and realizing the direction we are headed is wrong. They are unorganized. They are unfocused. But they do not lack a “connection to a concrete ideology,” they just are not skilled or trained in that ideology.

Before recommending Henry Hazlitt's Economics in One Lesson in his conclusion, Erick finds a way to work in plugs for Bernard Bailyn, Milton Friedman, and F.A. Hayek. 

Great work, Erick!

Deciphering Bono: Actions Sometimes Speak Louder Than Words

Anemone and I had a blast last night rocking out to U2 in the Georgia Dome.  Their play list offered a nice combination of new tunes and classics like "Beautiful Day" and "With or Without You," and their light show was spectacular.  The 71,000+ seat stadium was packed, which is a feat only a few bands could pull off. 

Seeing U2 perform is something we've wanted to do for years because we both love listening to Bono when he has a microphone in hand and Edge behind him.  However, I tend to push the "Mute" button on my remote whenever U2's front-man is on Oprah or without Edge.  While I'm sure Bono's heart is in the right place, good intentions, ill-informed economic reasoning, and tremendous international appeal make for a dangerous combination when it comes to some of his activist efforts.  In other words, unless he's singing, I try to tune out his words as much as possible.

His actions, on the other hand, are sometimes worth paying attention to because they demonstrate that even the great humanitarian, Bono, responds to economic incentives (additional stories here and here).  The Rolling Stones also appear unable to get no satisfaction, and, as a result, they have followed Bono's move to The Netherlands. 

A Sentence to Ponder

"The large expansion in debt in World War II looks like a small blip compared to what's coming if we do not change policy."  That's what John Taylor said recently on his new blog, Economics One. 

Here's the relevant graph accompanying the comment:

 

What Caused The Great Depression?

Here's Art Laffer's answer in a WSJ op-ed from earlier this week.  The piece is quite good overall, and it encourages policymakers to exercise caution in the wake of our current crisis. 

The Nanny State Knows Best

I doubt this new tax on soda and energy drinks will ever become law, but paternalist policies like the "soda tax" are something to keep an eye on as the Obama administration's focus turns to health care reform.

When visiting with my dental hygienist last week, she told me that one of the worst things for a person's teeth (especially the teeth of children) is fruit juice.  Yet, juice is widely thought to be an appropriate drink for children.  Given the nasty effects fruit juice has on our teeth, and given that when consumed in excess it, too, contributes to obesity, why not slap the "soda tax" on juices? 

I'm assuming juice is getting a free pass because there are benefits (e.g., Vitamin C) that offset some of the health costs.  If this is our rationale, couldn't soda be defended by the same standard? The benefits of soda for responsible adults, in terms of pepping them up, are offsetting a lot of the health costs. 

If juice is remaining untaxed thanks to some kind of implicit cost-benefit analysis, why not apply the same standard to energy drinks?  Yes, stoners and teenagers drink a lot of Snapple and Gatorade.  The overwhelming majority of energy drink consumption, however, comes from the millions of runners and athletes who drink the energy drinks responsibly.  Unfortunately, the blunt instrument of an across-the-board "soda tax" doesn't discriminate between the so-called deviants (those exhibiting behavioral anomalies in Behavioral Econ-speak) and the responsible consumers. 

What I'm getting at here is the following: Once we head down the road of case-by-case taxation based on paternalist rationales, the line of where to stop becomes blurry and the slope slippery.  This, of course, is a point one of my favorite anti-paternalists has been making for quite some time.  I wish our legislators were reading more of his work.  

ADDENDUM: After I posted this entry, one of my students pointed me to this blog about the nanny state in Britain, which is titled "Nanny Knows Best." 

Back Toward a 90% Marginal Tax Rate

Take a look at the following chart provided by Matthew Yglesias:

The latest move to tax the bonuses at AIG is an attempt to bring about, essentially, a new marginal tax rate of 90%.  We haven't seen that since the 1950s and early 1960's in the U.S. 

The difference here between today's proposal and that of the past is that it is targeted not toward a general class of income earners, but to bonus-earners (non-earners, the politicians shout) at a corporation (or a handful of corporations).  What kind of incentives do you think this unprecedented tax target will foster?

The Flat(ulence) Tax

The other day I posted a link to Richard Epstein's thoughts about the flat tax.  Yesterday Greg Mankiw offered a link to a flatulence tax over here.

Now that I've come to think about it, Hitler should've been taxed long before he committed suicide.

A Call For The Flat Tax

See today's piece by Richard Epstein.

Are Universal Vouchers Coming to Georgia?

Maybe.  Earlier this week, Eric Johnson, a Republican Georgia Senator from Savannah, proposed an expansion of vouchers from “special needs” children only to all Georgia children. 

At first glance, this seems like a great idea in that it makes opting out of public schools more attractive for parents.  This exit option should then, in theory, encourage public schools to improve. 

At a more fundamental level, it gives Georgia taxpayers who send their kids to private schools some benefit back for all of the money they’re paying into the system. 

Voluntary Compliance, Compulsory Violence

Collecting taxes in a fair and consistent manner is a core mission of the Treasury Department.  Treasury's priorities in tax administration are enforcing the nation's tax laws fairly and efficiently while balancing taxpayer service and education to promote voluntary compliance and reduce taxpayer burden.

The rest is here.

Spend Your Taxes as You See Fit

I thought of this while walking back from my classroom lecture on the Edgeworth Box.  For upper-level (and above) Micro and Public Finance students:

Suppose a person is taxed $10,000 on income.  You have no direct choice on how that money is allocated.  Less tax extraction is preferred to more, but let's assume that's not going to happen.  Would you be better off if you had a choice in how your taxes are allocated?  Suppose there are many, many agencies and programs you could choose among (perhaps grouped into "program portfolios" or "social choice" funds).  

1.  Why not allow those who earn income to directly cast "dollar votes" on the programs that they value?  Wouldn't that be a more democratic approach to public finance outlays? Wouldn't it provide a higher utility (lower disutility) to the taxpayers?