Diminishing Returns

Posted on by John Payne

Apropos of my post about income taxes last Friday, two columns that ran over the weekend dramatically illustrate the downsides of income taxation. First, financial analyst Bill Bonner writing in the Christian Science Monitor explains that millionaires in Maryland are fleeing the state to avoid its 6.25-percent income tax — Missouri’s income tax is barely lower, at 6 percent — causing tax receipts to fall. Bonner attributes this paragraph (perhaps mistakenly) to the Wall Street Journal:

However, there were two things that Maryland politicians didn’t count on (1) a world-wide economic crisis decreasing the number of million dollar earners and (2) millionaires simply leaving (or taking in less income). “By April 2009, one-third of the millionaires have disappeared from Maryland tax rolls. On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year – even at higher rates.

Harvard economist and New York Times columnist Greg Mankiw elucidates the micro-level choices that lead high income earners to avoid income taxes or reduce their incomes:

Suppose that some editor offered me $1,000 to write an article. If there were no taxes of any kind, this $1,000 of income would translate into $1,000 in extra saving. If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now, when I pass on, my children would inherit about $10,000. That is simply the miracle of compounding.

Now let’s put taxes into the calculus. First, assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes on that extra income. Beyond that, the phaseout of deductions adds 1.2 percentage points to my effective marginal tax rate. I also pay Medicare tax, which the recent health care bill is raising to 3.8 percent, starting in 2013. And in Massachusetts, I pay 5.3 percent in state income taxes, part of which I get back as a federal deduction. Putting all those taxes together, that $1,000 of pretax income becomes only $523 of saving.

And that saving no longer earns 8 percent. First, the corporation in which I have invested pays a 35 percent corporate tax on its earnings. So I get only 5.2 percent in dividends and capital gains. Then, on that income, I pay taxes at the federal and state level. As a result, I earn about 4 percent after taxes, and the $523 in saving grows to $1,700 after 30 years.

Then, when my children inherit the money, the estate tax will kick in. The marginal estate tax rate is scheduled to go as high as 55 percent next year, but Congress may reduce it a bit. Most likely, when that $1,700 enters my estate, my kids will get, at most, $1,000 of it.

HERE’S the bottom line: Without any taxes, accepting that editor’s assignment would have yielded my children an extra $10,000. With taxes, it yields only $1,000. In effect, once the entire tax system is taken into account, my family’s marginal tax rate is about 90 percent. Is it any wonder that I turn down most of the money-making opportunities I am offered?

The worst effect of income taxes is probably not actually on the people who pay them. They have the option of consuming more leisure instead of working more and still living very comfortably. The biggest loss is the wealth that is never created because of the system’s disincentives, which hurts consumers across the board.

More Evidence Against State Income Taxes

Posted on by John Payne

On Tuesday, the Wall Street Journal ran an editorial by economist Art Laffer about the negative impact of state income taxes, and the statistics he cites are worth repeating:

In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.
[…]
Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.

[artlaffer]

The 11 states where income taxes were adopted over the past 50 years are: Connecticut (1991), New Jersey (1976), Ohio (1971), Rhode Island (1971), Pennsylvania (1971), Maine (1969), Illinois (1969), Nebraska (1967), Michigan (1967), Indiana (1963) and West Virginia (1961).

Each and every state that introduced an income tax saw its share of total U.S. output decline. Some of the states, like Michigan, Pennsylvania and Ohio, have become fiscal basket cases. As the nearby chart shows, even West Virginia, which was poor to begin with, got relatively poorer after adopting a state income tax.

These findings support the conclusions of a number of Show-Me Institute publications. In March, we published a policy study showing that taxes have a negative impact on economic activity. I used that data to write an op-ed. Show-Me Institute Chief Economist Joe Haslag and intern Abhi Sivasailam wrote last fall about the relative benefits of a sales tax versus an income tax. Finally, policy analysts Dave and Jenifer Roland compared the economic growth of Missouri to Tennessee, and found Missouri falling behind Tennessee, possibly because of Tennessee’s lack of an income tax.

Where Did That Money Go, Again?

Posted on by Thomas Duda

Show-Me Living is one of the Show-Me Institute’s best resources for accessing public information about Missouri government expenditures. Questions about tax credits and tax dollars often have answers on Show-Me Living.

Yesterday, I stumbled across a Sept. 30, 2010, article in the St. Louis Business Journal that prompted me to do a little research using the Show-Me Living web tools. The story, “Chemical Building owner files for Chapter 11,” reports: “Chemical Building Acquisition LLC, an investor group based near Los Angeles, sought Chapter 11 bankruptcy protection in U.S. Bankruptcy Court Eastern District of Missouri, delaying planned redevelopment of the historic building at 777 Olive St.”

Curious, didn’t “Chemical Building Acquisition LLC” receive more than $1 million in Brownfield Tax Credits in 2007? Thanks to Show-Me Living, I can say definitively that the answer is yes.

Consistent with recent Missouri audits showing the failure of tax credit subsidies to serve their intended purposes, the $1,065,000 spent on the Chemical Building to date appears to be a waste of taxpayer funds. After all, consider the following eligibility criterion for the Brownfield Redevelopment Program:

The project must be projected by DED to result in the creation of at least ten new jobs or the retention of 25 jobs by a private commercial operation.

If you have a question about how to find this information, Show-Me Living is a great place to start finding the answers.

Kansas City Considers Private Involvement in Infrastructure Management

Posted on by David Stokes

As I understand it, at their regular meeting tomorrow, Kansas City’s City Council will be deciding on whether or not to proceed with a resolution authorizing the city manager to conduct a study of potential opportunities to contract with private agencies, companies, etc., to manage city infrastructure assets. Needless to say, I think this is an excellent opportunity for the taxpayers and residents of Kansas City. I think that Mayor Mark Funkhouser and the council deserve a great deal of credit for considering this step.

The Kansas City Star is hosting an op-ed I wrote about the benefits of this approach. If you live or work in Kansas City, I encourage you to check it out. You can also see our version of the op-ed, along with other related writings on the issue.

Ben Franklin Would Have Let the House Burn Down, Too

Posted on by David Stokes

Yesterday, in a rural part of northwestern Tennessee (fairly close to Missouri), a fire department refused to put out the fire for a house that had not paid its annual fire bill. Firefighters arrived at the scene and just let the house burn until it began to threaten the neighbor’s house — who had paid the bill — at which point they sprung into action. This has been getting a great deal of attention in the media and blogosphere; I first saw the story on Channel 4 last night.

I was curious whether the fire department in this case was a private company (many areas in Tennessee make use of privatized fire departments). However, as best I can determine from the city’s website, it is a standard municipal fire department, rather than a private contractor. But should they have put out the fire anyway, and just sent the family a bill afterward?

The easy answer is “yes,” but that is simple to say when you are not the one responsible for putting out the fire. Firefighting is an inherently dangerous act, and expecting someone else to put out a fire for people who have not fulfilled their end of a contract is rather presumptuous. It is important to note that the particular fire in question did not occur within the city limits of the responding fire department. Although they don’t have to do so, the department agrees to serve people outside the city limits who pay an annual bill.

Ben Franklin would not have put the fire out. When I visited Philly in 2000 for a certain convention, I took the city’s historic tour. I remember the guide talking about how the fire department / insurance company (which Franklin founded) would not put out your fire if they arrived at your house and saw that you had not paid the bill that year.

I think Daniel Hamermesh at the Freakonomics blog makes a good point about the differences between rural and urban areas. In a rural area, you may be able to distinguish between houses that are far apart. In an urban area, the threat of the fire rapidly expanding to other homes is too great, so a more efficient way to manage risk is to charge for the service via taxes to make sure that everyone receives proper fire service. I can agree with that, but I see nothing wrong with the way that the department in Tennessee acted.

Law to Expand Health Coverage Limits Health Coverage

Posted on by John Payne

The Patient Protection and Affordable Care Act passed last March requires insurers to spend at least 80 to 85 percent of their earnings from premiums on health care for its customers. That certainly sounds like a good idea — who wants 20 cents of their health insurance dollar going to administrative costs? — but it would eliminate limited-benefit health insurance plans known as “mini-meds,” which are used by 1.4 million Americans. The Wall Street Journal reported on the situation last week:

While many restaurants don’t offer health coverage, McDonald’s provides mini-med plans for workers at 10,500 U.S. locations, most of them franchised. A single worker can pay $14 a week for a plan that caps annual benefits at $2,000, or about $32 a week to get coverage up to $10,000 a year.

Last week, a senior McDonald’s official informed the Department of Health and Human Services that the restaurant chain’s insurer won’t meet a 2011 requirement to spend at least 80% to 85% of its premium revenue on medical care.

McDonald’s and trade groups say the percentage, called a medical loss ratio, is unrealistic for mini-med plans because of high administrative costs owing to frequent worker turnover, combined with relatively low spending on claims.

Brian Hook of Missouri Watchdog points out that McDonald’s is among the top 20 employers in the Saint Louis metro area, with between 5,000 and 9,999 employees. Furthermore, this problem is hardly limited to McDonald’s employees:

Insurers say dozens of other employers could find themselves in the same situation as McDonald’s. Aetna Inc., one of the largest sellers of mini-med plans, provides the plans to Home Depot Inc., Disney Worldwide Services, CVS Caremark Corp., Staples Inc. and Blockbuster Inc., among others, according to an Aetna client list obtained by the Journal. Aetna also covers AmeriCorps teaching-program sponsors, who are required by law to make health coverage available.

Aetna declined to comment; it has previously indicated that the requirement could hurt its limited benefit plans.

Granted, these plans are far from perfect, but for many of the people who use them, it is likely the best they can afford. If the plans are outlawed, these people will either seek taxpayer-subsidized coverage or opt for no coverage at all. Mini-med plans are evidence that the market can insure the overwhelming majority of people, but not when it is so frequently hobbled by government restrictions.

Would Prop B Really Help Puppies?

Posted on by Dave Roland

You may have noticed the statewide hubbub about the so-called “Puppy Mill Cruelty Prevention Act.” I’m starting to wonder how many people — on either side of the debate — have actually read either the proposed statute or the current law on the subject. To help clarify the conversation, I thought I’d offer the following comparison between the law currently on the books and the actual text of Prop B.

Current Law: Prop B:
Animals must be fed at least once every 12 hours. “The food must be uncontaminated, wholesome, palatable and of sufficient quantity and nutritive value to maintain the normal condition and weight of the animal. The diet must be appropriate for the individual animal’s age and condition.” Dogs must have access to “appropriate, nutritious food at least once a day”.
Current Law: Prop B:
“If potable water is not continually available to the animals, it must be offered to the animals as often as necessary to ensure their health and well-being, but not less than once each eight (8) hours for at least one (1) hour each time, unless restricted by the attending veterinarian. Water receptacles must be kept clean and sanitized in accordance with this rule and before being used to water a different animal or social grouping of animals.” Dogs must have “continuous access to potable water that is not frozen, and is free of debris, feces, algae, and other contaminants.”
Current Law: Prop B:
Breeders must employ an attending veterinarian and must provide “daily observation of all animals to assess their health and well-being.” While this daily observation need not be made by a licensed vet, “a mechanism of direct and frequent communication is required so that timely and accurate information on problems of animal health, behavior and well-being is conveyed to the attending veterinarian.” “Necessary veterinary care means, at a minimum, examination at least once a year by a licensed veterinarian.”
Current Law: Prop B:
Each dog must be provided floor space equivalent to (animal length from tip of nose to base of tail + six inches) squared. Nursing mothers must be provided additional space as determined by the attending veterinarian. Ceilings must be at least six inches higher than the height of the tallest dog in the enclosure. All shelters “must allow each animal to sit, stand and lie in a normal manner and to turn about freely.” Dogs must have “(1) sufficient indoor space for each dog to turn in a complete circle without any impediment (including a tether); (2) enough indoor space for each dog to lie down and fully extend his or her limbs and stretch freely without touching the side of an enclosure or another dog; (3) at least one foot of headroom above the head of the tallest dog in the enclosure; and (4) at least 12 square feet of indoor floor space per each dog up to 25 inches long; at least 20 square feet of indoor floor space per each dog between 25 and 35 inches long; and at least 30 square feet of indoor floor space per each dog for dogs 35 inches and longer (with the length of the dog measured from the tip of the nose to the base of the tail).”
Current Law: Prop B:
Indoor facilities for animals must generally remain above 50 degrees, and if the temperature drops lower the animals must be provided with “dry bedding, solid resting boards or other methods of conserving body heat.” If temperatures rise above 85 degrees, animals must be provided with “fans, blowers, or air conditioning.” Dogs must have “constant and unfettered access to an indoor enclosure that has a solid floor; is not stacked or otherwise placed on top of or below another animal’s enclosure; and does not fall below 45 degrees Fahrenheit, or rise above 85 degrees Fahrenheit.”
Current Law: Prop B:
Breeders must establish an exercise plan for each animal and have it approved by the attending veterinarian.

“The opportunity for exercise may be provided in a number of ways, such as
(I) Group housing in cages, pens or runs that provide at least one hundred percent (100%) of the required space for each dog if maintained separately under the minimum floor space requirements of this rule;
(II) Maintaining individually housed dogs in cages, pens or runs that provide at least twice the minimum floor space required by this rule;
(III) Providing access to a run or open area at the frequency and duration prescribed by the attending veterinarian; or
(IV) Other similar activities.”

 “Regular exercise” means constant and unfettered access to an outdoor exercise area that is composed of a solid, ground level surface with adequate drainage; provides some protection against sun, wind, rain, and snow; and provides each dog at least twice the square footage of the indoor floor space provided to that dog.
Current Law: Prop B:
“Excreta and food waste must be removed from primary enclosures daily and from under primary enclosures as often as necessary to prevent an excessive accumulation of feces and food waste, to prevent soiling of the animals contained in the primary enclosures, and to reduce disease hazards, insects, pests and odors. When steam or water is used to clean the primary enclosure, whether by hosing, flushing or other methods, animals must be removed, unless the enclosure is large enough to ensure the animals would not be harmed, wetted or distressed in the process. Standing water must be removed from the primary enclosure and adjacent areas. Animals in other primary enclosures must be protected from being contaminated with water and other wastes during the cleaning. The pans under primary enclosures with grill-type floors and the ground areas under raised runs with wire or slatted floors must be cleaned as often as necessary to prevent accumulation of feces and food waste and to reduce disease hazards, pests, insects and odors.” Dog shelters must be cleaned of waste at least once per day while the dog is outside the enclosure.

Prop B would certainly require some changes — for example, although it talks about the requirements for enclosures, it also seems to forbid them entirely by demanding “constant and unfettered access” to both indoor and outdoor spaces. Wouldn’t any enclosure that prevented such “constant and unfettered access” to these things violate the law?

Another interesting point is that, as you can see, some of the standards that Prop B would establish are actually lower than those in the current law. If the law currently requires that dogs be given food at least twice per day, why would you want to lower the requirement to feeding once a day? If the law currently sets the expectation that indoor facilities be kept higher than 50 degrees (and specifies the actions that must be taken to ensure the animals’ comfort if the temperature drops lower), why adopt the lower expectation of 45 degrees? Even where the standards established under the two laws are very similar, our current rules are very specific about how animals ought to be cared for. Why would it be a good idea to move from those specifics to something more general?

I am not, of course, advocating either in favor of the current law or in favor of Prop B. I just think that people should have a more thorough understanding of the proposed changes before they decide where they stand on this issue.

Private Sector Can Help Kansas City Manage Its Public Infrastructure, Likely for Less

Posted on by David Stokes

The $2.5 billion settlement to improve the Kansas City sewer system has put the city well past the question of whether something needs to be done with its infrastructure assets. Right now, private companies are willing to pay for the right to manage the city’s property, and long-term savings result when the private sector operates public services more efficiently. Partnering with the private sector — either in the form of up-front payments for asset management, or cost savings from greater operational efficiencies — could help Kansas City meet its financial obligations, both now and in the future.

In 1984, Oklahoma City contracted out the management of its wastewater treatment facilities to a private utility company, Veolia Water. At the time of the contract, Oklahoma City spent $14 million per year on its system. Seventeen years later, in 2001, Veolia operated an improved system for only $11 million per year. These numbers have not been adjusted for inflation, making the savings even more impressive. Veolia still operates the Oklahoma City wastewater system today, after further contract renewals.

I provide this example not to encourage you to buy stock in Veolia or move to Oklahoma City, but to showcase the potential effectiveness of partnering with the private sector in public infrastructure operations, management, and delivery. A city council committee has approved a resolution for Kansas City officials to study the possibilities offered to residents and taxpayers from private sector competition for public infrastructure programs. The full council is scheduled to consider the proposal soon.

This resolution is limited in its reach. The proposal simply calls for the city to study the expected effects of contracting out the management of certain assets. There is no plan or intention to sell off and fully privatize city assets. Instead, the study could consider a range of options, such as private companies that pay the city for the right to operate city parking garages, or a private engineering firm contracting to operate water or wastewater facilities. One local example of the benefits of these ideas involves recent successful changes to the Kansas City animal shelter, although that particular effort moved further toward full privatization than this proposal does.

Successful examples of the private provision of public services can be found throughout Missouri. They include instances of outsourcing, contracting, and private ownership. Private companies successfully operate the nation’s only private, commercial airport in Branson; manage the pharmacy services of Saint Louis County’s Department of Health; provide electricity, gas, and water throughout Missouri; and manage trash collection in communities throughout the state. Around the country, private companies efficiently operate public highways, libraries, jails, and much more.

Not every example would be appropriate for Kansas City, but a study could help determine where private partnerships would benefit the city. Mayor Mark Funkhouser deserves credit for bringing these issues to the forefront, and the people of Kansas City will benefit if they get the serious study they deserve.

David Stokes is a policy analyst for the Show-Me Institute, a Missouri-based think tank.

 

Free Trade Does Not Cost Too Much

Posted on by David Stokes

Mike Guzy, who currently writes for the St. Louis Beacon and formerly wrote for the Post-Dispatch, is a very talented writer. A column he wrote probably 10 years ago for the Post defending the use of the death penalty remains one of the best treatments of that topic I’ve ever read. But today in the Beacon, he gets his economics wrong. How wrong? Let’s just say it took only a few seconds of research to find two economists who are frequently at odds with each other both disagreeing with his point.

What is his point? That cheap imports are causing unemployment in our current recession, and the proper solution is to raise tariffs on imported goods. From his article:

The only conceivable way to revitalize the American middle class — the little engine of consumption that pulls the global economy — is to impose labor tariffs on imported goods, making their cost comparable to those manufactured here.

Let us now quote famous men and women writing about the Smoot-Hawley Tariff, which did almost exactly what Guzy calls for, and is near-universally derided as one of the worst pieces of legislation ever passed by Congress. Here is Great Depression historian and economist Amity Shlaes:

This lack of concern resembles many Americans’ disregard for the effects of the Smoot-Hawley Tariff Act, signed into law by Hoover in June 1930. Republicans told themselves that the tariff couldn’t hurt much since trade was a small part of the U.S. economy at that point.

But that view overlooked the signal that markets were sending. Long ago Jude Wanniski noticed that the progress of the Smoot-Hawley legislation tracked declines in the stock market. More recently Scott Sumner, a professor of economics at Bentley University in Waltham, Massachusetts, has argued that the tariff reduced investment all over the world, and therefore produced deflation.

Shlaes’ great book, The Forgotten Man, goes into much more detail about the harm of the tariff.

And now we turn to Paul Krugman for his views on the Smoot-Hawley Tariff:

Just to be clear, I don’t think the Smoot-Hawley tariff was a good thing — it was a really bad thing. Nasty protectionism! Bad Smoot-Hawley! Bad! Bad! Bad!

Krugman is clear that although he doesn’t think protectionism and the tariff caused the Great Depression, it was nonetheless a terrible idea.

When legislation makes the goods that we import, and voluntarily choose to purchase, more expensive, it limits our choices and our freedoms, and increases our costs of living. It also immediately harms the enormous number of Americans who depend on trade, shipping, and related industries for their employment, and results in retaliation by other trading partners that would limit our exports. Instituting higher tariffs for protectionist purposes is always a net loss for our economy.

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