Incentives for Students

Posted on by Sarah Brodsky

This week, Gary Becker and Richard Posner discuss programs like the one in New York City that pay children to attend school and do well on exams. I’m surprised that this idea isn’t considered more seriously in St. Louis. After all, St. Louis suffers from some of the same problems as New York, such as a high drop-out rate and low test scores. And many economists support the effort. Becker is enthusiastic in his praise of the incentive programs:

I am confident that it will raise the performance of the students participating. The reason is simply that boys and girls as well as adults respond to incentives, as every parent realizes time after time.

Posner, on the other hand, is more cautious:

The largest indirect cost, I would guess, would consist in relaxed pressure to improve the public schools or to allow them to be bypassed by means of voucher systems. High rates of truancy may be due in significant part to low quality of schools. Paying children to attend school will reduce truancy rates some but without improving school quality, and perhaps without improving the education of the children receiving the payments.

Posner’s point makes sense because the evidence in favor of incentive programs comes from developing countries where children leave school to work and help support their families. They would like to be in school, but they can’t give up the income from their jobs. An incentive program allows them to earn money while attending school.

Before implementing incentive programs, we need to consider whether children are being pulled away or pushed out. If children are leaving to earn money, as is the case in some developing countries, paying them to stay might be appropriate. But if children are leaving because the schools are bad, an incentive program would just keep them in an unproductive environment.

My guess is that both of these factors are at play in St. Louis, at least in the older grades. There’s no reason we couldn’t try to address both. For example, a charter school with afternoon and evening classes would allow students to work during the mornings — like this school in Texas. Or students could combine high school classes with paid internships and apprenticeships. A combined choice/incentive program would keep students in school and improve the quality of their educational experience.

Beating a Dead Horse (With Some New Evidence)

Posted on by Justin Hauke

Devotees will remember my reservations about the passage of the property tax reform bill (which prevents backdoor tax increases through reassessment). Well it turns out that compliance with the new legislation is going to cost St. Louis County more than $700,000.

And it may not just cost the county government, but the state government as well. Eugene Leung, St. Louis County’s revenue director, argues that the property tax bill’s requirements amount to an unfunded mandate, in violation of the Missouri Constitution, and therefore the state may have to pony up the bill anyway.

So not only will the bill subsidize existing homeowners at the expense of new homeowners (as I’ve argued), but it also will require taxpayers across the state to pay for the bill’s compliance costs.

No, thanks.

“Those Who Can, Do. Those Who Can’t, Close”

Posted on by Justin Hauke

Here’s a good way to make a positive out of a negative. The Missouri State Board of Education has decided to close down the Can! Academies of St. Louis, a charter school that began operations this year.

The Can! Academy never really succeeded. Beginning with 440 students (mostly former high school dropouts), it dropped to only 118 by the end of its first year of operation. Administrators decided that the school wasn’t meeting its performance obligations and the decision was made to suspend operations.

The positive, however, is that this is a perfect example of educational choice at work. If Can! were a traditional public school, it would continue to operate regardless of how bad things got. But that’s the beauty of choice. If a school doesn’t work, then it’s discontinued. Competition among schools helps to ensure that only schools that are actually succeeding continue to operate.

In other words, at least the Can! students aren’t forced to remain in a failing school.

The Earnings Tax in Action

Posted on by Dan Grana

Perhaps there is no finer crucible with which to test criticisms of the earnings tax than a general economic downturn. Nationwide, material costs and unease over the economy have slowed the construction industry. An article by the Post-Dispatch claims that St. Louis is no exception.

The same piece concedes that there is a lone exception, office construction in St. Louis County. Although there are certainly more variables behind a developer’s decision than just the earnings tax, examples like these demonstrate the practical insight behind academic musings. As commercial buildings continue to flee city limits despite their heightened desirability in somewhat uncertain times, lawmakers would be well-served to heed suggested solutions.

Gas Price Crimes and Milk Misdemeanors

Posted on by David Stokes

Today’s post is simply planned as a collection of stories that you can make your own mind up about. Won’t that be fun! There is an investigation into milk price fixing centered on the Kansas City area and the headquarters of the Dairy Farmers of America. You can get the national angle here from the Washington Examiner and the local story here from the Platte County Landmark. Now, take these charges into consideration when reading Reason’s story about the recently passed horrible Farm Bill. As an Examiner editorial (that I can’t find to link to) asked recently, why is it a crime when private co-ops conspire to fix prices, but the federal government is allowed to do the exact same thing with impunity? Don’t get me wrong, price fixing should be investigated and prosecuted. However, the same government that is investigating this is also helping agricultural interests artificially raise prices through any number of means, from direct subsidies for ethanol to high tariffs for foreign sugar, to asking people nicely to eat more avocados.

Also, in the Platte County Landmark you can find an editorial stating that the price of gas is dictated by corporate manipulation moreso than supply and demand. I don’t know whether to laugh or cry. But I guess this chart, which clearly shows the growth of demand of more than a million barrells a day each year for the past four years, has nothing to do with price increases. Nothing at all to do with it, so let’s all go to the water cooler and bash the oil companies.

Pitch Whacks Earnings Tax Flat in Its Tracks; Backs Tax on Plats, in Fact

Posted on by Eric D. Dixon

Justin’s excellent post earlier today touching on the distortionary effects of the earnings tax was particularly timely. Also today, The Pitch published a piece that mentions our 2007 study about this very issue, "How to Replace the Earnings Tax in Kansas City," written by University of Missouri?Columbia economics professor Joseph Haslag (also now serving as the Show-Me Institute’s executive vice president). Haslag wrote a companion piece that makes the same case for the other side of the state, "How to Replace the Earnings Tax in Saint Louis."

The Pitch‘s piece isn’t uniformly great; for instance, the author, David Martin, mentions at one point that despite some misgivings, "relics such as the old Greyhound station make me thankful that the TIF Commission and other inscrutable quasi-government agencies have the power of eminent domain." But Martin picks up on something that many other people omit when they discuss eliminating the earnings tax — the Show-Me Institute’s suggestion that lost earnings tax revenues could be replaced with a much less distortionary land tax:

[T]he Show-Me Institute released a study on January 25, 2007, urging Kansas City to phase out the 1 percent tax on income and put in its place a tax on land. The author, Joseph Haslag, an economics professor at the University of Missouri-Columbia, calls the land tax a "slam dunk" in terms of promoting growth. […]

The beauty of the land tax is that it essentially makes available to everyone the tax abatements that big-shot developers are always getting at City Hall. It would also save the city from having to go to court to pry valuable real estate from the bony fingers of people like Barber. When the land tax works as intended, speculators are forced to develop their holdings or sell them to somebody who will.

This is indeed one of the advantages of levying taxes on land value. Owners of land would have more of an incentive to either use their land in productive ways, so that they can recoup the value of the taxes the must pay, or avoid paying the tax at all by selling the land to somebody else who believes they can use it profitably. Although Henry George is most famous for promoting this idea, one of the earliest free-market economists, Adam Smith, also observed the value of a land tax as an alternative to other potential forms of taxation.

Of course, a more optimal outcome would be for government officials simply to find ways to cut unnecessary programs and spend much less of the taxpayers’ money. But nobody’s holding their breath for that to happen.

Scrap Metal Law Shines

Posted on by Dan Grana

It’s certainly a rarity that market-regulating legislation uniformly helps economic growth. New standards facing Missouri scrap metal trading, however, have the rare distinction of being sensible. Although the law imposes new responsibilities on metal buyers, the parameters of the regulation are reasonable and definite. Only an unfamiliar seller with $50 or more in scrap is subjected to documentation requests. The law’s rigidly defined limits and minimal allowance for subjectivity are praiseworthy.

Aside from being horrendously wasteful, metal theft can affect businesses and homeowners of almost every variety. This new measure may seem especially appropriate to the construction industry, which, in addition to suffering the rising costs of metal, is especially vulnerable to materials theft.

Hopefully, the felony penalty attached to stealing certain metals and the fines associated with buying them will deter dangerous and costly criminal activity. If not, at least police will have a new tool for tracking perpetrators. After all, everyone gets along better when traffic lights don’t go missing.

Fun With Numbers (and Economic Incentives)! Hooray!

Posted on by Justin Hauke

There are all kinds of fun number-crunching stories to talk about today. But I’ll concentrate on just one.

Chicago currently has the dubious honor of having the highest consumer gasoline prices in the country. In large part, this is because of its very high gas taxes. People are up in arms. In fact, the local CBS-affiliate of “Chicagoland” reports today that long lines await Indiana suburban commuters hoping to fill up before the Illinois border. One commuter summarizes the current tax incentive best:

"It was $4.20 [in Illinois]. I can come over here and get it for $3.93," said Tikvah Wadley, one of the many fleeing Illinois taxes.

What does this tell us? It tells us that economic incentives matter, particularly when they are distortionary taxes. When consumers feel the effects of high taxes, they vote with their feet and flee to lower tax areas (in this case, choosing to fill up their gas tanks on the Indiana side of the Chicago metropolitan area).

But how does this relate to Missouri? Well, we have our own equally pernicious tax in the Kansas City and St. Louis metropolitan areas. The earnings tax is a 1 percent income tax on gross earnings levied on those who live and/or work in Missouri’s two largest cities. But if you happen to live and work in the metro areas outside of the city limits, you don’t have to pay it. We’ve written about this topic extensively.

If Chicago’s high gas taxes are having an impact on consumer behavior in Illinois, then imagine what the earnings tax might be doing to consumer behavior in Missouri Think of it this way: Combined federal and state gasoline taxes are 57.9 cents per gallon in Illinois (compared to 36 cents in Missouri). Chicago levies an additional 12.75 cents per gallon on top of that, for a whopping total of 70.7 cents per gallon. Indiana’s gas tax is 50.1 cents per gallon.

Ok, so here’s where the numbers get fun (and exciting!). Say that you live in Chicago and decide you’re fed up with high gas taxes, and want to fill up your car in Indiana instead. If you drive 12,000 miles per year and get about 25 miles per gallon on average (which seems reasonable), then you’d pay only $240.48 in gas taxes in Indiana this year instead of $338.88 in Chicago, for a total annual savings of $98.40. This $100 savings has been enough to promote long gas lines and impact Illinois gas stations. Apparently small incentives matter. I mean, think how hard it is to drive out of your way just to save a few cents.

OK, back to Missouri. Imagine you’re working in Clayton but that you live in St. Louis. If you make $35,000 year (the current per-capita Missouri household income), then you can save an extra $350 per year just by living a couple of blocks down the road. This is 3.5 times more in tax savings than the Chicago drivers are saving by filling up in Indiana! Wouldn’t you think this might be having an effect on urban growth?

Let’s take it a step further. The marginal income tax rate in Missouri is 5.91 percent. In Illinois, it’s only 3 percent. Do you think that might have an impact, also? Perhaps we can provide a pretty good answer to the question David Nicklaus poses in today’s Post-Dispatch as to why the St. Louis-area lost 5,000 jobs over the past year. Maybe taxes matter.

Of course, I’d be remiss if I didn’t throw in a plug for our new Missouri tax estimator, too. See how outraged you can get. Or read here about how small tax payments can affect your lifetime wealth.

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