‘Government Efficiency’
I recently criticized the idea that policymakers should focus their attention on making government more “efficient.” Instead, I argued that policymakers should focus their reform efforts on reducing government’s size.
Government efficiency proponents make the mistake of viewing the cost of government in the same light as the cost of operating a private business. However, government cannot operate like a business because it isn’t a business.
Private businesses obtain their revenue through voluntary exchange: consumers willingly give a business their money in return for a product. Businesses must control the cost of providing a product in order to maximize profits. A business that does not adequately control its costs can find itself undercut by a competitor offering a like product at a lower price. In the private sector, the market sets the price of a product through the interaction of supply and demand.
Government is unconcerned with “profit.” The “cost” of government is equal to the taxes extracted from the private sector to pay for government activities, plus the economic damage caused by extracting resources from the private sector. Taxes are involuntarily obtained through compulsion and force. Regardless of the value a citizen assigns to the services provided by government, a citizen must pay for those services, and at a price set by government. The price one pays for government is primarily a function of political factors, which are only indirectly influenced by economic considerations.
Therefore, the question of how efficiently government provides services is less important than deciding what services government should provide. For example, it matters little how quickly the USDA processes subsidy checks for farmers. More important is whether farmers should be receiving subsidy checks at all.
KFF/HRET Survey Part II: Isn’t This Good News, Too?
As I blogged earlier, yesterday the Kaiser Family Foundation and the Health Research & Educational Trust released their survey of employer-sponsored health benefits in 2010.
For most of this survey’s history, it included a very useful graph of the average growth rate of employer-sponsored insurance premiums. Here’s the graph from their 2007 survey:
(The grey and light-green lines represent year-to-year growth in overall inflation and wages, respectively.)
Unfortunately, 2007 was the last year that KFF/HRET included that graph in their annual survey. Had they included that graph this year, it would have shown an even more heartening moderation of premium growth:
A lot of things can drive premium growth. I discussed a couple of them in my last post. Some factors that could cause premium growth to moderate might not be all that welcome; if insurers dumped all their sick enrollees, for example. But absent dramatic evidence of that, isn’t this good news? And isn’t good news worth highlighting?
Experience Is a Good Teacher, But She Sends in Terrific Bills
[above quote attibuted to American writer Minna Thomas Antrim (1861-1950)]
The AP reports on trouble facing the Chinese census:
After years of reforms that have reduced the government’s once-pervasive involvement in most people’s lives, some Chinese are proving reluctant to give up personal information and harboring suspicions about what the government plans to do with their details.
Gov. Barbour Breaks with GOP on Immigration
OK, the headline may be a bit overstated, but recent comments on immigration by Gov. Haley Barbour of Mississippi are different enough from what most of his fellow Republicans are saying to be newsworthy.
In a video interview released earlier this week (see link below), Barbour expressed appreciation for the Hispanic immigrant workers who helped rebuild his state after Hurricane Katrina in 2005, and for the need to be more open to highly skilled immigrants from countries such as India.
Barbour is an important figure in the GOP. He is in his second term, chairs the Republican Governors Association, and led the Republican National Committee back in 1994 when the party swept into power in Congress.
When asked what he would say to people in California who are upset about illegal immigration, Barbour responded:
Let me just tell you, I’ve had a different experience than perhaps some other governors. I don’t know where we would have been in Mississippi after Katrina if it hadn’t been for the Spanish speakers that came in to help rebuild, and there’s no doubt in my mind some of them weren’t here legally. Some of them were, some of them weren’t. But they came in, they looked for the work—if they hadn’t been there, if they hadn’t come and stayed for a few months or a couple of years, we would be way, way, way behind where we are now.
Every country—I don’t care if it’s the United States of America or Papua New Guinea, every country has gotta have a secure border. If you can’t secure your border, you’re not much of a country, and we’ve gotta secure our border. But we’ve gotta do so with the recognition that even in our lifetime we’re gonna have a labor shortage in the United States. We don’t want to be like Japan, where the aging population is supported by fewer and fewer and fewer and fewer.
So there’s gotta be a way—a) we gotta secure the border, but b) we’ve got to work through how are we gonna make sure we’ve got the labor we need in the United States. H1B visas—a huge, huge thing. My idea is everybody from Stanford who’s from India that gets a PhD, we oughta stamp citizenship on his diploma, so instead of him going back to India and starting a business that employs 1,800 people, that he’ll start a business that employs 1,800 people in Des Moines, Iowa, instead of India. A lot of this is just common sense, and common sense tells us we’re not gonna take ten or twelve or fourteen million people [currently here illegally] and put them in jail and deport them. We’re not gonna do it, and we need to quit—some people need to quit acting like we are, and let’s talk about real solutions.
KFF/HRET Survey, Part I: Some People Don’t Know Good News When They See It
Every year, the Kaiser Family Foundation and the Health Research & Educational Trust produce the leading survey of employee health benefits. Yesterday, KFF and HRET issued their survey of health benefits in 2010 with a news release that begins:
Family Health Premiums Rise 3 Percent to $13,770 in 2010…
Premiums rose by just 3 percent? Great news! Last year, KFF/HRET guesstimated that the average cost of family coverage could hit $14,539 in 2010. Working families saved hundreds of dollars!
Not so fast, says KFF/HRET. The main reason premiums rose less than expected is that “businesses have been shifting more of the costs of health insurance to workers through … deductibles and other cost-sharing,” said KFF president and CEO Drew Altman. Actually, deductibles and other cost-sharing do not shift health insurance costs; they reduce the amount of insurance. What they shift is the cost of health care, from the insurance pool to individual members of the pool.
Nevertheless, greater cost-sharing does appear to be a significant factor behind the minimal growth in premiums:
Many employers are … raising the annual deductibles workers must pay before their health plans begin to share most health care costs. A total of 27 percent of covered workers now face annual deductibles of at least $1,000, up from 22 percent in 2009, the survey finds. Among small firms (3-199 workers), 46 percent face such deductibles…
Among other plan types, only consumer-driven plans (which are high-deductible plans that also include a tax-preferred savings options such as a Health Savings Account or Health Reimbursement Arrangement) saw growth in their market share. Such plans now enroll 13 percent of covered workers, up from 8 percent last year…
“Consumer-driven plans have clearly established a foothold in the employer market, tripling their market share from 4 percent in 2006 to 13 percent today,” said study lead author Gary Claxton, a Kaiser vice president and director of the Healthcare Marketplace Project.
Competing Naïvetés: How to Produce a Privacy-Protective Society
My Economist.com debate on whether governments should “do far more to protect online privacy” has now concluded. The vote on the motion went to my opponent, supporting government involvement by a margin of 52 to 48 percent.
I won a moral victory, perhaps, moving the vote from 70 percent in favor of government intervention to the very close ending tally. My commentary highlighting the substantial role of government in undermining privacy seems to have begun moving the dial in my direction.
A pleasant side-effect of the debate was to open lines of communication with a number of my privacy-advocate colleagues, many of whom do not share my libertarian outlook. One called me naïve to think consumers can successfully demand privacy given the imposing wall of corporate practices that rely on intensive and comprehensive data collection.
Full health privacy, for example, would require a marketplace in which consumers can pay cash for services or demand that information about their treatments not be shared. It is illegal for a pharmacy to fill a prescription without identifying the patient apparently, a requirement that sets up the conditions for nationwide tracking of patients’ medicines and, inferentially, their health conditions.
This prescription tracking is facilitated and reinforced by government regulation, of course. Consumers cannot exercise privacy self-help when the law requires pharmacies to collect information about them. Freedom to pay cash for medicines, and to do so unidentified, is at best a long way off, to be sure.
But I had suggested the naïveté of the pro-government view as well:
The arguments for government control certainly seem to rest on good-hearted premises: if we just elect the right people, and if they just do the right thing, then we can have a cadre of public-spirited civil servants dispassionately carrying out a neutral, effective privacy-protection regime.
But this romantic vision of government seems never to come true. Crass political dealmaking inhabits every step, from the financing of elections, to logrolling in the legislative process, to implementation that favours agencies’ interests and the preferences of the politically powerful.
State Bureaucrats Continuing to Advance REAL ID
Across the country, state legislatures have objected to, and outright rejected, the national ID and surveillance mandate imposed on them by the REAL ID Act. Passed in May 2005 with a compliance deadline three years later, the law has never been implemented. The Department of Homeland Security has repeatedly threatened to deny air travel to people from the states refusing compliance, then backed down when states have not caved to its demands.
But state legislatures are one thing. State-level bureaucrats are quite another. And they are hedgehogging along, positioning their states to implement the national ID law.
Writes Alan Greenblatt in State Legislatures magazine:
In a number of states, motor vehicle departments are doing the behind-the-scenes work necessary to move closer to compliance, including updating computer systems, installing face-recognition software and setting up more secure card production rooms. . . . [E]very state is moving toward compliance. Even in the 14 states where legislatures have explicitly rejected REAL ID through laws or resolutions, some moves have been made in the direction of compliance.
Politicians come and go, but the bureaucrats are in it for life. And they can grow their portfolio be building a national ID.
Credit Where It’s Due, National Journal Edition
A week ago today, I questioned both the premises and purpose of an upcoming National Journal forum on ObamaCare and job creation. The forum’s promotional materials touted the new health care jobs that the law will create as a Good Thing, even though we already have too many health care jobs. All in all, it looked to be a very dignified pro-Obama(Care) rally, funded by one of ObamaCare’s biggest beneficiaries, the drugmaker Eli Lilly. The Washington Examiner‘s Tim Carney picked up on the story. Then Instapundit added his own pithy interpretation: “Hey, the Atlantic media empire needs money. Eli Lilly has it. Plus, it boosts Obama. Win-win!” (Actually, I believe that would be win-win-win.)
To its credit, National Journal has since added balance to the forum and its panel. I received a promotional email today that reframes the event by asking, “are the right jobs being created?” (Emphasis mine.) They’ve also added AEI’s Tom Miller to the panel, who I’m guessing will cast a skeptical eye on the value added by these new health care jobs. Now the event looks to be a dignified and balanced discussion of ObamaCare.
National Journal still describes ObamaCare as “reform,” which I submit compromises objectivity. But this is progress. Kudos to them.
David Friedman: The Machinery of Criminal Defense
I once went to another Washington think tank to hear an advertised lecture by David Friedman, “author and professor of law and economics at Santa Clara University.” The great libertarian author of The Machinery of Freedom, speaking at a liberal-establishment Washington think tank? Cool. So I showed up early, took a seat by the wall, and was crushingly disappointed to discover that the speaker was in fact some other David Friedman, who was decidedly no libertarian, and I was pinned in and couldn’t leave. They told me later that an intern got the wrong bio off the web. Always blame the intern.
So anyway, I just wanted Cato-at-Liberty readers to notice that our new paper “Reforming Indigent Defense: How Free Market Principles Can Help to Fix a Broken System,” which Tim Lynch wrote about here, is in fact co-written by “the real David Friedman,” the son of Milton Friedman, the professor of law and economics with a Ph.D. in physics, the author of the early libertarian classic The Machinery of Freedom as well as such other books as Hidden Order, Law’s Order, and Future Imperfect — yes, that David Friedman.
So even if you didn’t think you were interested in the topic of voucherizing legal aid for indigent defendants, just consider that David Friedman is always interesting.
Is an Education Free Market Really ‘Totally Insane’
Matt Yglesias thinks my assertion that we would be better off economically if education money stayed with taxpayers rather than going to public schools and universities is “totally insane.” Ouch!
Now, I can actually understand this, because many people have difficulty envisioning things other than what they’ve always known. But have I really gone all Crazy Eddie? If government didn’t spend taxpayer dough on education, would the poor be much worse off than they are today? Can we never over-invest in schooling because education is just so important? Does the college wage premium mean we should never ratchet down subsidies for college education? And is it at least possible that spending more and more public dough doesn’t lead to more or better education — by which I mean actual, valuable learning — as much as more waste?
Unfortunately, it seems Ygelsias didn’t follow any of the links I provided in the post containing the line he objected to, which furnished some valuable data answering these important questions. And, by the way, it really was just one line he seemed to dislike – the point of the post was to argue against spending yet more taxpayer dough on an education-centered stimulus, not for complete separation of school and state. And, of course, tax-credit-based school choice leaves taxpayers in control of their money without eliminating support for education.
But let’s start answering our questions in more depth so that Mr. Yglesias and others can start to think outside of the “how we’ve always done it” box.
Crocodile Dundee vs Australia’s Tax Police
Here’s a Reuters story about the Australian Tax Office harassing Paul Hogan, better known to Americans as Crocodile Dundee, because of a tax dispute. The grinches at the tax office took advantage of Hogan’s return for his mother’s funeral to hold him hostage, refusing to let him leave the country until he coughs up some cash. It appears that the tax police in Australia are just as politicized and above the law as the IRS. Hogan has never been charged with tax evasion and there are plenty of signs that the bureaucrats want to make him a high-profile victim to justify the amount of money that has been squandered in a probe of supposed offshore evasion.
Actor Paul Hogan, star of the “Crocodile Dundee” movies, has vowed to continue fighting the Australian tax office which has barred him from leaving Australia until he pays a massive bill, saying he’s victim of a witch hunt. Hogan, 70, was served with a departure prohibition order 10 days ago while in Australia to attend his 101-year-old mother’s funeral which has prevented him from leaving to return to Los Angeles where he lives with his wife and son. The Australian Tax Office refused to comment on reports of seeking tax on A$38 million ($34 million) of allegedly undeclared income from Hogan, saying it cannot give details of individual taxpayers. But the actor went public in the Australian media this week to put forward his side in his five-year row with the tax office, saying he had done nothing wrong and the tax office was on a witch hunt for a high-profile case. …”If I was a tax evader, which I’m not, I must be the dumbest one in the world to keep coming back here instead of fleeing to a tax haven … I know they’re absolutely desperate to nail some high-profile character with money to justify the expense to the taxpayer.” Hogan, who was once a painter on the Sydney Harbour Bridge, is under investigation as part of Australia’s biggest probe into offshore tax evasion, Operation Wickenby. The operation is budgeted to cost at least $300 million. The tax office has claimed he put tens of millions of dollars in film royalties in offshore tax havens, a claim that he has denied. He has never been charged with tax evasion.
This story is symbolic of a bigger issue, which is the the unfortunate tendency of governments to create ever-more oppressive and misguided laws in response to failures of existing policy. We see this in the failed War on Drugs, which leads to trampling of civil liberties and erosion of privacy. We see it in the failed War on Poverty, which leads to more redistribution that further traps people in dependency. We see it in the failed government-run education system, which wastes more money every year as outcomes remain stagnant and children from poor and minority communities suffer.
In the case of tax policy, politicians impose high tax rates and punitive forms of double taxation. As anybody with a modicum of common sense could predict, this bad tax policy undermines economic performance and drives economic activity to jurisdictions with better tax law. The politicians then have two ways to respond. They can lower tax rates and reform tax systems, an approach that simultaneously would boost growth and improve compliance (as happened during the Reagan years). Or they can tighten the thumbscrews on taxpayers, trample their rights, and conspire with other high-tax nations to punish the jurisdictions that do have good policy.
Not surprisingly, most politicians choose the latter approach. And the attack on low-tax jurisdictions is a particularly loathsome part of their response. As this video explains, tax competition is a liberalizing force in the world economy and the effort by high-tax nations to penalize so-called tax havens is driven by a statist impulse to prop up decrepit and inefficient welfare states:
Lessons in Crony Capitalism
From this week’s Washington Post:
Afghanistan’s Central Bank has taken control of the country’s biggest and most politically potent private bank and ordered its chairman to hand over $160 million worth of luxury villas and other real estate purchased in Dubai for well-connected insiders, according to Afghan bankers and officials.
Farther down the page the article continues:
Kabul Bank previously had been shielded by the political clout of its shareholders who, in addition to Mahmoud Karzai [President Hamid Karzai’s brother, who partly owns Kabul Bank], include Haseen Fahim, the brother of Vice President Mohammed Fahim.
If this hostile takeover wasn’t questionable enough, the article goes on to report:
Kabul Bank’s biggest creditor, bank insiders said, is Haseen Fahim, a minority shareholder, who borrowed tens of millions of dollars to fund various business ventures, which in turn won contracts at U.S. bases and sites in Afghanistan operated by the CIA.
So, in an effort to stamp out corruption, which U.S. officials have prodded Afghanistan’s President Hamid Karzai to do, he orders his Central Bank to take managing control of the country’s largest private bank, which, I might add, “also contributed to President Karzai’s reelection campaign last year.”
At the risk of oversimplifying, the above-cited transaction sounds like a stark lesson in crony capitalism: an allegedly capitalist economy based on close relationships between politically connected business figures and the state. This U.S.-led nation-building charade in Afghanistan sounds eerily reminiscent of the state-controlled corruption surrounding Afghanistan’s mineral mining laws:
“Article 4: Ownership of Minerals
(1) All naturally occurring Minerals and all Artificial Deposits of Minerals on surface or subsurface of the territory of Afghanistan or in its water courses (rivers and streams) are the exclusive property of the State.”
Well, it’s nice to see that we are exporting our system around the world!
On Tonight’s John Stossel Show (FBN)
I’m a guest on tonight’s John Stossel program on the Fox Business Network, on the subject of the consequences of the twenty-year-old Americans with Disabilities Act (ADA). The show was shot live to tape yesterday in New York and was fascinating throughout; even those who think they know this subject well will learn a lot. I’m also quoted in John’s latest syndicated column on the same issue.
Among the highlights of the taping: a disabled-rights lobbyist defended several extreme applications of the law, including the notion that it might be appropriate to force networks to hire someone who suffers from stuttering as on-air television talent. We also shed some light on the state of California’s up-to-$4,000-a-violation bounty system for freelancers who identify ADA violations in Main Street businesses, and the case for at least requiring complainants to give business owners notice and an opportunity to fix an ADA violation before suing. (The disabled-rights lobby has managed to stifle that proposal in Congress for years.) Also mentioned: the suit against the Chipotle restaurant chain recently covered in this space.
Donald Shoup on Free Parking
Donald Shoup, the author of The High Cost of Free Parking, has posted a response to my first post about Tyler Cowen’s op ed against free parking. Shoup points out that I erroneously attributed proposals to him that are in fact only urged by his followers, such as maximum-parking requirements and requirements that all businesses charge for parking. I apologize for that.
In fact, Shoup’s book argues that cities should eliminate minimum-parking requirements and charge market rates for on-street parking. I favor these things as well. Where we may disagree is about the effects of these policies.
My post pointed out that many municipalities do not have minimum-parking requirements, but businesses still offer plenty of free parking to their employees and customers. Shoup asks for “a list of some of these.” Virtually all counties in Texas, most counties in Nevada, and many counties in Indiana have no minimum-parking requirements, and I am sure I could find counties in many other states as well. Unlike California, where Shoup lives, and Oregon, where I live, these states do not restrict urban development to within city limits or urban-growth boundaries, and developments in unincorporated parts of these counties offer plenty of free parking.
What’s Behind the Decline in Illegal Immigration? It’s the Economy, Stupid
A Pew Hispanic Center report released today confirms what has been widely known, that the number of illegal immigrants in the United States has dropped sharply since 2007. The real argument is over what’s behind the decline.
According to Pew’s Jeffrey Passel and D’Vera Cohn, the annual inflow of unauthorized immigrants dropped by two-thirds during 2007-09 compared to 2000-05. That plunge has contributed to an overall decline in the total number of illegal immigrants in the United States from a peak of 12 million in March 2007 to 11.1 million in March 2009. Pew calls this “the first significant reversal in the growth of this population over the past two decades.”
Advocates of more restrictive immigration policies have been quick to credit increased enforcement for the decline, but that thesis doesn’t hold up to scrutiny. While enforcement efforts have indeed been ramped up in the past couple of years, the change has not been dramatic. Resources devoted to border and interior enforcement have been increasing pretty steadily since the early 1990s.
It seems implausible that more recent, incremental increases would have such a visible effect when years of increased enforcement efforts before now so visibly failed. In fact, the same restrictionists who constantly complain that nothing has been done to enforce our immigration laws are among those now praising that supposedly non-existent enforcement for the drop in illegal immigrants. They can’t have it both ways.
The more obvious explanation is the steep economic recession that began to bite in 2008. The downturn has been especially brutal in the housing and construction industries where many illegal immigrants found employment during the previous boom. As evidence, the decline in the number of illegal immigrants has been steepest in those states, such as Nevada, California, and Florida, where the housing downturn has been the most severe.
When the economy revives, I predict the inflow and population of illegal immigrants will begin expanding again, too. This problem will not be solved until Congress and the president work together to enact comprehensive immigration reform that widens opportunities for legal immigration.
Obama’s ‘Perfectly Clear’ Iraq Policy
As someone who has his own snarky tendencies, I am really starting to have a hard time discerning when Matt Yglesias is being serious and when he is being sarcastic these days. For example, he writes of President Obama’s Iraq speech last night that
I think Barack Obama’s Iraq policy was perfectly clear as of last week—war kinda sorta ending on August 31, 2010 and more honest-to-god ending in December 2011—so I wasn’t exactly glued to the set to watch his speech last night.
So Obama’s “perfectly clear” Iraq policy is that “the war” “kinda sorta ended” yesterday, and will have a “more honest-to-god [than kinda sorta?]” end on New Year’s Eve next year? But when does it just plain end?
Or maybe the best way to clear this up would be if I could put Tom Ricks’ question to Matt: “How many U.S. military personnel will be in Iraq four years from today — that is, Feb. 25, 2014?” Or if we’re assuming one term, by January 2013?
Reforming Indigent Defense
We know that most of the people arrested and prosecuted in our criminal courts are indigent. We also know that indigent legal representation is scandalous in many places around the country. What to do? The conventional remedy to this problem has been a plea to spend more money on our overburdened public defender organizations. However, a new Cato paper takes a fresh look at this subject and proposes an entirely new model for the delivery of indigent legal services — defense vouchers that will empower defendants to choose their own attorneys. Authors Stephen Schulhofer and David Friedman explain how such a system could be implemented and why it can be expected to provide an effective cure for the major ills of indigent defense organization.
From the Executive Summary:
The uniform refusal of American jurisdictions to allow freedom of choice in indigent defense creates the conditions for a double disaster. In violation of free-market principles that are honored almost everywhere else, the person who has the most at stake is allowed no say in choosing the professional who will provide him one of the most important services he will ever need. The situation is comparable to what would occur if senior citizens suffering from serious illness could receive treatment under Medicare only if they accepted a particular doctor designated by a government bureaucrat. In fact, the situation of the indigent defendant is far worse, because the government’s refusal to honor the defendant’s own preferences is compounded by an acute conflict of interest: the official who selects his defense attorney is tied, directly or indirectly, to the same authority that is seeking to convict the defendant.
Check it out.
Are the Anti-War Left and the Tea Party Just Two Sides of the Same Coin?
Responding to my POLITICO Arena post this morning about the Tea Party’s potency as a notional political force, David Biespiel, poet, editor, writer, and founding executive director of the Attic Writers’ Workshop in Portland, Oregon, points to opposition to the Iraq War as he argues that “the anti-war left were tea partiers before being tea partiers was cool!” Look here and scroll down a bit for Biespiel’s argument and my response.
The Rumors of Manufacturing’s Death Have Been Greatly Exaggerated
“US manufacturing grows for 13th straight month” is the headline of an AP newswire story posted around noon today. This statistic doesn’t surprise me, since I’ve been following developments in U.S. manufacturing for many years now, and have published analyses of public data that refute the myth of deindustrialization and manufacturing decline.
With the exception of the recession of 08-09, when all U.S. economic sectors took a hit, U.S. manufacturing has been breaking its own record, year after year, with respect to output, value-added, profits, returns on investment, exports, and imports. U.S. factories are the world’s most prolific, accounting for 21.4% of global manufacturing value added in 2008 (China accounted for 13.4%).
But I bring the AP headline to your attention for one reason: so that you can judge for yourself who has any credibility on Capitol Hill, within the executive branch, in the media, among organized labor, in industry, in the think tank world, and within the international trade bar, as Nancy Pelosi tries to stuff a ruinous anti-China trade bill down our throats in the name of supporting our floundering manufacturing base. Look for the columns, the op-eds, the press releases, and the floor statements between next week and November.
Who among them will continue to cite our suffering manufacturing sector as the justification for protectionism? They should never again have any credibility.
More Arguments against a Value-Added Tax
The biggest long-term threat to fiscal responsibility is a value-added tax, as I’ve explained here, here, here, here, and here. So I’m delighted to see a growing amount of research showing that a VAT is bad news. Jim Powell has an excellent column at Investor’s Business Daily that makes a rather obvious point about the wisdom (or lack thereof) of copying the tax policy of nations that are teetering on the edge of fiscal collapse (this cartoon has the same message in a more amusing fashion).
Drums are beating in Washington for a value-added tax in addition to the “stimulus” taxes, health care taxes, energy taxes and other taxes President Obama has imposed and wants to impose on hard-pressed taxpayers. Supposedly a value-added tax is a magic elixir for curing budget deficits and excessive debt. Quack remedy would be more like it. If it worked, you’d observe that countries with a VAT had budget surpluses and no debt problems. But almost every country that has a VAT is plagued with budget deficits and excessive debt. … No surprise that the worst financial basket cases all have a VAT. Iceland has the highest VAT rates, but this didn’t prevent its financial crisis and the near bankruptcy of its government. Italy’s VAT rates are almost as high, and its debt exceeds its GDP. Financial crises are looming in Spain and Portugal, and of course they have a VAT. Greece has a VAT, too, and when politicians ran out of money to pay government employees for more than a year’s worth of work every year, they rioted in the streets. Great Britain has a VAT, and its government finances are in the worst shape since World War II — its budget deficit is expected to be bigger than that of Greece. Moreover, the OECD has acknowledged that “(VAT) tax and transfer wedges have discouraged firms from offering employment and individuals from taking it, reduced employment and increased inequality.”
And a new study by Douglas Holtz-Eakin and Cameron Smith finds evidence that a VAT would lead to bigger government.
VATs provide a significant amount of revenue. …But do these significant revenues cause government spending to grow larger? Or is it the case that adoption of a VAT is evidence of the desire for a larger government so that the causal arrow runs from a taste for Leviathan to a VAT, and not the reverse? …we find a statistically significant dynamic relationship between the rate of VAT taxation and the size of government. Although no single study is definitive, this is the first rigorous evidence that a VAT causes government to grow larger. …countries that adopted a VAT did in fact experience, on average, a 29 percent increase in the size of government. …The estimated coefficient of 0.262 indicates that adopting a VAT is associated with larger government. This estimate is statistically significant. …our results shift the burden of proof to those who deny that VATs fuel increases in the size of the public sector.
This study jumps into a long-running chicken-or-egg debate in the academic literature about whether higher taxes lead to higher spending or whether higher spending leads to higher taxes. This causality debate is interesting, but I’m not sure it really matters. A VAT is a terrible idea if it triggers bigger government, and a VAT is a bad idea if it merely finances bigger government. But I suspect this study is correct. The key thing to remember is that Milton Friedman was right when he warned that “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.” This means that a VAT will allow more government spending and no reduction in deficits and debt, which is exactly what we see in Europe (and as Jim Powell noted in his column). Last but not least, this video summarizes the best arguments against a VAT.
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