Pence’s call for tax reform in Indiana

An op-ed on tax reform in Indiana (and elsewhere)...

Governor Mike Pence is calling for a review of the State’s tax code. His top goals are to simplify the code and to promote economic development—two worthy pursuits. 

First, if the government is going to take our money, then it should do so as gently as possible. The U.S. income tax code is notoriously burdensome in terms of the billions of hours and dollars required to complete the paperwork. Governments will tax our money, but they shouldn’t unnecessarily tax our time too. 

Second, all things equal, fiscal and regulatory policies should minimize the damage to the economy and increase the possibilities of economic development. It is important for policy-makers to strive for this goal. 

But while Indiana’s leaders are looking at tax reform, they should achieve one other goal: eliminating the income tax burden on working poor households. 

These days, it is common to make loud (and vague) complaints about the “gap between the rich and the poor”. Related to that, it is popular to advocate a higher minimum wage. But a higher minimum is a very mixed bag. 

To name two reasons (among many): First, the minimum wage has both benefits and costs. By artificially increasing the price of less-skilled, it will be less attractive to firms. Depending on the context, firms may respond by increasing prices to consumers or reducing other forms of compensation (e.g., free uniforms, discounts on product). But if these are not sufficient, firms will eliminate jobs. 

It’s a shame to help some vulnerable people by harming other vulnerable people. This hurts those who lose jobs—short-term and then long-term, by taking away their opportunities to build skills, cutting off the first few rungs of the economic ladder that would allow them to move to the middle class. 

Second, the minimum wage is poorly-targeted—impacting middle-class teens and the elderly, as well as poor heads of households. Policy prescriptions should be as precisely targeted as possible, limiting the costs of the policy and concentrating the benefits of the policy appropriately.

Fortunately, there is a better policy alternative: eliminating taxation on working poor households. By far, the most onerous burden comes from the FICA payroll taxes on income that are used to support the Social Security and Medicare of current retirees. These take 15.3% of every dollar earned by the working poor—more than $3,000 annually from a head-of-household at the poverty line. It always amazes me that so-called champions of the working poor rarely talk about this devastating policy issue. 

Of course, Hoosier leaders can’t do much about a nasty federal policy. But they shouldn’t add to those burdens by imposing state income taxes on the same vulnerable people. At present, Indiana is one of a handful of states that impose taxes on hard-working, lower-skilled, heads-of-household at the poverty line. 

A decade ago, Indiana added an earned income tax credit (EITC) to offset much of this burden. But Indiana legislators should take the next step. They should remove all working poor households from the tax rolls and freeing up the EITC to do what it was designed to do: subsidize working-poor households. Poor households would have more money in their pocket—without the risk of being priced out of the labor market by a higher minimum wage. This would be a win-win for the working poor and the Hoosier economy.

our trip to (southern) Michigan

With my sabbatical this year, our vacations were more frequent but more modest: a trip to Alabama to see Chris’ family in October; a trip to Florida in March to see friends; and this summer (last week), the “big” trip to see Southern Michigan. (In previous summers, we’ve gone to much of NC in 2010, NY state in 2011, SD and eastern CO in 2012, and SC and more of NC in 2013.)

 

We headed out after a DC co-leader training on Saturday AM, with a stop in Auburn, IN to see the Victory Museum. It featured a ton of period vehicles, focusing on WWII. The building/admission also included a small display on local professional baseball players (including the women’s league team around WWII—as in the movie, “A League of Their Own”) and the Kruse Auto Museum (including race cars, drag racers, monster trucks, and some famous cars designed by Carl Casper: Dukes of Hazzard, Batmobile, Knight Rider).

 

On Sunday, we had our first major stop in Michigan: the Gilmore Car Museum (& Barns) in Hickory Corners. That weekend, they happened to have an English car show, so it was cheaper—and we got to see a lot more cars!

 

Later on Sunday we visited Saugatuck, an “eclectic and pretty” town, including its “chain ferry” and a public potty professionally painted with pointillism. We ended the evening with time at the beach at Holland State Park, a brief stop to see the tunnel at Tunnel ParkBeach, and some ice cream at the renowned and popular Captain Sundae.

 

On Monday, we enjoyed some shopping and the riverwalk at Grand Haven. Lunch was the corn dogs at Pronto Pups. (Good stuff! All they sell is corn dogs and cold sodas without ice.) Moving on, we hit PJ Hoffmaster State Park (incl. the Gillette Sand Dune Visitor Center and a short hike) north of Muskegon and Duck Lake State Park’s beach south of Muskegon. In addition to a nice beach, Duck Lake has a shallow waterway bridging to Lake Michigan, so you can walk from one to the other. All of the other beaches were quite nice, but Duck Lake is the only one that's memorable.

 

On Tuesday, we enjoyed MacWood’s Dune Rides (excellent!) and the lighthouse at Silver Lake. Then we headed east across most of the state, hitting Shrine of the Pines in Baldwin (amazing log cabin and furniture built by hand, without electricity); Morgan Composting in Evart/Sears (home of Dairy Doo, owned by one of the three entrepreneurs in the Acton film, The Call of the Entrepreneur); Cops & Doughnuts in Clare (a once-failing but now-thriving store bought by cops who took advantage of their infamous connection to the pastries); and the “Tridge” (a three-way bridge over two rivers) in Midland.

 

On Wednesday, we started with the Castle Museum (including a nice Legos display) in Saginaw. Then we visited Frankenmuth, a touristy Bavarian-style town to walk around and shop a bit. We had a late lunch at Tony’s in Birch Run. With its huge servings—e.g., the BLT with one pound of bacon!)—we didn’t need to bother with dinner. And we finished at Marvelous Marvin’s Museum/Arcade (a collection of old, functioning arcade games) in Farmington Hills.

 

On Thursday and Friday, we saw most of “The Henry Ford” in Dearborn. We spent two days there and still couldn’t get through everything. Its three components were all amazing! First, the museum thoroughly covered the range of Ford’s business interests—planes (new info there!), tractors (Sears and other retailers sold car/tractor conversion kits), and automobiles (all the way back to the Quadricycle)—and other relevant stuff (trains) or interesting stuff (furniture). (They also had a half-dozen IMAX options. We saw the D-Day film narrated by Tom Brokaw—masterfully organized and helpful for understanding the choreography of the battle and what followed.)

 

Second, Greenfield Village was similar to Colonial Williamsburg, but more extensive and wide-ranging (at least as I remember them), Most impressive, they had many original buildings—modest (an old doctor’s office); connected to famous people (one of the courthouses where Abraham Lincoln worked); or outright famous (e.g., the Wright Brothers’ home and bike shop). They also had a multi-building replica of Edison’s workshop community, including a laboratory where Edison’s team aimed to produce inventions regularly. GV was meant to preserve history, but started in October 1929 to commemorate the 50^th anniversary of Edison’s light bulb. (They have the chair that Edison sat in; supposedly untouched since then!)

 

Third, the Ford/Rouge plant/factory tour was terrific-- getting to see them put together a good chunk of the F-150s. They also had two short films on the changes over history (a labor economist’s dream).

 

On Thursday evening, despite some warnings, we took our carry-out dinner to Belle Isle in Detroit. It was beautiful and safe. On the way there, we were on safer/busier roads; it was like driving down Broadway in Louisville. On the way back, we stayed on significant neighborhood roads and that was a bit dicier, but still fine. (I would not have wanted to make that drive at night—perhaps fine, but not sure.) On that route, I’d say half of the houses were boarded up. More sobering, the huge manufacturing and apartment buildings that had been abandoned—and were not even worth tearing down.

 

The trip was just under a week, since I had the next DC co-leader training on Saturday AM. If we head north again—say, on the way to No. Michigan and the UP (which are supposed to be awesome)—we would likely visit the Cord-Duesenberg Auto Museum in Auburn, IN (we did get to see a lot of those cars in the other museums); the Mid-America Windmill Museum in Kendallville, IN; the Auto Hall of Fame in Dearborn; and the Yankee Air museum in Belleville (west of Detroit).

 

Two other small things to report: 1.) The hotels were nicer and far cheaper on the east side (in Saginaw and Detroit): both nice-- for $43 and $47 with a pool vs. $75-100 for far less clean. 2.) The road numbering was noteworthy—in particular, the use of numbered streets (e.g., 128^th Road or Street), even in rural areas.

 

All in all, an excellent trip. It wasn’t our best overall; that honor still goes to SD and eastern CO. But it was probably tops in satisfaction per dollar and per mile.

rural gasoline, anti-trust, and health care/insurance

*Very* interesting: a rural county worried about a cartel at the gas station level, opening up its own store to compete...


If they're not losing any money on it, this would be a really cool approach to anti-trust concerns-- at least on paper. (Are they losing money? It'd be hard to measure, given the layers of bureaucracy-- and given that we're talking about the government, it'd be naïve not to have doubts!)


There may be an implicit cartel, where the stores offer higher-quality gasoline or have moved into offering other services that are costly but convenient (e.g., food). And there may be a market for low-frills gas-only services. (That said, my understanding is that they make good money on the other services and wouldn't need to bid up the price for their gas to cover costs.) Does that explain the lower prices at Swifty?


One other connection: This is one of the rationales for ObamaCare-- that the government can provide another choice. At least two problems with the comparison: 1.) Selling gas is a lot easier than manipulating the market for health care and health insurance! 2.) Government is largely responsible for the distortions in health care and esp. health insurance. So, the government has caused the problem that it is unlikely to fix with its remedy.

crazy pay and wage inequality, corporatism, discrimination at the C-J

This story is amazing on many different levels:



-The C-J gets hoisted on its own petard of relying on lame statistical proxies and having an incoherent worldview on discrimination. (I wonder what their gender pay numbers look like? They should publish those immediately.)



-The C-J gets hoisted on its own petard on corporations and unions.



Can you believe how much their mid-level executives earn? Wow. $325K for this guy?! Wow. Looks like a terrific example of monopolies being able to over-pay their workers (at least those on the high end). And as their market has gotten more competitive, they're unable to pay inefficient compensation.



-Thus, the C-J gets hoisted on its own petard on wage inequality.

reflections on church integration

Worshiping at five rather-similar churches over the past month, I've been struck by the differences in culture, class, preaching and worship styles-- all of which make it somewhat/surprisingly challenging to move from one congregation to another.


Sometimes, we wonder why (far more) churches aren't "better" (more) integrated in terms of race and class. Throw in centuries of history on race, the (eternal?) difficulties of crossing class "barriers", learning new songs, getting used to different worship and preaching approaches. Then, there's just the work of getting to know new people. And until 60 years ago, you would have just gone to a church close to your home, because transportation was so challenging-- which would have built fixity into all of the above.


And here, I'm talking about simply visiting churches-- and the barriers there. If we were to actually make the far-larger investment of joining a new church community or a new denomination, we would find larger "barriers" that are inevitable but ranging from reasonable to "ideological".


Maybe we should be thankful for the integration that has taken place. We should continue to strive to break down barriers. But, in practice, like many things, it's easier to talk about than to do.


I should add that we felt reasonably comfortable in all five churches-- and everybody at each church did everything reasonable to be friendly and welcoming. The "challenge" of being (completely) comfortable was simply in the differences between the churches and being in a new place.


Which five churches? Of course, we've been to our church (Southeast CC-- So. IN). But we've had occasion to visit St. Stephens (So. IN), Oak Park Baptist (Jeff), Mt. Zion Baptist (No. KY) and So. L'ville CC. Since the middle school programming at SE doesn't start for another week, maybe we'll visit a sixth this weekend!

It's been good to be with more brothers and sisters in Christ-- even when it's only been the light touch of a "visit". And we hope it's been really good for our kids to see something different!

#Galatians3_28

Ft. Wayne, interest groups, diffuse costs, and Public Choice economics

I had an op-ed in one of the Ft. Wayne News-Sentinel-- on the brouhaha there over public sector pay for police and fire fighters...

I read your Mayor Tom Henry’s recent statements on collective bargaining with interest since they are a nice application of principles that I teach every semester.

The mayor, the City Council and public-sector unions are engaged in what is a common debate about pay.

We see this play out in the private sector all the time. For example, consumers want lower prices for goods and services; producers want higher prices. If markets are competitive, then the market will reduce prices to a level that reflects costs and a normal rate of return. It’s the tension of demand and supply — and the goals behind each — that yield market outcomes.

In the public sector, it’s more complicated for at least two reasons. First, the public sector tends to be much more monopolistic. From K-12 education to national defense to fire, police and roads, monopoly power is the rule more than the exception. And where government dominates, monopoly power and its problems tend to follow.

All things equal, this is a reason to avoid government solutions — particularly those that give public-sector providers a lot of power over consumers and taxpayers. Notably, Indiana has been ahead of the curve in terms of reducing government’s monopoly power over K-12 education, recognizing that competition is good for consumers — even though it’s not popular with producers.

Second, agents in the public sector are spending someone else’s money — and those costs are diffused among many, many taxpayers. It’s certainly possible to spend your neighbor’s money as carefully as you spend your own. It’s far less likely, however, that you would spend a stranger’s money as well — or that you would be as concerned if the costs were otherwise hard to trace.

Let’s assume 2,000 public-sector workers in Fort Wayne all receive an extra $1,000 in pay. The additional $2 million would cost $8 per person annually ($0.16 per week) for the 250,000 people in the city. Who would notice those few extra dollars in taxation?

As such, economists say that the general public is “rationally” ignorant and apathetic about such policies. It doesn’t make sense to learn about such things or to take action against them; it’s only $8. Those receiving the extra $1,000, however, will be excited — and they may engage in a number of activities to encourage the wealth transfer, i.e., voting, lobbying, campaign contributions, etc.

Proponents also will try to provide rationales for why this serves the common good. One of the most popular stories is the erroneous idea that such redistribution creates economic activity.

And you can see how someone could believe this. It’s easy to imagine the economic activity generated by this additional government spending. But the $2 million didn’t grow on trees; it came from other people, destroying at least as much economic activity. Although the costs are more subtle and require more sophistication to see, they are at least as large. Supporting higher pay might be a good idea but don’t imagine that it’s a boon for the community.

So, how does this apply to the controversy in Fort Wayne?

In one sense, we don’t know. We can be reasonably confident that most government workers will receive adequate compensation — wages, fringe benefits, working conditions, job security, deferred compensation, etc. If not, they would not accept the jobs or remain in them. But given the discussion above, we might expect at least some government workers to receive above-market compensation.

In any case, we can be confident that interest groups and politicians will, at least occasionally, be tempted to engage in mutually beneficial trade at the expense of the general public and the common good.

Finally, we trust in an effective media such as yours to do what it can to emphasize the less obvious consequences of public policy — and make it easier for the general public to become better inform

Lord, let me treat people like you did...

-kind to the broken and broken-hearted
-inclusive of those who are poor in spirit and do not feel worthy of the Kingdom
-aggressive in defending the rights of the oppressed
-purposeful in building up your disciples and disciple-makers
-provocative to those who are dim-sighted but well-intentioned
-tough as nails on the smug Pharisees and blind fundamentalists in both religious and non-religious circles

DC now has 1,700 "graduates"

The Lord has blessed our efforts! After 12 years, there are more than 1,700 graduates of DC: Thoroughly Equipped at dozens of churches. These men and women have studied 5 hours per week and met weekly for 21 months, learning how to watch their life and doctrine closely, growing in the grace and knowledge of our Lord and Savior, becoming thoroughly equipped for every good work.

 

Our mission was to help our church and other churches fulfill the Great Commission-- to make disciples who could make disciples. We wanted to develop "thoroughly equipped" lay-leaders for the local church. We wanted to empower people to be more effective in their marriages, their families, their workplaces, and their neighborhoods. By immersing themselves in God's word through an established process, hundreds of DC'ers have learned to walk more closely with God, in greater knowledge and humility, with more competence and confidence, to be effective Kingdom workers. 

Of course, there are many ways to accomplish this aside from DC. But if you don't have a plan-- or a plan to make your plan happen-- Kurt or I would be happy to talk with you about ministry, making disciple-makers, and training up lay-leaders. We also have a new website that might be useful: http://thoroughlyequipped.org. If you're interested, drop me a line. 

Laffer & Co. on state policy and economic outcomes

Dr. Arthur Laffer, the WSJ's Stephen Moore, Travis Brown (author of How Money Walks; more later)  and one other co-author have produced a useful volume on state policies (tax and otherwise) and the state outcomes that follow.


Let's talk analysis first...
A key point: They rely on aggregate measures more than more-popular per capita measures. Why? In a nutshell, because declining population allow per capita measures to remain relatively constant while a state is losing economic prowess. Moreover, population is an excellent measure of "voting with one's feet"-- the extent to which policy and other variables are driving people from one state to a better state (p. 5-7).


As a matter of theory, it's more reasonable to choose measures which allow for mobile labor (and capital). "Any prosperity where the number of people is the denominator, such as income per capita or the unemployment rate, makes little or no sense when people can move to where income and jobs are located, or the jobs and income can move to where the people are located." (xv) In the case of struggling states, "some of the states lost people faster than income...reported relative increases in income per capita and tax revenues per capita." (xviii). When they analyze particular outcomes, they start with population, "because we cannot think of a better indicator of a state's quality of life." (54-55) While one certainly cannot dismiss per-capita measures outright, Laffer and Co. make a strong point that aggregate measures are at least as valuable in measuring aggregate performance.


In addition to a lengthy series of single-variable analyses (which tell a similar story), they use limited econometrics modeling (in chapter 6)-- both because they run limited models and because such models are inherently limited in trying to measure what's at hand. At least they recognize these limits and argue that these results should be interpreted in light of the other results in the book (which turn out to be consistent). They also provide what seems to be at least a decent literature review. But I don't know that area nearly well enough to say with any authority.


Results:
Chapter 1 provides an analysis of the 11 states that imposed an income tax after 1960. Public officials embraced a state income tax, anticipating/selling a future with a.) minimal damage to their economy; and b.) greater tax revenue to produce greater public services. In a nutshell, they were wrong on both counts. All of them declined in terms of GDP growth and tax revenue, compared to the other 39 states (5). In terms of public services, the results are sobering and perhaps/probably surprising (16-21): lower K-12 test results, smaller health/hospital personnel per capita, higher crime rates, higher poverty rates, and poorer highway systems. Ouch! (In terms of method, they explain their preference for direct measures, where available-- and the inferior measure of inputs when direct measures are not available [16].)


Based on economic and political economy theory, the results might surprise, but can't shock. There are links and thus, potential leaks in the chain of logic that takes one from higher tax rates to improved public services: higher tax rates do not necessarily yield higher tax revenues; higher tax revenues are not synonymous with more spending on public services; and more spending on public services is not equivalent to a greater provision of public services (224).


Not surprisingly, the authors make reference to the famous "Laffer Curve" (LC). The LC is a basic tool to explain the necessary qualitative relationship between income tax rates and income tax revenue. If tax rates are 0%, then you will raise $0. If tax rates are 100%, you'll raise $0. It follows that revenues will increase as rates rise above zero-- up to a point. After that, they must fall-- so that higher rates produce less revenue. And so, unless one is into taxing people just for grins (as some on the Left seem to want!), then higher rates can be counter-productive.


Applying the same analysis to other forms of taxation, you get a similar relationship: increasing tax rates can increase or decrease revenue. So, increasing them, without this general knowledge-- and knowledge about the particular contexts of a tax increase-- is not wisdom.


They also add a theoretical angle that was (somehow) an innovation for me: the difference between a short-run and long-run LC. Of course, people are more flexible/elastic if you give them more time to respond. So, the LC is more painful for tax rate increases in the long-run than in the short-run (11). "You can't balance a budget on the backs of the unemployed or collect tax revenues from people who leave your state. High tax rates are a double-edged sword. You collect more, of course, per dollar of income, but you get less income." (10)


Along the same lines, they note that most economic development models assume that capital is fixed or semi-fixed-- a relatively static (vs. dynamic) analysis that implicitly holds relevant policy variables (inappropriately) constant. Moreover, they note that the dynamics of this can easily become a "vicious cycle"-- where higher tax rates cause flight/migration which leads to a temptation to increase rates further, and so on (12-13). Hello Detroit and Cleveland!


In Chapter 3, they turn to analyze state tax policies in all states. Again, they recognize that their analysis is "limited" (54) and that many "non-policy variables...matter as well" (251-252). Here, they compare the top nine states to the bottom nine (55). They choose nine since that's the number of states without an income tax. They go back 50 years and calculate 10-year moving averages (67). There are exceptions (which get some anecdotal explanations/stories from the authors), but the general trend is consistent with economic theory and incentives on pro-growth vs. anti-growth policies. From population and GDP to tax revenues and public services, the results cannot be what the pro-tax people want (56-62, 72-73, 76).


In Chapter 4, they analyze other state policies-- other taxes, right-to-work, unionization, and the minimum wage (81-82). They find, unsurprisingly, that sales taxes are efficient (even if they're not equitable), since they tax a broader base (88). "The average of the nine states with the lowest sales tax burdens underperform the average of the nine states with the highest sales tax burdens." (87) Estate/inheritance taxes are deadly (88). Right-to-work and unions are correlated with low performance (90, 96). I think they over-reach on the minimum wage, since in part the minimum is merely a proxy for higher costs of living (96). Interesting news for objective observers and good news for those who value liberty more highly: "the blue states are getting bluer, but also that the red states are getting redder. [But] as interesting as the increasing polarization of the states is the drift in the overall population toward red states." (xvii).


In Chapter 5, they tease out the in/out-migration numbers, bringing in Travis Brown's work at HowMoneyWalks.com. This is simply an extension or application of the long-run version of the Laffer Curve. From 1995-2010, millions of Americans moved between states, taking $2 trillion in adjusted gross income with them (99). Large states account for the bulk of the gains and losses, but the smaller states indicate the same pattern-- and adjusting for state size yields the same result (121-123). The upshot: "Progressive income taxes don't redistribute income; they redistribute people." (270)


In Chapter 7, they go through a thorough comparison of Texas and California. From the poverty rate (207) to public services, California gets smoked by Texas. Over and over again, there's far more spending on the services, but far fewer workers providing the services (from roads and prisons to education and health). One might think that California is hiring better people, but the direct measures available on quality do not indicate this at all (231-242). Brutal.







Miscellany: 
-The title of this book (An Inquiry into the Nature and Causes of the Wealth of States: How Taxes, Energy, and Worker Freedom Change Everything) is a take-off from the full-length title of Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations, usually known as The Wealth of Nations.


-The authors apparently drew some inspiration from Philip Ball's book, Curiosity. I hadn't heard of him or it, but will check it out. The quotes they provided from it were good-- on how we draw inferences from data, etc. Here are three of them: "Science needs much more in the way of prior hypothesis and theory than most [researchers are] willing to admit; there is no way to boil down a mass of raw data into a theory unless we are prepared to take a leap of faith by suggesting (and then testing) some generative mechanism for it." (xiii) "Data cannot be meaningfully collected without a prior hypothesis simply because there is so much of it." (23) "There is no scientific idea so absurd that you cannot find someone with a Ph.D. (indeed often with a Nobel Prize) to support it." (245)


-They also cite Colin and Rosemary Campbell's study of state policy and economic outcomes in VT and NH as a seminal work. Again, I was not familiar with it. (I'm not a big fan of empirical work in economic development, so this is not a literature of great familiarity for me.)