Chris Christie: We Need to Stop the Explosive Growth of Government

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If we are going to get ourselves out of the morass of government debt in which we find ourselves, it will only be due to the efforts of men and women like Governor Chris Christie of New Jersey.

Yesterday he announced how he intends to lead New Jersey out of the fiscal wilderness:

As you all know, we have a fiscal crisis in New Jersey: a $10.9 billion deficit on a $29.3 billion budget.
At 37 percent, it’s the worst budget deficit percentage in America-worse than California, worse than New York, worse than Illinois-and we need to take bold steps to deal with it.

On March 16, we put forward a budget with $10.9 billion in reductions against proposed spending of the Corzine administration.

This was not easy to do, so I want to start off by saying that while I stand firmly behind the cuts we proposed, please don’t take my firm stance in favoring those cuts as meaning that I don’t know how painful they are.

Everybody would love to be governor in a time when you can just give things away and make everybody your friend and make everybody happy.

That’s not the time that I’m getting to be governor.

I feel an obligation to stand up and do what the people elected me to do, which is to get our government under control, and to start to reduce the amount of money that people have to pay to the government in taxes.

But if all we do is cut, and we don’t get at the underlying problem, we’re just going to be back in this spot year, after year, after year.

New Jersey Is On An Unsustainable Fiscal Course

Over the last ten years, municipal spending has grown by 69 percent, and property taxes have grown by 70 percent, until New Jersey property taxes are now the highest of any state in the nation.

This is an unsustainable course.

For nearly 30 years, the citizens of New Jersey have placed in the hands of politicians-mostly politicians from Trenton-the responsibility for fixing property taxes. And in every gubernatorial election since 1973, we’ve had folks dancing around this property tax problem, putting band-aids on it, but not doing a thing to address the structural issues that allow politicians to hike property taxes year, after year, after year.

We can’t increase municipal aid, increase aid to school districts, and increase property taxes without end. At some point, the people’s ability to pay runs out.

And now we’re there.

With property taxes up 70 percent in ten years, people in New Jersey are now voting with their feet, and they’re leaving.

Senior citizens are leaving the homes that they raised their families in, heartbroken because they can’t pay the property taxes anymore.

Young couples can’t buy their first homes, not because of home prices, but because of the property taxes.

And middle class families are suffering from 9.8 percent unemployment in New Jersey, the highest in the region-higher than Pennsylvania, higher than Connecticut, higher than New York. Many of them are finding that after they’ve lost their jobs, they’re going to lose their homes as well, because their property taxes got raised beyond their ability to pay.

In every poll you’ll ever see, New Jerseyans say our biggest problem is property taxes.

So how do we fix it?

The Centerpiece of the Solution: Cap 2.5

First and foremost, we have to impose discipline on every level of the political system. I propose that we start with Cap 2.5, a constitutional amendment to cap property tax increases at no more than 2.5 percent per year.

For 30 years, politicians in Trenton have been passing the buck, and property taxes have gone up and up and up. The people of New Jersey have had enough.

I believe in less government, lower taxes, and empowering local officials who act on behalf of the people who elected them. I came here to do what the people sent me to do.

That may lead to a disagreement or two. Just recently, I had a friendly little exchange with a reporter you might have seen….

But anyone who comes to this discussion talking about “you can’t cut this” and “you can’t cut that” who doesn’t have some way to pay for it besides jacking up property taxes is just joining that pathetic, 30-year tradition of passing along the problem for the next guy to deal with.

When we enact a constitutional amendment to limit property tax increases to no more than 2.5 percent across the board annually, we will have put in place the foundation for getting our fiscal house in order for the first time in a generation.

With that in place, then and only then can we begin to look at doing-in a sustainable way-what New Jerseyans want for urban revitalization, education, and every other big-picture issue.

But first we have to fix the foundation.

Cap the Spending Side, Too

Fundamental fairness dictates that the other part of the constitutional amendment has to be that discretionary state spending-state spending outside debt service or aid to municipalities or school districts-has to be capped at 2.5 percent as well.

We can’t ask mayors to make sacrifices while the state goes on its merry way, spending like always.

We need to stop the explosive growth of government. If the projected spending of the Corzine Administration had been permitted to stay in place for Fiscal Year 2011, over the last 20 years state spending in New Jersey would have risen by 322%. That is 16% per year, every year, for 20 years. No economic model can sustain that level of public sector growth. On the local level this growth has also continued unabated.

Even as we speak, it continues in New Jersey at the local level, despite the economic downturn. Consider this fact. In 2009 we lost 121,000 private sector jobs in New Jersey, while the municipal and school board payrolls grew by 11,300 jobs.

The private sector shrank… while the government grew. That’s exactly backwards from how it’s supposed to be.

The leadership in the State Legislature in New Jersey believes that the solution to this problem is to increase taxes again-for the 116th time in the last 9 years. They passed a bill to raise taxes to 10.75% on those who make $1m per year. I vetoed that bill, literally, one minute after the Senate President handed it to me. I vetoed it because New Jersey does not have a revenue problem; it has a spending and debt problem. I vetoed it because it does not work. Look at the numbers.

In Fiscal Year 2009, the state collected $10.476 billion from our income tax, with no surcharge on small businesses and the wealthy. In Fiscal Year 2010, with Governor Corzine’s surcharge of 10.75% applied to small businesses and individuals, the state collected $10.243 billion. $233 million dollars less than the year without the surcharge. Higher taxes will continue to drive citizens and businesses from New Jersey and keep our private sector job growth at zero, which it was for the entire first decade of this new century.

We must change course.

We must cap the property tax increases. We must cap discretionary spending. They go together.

But that’s still incomplete, because mayors still have to provide services and education.

If they have to operate under a cap, then they deserve the tools to help control the underlying expenses.

That’s why this reform package is not only a cap on property tax increases, not only a cap on discretionary spending-it also contains a toolkit of 33 specific legislative reforms on collective bargaining, civil service, health care, education, and pensions.

Let me take you through these.

The Toolkit: Collective Bargaining Reform

First: Nearly 75 percent of every municipal or county budget is driven by personnel and labor costs. We need to level the playing field on those costs through collective bargaining reform for our public sector unions.

I stand foursquare in favor of arbitration to resolve the disputes with our public employees who do not have the ability to strike-police, fire, and teachers. Arbitration is there to be sure that these things are fairly resolved-and the key word there is “fair.” More often than not these decisions are favorable to labor, but they’re not always fair to the taxpayers who have to pay whatever the arbitrator decides.

So under collective bargaining reform, every arbitrator will have to take into account Cap 2.5. They will no longer be allowed to award a benefit that’s larger than that. For the first time, arbitrators will have to consider not only who’s sitting at the table in front of them, but also who pays the bills.

Municipalities, and mayors, and budgets, and taxpayers… shouldn’t be at the mercy of unelected arbitrators who can effectively impose a property tax increase at will. And under this reform, we won’t be.

The Toolkit: Civil Service Reform

We also need reform of the civil service system. Civil service was set up over a century ago to protect against political patronage, but collective bargaining has procedures to protect against that as well. We should have one system or the other.

Candidly, I think labor is best served by collective bargaining, so we should give mayors the ability to opt out of civil service, and to manage like a business. If someone isn’t doing their job, or that job isn’t needed anymore, the mayor ought to be able to get rid of it, and save the taxpayers the expense. Civil service reform will give them the tools to do that.

The Toolkit: Teachers’ Fair Contribution to Health Care Costs

When we’re taking into account what we spend and how we give raises, we can’t act as if health care expenses and pensions aren’t a part of it. This has been my big argument with the teachers union over the last number of months. You may have heard something about that….

Everyone values the hard work teachers do. And teachers should be able to have good medical benefits for themselves and their families. That’s just common sense.

So this is not about a fight with individual teachers.

This is about a union that has decided that everyone they represent is entitled to free medical, dental and vision benefits for themselves and their families from the day they’re hired until the day they die.

You may think I’m exaggerating.

I’m not.

The union does not pay a penny toward the health care of its own members.

That’s a pretty sweet deal. I can’t think of any other job where your employer says, Well, don’t worry about your health insurance. We’ll just throw that in no matter what it costs. Yet that’s what the union has right now, and their leaders don’t seem to feel any need to pay like the rest of New Jerseyans and join the real world on this.

It’s a question of fairness. We don’t want them to pick up 100 percent of the premiums. We don’t want them to pick up 50 percent. Not 25 percent-which is what I paid when I was a federal employee. Not 10 percent.

You know what we ask for? One-point-five percent of their salary.

One-point-five percent.

It’s not unreasonable to ask people in public employment to pay 1.5 percent toward their own medical benefits.

If the average teacher makes $55,000, we’re talking $825 annually for full family medical, dental and vision coverage. Less than $69 a month.

Now in the private sector, this is a deal employers would run to line up to get.

But the other side on this says this is an attack on public education. I have to tell you, I don’t understand why my child would learn better in school if their teacher was paying nothing toward their health benefits as opposed to paying 1.5 percent of their salary.

Candidly, it’s still a great deal, so this idea that we won’t attract people to teaching because they have to pay 1.5 percent of their salary towards benefits, as opposed to nothing, is just foolish. It makes a mockery of teachers’ commitment to their profession and to their students.

Most people become teachers because they find it so rewarding. Of course they want to make a good living, and have financial security like all the rest of us. But the difference between zero and 1.5 percent is not going to cause a dedicated teacher to leave the profession, or stop somebody who wants to teach from doing it in the first place.

I think when the union makes that argument, they’re selling their members short.

They may, but I’m not going to.

Also, we need to get away from this one-size-fits-all straightjacket about coverage. We need to give mayors the ability to negotiate with the private sector to offer a full menu of benefits that can lower the cost for municipalities, and give workers the choice to pick the health plan that best fits their needs.

This is not revolutionary. This is happening in the private sector every day. It is also happening with employees of the federal government. Why should state and local government workers in New Jersey have a better deal?

This is restoring a little common sense to the way we spend our tax money.

The Toolkit: Pension Reform

On pensions, I want that pension to be there for every police officer, for every fire fighter, for every teacher who’s counting on it.

But our pension system is $46 billion in deficit.

Don’t let anybody tell you that is caused by the failure of the state to stand up to its commitment to fund these pensions. That’s part of the problem, but it’s not the whole thing.

If the state had contributed every dollar it was supposed to over the last ten years, our pensions would be funded at 74 percent of value, instead of 64 percent, which is where they are today. That’s only 10 percent difference.

So what does that tell you?

What it tells you is that the benefits are too high and the contributions being made by many of the public sector unions are too low. We need to buttress the pension back up, make it strong for the folks that are in it now, so that it’s there for them when they come to retire.

A Real-Life Example of What’s at Stake

Now, I’ll end with this so you can really understand what’s at stake here.

Last week, I had a town hall meeting in Hoboken, and I talked to a family-a husband and wife and three boys-who had a property tax increase last year of $2000. That’s an incredible financial hit for any family to take, especially in one year. It’s not as if you can go to your employer and say, Hey, I need another $2000.

If Cap 2.5 had been in place for Joe and Jennifer and their three boys, their property taxes would have gone up only $213, not $2000.

For the first time, Joe and Jennifer’s property tax bill rose about the $10,000 mark.

Instead of paying the mortgage, or a making a down payment on a car, or saving for college, or taking a vacation, or just keeping up with what it costs to live, another $2000 of their paycheck got sucked up in that ten-year, 70 percent increase in property taxes.

We’re long past the point where politicians in Trenton can justify that kind of ever-increasing drain on a family’s income.

With Cap 2.5, there’s only one out if you want to raise taxes higher than 2.5 percent, and that is to put in on the ballot and let the voters decide. That’s what they’ve done in Massachusetts, and about half the time, the voters say, You know what, it’s worth me paying an extra point in taxes this year to have this new program, or to hire more police officers.

The other half of the time, they say no. But the control is in the hands of the people, not the politicians.

New Jersey Needs Cap 2.5

Skyrocketing property taxes hurt seniors, they hurt middle-class families trying to make ends meet, and they hurt young families trying to buy their first home.

Cap 2.5 will cap property tax increases at no greater than 2.5 percent a year for everything: municipal tax, county tax, and school tax.

For 30 years, the politicians in Trenton have failed the people of New Jersey. In the last ten years, those politicians have raised property taxes 70 percent.

We can no longer afford it, and the politicians in Trenton have refused to solve the problem.

Cap 2.5 will allow the people of New Jersey to control property taxes and keep them at no more than 2.5 percent a year, unless the people vote differently.

To fully address the problem, I’ve matched Cap 2.5 with a toolkit of 33 specific legislative reforms to reform collective bargaining, civil service, health care, education, and pensions.

After three decades of passing the buck, we’ll cap increases in property taxes that are wrecking people’s lives and driving people out of our state, and we’ll give local leaders the tools they need to help control the underlying expenses.

We’re going to build a solid fiscal foundation for our state. We’re going to say “No” to those who refuse to understand that the days of something for nothing are over and the days of shared sacrifice are here. We’re going to stand up to the entrenched, special interests that are unused to having the truth told to them without regard to the political consequences. We’re going to stand up for the future of our children and grandchildren-a future in New Jersey that is hopeful, optimistic and full of opportunity and prosperity in a private sector that is growing and a public sector that stops the annual grab for the taxpayers wallets.

The legislature needs to put Cap 2.5 on the ballot this November as a constitutional amendment, and let the people do what the politicians in Trenton have refused to do for 30 years: get out-of-control property taxes under control and, at long last, fix this perpetual fiscal crisis, once and for all.

Thank you.

Chris Christie is living proof that it is possible to elect a politician who not only understands the fiscal crisis that we are in, but who is ready to take the heat to do something about it.  Win or lose, I admire his courage.

Oh, and the teacher berating the governor for touching the sacred cow of education in the video at the beginning of this post?  Apparently she makes over 86,000 a year.

47 Responses to Chris Christie: We Need to Stop the Explosive Growth of Government

  • afl says:

    If only our President and Congress would recognize the spending problem. With our National debt reaching over 14 Trillion Dollars and the interest on debt soon to be I Trillon, when are we going to realise we can not continue down this path before we implode financially.

  • c matt says:

    Texas has a 10% cap (tax assessed property value cannot be >10% from last year). Guess what? Regardless of economic conditions, tax assessed property values magically increased by 10% every year since the cap was in place (over 10 years ago). Perhaps indexing it to inflation would be better.

    at least at 2.5%, it will take a lot longer for taxes to double.

  • Smittytex says:

    Governor Christie, When you’re done fixing things in New Jersey, would you consider moving to Texas to take a shot at our property taxes, please. Best of luck with the unions.

  • RR says:

    NJ’s taxes are why New Yorkers move there. NJ has lower taxes on everything except for property. Parents would rather pay high property taxes and get the best public schools in the nation than pay high other taxes and get NYC schools. High property taxes also keep NJ a relatively wealthy state which is part of the appeal. The dirty secret in NJ is that they want high property taxes to keep poor people out.

  • Art Deco says:

    The dirty secret in NJ is that they want high property taxes to keep poor people out.

    You mean the poor are being kept out of Newark, East Orange, Paterson, Jersey City, and Union City?

  • Median property tax in NJ: 2.4%
    Median property tax in Newark: 1.4%
    Median property tax in Hoboken: 3.3%

    Guess which city has more poor people?

    NJ had the highest median income in the country until 2007 when Maryland overtook NJ by a hair. I’d say NJ is doing a pretty good job at keeping poor people out.

    Jay Anderson, not all taxes are equal. Corporations and middle-class and wealthy families would rather pay property taxes than income taxes.

  • Art Deco says:

    There is considerable variation in per capita income from one state to another, not because there are barriers to the entry of ‘poor people’, but because the aggregate skill sets of populations do vary.

  • Todd says:

    It’s laughable to think either political party will achieve a balanced budget. Bill Clinton is the only major public official to accomplish it as a government executive in two generations.

    Federally, we would have to give up wars and bank bailouts. So much for Cheney and Paulson.

    The Iraq War would have been a much harder sell if citizens and corporations would have had to pay for it.

  • Donald R. McClarey says:

    “Bill Clinton is the only major public official to accomplish it as a government executive in two generations.”

    He didn’t accomplish it Todd, absent games with social security. That he came within shouting distance was due to two factors completely outside his control: the tech bubble that artificially inflated tax revenues for the years 1995-2000, and the Republicans taking over Congress in 1994 that rescued him from his worst fiscal instincts.

  • Art Deco says:

    The Iraq War would have been a much harder sell if citizens and corporations would have had to pay for it.

    Todd, I think about 75% of federal expenditure over the period running from 2001 through 2008 was financed through tax revenues and about 25% through public sector borrowing. Treasury bills, notes, and bonds are sold and traded worldwide, but I believe they remain predominantly the property of residents of the United States. With some qualification, we did pay for it, just not for every last cent.

  • Art Deco says:

    I cannot help but note that military expenditure has over the last decade increased from about 3.5% to 5.0% of domestic product. Federal expenditure has until quite recently oscillated around 20% of domestic product; the increment attributable to the wars in Afghanistan and Iraq would thus amount to 7.5% of federal expenditure. Money is fungible, Todd. We did not pay for the other 92.5% but not pay for this 7.5%.

  • Art Deco says:

    Federally, we would have to give up wars and bank bailouts. So much for Cheney and Paulson.

    Todd, the federal government followed in 1930, 1931, and 1932 a policy of allowing bank failures to be resolved through leisurely bankruptcy court proceedings; the government also elected to ignore a rapid increase in the demand for real balances. Sound money, and all (one of Dr. Paul’s fetishes). Worked just swimmingly.

  • RL says:

    Jay,

    Yeah, but Texas also has relatively high real property taxes (not as high as NJ, but still fairly high), so I’m not sure that’s it.

    Not defending TX property taxes, but dude, they’re a walk in the park compared to Michigan’s. MI has a 6% sales tax and an income tax to boot. I haven’t figured out TX sales tax yet, it appears that for some reason it ranges from 6 to 8% and there is no income tax. Though if you want to travel fast and with little traffic, you’ll likely be paying a toll. ;)

  • Todd says:

    Paying taxes is part of good citizenship. The problem with the tax system, federally, states, and locally is that they trend to unfairness.

    I think Steve Forbes’ idea of a flat tax might have some merit, were it applied equally to big corporations. Have a decently high tax rate, and apply it vigorously once a business or individual achieves a certain level of worth. Small businesses can compete more effectively when corporations like WalMart have to pass on their higher tax rates to consumers–assuming people would even want to pay real prices for crap when they could get better cheaper from places other than China.

  • I think Steve Forbes’ idea of a flat tax might have some merit, were it applied equally to big corporations. Have a decently high tax rate, and apply it vigorously once a business or individual achieves a certain level of worth. Small businesses can compete more effectively when corporations like WalMart have to pass on their higher tax rates to consumers–assuming people would even want to pay real prices for crap when they could get better cheaper from places other than China.

    This would only remotely make sense if you abolished the capital gains tax on securities — it hardly makes sense to tax a company’s profit heavily, then turn around and tax the investors who own the company again because the company had enough money left to pay them a dividend.

    I rather doubt it would have the effect that Todd is envisioning in re Wal Mart, however, in that small companies buy things from large companies, so the small companies would see their costs go up almost as much as Wal Mart. (Though it would make it more attractive to a be a small business owner, would doubtless be a good thing.)

    Also, frankly, the kind of efficiencies that a Wal Mart (or to use less tainted names, a Kohls or a Kroger or a Safeway or a Home Depot) manage to achieve would be very difficult to outweigh with any imaginable tax rate. Fast communication and the ability to build complex data systems to manage efficient supply chains are the things that would need to be banned in order to cripple the ability of large retailers to operate, and I would imagine that most people would not go for that.

  • Art Deco says:

    Yes it does make sense.

    Incorporated enterprises garner the advantages of limited liability; if they go public, they also have access to capital markets. If they seek the advantages of asking to be treating as a ‘person’ as a matter of law, they can pay taxes like one. When I last had to study the question, state corporate taxes were usually quite modest (< 3% of net profits), so a flat assessment of 1/3 of net profits by the federal government would be in order.

    Capital gains need to be calculated appropriately (i.e. an index derived from the GNP deflator applied to the purchase price), but that is a different question.

  • US corporate income taxes are already about 35% on corporate taxable profits, though corporations with taxable income less than $100,000 end up paying much less due to the graduated tax table.

    After paying these taxes, corporations can distribute the remaining profits to their shareholders in the form of dividends, which are then taxed again as personal income (though at a rate somewhat lower than standard earned income or capital gains.)

    Are you and Todd arguing that there need to be significantly heavier taxes at both these stages? Or just that similar rates of overall taxation should be maintained but through a simpler, flat tax system. (The latter I have little argument with, the former is likely to have effects on the economy that most people would not enjoy much.)

  • I don’t think “fairness” should necessarily play a part in debates over corporate taxation. The best reason I’ve heard for taxing corporations at the same rate as people is that it makes it harder for business owners to cheat taxes by taking advantage of lower corporate tax rates.

    Dividends should only be taxed once and capital gains should only be taxed if the principal was never taxed.

    All this can be accomplished by replacing all taxes with a VAT. A digital VAT card, like a debit card, would allow the VAT to be levied progressively. Don’t know if that’s feasible on a large scale though.

  • Mike Petrik says:

    Indded, fairness and corporate taxation don’t go together very easily. Among tax scholars, there are four cardinal objectives of a tax system:
    1. horizontal equity: the idea that people with similar abilities to pay ought to bear similar tax burdens.
    2. vertical equity: the idea that people with greater abilities to pay ought to bear greater tax burdens.
    3. administrability: the system should be administrable as a practical matter.
    4. efficiency: the tax system ought not to affect economic decision-making (i.e., interfer with normal market decisions).

    While mose people agree with these principles, they are tricky to apply with confidence, especially #2. And broad-based corporate income taxes are especially difficult to evaluate under #1 and #2 because the true economic burden (as opposed to the nominal legal burden) is passed on in ways that cannot be reliably understood or identified. Economists agree that the actual individuals who bear corporate tax burdens are the corporations customers, employees, and investors, but no one knows in what proportions, though there is common agreement that the answers depend by industry and are very temporally fluid. In other words, the corporate tax burden is distributed quite randomly and mysteriously, despite its paradoxical popularity. The best policy explanation for the tax is that corporations do burden their communities and must pay for those burdens. There is widespread disagreement among economists as to what extent this is the case. The best practical explanation for the tax is simply that most voters like the idea of sticking it to the corporations and have not figured out that corporations can no more bear a tax burden than a tree or bridge — some living breathing humans pay the tax.

  • Art Deco says:

    Are you and Todd arguing that there need to be significantly heavier taxes at both these stages? Or just that similar rates of overall taxation should be maintained but through a simpler, flat tax system. (The latter I have little argument with, the former is likely to have effects on the economy that most people would not enjoy much.)

    Todd will have to speak for himself. I have run my electronic pen at length in the past on the appropriate manner of calculating tax liability and it seems to bore people silly. Given public expenditure in the range of 35-40% of domestic product, I think an assessment of roughly a third on corporate income (with no deductions or exemptions as they constitute a subsidy to favored business sectors) is about right.

  • Art Deco says:

    Indded, fairness and corporate taxation don’t go together very easily.

    You have three businesses. For one, an impersonal and amorphous set of owners is not liable for the corporation’s actions and holds liquid shares. For the other, a discrete set of owners is liable and holds illiquid shares. For a third, a discrete set of owners is not liable but holds illiquid shares. Do you tax all three businesses at the same rate?

  • Art Deco says:

    Dividends should only be taxed once and capital gains should only be taxed if the principal was never taxed.

    ‘Dividends’ are only dividends once they have been remitted to the shareholder. They are only taxed once as we speak.

    Capital gains are appropriately taxed, and taxed at the same marginal rate as the remainder of your income, if by ‘gain’ you mean an increase in the real value of the property in question, not an increase in the nominal value derived from currency erosion.

  • AD, I think you know what people mean when they talk about the double taxation of dividends. Tax capital to be used for dividends as corporate profit or as individual income, not both. I’d prefer the latter.

    Capital gains are appropriately taxed like the rest of your income only if the principal was tax-deferred. If investing with post-tax capital, a capital gains tax would be inappropriate.

  • RR says:

    AD, it makes a big difference. Taxing the gains from taxed capital favors consumption over savings. Not taxing gains on taxed capital or taxing capital+gains at realization treats consumption and savings neutrally.

  • T. Shaw says:

    Real soon the idiots in congress, bumbledom (you call it bureaucracy), 500,000 “community organizers”, and the public employees’ unions are going to run out of other people’s , i.e., the private sector’s money.

    It’s already happened in Greece, Portugal, Spain, Iceland, Ireland, . . .

    There is weak economic growth because the private sector is being strangled by regulations and taxes.

    Anyhow, dividends are what’s left of corporate net income after taxes paid that is proportionately paid (not retained in the corporation) to the corporation’s owners/shareholders. Then, the distributed net income after taxes in the form of dividends is taxed a second time.

    Forget clueless university economics profs. The real world knows that zero corporate income taxes would result in economic growth and create far more wealth and tax revenues than the present demogogic set up of “tax the evil rich” laws and the politics of class envy/hatred.

  • Art Deco says:

    Ideally, personal income tax liability would be a flat rate on one’s total income less a dollar value credit for yourself and each dependent. People whose computed liability was negative could be compensated by an addition to savings accounts dedicated to expenditures on medical treatment and long-term care. If the funds in these accounts exceeded a certain referent value, the excess remittance could then be forwarded to the tax ‘payer’, but it would (for the able bodied and working age) have to be capped at a particular percentage of earned income lest we remanufacture AFDC and general relief. Everybody faces the same marginal rate, but average rates vary considerably according to income. This is about what Milton Friedman proposed in 1962, and has the added benefit of allowing one to eliminate the miscellany of means-tested subsidies to mundane expenditure that the government offers and much of Medicaid as well.

    If you are concerned about savings rates, you can reduce income tax rates and add consumption taxes to finance the state and achieve policy goals. The United States has been running a balance of payments deficits on current account for 28 years, so concerns of that nature are appropriate. Since consumption taxes are regressive, they should be used sparingly.

    AEI has a discussion of the pros and cons of various proposals for consumption tax.

    http://www.aei.org/outlook/29082

  • AD, the poor need subsidies other than for medical care. I wouldn’t place any restrictions on their use of the subsidies.

    The only problem I have with Friedman’s negative income tax is that it necessarily undercompensates. I’ve come to believe that the poor should be subsidizes out of poverty, not some lesser amount that guarantees to keep them in poverty. Yet, itt would disincentivize work completely if people were compensated 100% of the amount they fell short. The only way can I see to bring everyone out of poverty without completely disincentivizing work is a work requirement, even if it’s government make-work.

    Our current income tax system can easily be turned into a consumption tax system by eliminating the tax on capital gains and dividends. Behavioral economics would still recommend a VAT since it looks more like a consumption tax and therefore would encourage more savings even though its functionally identical to an income tax without capital gains or dividend taxes.

    There are various methods of making a consumption tax progressive. The best method I’ve come across is to have a very high VAT then issue everyone a digital discount card that gives users steep but diminishing discounts with use.

    You link to Bradford’s X-tax. I supported it when it was proposed years ago. Bradford’s the one would thought that corporate taxes should match personal income taxes to reduce the opportunity for business owners to cheat.

  • Mike Petrik says:

    rr,

    If I had more time I’d add more, but I’ll just say this:

    The conversion of our income tax system into a consumption tax would involve something a bit different than exempting capital gains and dividends; it would basically involve (i) permitting a deduction (or exemption) from the tax base for all savings and investments and (ii) requiring inclusion in the tax base all withdrawals from such savings and investments. You are correct to suggest that it could be accomplished by amending our current Code to do this. Think of an IRA system with no limits and no distribution requirements; the taxpayer pays tax as he spends based on his own needs and desires as he discerns them. Progressivity can be preserved via graduated rates. The most controversial aspect of such a system among tax scholars is the treatment of bequests at death (not charitable gifts — those present independent policy considerations). My own view is that such transfers should be considered consumption so that 100% of one’s lifetime income is taxed as it is expended. There are a number of advantages to such a system, but one important one is that it would treat the consumption and saving choice as a neutral one — an objective that is applauded by most economists.

    The expenditure (i.e. broad-based consumption) tax was first developed by British economist Nicholas Kaldor many decades ago, and was promoted by renown Harvard tax professor William Andrews in the 1970s and 1980s. The Reagan Administration seriously considered the idea, but concluded that its economic and policy advantages were not sufficient to overcome political disadvantages. Senator Sam Nunn proposed such a system a few years ago, but it garnered little interest except among academics.

    A negative consumption tax could be developed akin to Friedman’s negative income tax, of course, but would carry with it the same policy and incentive challenges.

    Our current tax system is a hybrid of multiple sorts. For example, the IRA/401(k) aspect makes it partly a consumption tax, just as the earned income tax credit has attrubutes of a negative income tax.

    If you are genuinely interested in tax policy I suggest you pick up the latest addition of “Public Finance” by Richard and Peggy Musgrave. While they lean a bit left in terms of their policy preferences, their text really is the single best source for folks with serious interest.

  • Mike, either would work. Either tax all income then don’t tax capital gains or exempt savings then tax the principal+gains at withdrawal. The methods result in identical tax burdens. As I stated before, besides differences in administerability, the only other difference is perception. People will save more if savings are tax-deferred even if taxing them first and not taxing them later produces exactly the same tax burden.

    Thanks for the reading recommendation.

  • Art Deco says:

    rr, you improve the real incomes of the impecunious by extinguishing their direct and indirect tax liabilities. They are perfectly capable of allocating their income between their various immediate objects. The sticky point is that providing for a selection of contingencies requires one have a longer time horizon than is common in certain circumstances and the consequences of failure to prepare can be ruinous. Public insurance, vouchers, and direct provision are appropriate for medical care, schooling, and legal counsel, not for your weekly grocery bill or your monthly rent.

    Because the marginal rates are equal across all strata, one can invariably improve one’s material welfare by taking on additional working hours, with the cost measured in one’s demand for leisure. It is this last point which renders it generally inadvisable to pass unrestricted cash to people with no earned income, unless they be old or crippled. It was tried from 1935 to 1996. Results not too cool.

    Conjoined to this, it would be helpful if the federal and state legislatures ceased pricing low end labor out of the market with minimum wage laws, mandatory fringe benefits, and means tested social programs. That the Democratic congressional caucus elected this time in history to raise the minimum wage is indicative of deep stupidity or deep indifference.

  • Mike Petrik says:

    rr,
    While either would perhaps work, there is a slight economic difference between taxing all income but deducting net savings versus taxing all income except the return from savings, though both would be steps in the right direction. As for the other distinction, if I understand you correctly (and I may not) the difference between taxing income as it is earned versus as it is spent is far more than perception. It alters the the current savings versus consumption preference calculus. People respond differently to consume or secure 6% after tax return versus consume and secure 4% after tax return. I think we both agree that the current system is not good for saving. I would only clarify that a tax that is imposed on lifetime income as it is expended is economically neutral whereas as the current income tax actually favors consumption. People are encouraged to consume a greater proprtion of their income than than they would in a tax free environment. This is not good tax policy in my view.

  • AD, I agree that people need some spending restrictions but it looked like you wanted to limit all subsidies to only health care. Also, not all methods of subsidy allocation work equally well. Vouchers create sticky prices at the voucher amount. I’d rather cut the poor a check then require that they obtain adequate health care coverage, legal counsel insurance, renter’s or homeowner’s insurance, and education for their children on their own. Cutting general subsidies to pay for them should only be done for those who fail to obtain the required services.

    I’d also agree that we can’t hand out subsidies to the able-bodied without a work requirement. I only wanted to point out that those who do work should be lifted out of poverty, by subsidies if necessary. I do not accept that those who work to the full extent their bodies allow should still live in poverty.

    I think government subsidies are better alternatives to min wages but I’m not convinced the low federal min wage we have does much harm. It’s too low to do much of anything. Illegal immigrants demand more than min wage.

  • Mike, we both want a pure consumption tax. I’m saying the point of taxation doesn’t make a mathematical difference. A sales tax, a VAT, an income tax exempting savings until withdrawn, and an income tax exempting capital gains, dividends, and interest, all produce mathematically identical results.

    Eric Brown, evasion would be too pervasive with a 30% sales tax on top of state and local sales taxes. I wish it weren’t so but the FairTax is simply unworkable.

  • Art Deco says:

    AD, I agree that people need some spending restrictions but it looked like you wanted to limit all subsidies to only health care.

    No, I was suggesting that if you had a negative tax liability, free-to-spend funds remitted to you should be capped at a % of your earned income bar if you were past the statutory retirement age or adjudicated as disabled. Some standardized contributions to savings accounts for medical and nursing care would be the exception to the cap. The indigent under indictment also have a right to counsel.

    Vouchers create sticky prices at the voucher amount. I’d rather cut the poor a check then require that they obtain adequate health care coverage, legal counsel insurance, renter’s or homeowner’s insurance, and education for their children on their own.

    I will have to look up some economic analyses of voucher programs. The only thing I had in mind was vouchers for primary and secondary schooling conjoined to re-incorporation of public schools as philanthropies, a prohibition on charging tuition, and mandatory participation in regents’ examinations. This would act to set a global baseline budget for primary and secondary schooling. Homeschooling families like Darwin’s could cash-out their vouchers for a portion of the family’s state and local tax liability. It would be a liberalization of current practice.

    Again, the only public insurance programs I had in mind were for medical and long-term care. There has been extensive discussion in this forum in the past on better design for these programs.

    I would be pleased if Donald or Blackadder would post their ideas on legal services for the indigent. It has been my impression from reading the newspapers that direct provision by public agency (e.g. the state welfare department) is the least bad way to do this.

    Again, legal services, long-term care, and medical care are subject to somewhat unpredictable spikes in demand over the course of one’s life cycle. Not so groceries, housing, and gas and electric usage, which the government insists on subsidizing as we speak.

    I’m not convinced the low federal min wage we have does much harm. It’s too low to do much of anything.

    They just raised it, and what do you know, we have had a year’s worth of economic growth with no discernable impact on the unemployment rate. Read Casey Mulligan on the administration’s treatment of the labor market. We have had chronically elevated unemployment rates for decades (when compared to what we know of previous decades). Minimum wage laws, benefit mandates, payroll taxes, means tested public benefits, Wagner Act unionism, maladroit health and safety regulations, and employment discrimination law all contribute fragments to this.

  • With minimum requirements (e.g., regents exams) to ensure adequacy, I’m not sure a separate government allocation is necessary. Milton Friedman proposed vouchers as the first step to completely eliminating public funding of education because he thought people will obtain adequate education on their own. I wouldn’t go as far as he does, but for many families (probably most families), vouchers are as unnecessary for education as they are for food or clothing. Admittedly, some families will not spend enough on education. We can measure this by academic achievement instead of by dollars spent. The state can increase the tax liability (or cut free-to-spend subsidies) in exchange for vouchers for those underspending families without doing so for all families.

    Ditto for health care. Mandate adequate coverage with the government stepping in to properly allocate only if the taxpayer refuses to do so.

    It’s possible that across-the-board government allocation for required services like education and health care is cheaper than the “allocator of last resort” approach I outlined above. I’m open to changing my position, if that can be shown.

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