Illinois is Economic Road-Kill

Sunday, November 6, AD 2011

This can be considered a companion piece to my worst governor post which may be read here.  The video above  consists of selections from a speech by author Joel Kotkin to the Illinois Policy Institute explaining some of the ways in which the powers that be in Illinois have made the state completely uncompetitive with other states in producing sustained private sector economic growth.  If I were starting out I would leave Illinois.  Nothing good is going to be happening in this state economically for a very long time.  The leadership of the state is completely blind to our problems and promote policies that drive businesses away and sink Illinois deeper in a fiscal morass.  Illinois’ woes are completely man-made, and Illinois, thanks to a majority of the Illinois voters, remains wedded to a model of high government expenditure, hostility to private enterprise and unending political corruption that makes effective reform for at least the next three years a pipe dream.

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23 Responses to Illinois is Economic Road-Kill

  • And to add insult to injury, you’re stuck with the Cubs, White Sox and Jay Cutler. My sympathies, Don. Up here in WI, at least we have the Pack and a contending Brewer team. Plus, Walker’s tough budget moves and restraints on public unions have worked. The budget is damn near balanced and companies are starting to take a hard look at WI for relocation/expansion, bypassing Illinois. If you can stand the harsh winters, come on up!

  • My mother-in-law lives up in Kenosha Joe and we visit her each year in August. If I didn’t have a fairly thriving practice after 26 years effort, I would have immigrated to the Land of Cheese this year!

  • Funny you should bring up this topic, Don, because of late I have begun to contemplate, for the first time in my life, whether it might not be wise for me and my family to move out of Illinois in the long term, say, after our daughter finishes high school (a huge move since neither of us has ever lived anywhere but in central or north-central Illinois and we have no friends or relatives living anywhere else).

    However, it’s not because of the tax increase, economic policy or even rampant government corruption (corruption may be less frequent elsewhere, but it does still happen). It’s because of the state’s apparent surrender to what Mark Shea calls the “gay brownshirts” and the abortion lobby. We’ve all heard about Catholic Charities being forced out of the adoption and foster care business, which is bad enough.

    A few days ago, on another blog (which I unfortunately can’t seem to find right now) I caught a post by someone IDing themselves as a licensed social worker in Illinois, saying they have heard rumors within their agency that the state will eventually require all social workers, as a condition of licensure, to agree that they will refer women for abortions if requested and that they will be willing to place children with gay couples.

    Now granted, this is just one anonymous blog post and it is just a rumor, so nothing may come of it. But I can’t help but wonder if there is a day coming when agreeing to endorse gay marriage and/or abortion will become a condition of state employment, or worse yet, of obtaining teacher certification, and if that happens, then we and all observant Catholic residents of Illinois are really screwed.

    The only question is, where to go? Is Cheesehead Land really a safe refuge, considering that Walker COULD be recalled and the crazy leftists could still take everything back? St. Louis isn’t too far away and looks kind of attractive but their economy, crime rate, etc. don’t look too promising. Indiana, Kentucky or Tennessee I could probably handle but again, not sure what the job prospects are. I don’t handle extreme heat or humidity very well so I’m not considering Texas or Florida or Arizona at this point. Again, all this is just speculating out loud and may never happen but I’d be interested in hearing any ideas.

  • Our poor Illinois is in a sad state Elaine. Long term I am optimistic on both the political front and the economic front, far more long term on the economic front, but short term optimism is not called for. I would probably go for west central Indiana myself, probably just right across the Illinois border as being similar to my beloved central Illinois. I was born and reared in Paris, so I was going across into Indiana all the time when I was growing up.

  • If I had the money and another 20 years, I’d follow Jesse Ventura to Mexico; better yet, Costa Rica. America is no longer the land I grew up in, sad to say.

  • The moral bankruptcy is worse.

    BUT: The bankrupt red states’ bonds must be repaid (from whence they’re killing the private sector?) or refinanced at much higher interest rates (consistent with excessively high default risks). Then, the US fiscal scam will be kaput like Greece, Italy, Spain, Ireland, Portugal have doomed the Eurozone to fiscal and monetary ruin.

    Short everything, except gold and guns.

    Go Jets!

  • I suspect that the blue states’ marriage to their ruinous economic policies is based on
    a belief that if/when the crash comes, the federal government will provide a bailout.
    In other words, the taxpayers of the more prudent states will pick up the tab for the
    negligence and irresponsibility of states like Illinois and California.

    It is a given that by that time, the politicians and bureaucrats responsible for the mess
    will have moved on and up. It will fall to others to clean up behind them, if they are
    even left with the financial means. Illinois will have exported its malaise to the other
    states. In the end, if federal bailouts of failed states happen, there will be nowhere
    in America that one can move to escape the effects.

  • “There will be nowhere in America that one can move to escape the effects”

    Of an economic collapse, yes, but I’m thinking more of a place one can escape the worst effects of aggressive liberal social engineering policies apparently designed to drive Catholics and evangelical Christians out of public life altogether. Or will we eventually not be able to escape THAT anywhere, even in reliably red states? If that’s the case, nowhere in North America will be safe (Canada is way worse in this regard already, and I’m not even gonna think about Mexico until they get the drug cartels under control).

  • Federal monies always come with strings attached. If our betters in Washington
    insist on taking our tax dollars to bail out failed blue states, you can count on
    them insisting that all states must submit to increased oversight and interference
    from the federal government.

    At least, if I were a fellow traveller with this administration, that’s how I’d play it.
    So if I’m anywhere near right, Mrs. Krewer, there will be nowhere in the 50 states
    to run to.

  • (Quietly pondering the destiny of arguably the greatest nation the world has ever seen – slowly slipping beneath the waves? )
    Long term I think (and hope) the USA will return to its core strengths and principles, wnich in many/most states it is failing to do right now. The pendulum swings – where is it right now?
    How many of the US states could well carry the label ” The Socialist Soviet of…………….” ?
    I suspect many more than is good for their economy and longevity.
    The South Pacific – despite our own issues – seems pretty good right now 🙂

  • Way, way too much gloom and doom in this thread! The great thing about man made disasters is that they have man made solutions. Time to roll up our sleeves and fight the political battles that need to be fought. A great start was made in 2010. Pro-life legislation is coming to the forefront in state after state, along with needed fiscal reform in many states. The economic policies promoted by our political adversaries are completely bankrupt, literally, and people are ready to listen to alternatives. This is a time of opportunity if we can only take advantage of it.

  • Sorry, Don, Spengler was right. We’re in the winter of decline. We are no longer one nation, one people. Multiculturalism has taken over and the results are disastrous as Europe is discovering. We will be destroyed by the vandals from within, as Lincoln said.

  • Spengler was as wrong Joe as his turgid tomes were snooze inducing. We are not in decline, any more than we were in decline during our Civil War when 620,000 Americans were killed fighting each other, or in the American Revolution when 20-30% of the poulation fought the British. One good thing about studying real history, rather than that Teutonic pessimism with an historical wrapper that Oswald Spengler was peddling, is that it gives one the ability to step back from one’s time and take a look at it from a broader perspective than is possible of attainment when we view events solely from a current stance.

    (For those wondering who the heck is Spengler?:

    http://en.wikipedia.org/wiki/Oswald_Spengler)

  • We are not in decline.

    Don, choose to ignore all the jeremiads, but as the prophet wrote:

    How doth the city sit solitary, that was full of people! how is she become as a widow! she that was great among the nations, and princess among the provinces, how is she become tributary!
    She weepeth sore in the night, and her tears are on her cheeks: among all her lovers she hath none to comfort her: all her friends have dealt treacherously with her, they are become her enemies.

  • And the Jews are still with us Joe, and Israel has arisen from the ashes. Jeremiads are all well and good for any society, but they tell only part of the story.

  • Don, when you get older you’ll lose your optimism, trust me.

  • I’m 54 now Joe. As I have grown older I have grown more optimistic.

  • Optimism is the madness of insisting that all is well when we are miserable.
    Voltaire
    (not your favorite philospher, I’m sure)

  • Indeed Joe. One of Voltaire’s favorite sayings was: “Lie, lie and lie! Some of the lies will stick!”

    Considering the life that François-Marie Arouet lived, I think pessimism as he neared his personal judgment with God was an understandable reaction in his case.

    I prefer this sally from a sinner, Oscar Wilde, who died repentant and embracing mother Church:

    “Pessimist: One who, when he has the choice of two evils, chooses both.’

  • I realize that Joe is an agnostic so this may not mean much to him yet, but for those of us who are Christians, even the end of the world is not the end of the world 🙂

    It also helps me to remember something C.S. Lewis wrote in “The Weight of Glory”:

    “There are no ordinary people. You have never talked to a mere mortal. Nations, cultures, arts, civilizations — these are mortal, and their life is to ours as the life of a gnat. But it is immortals whom we joke with, work with, marry, snub, and exploit — immortal horrors or everlasting splendours.”

  • Don, Wilde was semi-comatose on his deathbed and a priest was sent for. Apparently baptized as a child, the priest was reluctant to baptize him again but reportedly did so. Whether he was aware of the last rites is in question. This was the same made who uttered:

    ‘I think that God in creating Man somewhat overestimated his ability.’

    Spot on, Oscar.

  • Actually Joe before he became ill he had attempted to go on a retreat with the Jesuits. His desire to embrace the Church was no mere death bed fancy. Here is what the priest said who attended him in his last hours:

    “As the voiture rolled through the dark streets that wintry night, the sad story of Oscar Wilde was in part repeated to me….Robert Ross knelt by the bedside, assisting me as best he could while I administered conditional baptism, and afterwards answering the responses while I gave Extreme Unction to the prostrate man and recited the prayers for the dying. As the man was in a semi-comatose condition, I did not venture to administer the Holy Viaticum; still I must add that he could be roused and was roused from this state in my presence. When roused, he gave signs of being inwardly conscious… Indeed I was fully satisfied that he understood me when told that I was about to receive him into the Catholic Church and gave him the Last Sacraments… And when I repeated close to his ear the Holy Names, the Acts of Contrition, Faith, Hope and Charity, with acts of humble resignation to the Will of God, he tried all through to say the words after me.”

    Here is a good article on the long conversion of Oscar Wilder:

    http://www.catholiceducation.org/articles/arts/al0010.html

  • Interesting read, Don. Thanks for the link. Although I wouldn’t place him in the highest strata of English lit, which would include Dickens, Hardy and Kipling, Wilde is a rung below and left a few masterpieces.

    As for deathbed converts, alleged or otherwise, the list is long, starting with The Good Thief, down through Constantine, Antonio Gramsci (debatable), Wallace Stevens, King Charles II. Others who supposedly “saw the light” at the end were said to include Charles Darwin (though he daughter denied it) and Jean-Paul Satrre (to Judaism).

    Bishop Sheen tells of a deathbed conversion in his autobiography, Treasure in Clay, where he repeatedly visited a dying cancer patient in the hospital who kept telling him to “get the hell out.” Sheen says the man called on Jesus just before he expired, according to a nurse.

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

Thursday, May 27, AD 2010

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.

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

  • 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.

  • 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.

  • 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.

  • I’m liking Governor Christie more each day.

    He should be considered as a possible GOP primary candidate for POTUS.

  • 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.

  • RR,

    Which partly explains why Texas is a much more attractive state for families and corporations… no income tax!

  • 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.

  • Yes, Texas does have a high property tax that Governor Perry has yet to make a significant dent in.

    Though having no income tax could still play a minor if not major role in this.

  • 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?

  • You don’t need high property taxes to keep the poor out – all you need are high property values.

  • 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.

  • 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.

  • RR,

    Good stuff.

    I see what your conveying.

    Though the stereotype of New Jersey is a hard one to let go.

  • 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.

  • “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.

  • 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.

  • 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%.

  • 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.

  • 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. 😉

  • 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.

  • Flocks of flying pigs around Kansas City and Utica. Todd and I agree on something.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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?

  • 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.

  • I don’t see why they shouldn’t be taxed identically. Incorporation costs are covered by incorporation fees. Share liquidity is paid for by exchange fees.

  • 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.

  • If investing with post-tax capital

    I do not care if you paid for your Xerox shares with savings from your paycheck or if you paid for them by selling Kodak shares.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • 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.

  • This is why I support the FairTax. Tax policy makes me crazy.

  • 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.

  • 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.