no third solution

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No Nation Ever Taxed Itself Into Prosperity, Either

November 19th, 2008

The title is a reply to a recent comment on What is an Appropriate Tax Rate?, RG said (tongue-in-cheek) that “No state has ever reduced its taxes to prosper.”

No? Ever hear of a little country called Ireland? I hear they’ve been doing pretty well lately.

RG asked some serious and pointed questions, and like always, I try to respond to thoughtful comments.

[Y]ou analyze NY, MA, and CA taxes on the basis of their income, sales, and corporate tax rates. However, you totally forgot City of NYC taxes for New York (you didn’t think I was using Syracuse as an example, did you?). Additionally, you forgot property taxes (which must be nonexistent where you live, or you wouldn’t have skipped them). The indisputable point is that the places that create our industries also have the highest tax rates.

Those tax rates were the most readily accessible, and required the least amount of interpretation. Can you blame me for reaching the low-hanging fruit? City sales taxes and/or income taxes are generally very low, and moreover, to the specific point I was trying to make, they are applied with some degree of equity, to all businesses and individuals within the jurisdiction. Property taxes are far from non-existent where I live

But you think I chose special cases, so let’s examine: Cali is indeed beautiful. But again, did you think I meant that Cali’s industries came from the lower-tax Inland Empire or central Cali? No, those jobs come from the higher tax coastal and Bay regions. Similarly, NY’s engine of growth is the highest-tax part: NYC (which is also the engine of growth for NJ). I missed your argument about why the high tax rate in MA (specifically, the Boston area) does not drag on growth. In any case, you seem rational so I’d love to see a counterexample of a place with a substantially lower overall tax burden that has created a non-extractive (i.e. mining) industry.

I’m not accusing you of special pleading. On the contrary, I don’t find anything special about the cases you did present. I suspect that high tax rates are generally a consequence of wealth, rather than the cause, as you imply. To your question about lower tax burdens being an engine for growth, despite my complaints, the U.S. has a pretty low overall tax burden so it is not really a surprise that many innovations come from here. Also, have you ever heard of Ireland?

Ireland is currently the second richest country in the European Union, with a per capita GDP higher than that of Germany, France and Britain. But in the mid-1980s, the economy was faltering, college graduates were emigrating, and the outlook was bleak…

Ireland may not have created any new industries, but reducing their overall tax burden sure seems to have helped.


My first point is this: these places create jobs because they are the types of places where people who create jobs want to live. (Incidentally, NYC didn’t just happen to end up as the hub of global finance. They had to work at it e.g. by building subways and schools and bridges.)

Incidentally, multinationals that relocate to India often request larger tax levies from the government. Why? Because wouldn’t it be better if the government built roads, airports, water, sewer, etc.? A software company does not want to build these facilities. Further, it is a waste of finite resources to duplicate them everywhere.

If you’re “requesting larger tax levies” aren’t you really paying for these things voluntarily? Wouldn’t it be even better if multinationals didn’t depend on tax revenues generated by subsistence farmers, in order to subsidize the infrastructure that permits them to operate in these locales? Moreover, many large plants to maintain their own security, roads, water, and fire departments.

My second point is this: society matters. It’s strange to make this argument with a blogger over the U.S.-government developed Internet — obviously you are not very introspective about your place in the world — but I will try. People organize into societies. Those societies have shared values. In our society (let’s call it The Rich World), those values include some notion of addressing Problems of the Commons as well as addressing Common Defense. Any system of human organization that does not address these two fundamental issues will collapse. This is the fundamental characteristic of zero-tax systems.

Oh, I see, because I didn’t recognize that Al Gore invented the internet, I obviously don’t know what I’m talking about? The so-called “problems of the commons” can more often than not, and without too much effort, be attributed to insufficient property rights. This is the nexus of Coase’s seminal work, . Paradoxically, Government should by its very nature, suffer from the tragedy of commons.

I should interrupt myself: you are not at the point of a gun. You may always retire to the other major society on Earth (let’s call it The Developing World) or a non-society (let’s call it Antartica).

So if I don’t like it I should get the fuck out? How thoughtful.

I will not address the question of why a country might need a robust defense mechanism when it is many miles away from any current enemy. Instead, I will leave it as an exercise to the reader (once that reader has become acquainted with the history of World War II).

Do you mean the same World War II that was caused by the crippling war reparations after the Great War? John Maynard Keynes, far from my favorite economist, pretty much predicted the end of that story in The Economic Consequences of the Peace.

I should also add that you are taking very contradictory positions from the outset. One cannot talk about taxes destroying productivity without the willingness to look above the individual level.

I’m not playing this game. Any disincentive to production must destroy production. Tax policy is a disincentive, and it is widely recognized as such: tax alcohol to reduce consumption, tax imports to reduce reliance on them, tax gasoline so we’ll use less of it, etc. Why is it that miraculously, when we talk about taxing income, that people are so quick to assume it has the exact opposite effect?

In any event, I’m not arguing for some Benthamite fiction of “the greater good,” primarily because we can no more measure utility today, than could Bentham in his day. But even if we could, the crux of my objection to taxes is a moral one. This entire chain of posts has been, essentially a tangent.

You also ignored another key point of my questioning, which you brushed away by not wanting to discuss “abstractions” such as economies. (A very odd position for a financial blogger.)

It’s not an odd position, at all. If your income goes up by $50k next year, and mine stays the same, it is intellectually dishonest to assert that our “collective economy” became more productive. There are no national economies. There are only individual economies. You can group them together by whatever arbitrary lines on a map you think are suitable, but the aggregate is generally meaningless.

Anyway, the point I was trying to get across was that obviously a tax rise in NJ did not cause job losses in other states; and it didn’t cause those job losses in NJ either. There was likely another cause for all the job losses (perhaps the rise of foreign shipyards, or a drop in consumption over that period, or poor management at the firms in question, or bad unions, etc.).

I find it perplexing, actually, that you so flippantly dismiss the very real possibility that the luxury tax had anything to do with the Yacht industry’s downfall, a Congressional study, after all, is the source of the figure “7,600”.

If it didn’t cause the loss of over 7,000 jobs nationwide, then why were people were trying to repeal the luxury tax as early as 6 months after it was enacted. Some dealers were reporting sales down 80% or more. Industries dont’ die overnight.

In addition to the FEE publication I linked to initially (here), you’d do well to read a little bit more about the luxury tax and its effects on the yacht-building industry. You can find some information here, here, here and here.

If you’d like to discuss this further, I’d be happy to exchange e-mails with you. You can reach me through the Contact Me link here or at the top of the page.

Comments

17 Comments

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  • Azrael says on: November 20, 2008 at 10:12 am

     

    I wish people who love taxation would personally come to my house without an army of government thugs and take my money themselves. I can guarantee it would not go well for them.

    As for people coming together yes people do come together voluntarily and they usually make small groups with people they get along with. They can also leave those groups without the threat of violence unless it is a gang. Hmmm gangs, mafias, and government you cannot just leave and ignore what a coincidence!

    What we have today is statism the forced grouping of people and violent coercive control by a few humans over many humans. Somehow the few humans are superior and can handle a monopoly of power over the many. Then you have Democracy mixed in with that which is tyranny by a majority.

    Taxation is violence. It is nothing more then a monopoly forcing you to fund it. If we called government Wal-Mart I do not think people would like it if the Wal-Mart forced people to fund it.

    • Engineering Student says on: June 16, 2009 at 3:29 am

       

      I agree with you!

      I would love to add something to this discussion: Everyone knows that every First-World country's government purposely spends more than it's budget, right? In addition, most all of expidentures are for small interest groups whom helped elect said official. For example, Barack Obama, who as you may recall promised to help jumpstart the economy. Well, in case you haven't noticed or don't know. Every measure that his administration has come up with has the exact opposite effect. In addition, as eloquent as the man is: he can not get support behind his *cough* 'plans'.

      So in order to summarize what i am saying: Government's must learn how to spend public money only on such projects that BENEFIT EVERYONE, NOT your interest groups. Thus, leading to the ability to lower taxes to more appropriate or economy stimulating levels.

      (BarackObama READ THIS!!)

  • RG says on: November 20, 2008 at 10:47 am

     

    David —

    Would love to have had an actual intellectual discussion about these topics. I thought that was your interest as well. However, your rather flippant comments about Al Gore inventing the internet (it was DARPA); your total dodge of Common Defense (we don’t need it because we shouldn’t need it); your unwillingness to address the idea that industry creation is different from being an outsourcing destination, among other comments indicate that you’re not interested in any level of intellectual rigor. Which is a pity, really. I believe you have the mental horsepower, but that you are lacking in a desire to push beyond dogma.

    One more point about markets, which you also neglected to address. The GTFO argument you make is ridiculous on its face. Your general position is that people should be free to do whatever they want. So a set of ~300m people decide they want to adhere to a system more or less like the one we have (there are probably about 3m or so actual Libertarians, and perhaps 50k minarchists in the U.S. I am not including them in my rounded population figure). Anyway, you 300m people who control everything around you. They have joined in a biological construct called (excuse my convention here) a “social group.” You further assert your right to be a part of said social group without participating in the obligations thereof. So let’s punt on HOW you get from where you are to magically being an island. Why should we let you ever leave your little piece of island? I would think you’d want to leave if we isolated you to the parts of the world that you own free and clear. It seems that you do want to share some of our things, but not others, and that you are too selfish to admit this to yourself.

    Note: I use the word our not in a socialist sense by any stretch. But I do use it to mean that no one of us living can take credit e.g. for the fact that the U.S. is on the dollar standard, or that we enjoy safe shipping channels, or that there are no territorial conflicts on our soil as is a common occurrence in places with weak central governments. So to that extent, the prosperity that we all enjoy was stolen (to use your word) from others. It’s our choice whether we want to freeload or not, but make no mistake that you have already received.

  • RG says on: November 20, 2008 at 11:01 am

     

    Also —

    Ireland is a very weak example of reducing taxes to get to prosperity. First of all, the marginal individual rate is 41%, which should drive out entrepreneurs. An adversary would also point out the other countries with rates much lower than the countries on the chart here. You would then be compelled to explain why the Lebanese, or the Serbians, or the Chileans, or the Lesothonians, or the Cypriots are not the hotbeds of economic growth predicted by your hypothesis.

    In any case, Ireland is a very good example of the Problem of the Commons (militarily, technologically, and where shipping is concerned, they freeload on the UK, which freeloads on the U.S.). So you can just keep dodging this issue, but if you really want to understand why people choose to organize as they do, you have to have an answer to questions such as why the Europeans all let their militaries atrophy after the rise of the American global war machine.

    I promise that if you play your arguments three or four more steps out, you will develop a more complete worldview. You will also become much better at defending your views. But going to step One and stopping is more or less like being a talking head on TV: fun maybe, but not adding a lot of value.

  • David Z says on: November 20, 2008 at 11:31 am

     

    Did you give up on the 7,600 jobs in the U.S. yacht industry?

    Lebanon and Syria? Oh, IDK, only 50+ years of civil unrest and civil wars. Chile? Ever hear of Pinochet? Not exactly a paragon of virtue.

    Maybe Europe learned their lesson, what with how they lost an entire generation men, in a 30-year period. After their entire infrastructure was destroyed not once, but twice. Maybe they learned the lessons of imperialism. Maybe. Or, maybe they just said WTF, we can just let our American friends fight all our wars for us. So now we have a multinational tragedy of commons, instead of merely a local one. I don’t understand how this is preferable.

    You keep asserting that people are “choosing” to organize in a certain way. Where no alternative is possible, choice does not exist.

  • David Z says on: November 20, 2008 at 11:36 am

     

    What does the Commons problem have to do with a luxury tax on Yachts in 1991? In any event, my principle objection to your catch-all “commons” problem, is that Government itself is the consummate example of a public good, being non-rival and non-excludable. It should also be subject to the commons problem. Why don’t you think it is?

    “It seems that you do want to share some of our things, but not others, and that you are too selfish to admit this to yourself.”

    I’m not sure what the problem with this is: I’d accept as a compromise, the ability to pay for those things I’d like to share, so long as I don’t pay for the things in which I want no part. I’m somehow selfish, because I don’t want everything? Correct me, if I’m wrong (I’m not), but that’s the antithesis of selfish.

  • damaged justice says on: November 20, 2008 at 11:51 am

     

    Where no alternative is possible, choice does not exist.

    I’d rephrase this to “When alternatives are outlawed, choice does not exist.” I can always choose to disobey someone’s orders, though it may not be the wisest course of action. But when prohibitions or commands for specific performance are backed with “the gun of the law”, there is no choice — the end of the flowchart if you disobey is always, “And then they shoot you.”

  • RG says on: November 20, 2008 at 11:52 am

     

    Re: the yacht industry. No, I didn’t give up. I thought it was obvious that the data don’t provide nearly a compelling case. In any case, since we don’t believe in industries here, only individuals, I would think you’d want to supply earnings figures for the 7600 affected workers to show that they didn’t become software engineers making more money. Besides, you never really explained how a tax rise in NJ caused job losses at shipyards in other states. My response is that on the surface, the job losses were more likely the result of Korean shipyards coming on line or adding capacity.

    Besides, a coherent theory needs to explain also why the U.S. and Western Europe created the new industries of the 50s-2000s even though your theory predicts that it should not due to its high tax rates (which have been as high as 91% over this period). In other words, you need to explain why the G8 are outliers to your theory on taxation being a drag on productivity.

    Re: states with lower taxes. You cherry-picked a couple (of bad examples IMHO, considering the unrest in Ireland over the same period. Wouldn’t you want a better counter?) without addressing the others. Once again indicative of an incomplete theory (which should broadly explain them).

    I think you finally get the point that a multinational Commons problem is where we are now, and that therefore the Irish are able to artificially lower their tax rate. But our taxes make their economy possible. If we cut our military to zero, not only would our economy contract due to newly-useless global supply chains, but the Irish economy would likely collapse as the Soviets resumed their long-term expansion. Just saying “now we have a global PoC” doesn’t explain how you plan to solve it under your theory.

    Finally, people do & have had choices in their organization. For starters, the human species are tens of thousands of years old. They have tried lots of organizations over this time. Most have been tossed out. My argument is that you have happened upon an ideology that has been tossed out due to fundamental flaws (i.e. no answer to basic property ownership & economic questions). Some of these organizations are still in use today, but you would generally not recognize them.

    For instance, any failed state basically is a minarchist exemplar. Inside, you have a barter economy (no fiat money), no government (no monopoly on the use of force), no enforceable taxes (who would collect?) and people basically behave according to their own desires (absolute freedom — to the extent that you personally are able to can exercise it). I know minarchists want basic social services like courts, but every failed state proves that courts are useless without a monopoly on the use of force. So even in today’s current market, people have choices. Maybe you’re not of the same stock as our Founders, who crossed an ocean for their ideals (maybe I’m not either). But lots of people do cross borders to choose a system of human organization. And dollars to doughnuts, they do not immigrate into countries with absolute freedom, no governmental monopoly on the use of force, and no enforceable taxes. No, they immigrate into the countries much further on the spectrum toward what you would call “theft” and “socialist.” (I would bet that Afghanistan does not have an immigration problem.) So while you and I may not make the choice to change countries, surely you can recognize the validity of the natural experiments that are world immigration and the history of the human race?

  • RG says on: November 20, 2008 at 12:08 pm

     

    I think you mean that Government is such a problem that it is tantamount to a Problem of the Commons. Surely I can agree that there is a spectrum and we have to cost-benefit it. For most people, the fact that there are not bombs going off in town squares, or Soviets invading through Canada, or whatever, are sufficient benefits to put up with the problems created by government. But of course YMMV.

    I’m not sure what the problem with this is: I’d accept as a compromise, the ability to pay for those things I’d like to share, so long as I don’t pay for the things in which I want no part. I’m somehow selfish, because I don’t want everything?

    Okay, let’s play this out. I opt in to everything provided by the Government. Let’s say I’m on the Premium plan. So I get roads, schools (even though I have no kids), military, etc. You just want the military. Fine, but you pay a much higher rate for the military-only plan. If I were in business, I might set that rate very high. Or, I might not make it available at all, since my organization still has to do all the services anyway. Then, if you ever have kids, I might decide that you owe for the last 28 years of premiums before you are eligible to pay for schools for your kids. Sound ridiculous? Call Comcast and try to get The Discovery Channel by itself. Or try to get Internet service that’s domestic-only (maybe you don’t need to pay for the Asian cable runs that are so expensive). Or try to get car insurance after someone hits your car, or fire insurance while the house is on fire. My point is that the private sector arranges itself this way too. My assertion is that this is the result of billions of individual decisions over thousands of years, with trillions of dollars of wealth hanging in the balance. My assertion is further that unless a competing system can address all these issues with more than soundbites, it will never overcome the hurdle of massive experience & choice on the other side.
    Also, how would you propose the pricing for prisons? Specifically, if you’re on the Government Lite plan with only fire and road access, how do we address the fact that you are freeloading on all the people who pay for the police (by reduced probability of crime against yourself)? Or how do we price the fact that you are freeloading on the unemployment system (which makes it more likely that people will take risks, generating more employment & consumption & wealth & opportunities for you)?

  • David Z says on: November 20, 2008 at 12:15 pm

     

    “Besides, you never really explained how a tax rise in NJ caused job losses at shipyards in other states.”

    My oversight, the Luxury Tax was a congressional act, not a State-specific one.

    You’re way too obsessed with the freeloading/commons problem, you could probably Google some great essays from imaginative authors smarter than I am, who can describe in detail the very way these problems have been in the past eliminated/reduced (see “The Voluntary City”) or theoretically how they may be eliminated in the future (see Tabarrok’s “Dominant Assurance Contracts”).

    Seriously, do you have your own blog? The sidebar here is a terrible forum for discussion.

  • David Z says on: November 20, 2008 at 12:17 pm

     

    Now, you’re asking me to be an expert on everything. You’re asking for an answer to every conceivable problem, and even if I were to answer these, you’d probably dig up another objection.

    “My assertion is further that unless a competing system can address all these issues with more than soundbites, it will never overcome the hurdle of massive experience & choice on the other side.”

    And my thesis is that for most of these services/goods, “competing systems” are outlawed entirely. This is surely a massive hurdle.

  • RG says on: November 20, 2008 at 12:22 pm

     

    David —

    As you address how you would go about pricing of the services I mentioned, please keep two things in mind:

    1) Massive resource contention among competing providers. You should be able to explain how n militaries can coexist in the same airspace, for example, without a referee.

    2) Pricing will be done by a monopoly or oligopoly provider. The size of the spaces and the resource contention will dictate this. Use what you know about monopoly/oligopoly pricing power in a vacuum to address this, and why this is better.

  • RG says on: November 20, 2008 at 12:24 pm

     

    David —

    Good punt. I’m not asking for you to be an expert at everything. I’m raising basic objections to named economic problems. We’re not in esoteric theory here, we’re doing basic pricing and resource allocation.

    But good punt anyway, not addressing that the competing systems are not allowed in Afghanistan, Congo, etc. There *are* states further toward your ideals, you are just ignoring them.

  • RG says on: November 20, 2008 at 12:25 pm

     

    Sorry I meant that the competing systems are allowed in those countries, and further they have been allowed over time.

  • RG says on: November 20, 2008 at 1:10 pm

     

    Nope, don’t have a blog. But I get the hint and will stop posting here.

    But the reason the problem of the Commons/freeloading is an issue is that it’s one of the central issues in human organizing (the other is resource contention). So if you posit a system of organization that cannot address these basic problems, your system is likely broken. Also, if you cannot find exemplars of your system in action, that should also be a red flag. Be careful not to sound like the neo-Communists: our system is great; too bad it’s never been tried in its pure form.

  • David Z says on: November 20, 2008 at 1:37 pm

     

    RG – I’m not suggesting that you stop posting here, only that IMO, the comments section are great for brief convos, but not for long-running discussion, that is all.

    The neo-Communist error to which you allude, is essentially the same error from which proponents of any monopolistic system of organization suffer…

  • Brad G says on: November 21, 2008 at 2:47 pm

     

    Dave

    What are you and RG trying to solve? It sounds like a battle of “I have read more books than you so I’m more qualified.” RG sounds like a politician.

    I think your argument of taxation brings no good is simple enough. There just needs to be a better way to collect taxes instead of just taking it through income taxes or raising taxes on certain products (like yachts). I like a flat federal retail tax. This way the government can only get as big as the market will let it.

no third solution

Blogging about liberty, anarchy, economics and politics