Bottom-up experimentation

The nice thing about having 50 states is that we get to experiment with policies and see what works and what doesn’t.

As individuals, it’s nice to have choices, too. If you’re not happy with your state, rather than struggle to convince more people to vote with you, you can just choose to move to another state that has more attractive policies.

In the Wall Street Journal today, Arthur Laffer and Stephen Moore take advantage of the information we have from the 50 experiments on tax policies to build a persuasive case that lower taxes is good for everyone. I recommend reading, A 50-State Tax Lesson for the President.  Here’s a good snippet:

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Then there’s the question of in-migration from state to state—or how people vote with their feet. As common sense would dictate, people try to move from anti-growth states and cities to more welcoming climates. There are relevant factors other than tax policy, of course (as in North Dakota today, where the oil boom has brought about the lowest unemployment rate in the nation), but in general the most popular destination states don’t have income taxes. That’s as true recently as it was 40 years ago.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. Such interstate migration left Texas with four new congressional seats this year and spanked New York and Ohio with a loss of two seats each.

Warren Buffett IS wrong on taxes

I agree with Stephen Moore’s Op piece in today’s Wall Street Journal.  I hope I may have helped inspire it.

I wrote about a stark inconsistency in the way Buffett values businesses owned by Berkshire Hathaway, the successful holding company he runs, and how he views the taxes paid by these companies here.   In my opinion, the inconsistency is so stark that he deserves the title of hypocrite.

Stephen Moore makes the same point by including the taxes paid on Buffett’s behalf by the company he owns a great deal of, Berkshire Hathaway, something Buffett does not do.

Perhaps I inspired Moore’s view on this.  I wrote to Stephen Moore shortly after Buffett’s 2003 Washington Post article (the text from that email appears below the fold).

Moore writes:

So how does Mr. Buffett arrive at such a low personal tax rate? He may have been referring to a 2010 IRS study of the 400 richest American taxpayers, a list he’s probably on. It showed those people paid an effective federal income tax of 18.1% in 2008.

Yet that study crucially omits the corporate income tax, which is mostly borne by the owners of companies.

Mr. Buffett owns about one-quarter of his investment company Berkshire Hathaway, and his shares are worth about $38 billion. This wealth is mostly stored in what are technically called “unrealized capital gains.” Eventually when those gains are converted into income, he will pay a capital gains tax. Even so, in 2008 Berkshire paid $3 billion in corporate taxes. And since Mr. Buffett is the principal owner, he shoulders a big share of that tax.

Moore goes further to point out that Buffett is wrong on the rates too, higher income folks paid a rate nearly twice as high as middle class families.

According to the Congressional Budget Office (CBO), middle-class families in 2007 (earning between $34,000 and $50,000) paid an effective 14.3% of their income in all federal taxes. The top 5% of income earners paid 27.9% and the top 1% paid 29.5%. And what about the highest earners? Americans with annual incomes above $2 million paid an average 32% of their income in federal taxes in 2005 (the most recent year for which data are available).

Moore also points out that Buffett has been a critic of one aspect of Obama’s tax proposals.

To his credit, Mr. Buffett has criticized President Obama’s near-obsessive calls for higher taxes on corporate jets.  As Mr. Buffet correctly noted, the writeoffs companies take for capital expenditures such as jets are legitimate business expenses.

Buffett’s view here is not surprising.  Berkshire Hathaway owns NetJets, a major provider of corporate jet services.  Hmmm…

One of Warren Buffett’s cardinal investing rules is to not invest in things he doesn’t know much about.  This is understandable.  He has learned through experience that this can be costly.  Apparently, it’s not nearly as costly for him to talk about things he doesn’t know much about.

My 2003 email to Stephen Moore appears below:

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Make it, take it

In the Wall Street Journal Opinion section today, Stephen Moore writes a slightly different take on rent-seekers or freeloaders in his piece called, We’ve Become a Nation of Takers, Not Makers.

His statistics are eye opening.

If you want to understand better why so many states—from New York to Wisconsin to California—are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

And, it’s not just manufacturing.  Moore takes a closer look at states known for other things:

Iowa and Nebraska are farm states, for example. But in those states, there are at least five times more government workers than farmers. West Virginia is the mining capital of the world, yet it has at least three times more government workers than miners. New York is the financial capital of the world—at least for now. That sector employs roughly 670,000 New Yorkers. That’s less than half of the state’s 1.48 million government employees.

Moore goes onto to discuss something near and dear to my heart — managing inputs rather than outputs, which leads to declines in productivity:

After setting the table to show that productivity (i.e. output per employee) has increased dramatically over the last several decades in the private sector, Moore writes:

Where are the productivity gains in government? Consider a core function of state and local governments: schools. Over the period 1970-2005, school spending per pupil, adjusted for inflation, doubled, while standardized achievement test scores were flat. Over roughly that same time period, public-school employment doubled per student, according to a study by researchers at the University of Washington. That is what economists call negative productivity.

But education is an industry where we measure performance backwards: We gauge school performance not by outputs, but by inputs. If quality falls, we say we didn’t pay teachers enough or we need smaller class sizes or newer schools. If education had undergone the same productivity revolution that manufacturing has, we would have half as many educators, smaller school budgets, and higher graduation rates and test scores.

And we may yet see that with innovations like Khan Academy.