Soak the Rich, Lose the Rich

In the WSJ today, Art Laffer and Steve Moore make a case that I have made in this space previously.
Of course, Dr. Laffer and Steve Moore do a better job of naming their piece.

Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Martin Feldstein, Harvard economist and former president of the National Bureau of Economic Research, co-authored a famous study in 1998 called "Can State Taxes Redistribute Income?" This should be required reading for today's state legislators. It concludes: "Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust. . . . A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees."

Of course, this is sort of an easy argument to make, as high tax and regulation states are hemorrhaging capital and upper middle class inhabitants. Of course, then this tax burden will fall on the middle class. Of course, here we see another case for a flat tax at the state level. If the Feds won't implicate one, maybe the incubators of democracy will. Of course, people will make the argument that if not for these high taxes to redistribute income, how will the lower classes be affected.

Those who disapprove of tax competition complain that lower state taxes only create a zero-sum competition where states "race to the bottom" and cut services to the poor as taxes fall to zero. They say that tax cutting inevitably means lower quality schools and police protection as lower tax rates mean starvation of public services.

They're wrong, and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.

Of course, Dr. Laffer destroys this class warfare rhetoric and puts it into it's place. As always Dr. Laffer is a good read here

School Choice

Another Fine video from my friends at Reason.tv



We can prop up failing industries but can't support a program which actually fucking works. This pisses me off so much. I would like to see some asshole defend this despicable move by the Obama Administration. If my President really wants ideas that work for education, vouchers work. As Twain says facts are stubborn things.

Update

From the Wall Street Journal Today:

See if you can follow this political syllogism. President Obama and his Education Secretary have repeatedly promised to support "what works," regardless of ideology. The teachers unions adamantly oppose school vouchers, whether or not they work. Ergo, Messrs. Obama and Duncan decide to end a D.C. school voucher program that works and force poor kids back into schools where Messrs. Obama and Duncan would never send their own children. What a disgrace.

Read the whole editorial here

The Road to Serfdom

If you have never read F.A. Hayek's The Road to Serfdom, or even if you have, watch this



The site

GM won't go into bankruptcy

From one of my favorite publications The Economist this afternoon Two passages of interest:

IN DECEMBER, when GM secured a large slice of government bail-out funds to keep it alive, the giant car company was jokingly dubbed Government Motors. The company’s latest—and most sweeping—restructuring plan, announced on Monday April 27th, could make the joke a grim reality. GM had until the end of May to present proposals to persuade America’s government to release billions more of taxpayers' dollars to keep it from the bankruptcy court. GM believes it has done the job already with a plan that gives the government a 50% stake in the firm. Now the important deadline is May 26th, by when the company’s creditors are supposed to agree to a deal which treats them far less generously.

This my friends is why Rick Wagoner had to go. No CEO worth his golden parachute would have devised a plan such as this; this makes GM a ward of the state and essentially launders taxpayer dollars to be paid out to the UAW through dividends and the continuing support of taxpayer dollars.

Despite protestations from the White House that the government had no desire to own or run a big car company, the politicians may have little choice but to get involved, if the deal goes through in its present form. The alternative might be to cede control to the UAW, the second-biggest shareholder, which is hardly blameless for GM’s current parlous state. Rumours also abound that a similar deal to avoid bankruptcy at Chrysler would see the UAW take a 55% stake in America’s third-largest homegrown car company. If so, it is unclear whether further concession from unions, if they are needed at the two carmakers, would be easier or harder to extract.

Standing in the way of restructuring outside of the bankruptcy courts are GM’s aggrieved bondholders. GM wants holders of just over $27 billion in unsecured debt to swap it for a mere 10% of shares in the company. If debts cannot be cut by 90% then GM will file for Chapter 11 bankruptcy protection. Bondholders smell an unsavoury deal cooked up between the UAW and Barack Obama, who had the union's support in last year’s election. Early signs suggest that the bondholders may conclude that they will do better to hope for a bigger pay-out in bankruptcy rather than agree to a deal on these terms.

It may be that by announcing the proposals early GM has left time for renegotiation with the bondholders. But the ferocity of their initial disapproval suggests that small sweeteners will not persuade creditors to change their minds. Bondholders face the prospect of a small stake in a clapped out car company run by a union-friendly government with a zeal for green cars that may not have much of a market. With that as an alternative, a gamble in a bankruptcy court may seem quite appealing.

If I were a bondholder in GM, I would hold off and allow them to go into bankruptcy court. Of course, with the way that we saw the FEDS handle the transaction of Merrill Lynch to BofA, the question becomes will the FEDS hold the bondholders feet to the fire in their quest for a "green" car company.

Read the article here.

I believe that this video covers it all.



Video H/T to Iowahawk

The Daily Twain

Always do right. This will gratify some people and astonish the rest.

More people staying put than before.

An interesting piece from the NY Times this afternoon. Two excerpts that I would like to comment on:

The Census Bureau reported that the annual rate at which people moved dipped last year to 11.9 percent, compared with 13.2 percent in 2007 and a recent high of 20.2 percent in 1984-85. It was the lowest rate since the bureau began measuring mobility six decades ago.

The declines appeared to be directly related to the housing slump and the recession.

“It represents a perfect storm halting migration at all levels, since it involves deterrents in local housing-related moves and longer distance employment-related moves,” said William H. Frey, a demographer with the Brookings Institution.

The decline in housing prices, as well as the home ownership rate being higher than ever before, makes it less likely that people will strike out like the Joads looking for their fortune elsewhere. These individuals who currently own homes and are "underwater" would, if they were just renters, strike out to another area of the country. This isn't the case. There is a dis-incentive for these individuals who are upwardly mobile to want to take the hit that walking away from a mortgage would do to their credit score, fiscal situation, etc. It's simple cost benefit analysis. If you rent, breaking the lease is simply monetary. As a homeowner your responsibility is not just the bank, who is the de-facto landlord. It is also to the municipality which collects taxes and other assorted fees from the homeowner for the general upkeep of the neighborhood. In the situation as a homeowner, those who choose to walk away from the home come out in the negative, even if they move to a lower tax and more economically viable neighborhood. Even with the loss of money in the current home owning situation the benefit is in staying in the current situation. Essentially they are trapped.

In 2008, the bureau said, 35.2 million people changed residences, compared with 38.7 million the year before.

People who moved were more likely to be unemployed, renters, poor and black. Those surveyed listed their reasons for moving as housing, family and job, in that order.

In all, 2.2 million people moved to the suburbs last year, while the major cities lost 2 million people.

The South recorded the largest net gain of people moving in, including a large influx of blacks. While the South also drew more children than any other region, it also lost more.

The Northeast lost the most residents of any region, as it has for years, but the West also registered a decline.


Two pieces of this snippet I want to comment on here. First, the south recorded the largest percentage of people moving into the region, while we saw a decline in the Northeast as well as the west. In regards to the Northeast. Here we have a high tax, high regulation block of states which has put the stranglehold on housing(rent control, public housing, subsidized housing, thus driving up the actual cost of housing across the board)as well as business; Also the state budgets grew larger through legacy costs as well as increased welfare payments. Now, the people who are supposedly benefiting from this welfare state are, as Friedman would say, voting with their feet. Also, we see high-income earners moving from high tax states like NY and Massachusetts to lower tax states. These two classes are in essence "going Galt." The social utopia that the do-gooders have created in these states is driving those at the extremes of the income scale out of the states and putting the burden for this ever-growing government on the middle class, who are the real drivers and creators of economic growth. It will be interesting to see how all of this shakes out.

The beginning of Corporate Capitalism

From National Review Online: My man Larry Kudlow

An old friend e-mailed me this week about how to characterize Obama’s economic interventions into the banking and auto sectors (with health care next on the list). He says it’s not really socialism. Nor is it fascism. He suggests it’s state capitalism. But I think of it more as corporate capitalism. Or even crony capitalism, as Cato’s Dan Mitchell puts it.

It’s not socialism because the government won’t actually own the means of production. It’s not fascism because America is a democracy, not a dictatorship, and Obama’s program doesn’t reach way down through all the sectors, but merely seeks to control certain troubled areas. And in the Obama model, it would appear there’s virtually no room for business failure. So the state props up distressed segments of the economy in some sort of 21st-century copy-cat version of Western Europe’s old social-market economy.

So call it corporate capitalism or state capitalism or government-directed capitalism. But it still represents a huge change from the American economic tradition. It’s a far cry from the free-market principles that governed the three-decade-long Reagan expansion, which now seems in jeopardy. And with cap-and-trade looming, this corporate capitalism will only grow more intense.

As always, Larry Kudlow makes some fine points and doesn't break down into mass hysteria or ridiculous populism. Although I would make one point. With the EPA designating carbon dioxide as a green house gas and impending cap-and-trade(which more than likely will not pass in it's current incarnation; I hope)the government will have a dictatorial hand in the day-to-day operations of business. Now, of course this is not a dictatorship in the everyday vernacular; however, what we are seeing is a "market" created and administered by the FEDS which will be oppressive to economic growth. There must be risk that comes with whatever "reward" our new titans of industry in Washington D.C deem is ok. Government should be equalizing the market by setting rules for business to work within that will not stymie growth. That doesn't appear to be the case.

Kudlow; as always a great read here.

The Daily Twain

Always acknowledge a fault. This will throw those in authority off their guard and give you an opportunity to commit more.

A Back door to Nationalization

A Headline from the NY Times, U.S. may convert bank bailouts to common stock:

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

Any person who is worried about undo political influencing decisions about who should and should not be extended credit should shutter at the thought, even implication of bank nationalization. The Obama administration, and the President himself have tried to stay away from any talk of nationalizing the banks as the political hit that will arise from a power grab of this magnitude would sink even his ratings. How does the government "vote" at shareholder meetings? Will congress now be the largest shareholder, pushing aside private capital? These are serious questions that need to be addressed.

Read the entire article here

The Daily Twain

A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.

Reason TV

As always, an excellent video from my friends at Reason.tv

The Daily Twain

I have never let my schooling interfere with my education.