America has “big” problems

The recent election of Scott Brown is just one more opportunity to ruminate over the excessive size of the US government.  In earlier posts I have argued that there are big diseconomies of scale in governance.  Small countries like Singapore, Denmark and Switzerland seem to be more effectively governed that bigger countries like Germany, Britain and Italy.  Why is that?  I am not really sure, but I’d guess it is partly related to the principal/agent problem. 

The US appears to be an exception, but I think we are coasting on our past (decentralized) success.  I wonder how much longer we can maintain our position near the top of the global PPP income rankings.  Today the Heritage Index of Economic Freedom came out, and we continued to slip, down to number 8.  All of the countries ahead of US are small, not just relative to the US, but relative to the UK and Italy.  It’s also interesting to note that all but one were colonies of Britain when Britain was one of the most democratic countries in the world.  The only exception is Switzerland, which is currently the most democratic country in the world.

Right behind us is Denmark.  When you consider that Heritage views taxes and size of government as big negatives in their rankings, what does Denmark’s near-tie with the US tell you about how effectively our “small government” is currently governing.

Just yesterday I thought of one piece of evidence for the inefficiency of big countries.  I was reading an article about how Poland’s new income tax is a model of simplicity compared to the US.  Just two rates (18% and 32%) and far few loopholes.  I don’t know the details, but something tells me that Poland does not require taxpayers to practice their high school math by calculating numerous “worksheets” that have no discernible purpose.

[As an aside, I have to think that the average taxpayer believes the government "must have some good reason" for these worksheets.  If they knew, as I know, that the only purpose is to give work to tax accountants, that they serve no purpose, there would be a revolution.  And please don't insult my intelligence by telling me that these worksheets add progressivity to the tax system.  An identical degree of progressivity can be achieved by eliminating all the worksheets (and the AMT for that matter) and then fiddling with the tax rates.]

Then I started to think about our system.  I have argued that if we were to adopt the European model then all activities done by our Federal government would be downloaded onto the states.  And I recalled that my state tax form is dramatically simpler than the Federal form.  I spend at least 5 times as much effort on the federal form as the state form.  Now you might argue that the federal form must be more complex, because they raise much more revenue.  But it is just the opposite.  Peter Lindert is one of the most intelligent defenders of the welfare state.  And he argues that the higher the tax level, the more important it is that the tax system be very efficient.

For the most part our Federal government does completely different things from the state governments.  The federal government does national defense, space exploration, Social Security, etc.  States do police, fire and schools.  So it’s hard to compare efficiency.  But both do income taxes, and the state income taxes are far more efficient than the federal income tax, just as the income taxes of small countries like Estonia and Iceland are models of simplicity.  (Oops, maybe not a good time to argue for the small country model.  Oh well, you have to take the long view.)

Back to Scott Brown.  This country does not have any sort of consensus as to what sort of health care system it wants.  Libertarians want less government, liberals want more, and the health industrial complex wants expensive health care.  Americans say they are happy with their health insurance, but only because they have no idea how much they are paying for it. 

Because we can’t agree, we end up with a federal tax system and a health care system that are like a giant Rube Goldberg devices.  It’s even worse when the two systems interact.  There is a provision in the tax code that lets you prepay “medical expenses” in before-tax dollars.  But you first must decide at the beginning of the year how many health emergencies you are going to have, and then set aside the money to pay for those health emergencies.  What?  You say you don’t know how many heart attacks you are going to have next year?  Come on, you need to start planning your life more carefully.  Of course in reality people don’t use these expenses for health care, because if you set aside money and don’t use it then you lose the money.  And some people fear they might fail to get sick.  So I use $720 of the money for purely cosmetic purposes, to buy disposable contact lens.  By the way, I appreciate your support; you guys are picking up 40% of the bill.  Even worse, the seller understands the system so rather than giving you a simple price cut, they force you to fill out complicated forms to get a $30 dollar rebate.  This means the taxpayers are actually picking up more than 40% of the net cost.

Sometimes I wish I lived in a small country like Australia or New Zealand (3 and 4 on the Heritage list.)  I am sure they have lots of problems, but surely their tax/health care system can’t be as maddening as ours.

PS.  I don’t know if you guys are interested in the Scott Brown race, but perhaps I should say something about our strange politics in Massachusetts.  Unlike southern states, in Massachusetts the richest towns tend to vote for liberals.  Coakley won Boston (which is a mix or rich and poor) and nearby towns like Cambridge and Brookline by huge margins.  She also won most of the affluent suburbs to the west, even including posh Wellesley, home of Greg Mankiw.  She won affluent Newton (where I live) by 2 to 1.  OK, so Coakley won huge victories in the most urban areas, and also won in the affluent suburbs to the west of Boston.  Then given that metro Boston is 75% of the state, how in the world did a Republican win by 5%.  Not by winning the far west of the state, all those towns also went for Coakley.  The plot thickens.  There are two answers.  Brown won the middle class suburbs north and south of Boston, and also the exurbs further out.  The margins were often large, and the turnout was much higher than in Boston.  And most importantly, he fought Coakley to a near draw in many of the gritty blue collar towns where a Democrat should have a large advantage.  Places like Revere and Worchester are normally Democratic, but have some populist anti-tax instincts.  A number of them voted to completely repeal the state income tax in a referendum held about 10 years ago, even though the proposal was viewed as so wacky that even the Republican Party opposed it.  It came surprisingly close to passing.

Here is a map of the state and vote totals by town, for you political junkies.


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55 Responses to “America has “big” problems”

  1. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 08:20

    The middle class are on to the fact that the very rich are using state power in a war against them, a status war where the very rich are attempting to reduce the middle class to the same ward of the state serf status now held by the disfunctional poor.

    It’s pin head elites with bad elite educations against middle class people with common sense values and principles.

  2. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 08:23

    A lot of the well to do in MA are government funded professors, state workers on fat pensions, and contractors working for the state, I’d guess.

  3. Gravatar of ssumner ssumner
    20. January 2010 at 08:31

    Greg; You said;

    “A lot of the well to do in MA are government funded professors, state workers on fat pensions, and contractors working for the state, I’d guess.”

    I recall that one electrician recently earned nearly $300,000 working for the Mass Turnpike, which needless to say has not yet been privatized.

    Many of the wealthy work in industries like law and medicine, which depend heavily on favors from the state and/or subsidies. But I think it is more than that, I think many wealthy voters actually believe big government is a good thing, regardless of their special interests.

    This post wasn’t arguing against Danish-style big government, it was arguing against American-style big government. Government that is big in absolute terms, not relative to GDP.

  4. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 09:42

    The professional class has absorbed the often brain dead and often morally revolting ideological fashion wear of the professoriate — well autopsied by Thomas Sowell and Shelby Steele in various books. As Sowell explains, it’s something like a religion or “ethical” costume impervious to evidence and theoretical analysis.

    Sort of like much of Ivy League economics. (It’s only a joke because it’s, well, sort of true.)

  5. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. January 2010 at 09:57

    The distinction between Brown and Coakley voters is nicely (if cluelessly) demonstrated by this almost totally self-unaware piece in the NY Review of Books:

    http://www.nybooks.com/articles/23532

    ———–quote————
    Going Rogue is about further cementing her connection to the tribe. A book that begins with Governor Palin visiting the Alaska Right to Life booth at the 2008 state fair (“With their passion and sincerity, the ladies typified the difference between principles and politics”) clearly isn’t aiming to pander to liberal trespassers among its readers. Her encounter with the sincere and passionate ladies, and the jangling false antithesis between “principles” and “politics,” which goes little further than the fact that both words begin with a p, sound the opening notes of Palin’s dominant theme, as she markets her brand of “Commonsense Conservatism.”

    Commonsense Conservatism hinges on the not-so-tacit assumption that the average, hardworking churchgoer, like the ladies at the booth, equipped with the fundamental, God-given ability to distinguish right from wrong, is in a better position to judge, on “principle,” the merits of an economic policy or the deployment of American troops abroad than “the ‘experts’”—a term here unfailingly placed between derisive quotation marks. Desiccated expertise, of the kind possessed by economists, environmental scientists, and overinformed reporters from the lamestream media, clouds good judgment; Palin’s life, by contrast, is presented as one of passion, sincerity, and principle. Going Rogue, in other words, is a four-hundred-page paean to virtuous ignorance.
    ———–endquote———-

    Here’s the author’s bio:

    ‘Jonathan Raban’s books include Surveillance, My Holy War, Arabia, Old Glory, Hunting Mister Heartbreak, Bad Land, Passage to Juneau, and Waxwings. He is the recipient of the National Book Critics Circle Award, the Heinemann Award of the Royal Society of Literature, the PEN/West Creative Nonfiction Award, the Pacific Northwest Booksellers’ Award, and the Governor’s Award of the State of Washington. He is a frequent contributor to The New York Review of Books, The Guardian, and The Independent. He lives in Seattle.’

    Only a guy with that resume could come up with ‘overinformed reporters’.

  6. Gravatar of Doc Merlin Doc Merlin
    20. January 2010 at 10:46

    “This post wasn’t arguing against Danish-style big government, it was arguing against American-style big government. Government that is big in absolute terms, not relative to GDP.”

    And the US government discovers diseconomies of scale.

    Scott, I agree, we need smaller government.

    And on another note, spending is worse than taxes, because spending competes directly for resources individual revealed preferences.

    @Patrick:
    That is the main difference between the progressive movement and the libertarian one. The progressives believe in central planners, experts, and wisdom of philosopher kings. The libertarians believe in individuals, the invisible hand, and in market planning.

  7. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 10:47

    Greg:

    “A lot of the well to do in MA are government funded professors, state workers on fat pensions, and contractors working for the state, I’d guess.”

    The level of disinformation in this claim is staggering – the average starting professor (assuming one can get a job; many are adjuncts these days) earns ~50k. One is generally better off with a 2 year nursing degree, and that doesn’t even control for innate talent.

    Regarding state/federal employment, Massachusetts (like most wealthy liberal states) transfer far more to poor uneducated Republican states (like the deep south) than it gets back. One can complain as much as one wants about California, but every Californian – the Governator included – is angry about the net wealth transfer.

  8. Gravatar of Doc Merlin Doc Merlin
    20. January 2010 at 10:48

    Typo:
    should read: “for resources with individual revealed preferences.”

  9. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 10:58

    When you looked at Obama’s funding sources in 2008, what popped off the map was all the money going to Obama from the government dependent leftist professors.

    My thesis about the power and status war of the elite and the wealth against the private economy middle class would gain support by a mapping of the vote total against Brown coming enclaves where trust fund babies do their voting.

    Who votes on Martha’s Vineyard? The guilt ridden and “fasionable” leftist rich, or university created cultural leftists, or middle class and working class Americans working mostly in the private economy. What part of the Island do the servants live on?

  10. Gravatar of azmyth azmyth
    20. January 2010 at 11:15

    I heard this story secondhand from one of my professors, and I thought I might pass it on. A few GMU professors were sitting around pondering why the tax code is so complex. Complexity does not add progressivity, efficiency or anything useful to society as a whole. James Buchanan walked up to the group and explained that the reason tax codes are complex is because politicans like them complex. It gives them a lot of favors that they can hand to constituents. However, when the tax code becomes too complex, all the favors have already been handed out, so politicians have nothing left to give. They then dramatically simplify the code and start handing out favors again. Any political system is bound to flucuate between simple and complex tax codes.

    How high the “waves of complexity” go is determined by how much independence Congress has from voters. In small countries, politicians must be far more responsive to voters, so the tax codes never get as complicated.

  11. Gravatar of D. Watson D. Watson
    20. January 2010 at 11:17

    The Cornell rag reported during the election that Obama donaters from the school outnumbered McCain donaters almost 50:1.

    September 25, 2008:
    “As of yesterday, over $92,000 of Obama’s campaign money came from 143 of Cornell’s professors and administrators; only three chose to give money to John McCain, totaling $1,300.”

  12. Gravatar of Rolling Ball Rolling Ball
    20. January 2010 at 11:21

    The New Zealand tax system is a little crazy. We have 4 tax brackets, the highest being over $70,000 (~ USD$50,000), where we get taxed 38%. Our tax rates are being looked at right now with thoughts of lowering them. Having said that the NZ system is alot easier to understand then the maze of US taxes.

  13. Gravatar of S. Paradis S. Paradis
    20. January 2010 at 11:39

    Isn’t the main problem how corrupt/dishonest and ineffective all politicans–both Democrat and Republican–are?

    Although Coakley barely ran a campaign (who seriously would have thought a Republican could have won?), I honestly believe the public is sick of all the nonsense that goes on in Washington and gets put into the bills–specifically the HCR.

    But, I think Obama disheartened a lot of people because of the high expectations he set for himself, and how far to the left he actually went. America is a center right country and unless we get a leader that actually governs as a moderate this mess will continue to go on (see Clinton after 94).

    As for the size of government…I studied abroad in Denmark and it’s definitely a good system for them. Denmark is a very homogenous country (I remember hearing the work ‘clan’ a lot) with similiar mentalities. I don’t think it’s in the American culture to adopt a system like theirs. U.S. need a limited federal government and run w/ the efficiencies state governments can provide.

    And one of the best thing about the U.S. is labor mobility which the E.U. doesn’t have due to various reasons. If you prefer one state over another (e.g. right to work vs. unions)…it’s pretty easy to move there!

  14. Gravatar of Lorenzo from Oz Lorenzo from Oz
    20. January 2010 at 11:40

    The Australian tax code is ludicrously complex: make of that what you will.

  15. Gravatar of malavel malavel
    20. January 2010 at 11:42

    Declaring your taxes couldn’t be simpler in Sweden. You get an envelope with the state’s calculations and a code. If you accept the state’s calculations you can SMS the code or go to a web page to accept. That’s what I do every year. I’m too lazy to make sure that they calculated correctly.

    azmyth, that’s something I suspect is going on in Sweden for taxes on small business owners. Every 5 – 10 years there seems to be a big ‘Oh no, the tax system is too complicated. We need to simplify things.’ And between those events there’s always important exceptions that have to be implemented to make the system more fair or better in some other way. So each year there are new rules that people have to learn.

  16. Gravatar of Chris Chris
    20. January 2010 at 11:50

    I think another reason for all the worksheets in the U.S. is that they allow people to “find” extra money for their tax refund, kind-of like a prize. This makes people more complacent with the tax system because this, combined with the fact that people don’t pay taxes directly due to withholding, makes tax day feel like big windfall.

    In contrast, if we had a simpler system where there were no deductions and hence very few and low refunds, people would quickly get upset regarding the amount of taxes they are paying which might force the government to actually shrink. And, we can’t have that now, can we?

  17. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 11:56

    On Mass politics:

    Most outsiders, and many insiders, don’t understand Massachusetts politics. Lots of people think Mass is a liberal state. Hardly. Mass is a Puritanical state. I’ve tried to convince people of this, but they never believe me.

    Look at how we dress compared to how people dress in Florida (even during the summer). Observe how personal consumption manifests in Boston vs. Dallas or California. The wealthy in this state (and there are plenty) do not flaunt wealth in the same way. It’s considered gaudy. The wealthy here socialize with lower classes because they morally believe in egalitarianism – it’s an expression of their magnanimity. The wealthy elsewhere segregate themselves to reinforce status.

    Why does Mass spend on social services? Because it believes in the same puritanical principles that the Puritans believed – prison is for reform, not punishment. Hence, it doesn’t like to send people to prison because prison tends to make them worse (unless they are irredeemable).

    http://filipspagnoli.files.wordpress.com/2009/08/per-capita-incarceration-rates-by-us-state.png

    The goal of society is to encourage individual salvation. (Mass never warmed up to evangelicalism because of its gaudiness and obsession with personal-relationship-with-Jesus, in the words of Kerry – he didn’t “wear his faith on his sleeve”)

    One might think Mass is liberal when it comes to race. Hardly – it’s hard to imagine a whiter state. Don’t believe me? Look here:

    http://www.censusscope.org/us/map_nhwhite.gif

    But really, we don’t judge a person’s race by the color of one’s skin; we judge them by the quality of their diction. In that context, Obama was all wight. Even Senator Reid commented to that effect. Reid would fit in well in Massachusetts.

    One would think Mass loves high taxes… except that we rank only 23rd in the nation, right behind other ‘liberal’ bastions like Oklahoma and Utah… Go check where your state ranks:

    http://money.cnn.com/2009/04/10/pf/taxes/state_tax_rates/index.htm

    (Hint: If you teach at George Mason U and nearby, you pay more in state taxes than I do.)

    Indeed, we frequently elect Republicans at the state level on anti-tax/pro-reform platforms (Romney recently, until Bush II destroyed the Republican brand in the state). Mass’ rejection of most republicans stems mostly from recent insanity at the national level.

    What does Mass believe in? Science, knowledge, personal chievement… for these reasons it is more secular. (look up data on weekly church attendance and certainty in existence of god) It believes in local government. (We still run our town at town meetings – does your municipality?)

    Mass doesn’t believe in _big_ government, but it _does_ believe in technocracy (and local control at the same time). Mass also believes in hard work… why did Mass vote for Reagan twice? Because it detests the notion of welfare abuse.

    I’m not surprised by Brown winning – people here are ticked off. The progressives feel betrayed and taken for granted (they supported Obama – did the ethnic vote turn out for Coakley?). While Brown ran Change adds, Coakley ran a bunch of pro-choice adds (people in mass are pro-choice, but lots of them are catholic too, and don’t like being reminded they are pro-choice). The centrist/moderate dems are frankly ticked off at Obama’s unbelievable incompetence and failure to live up to the main centrist goals he focused on – energy policy, infrastructure, trade, restoring fiscal responsibility, etc. They are pro-reform in health care, but favor efficiency reforms, not generous extensions of benefits that are paid for by more taxes on upper middle income folks (which _disproportionately_ hits Mass voters). They’re well aware that Obama’s health care plan amounts to a transfer of wealth from Mass to Nebraska, and they did not appreciate it one bit. Nor did they appreciate the sellout to insurance companies, or the widespready bailouts. (Which _they_ did not benefit from; indeed, a disproportionate number of middle income Mass voters were above the income caps for the homeowner first time buyer subsidy – yet more out of state transfers.)

    So no, Brown’s victory doesn’t surprise me.

  18. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 12:04

    How about this.

    One reason we have a complex tax code is for the same reason we have grocery coupons and product rebates. This system price discriminates against some and provides hidden rewards to a select group of others, rewards mostly unknown to those who are paying full price.

  19. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 12:07

    Greg:

    “Who votes on Martha’s Vineyard? The guilt ridden and “fasionable” leftist rich…”

    Which is why Wall Street millionnaires defected en masse from Bush II and disproportionately supported Obama? I think you are seeing what you expect to see in the data, not what is actually there. The stereotypical view of Mass politics is not accurate.

    I left a comment on the topic which (predictably) hit the link filters. The truth is, Mass is not a “liberal” state as many pundits would define it.

  20. Gravatar of OGT OGT
    20. January 2010 at 12:07

    On the other hand Defense has a substantial economy of scale, and while that may not seem important now, in the long term has been quite important. My only objection to a disaggregation of the US is loss of mobility and increased transaction costs. As long as we stayed in a free passport zone and free trade zone, with a common defense, and without a common currency, I see no problem.

  21. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 12:08

    Greg:

    “One reason we have a complex tax code is for the same reason we have grocery coupons and product rebates. This system price discriminates against some and provides hidden rewards to a select group of others, rewards mostly unknown to those who are paying full price.”

    That is absolutely true. It is a non-transparent way of conducting subsidies, transfers, bailouts, etc. And the comparison with grocery coupons is an excellent one.

  22. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 12:13

    MA has long believed in robbing Peter to pay Paul — not part of the Puritan code.

    This is the game all the national MA Dems have played.

    Can you say “Big Dig”?

    Can you say Barney Frank / Fannie Mae / Barney Frank / Fannie Mae, repeat, repeat, repeat.

    Can you say “professor dependent of government money”?

    Can you say government union worker?

    The Puritan tradition was put in the ground a long time ago.

    Check out John Adam’s Unitarian Church on the web to see what has become of “Puritanism” (which was fading even in Adams’ day, as his Unitarian faith attests.)

  23. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 12:18

    OGT:

    “On the other hand Defense has a substantial economy of scale…”

    This is patently false.

    DEFENSE does not have a substantial economy of scale. This applies both to repulsion of hostile elements that attempt to pacify our nation, and to large scale assaults.

    In the former case, a sufficient supply of small arms is capable of neutralizing a vastly more expensive array of weapon systems. $50 billion could equip the US population to repel any number of tanks using inexpensive mines, shoulder launched rocket systems, high caliber infantry weapons, and other small arms. Armories filled with such weapon system could, and have historically, been distributed around the US and held in state armories against such a contingency.

    In the latter case, we have (even after system reductions) a vastly larger nuclear arsinal than is necessary to destroy any enemy many times over.

    Perhaps you meant to say that OFFENSE has economies of scale. Power projection has economies of scale. Tactical first strike stealth weapons systems have economies of scale. And these systems are necessary to the extent that we are _dependent_ on other countries. Large, complex, _offensive_ weapon systems are a cost of a globalized interdependent economy.

  24. Gravatar of malavel malavel
    20. January 2010 at 12:27

    Puritanism: that haunting fear that somewhere, someone is having a good time.

  25. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 12:28

    Greg:

    “MA has long believed in robbing Peter to pay Paul…”

    Wow, there is a certain vehemence and anger in your tone. I take it then that you hate Massachusetts?

    In any case, your beliefs are yet again contradicted by the data:

    http://www.taxfoundation.org/UserFiles/Image/Blog/ftsbs-large.jpg

    The Big Dig was peanuts compared to the amount of Federal largesse a state like Virginia or Mississippi absorbed. Mass got back 77 cents on every dollar it pays. Virginia got back $1.63. Mississippi? $1.77

    There is a huge correlation between net beneficiaries of federal largesse and propensity to vote Republican.

    How, exactly, does that fit into your cognitive worldview?

  26. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 13:39

    StatsGuy, I have nothing against MA. I see a system set up by classical liberals which has become a mechanism for producing non-liberal ends. Folks in every state in the union participate in this system — MA is only noteworthy for playing such a leading role in absorbing and then propagating ideas taken from Germany and France long ago for attacking and marginalizing classic liberal values and principles.

  27. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 13:47

    It’s a really dishonest game to put on me the burden of justifying the Federal spoils system in Virginia, Mississippi or supported by this group of Republicans or that, StatsGuy.

    I don’t play this “my team” homer advocacy that dominates so much of public discourse.

    And there is all sorts of stuff you are hiding here, e.g. the very different issue of appropriate levels of defense spending, and how those dollars get spent.

    Virginia is a home to the central Federal Government and the Defense department. Pretending it isn’t a special case is dishonest.

  28. Gravatar of Simon K Simon K
    20. January 2010 at 14:24

    Greg, VA may be a special case, but the state-level pattern is consistent. Blue states tend to be net payers to the federal system. Red states tend to be net payees.

    I’m interested in how this can be the case if the propensity for blue states to elect liberals is due to those most dependent on government spending voting their self interest. If that were true, voting patterns would be reversed, no?

  29. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 15:02

    Greg Ransom:

    “Virginia is a home to the central Federal Government and the Defense department. Pretending it isn’t a special case is dishonest.”

    That is true, and it was not fair of me to construct a straw man out of your arguments. Some of the other states that absorb federal largesse, like New Mexico, have similarly unique characteristics (Los Alamos & Sandia Labs, various Air Force Bases, various native American reservations, etc.)

    On the other hand, it is indisputable that the progressive federal tax system and the non-location-adjusted means-testing transfer systems move huge amounts of money from liberal states to conservative states – even after accounting for special appropriations.

    The truth is almost always more complicated than it seems, and I acknowledge this. But the truth about Massachusetts is similarly complicated, as Scott Brown’s election just demonstrated.

  30. Gravatar of OGT OGT
    20. January 2010 at 17:35

    Statsguy- I was referring to the resources provided for military use of being a continent sized economy, whether that’s for deterrence or force projection. It certainly will be an interesting test as to the stability of globalization as the US’s relative economic and military power declines.

    I quite agree with you on the effect of nominally denominated tax rates on high income/cost states like MA and NYC. NYC’s per capita PPP GDP is about average, but because of the high cost living the effective tax rate is approximately 46% higher than average, the figure is 24% higher in MA. Another point in favor of breaking up the Union, or at least reforming the tax code.

  31. Gravatar of Peter Whiteford Peter Whiteford
    20. January 2010 at 17:36

    Poland may now have very simple income taxes but it also has 13.7% employee social security contributions, 18.5% employer contributions and a VAT where the standard rate is 22%.

  32. Gravatar of StatsGuy StatsGuy
    20. January 2010 at 18:25

    “I was referring to the resources provided for military use of being a continent sized economy”

    In that context, yes – I misinterpreted. But I think the bigger issue is that national defense is a public good. You can’t protect the country without also protecting me, even if I don’t lift a finger.

  33. Gravatar of ssumner ssumner
    20. January 2010 at 18:33

    Greg, I think progressives are well-intentioned, but lack a sophisticated understanding of economic incentives.

    Patrick, The NYROB is one of the few publications I subscribe to (along with The Economist, and Reason.)

    The problem with their economic articles is that they don’t adhere to their own views, which is that the Bush admistration relied too much on people whose only credentials are ideological conformity. They publish all sorts of articles on economics written by people who have little knowledge of economics. Their only qualification seems to be ideological purity.

    I agree that they consider most conservatives to be either fools or knaves, although that problem occurs on both sides of the spectrum, to some extent.

    I haven’t read the Palin book, so I won’t comment. My advice to the Republicans would be to look for a Reagan- type candidate; someone with Republican values, a good personality, who was also fairly well read. I’m not sure Palin fits the last part of that description. But she’s still young.

    Doc Merlin, I agree.

    Statsguy, I agree.

    azmyth, Yes, but the worksheet items usually don’t favor any special interest group. It is simply meaningless complexity. Yes, you could always say the tax accountants are a special interest group. But no matter how cynical I get, there is still something breathtaking about Congress sitting down and trying to add needless complexity merely to make it harder to file taxes. Perhaps that is the reason, but being a charitable guy I prefer to think that Congressman are simply REALLY REALLY STUPID. I’d hate to think they are that evil.

    D Watson, I am not surprised,

    Rolling Ball, Assuming you have no local income taxes, your top rates are lower than ours. ButI do think you should lower them further. If you want to maintain progressivity, raise a payroll tax on the rich to offset. Does New Zealand have a payroll tax?

    S. Paradis, Yes, we are a center right country, and we need more decentralization. Unfortunately our last president (who was supposedly a right-winger) seemed to believe in more centralization.

    Lorenzo, I’ll wager ours is ten times more complicated. Do you have to fill out all of yoru tax forms, get to the amount you owe, then start all over with completely different tax forms, again figure out how much you owe, and pay the higher amount? I can’t believe any other country is as stupid as we are. I’ll bet even North Korea doesn’t have an AMT. Any North Korean readers out there who care to comment?

    malavel, Sweden sounds like paradise. I agree that the government should simply send you a bill (unless you run a business.) I actually think our system is unethical. I don’t think the government has a right to tell you to figure out how much you owe, unless they provide clear instructions. When I’ve called the IRS with a question, the person on the other end often doesn’t understand the code either. “Void if vague,” I think that used to be English common law. And tax protesters out there?

    Chris, Yes, I know people like that. I like to remind them that they are bragging about making an interest free loan to the government. Over my lifetime I have made $1000s in profit by underpaying my taxes, and then paying the ridiculously small penalty (often 1% or 2%) In good years I’ve made 40% on Asian mutual funds with the government’s money.

    Statsguy#2, There are 2 definitions of liberal; libertarian and utilitarian. I believe the liberals are best described as utilitarians, and hence I believe this is a very liberal state. They are Puritans for utilitarian reason, not religous reasons, as you say.

    I don’t think the attitudes here are particularly egalitarian, but perhaps that’s because I grew up in Wisconsin, which has some of the most egalitarian attitudes in the country. It seems to me that people here are snobbier than in the Midwest, and tend to look down on the less well-educated. And they don’t want poorer people moving into their neighborhoods. Many of the beaches are even private, something almost unheard of in the Midwest.

    But I agree with most of your description. Your last paragraph is much better than I could have written as I am less tuned in to things around here. I will always be an outsider.

    BTW, I think the very decentralized political structure here keeps taxes down. Town government. In addition, people move around less than out west, so they develop deeper ties to their community, and are more heavily involved in governance. Our neighbor to the north has the best governance in America.

    Greg, Yes, it is like price discrimination.

    Statsguy, Yes, and the rich split almost equally between Bush and Obama, which is a pretty good result for a Dem.

    OGT, That is what I proposed in an earlier post, that we become like the EU, but keep a common currency, free travel, common defense, etc.

    Everyone, I agree the poorer states get more back from the Federal government, and also that they tend to be red. But here is a question: Suppose the military spends $100 billion putting nukes in North Dakota. Does that money actually benefit North Dakota as much as the raw numbers would suggest? Do the numbers reflect income to residents, or do they include costs that are for materials from out of state? And isn’t there a difference between cash tranfers, and payments for services rendered? Still, in the end the red/blue gap would probably still be there, people in places like Mississippi simply don’t pay as much income tax, as their incomes are lower.

  34. Gravatar of ssumner ssumner
    20. January 2010 at 18:36

    Peter, Thanks for the info. A 32% payroll tax combined with 22% VAT is pretty steep. Why do the French and German’s think Eastern Europe has low taxes?

  35. Gravatar of Peter Whiteford Peter Whiteford
    20. January 2010 at 19:26

    Believe it or not, combined French payroll taxes start at 63% -although they fall to about 32% on incomes over 133000 Euro and their VAT is just under 20%. German combined payroll taxes are just under 40% and their VAT is 19%.

    Its all at http://www.oecd.org/document/60/0,3343,en_2649_34533_1942460_1_1_1_1,00.html

    I think that what’s probably more important is low wages in Eastern Europe, however.

  36. Gravatar of Eric Crampton Eric Crampton
    20. January 2010 at 19:31

    NZ health system reasonably simple. Public system rations by queueing and difficulty of getting to see a specialist. But private insurance is dead cheap: I pay less for health insurance (high deductible) for me, wife, and kid than I do for our telephone/internet.

    Pregnancy is covered under the public system, but if you want an obstetrician instead of just a midwife and you don’t have any particular medical need for one, you pay out of pocket. But $3K covers the obstetrician, and you don’t have to pay bloated insurance premia all the years you don’t need an obstetrician.

    I’ve never had need to actually try using our (high deductible) health insurance, so can’t vouch for how well that works. Small ticket stuff like GP visits you pay out of pocket and throw out the receipt unless you’re expecting to hit your deductible.

    If a company offered health insurance as a job benefit, it would be subject to fringe benefit tax like any other fringe benefit. Very nice system.

  37. Gravatar of Rolling Ball Rolling Ball
    20. January 2010 at 19:40

    We have a PAYE which tops at 38% on top of that we have GST of 12.5%. There are talks of lowering our top payroll rate to 33% then raising VAT to 15%, along with closing some loop holes to fund this. I would like to see a bracket of NZD$100k+

  38. Gravatar of Peter Whiteford Peter Whiteford
    20. January 2010 at 19:54

    Neither New Zealand nor Australia have social security contributions and their (flat rate) benefits are funded from general revenue. Australia has compulsory private pensions funded by a 9% levy paid by employers.

  39. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 21:05

    Michael Barone on MA voter demographics:

    http://www.pjtv.com/video/InstaVision_With_Glenn_Reynolds/InstaVision_READY/2972/

  40. Gravatar of Michael M Michael M
    20. January 2010 at 21:10

    The Blue-state->Red-state transfer isn’t that complicated. Poor, rural Americans disproportionately vote Republican, while because of their poverty they qualify for Federal aid.

    Meanwhile, the wealthy, urban Americans vote Democrat but because of their wealth they don’t receive as much aid.

  41. Gravatar of Greg Ransom Greg Ransom
    20. January 2010 at 21:13

    Scott writes,

    “Greg, I think progressives are well-intentioned, but lack a sophisticated understanding of economic incentives.”

    I used to believe this. I no longer do.

    And I’d suggest the key thing that is not understood isn’t incentives, what is not understood is the grounding of extended social cooperation in general liberal principles and the coordination function of prices. And a complete failure to understand how unprincipled expediency promising “social justice” threatens and undermines both.

  42. Gravatar of Doc Merlin Doc Merlin
    20. January 2010 at 23:33

    @Scott
    “Statsguy#2, There are 2 definitions of liberal; libertarian and utilitarian. I believe the liberals are best described as utilitarians, and hence I believe this is a very liberal state. They are Puritans for utilitarian reason, not religous reasons, as you say.”

    I disagree with this. Libertarians like David Friedman are utilitarian. As a matter of fact many utilitarians I know are libertarian. I think your dichotomy is a false one.

  43. Gravatar of malavel malavel
    21. January 2010 at 00:55

    Doc Merlin, David Friedman claims that he isn’t a utilitarian.

  44. Gravatar of OGT OGT
    21. January 2010 at 05:58

    Prof. Sumner- I would be fine with that, except for the common currency. It would be unfair and inefficient to tie places like Michigan to an inappropriate monetary policy without fiscal transfers. Or commodity dependent places like Lousianna. The EU is certainly giving us a lesson on that.

    Though David Beckworth recently suggested that use of the discount window by regional Fed banks could differientiate monetary policy for local conditions.

    On the nominal tax rates, one of the smarter things Brown did was stress the net transfer a health care bill would take from MA. If north east Republicans could untie themselves from the southern cultural reactionaries and make that point consistently, which the late Pat Moynihan used make as well, they’d be able to make significant progress up here.

  45. Gravatar of Winton Bates Winton Bates
    21. January 2010 at 12:23

    The U.S. has problems but Heritage still gives it a higher ranking on “fiscal freedom” than Australia and New Zealand. The size of government still seems to be more of a burden in Australia than the U.S. – and is an even larger burden in New Zealand.

  46. Gravatar of Greg Ransom Greg Ransom
    21. January 2010 at 20:53

    StatsGuy and Scott,

    MA is cutting many social services –in order bankroll ever larger government worker salaries and pensions. This is about the government class doing well
    for itself and exploiting the private sector worker bees. This class makes itself feel good about what well intentioned people they are, while raking in wealth for themselves at the expense reduced services for others. Classic example: teachers unions that care about privileges and power and profit for themselves, at the expense of declining educational quality for the children — even drunks and sexual preditors protected and kept on the payroll in school districts around the country. And MA is part of this trend of unionized government workers and pensioners sucking out the wealth once used to provide public services. From the WSJ:

    “Massachusetts’ spending fell for mental health, the environment, housing and higher education. The physical infrastructure in blue states is literally falling apart. But look at those public wage and pension-related outlays. Ever upward.”

  47. Gravatar of Doc Merlin Doc Merlin
    21. January 2010 at 20:53

    I guess I should amend what I said about David Friedman, Friedman relies almost exclusively on utilitarian arguments for libertarianism. Yah, in the last chapter of “The Machinery of Freedom” he does claim he isn’t a utilitarian, but he seems at-least soft utilitarian to me.

  48. Gravatar of Robin Hanson Robin Hanson
    22. January 2010 at 14:46

    Yes, the US is too big, and suffers increasing diseconomies of scale as a result.

  49. Gravatar of StatsGuy StatsGuy
    22. January 2010 at 15:05

    Greg:

    “MA is cutting many social services – in order to bankroll ever larger government worker salaries and pensions.”

    You make this sound as if it’s unique to government workers – this is reflective of:

    1) Falling NGDP with sticky wages and nominal debt
    2) Longer lives without longer working lives
    3) International wage arbitrage that is affects sectors that are amenable to labor shifting (leaving behind social service sector jobs)

    According to salary.com, a staff nurse has a median base salary of ~72k in the boston area, a public school teacher, ~57k (with entry level much lower). Adjusting for time off, about the same, but I believe this is because nurse salaries have risen faster.

    Having said that, MA government (many state governments) are largely corrupt and suffer from nepotism. Then again, have you ever worked inside a large corporation?

    Even so, pensions reflect fixed obligations, and there are three ways to deal with them (just like social security obligations and the federal debt):

    - Grow nominal GDP faster, even if this means inflation (and do not give them a full inflation adjustment)
    - Default
    - Pay it off in full by sacrificing something else (which is, at this stage, impossible due to other nominal debt-like obligations)

    Which do you prefer?

  50. Gravatar of q q
    22. January 2010 at 19:54

    if the US is too big, then, well, isn’t china too big?

  51. Gravatar of scott sumner scott sumner
    23. January 2010 at 06:00

    Peter, Thanks for that info. No wonder the French like vacations! I do recall some Western Europeans worrying about a “race to the bottom” with too much tax competition, but I imagine you are right that fear of low wage labor also plays a role. Also, some eastern countries like Slovakia have flat taxes.

    Eric, That sounds like a good system. I like the high deductibles, and the fact that health benefits are taxable. Both of those help explain why you guys spend much less then we do.

    Midwives are uncommon here—just one more reason why if we adopted the universal health care others have, our costs would remain much higher. We are used to expensive health care.

    Rolling Ball, That would be a good reform.

    Peter#2, I have advocated something like your compulsory private pensions. But not just pensions, I’d also have it cover health savings accounts and unemployment comp–just like Singapore.

    Greg, Thanks, I will look at that.

    Michael, I generally agree, although it is a bit too simple the way you put it. Affluent Americans in the South are much more likely to vote Republican than affluent Americans in Boston, NYC, LA, SF, DC. And the rural poor split somewhat on racial and ethnic lines, with blacks and hispanics being more Democratic. But you are mostly correct.

    Greg#2, You said;

    “And I’d suggest the key thing that is not understood isn’t incentives, what is not understood is the grounding of extended social cooperation in general liberal principles and the coordination function of prices. And a complete failure to understand how unprincipled expediency promising “social justice” threatens and undermines both.”

    I am not sure we are that far apart, as you last sentence includes the phrase “failure to understand,” which was my point.

    Doc Merlin, You misunderstood my point. I have always categorized libertarian utilitarians as right wing liberals. Others call them classical liberals. And I have always categorized more socialistic liberals as left wing liberals. Others call them modern liberals. Liberals see cause and effect differently, and hence reach different policy views despite sharing a utilitarian value system.

    OGT, I think the EU is suffering form tight money, not a common currency. I think it would be hard to set up a free trade zone here without a common currency. If Michigan devalued 20%, then Indiana and Ohio would go ballistic. I think the efficiency gains of a common currency exceed the cyclical costs.

    Your political observation was a good one.

    Winton, I thought our government was now larger than Australia’s. Is that wrong? And I doubt Heritage takes into account tax complexity. Ours is simply off the charts.

    Greg, You are right about the public employees, they have taken over the government here. The government now serves the government, not the people. We get lousy public services for the taxes we pay. Some studies show Massachusetts only 23rd in taxes, but those studies are misleading. We have a very high income, and hence the absolute amount of tax revenue is very high. I believe Cambridge spends about $25,000 per pupil in its public schools. That’s more than many elite private schools.

    If you drive north into New Hampshire, the roads seem better, even though they have the lowest taxes in the country. And their students are near the top as well (even adjusting for ethnicity.)

    Thanks Robin.

    Statsguy, I notice you didn’t mention Boston cops, who start at over $100,000. Or workers on the Masspike. And don’t forget that the public pensions are really sweet.

    Overall though my complaint isn’t that public employees are paid too much, but that many of them shouldn’t be in the public sector at all. Certainly schools, the Masspike, and fire depts. could be privatized.

  52. Gravatar of StatsGuy StatsGuy
    23. January 2010 at 18:28

    “We have a very high income, and hence the absolute amount of tax revenue is very high.”

    So is the cost of living – these things are related. High costs and high wages partly cancel out, except of course that taxation shifts vast wealth to lower-cost-of-living states. Without this vampire-like blood drain, I suspect Mass would be in much better shape.

    With regard to Boston police – are you advocating privatization of police? (Privatization without oversight has a bad history; and good oversight requires good government anyway – corporations are no less adept at influencing overseers than unions.) But yes police here are overpaid, and get way too much overtime. NH, for example, doesn’t mandate that every little road construction project has a police officer on duty (often paid overtime) to drink coffee.

    But what about courts, should those be private? (if you think police are overpaid, they have nothing on judges)

    Masspike should not exist – it’s a device that disproportionately taxes on region to subsidize another, and was supposed to be eliminated years ago.

    Schools are complicated – many public schools are well run (including in NH). Likewise in Mass. They are simply well run by small communities. NH doesn’t have a metro region; or they do, and it’s called Boston. The pro-voucher arguments ignore one of the main issues, which is fragmentation and polarization. Public schools are one of the few places where different groups mix, and where US civics are (supposed to be) inculcated. My fear is that fragmentation of schools would have the same effect as fragmentation of news sources – this is not an efficiency argument. It’s a sociological one – your thoughts?

    Pensions, everywhere, are abominable – they were designed for a society where average life expectancy was 65.

    I agree with much of what you say; I simply wouldn’t go quite as far, nor would I accede to the broad generalizations that Greg makes.

  53. Gravatar of Peter Whiteford Peter Whiteford
    24. January 2010 at 02:31

    Once again while some countries in Eastern Europe like Slovakia or maybe Latvia have flat income taxes they both have very large social security contributions and very high – by US standards – consumption taxes. The systems are “simple” but they are not low tax regimes.

    I think that Australia has higher taxes as a percentage of GDP than the USA, but from around 2000 up until 2008 the Australian federal government was running a budget surplus, first completely eliminating federal government debt and then investing in a “future fund”, while as we know the USA was running deficits. So I think that the conclusion that one country or another has more “fiscal freedom” depends on whether you want to measure this by the level of taxes or the level of spending.

  54. Gravatar of scott sumner scott sumner
    24. January 2010 at 09:13

    q, Yes, but if I say that I’ll get blocked in China. Come to think of it, I am already blocked in China, so I’ll point out that the little China’s (Singapore, HK, Macao, Taiwan) are much richer than the big China.

    Statsguy, No, I didn’t suggest privatizing police and courts. My definition of “government” is “that group that runs the justice system”(Police/courts, etc.) So I really don’t see how it could be privatized.

    You said;

    “Public schools are one of the few places where different groups mix, and where US civics are (supposed to be) inculcated. My fear is that fragmentation of schools would have the same effect as fragmentation of news sources – this is not an efficiency argument. It’s a sociological one – your thoughts?”

    I love the fact that the CBS/PBS/ABC/NBC cartel of my youth has been broken up, and now a 100 flowers bloom. We have access to a much wider set of viewpoints.

    Even Fox news has lots of liberals on debating conservatives, despite its strong Republican bias.

    Right now the poor are stuck in loser inner city schools. Vouchers would allow the more ambitious inner city students to go to better schools in other neighborhoods. I don’t care about “diversity,” I want “opportunity” for ambitious students of all races and income levels. Vouchers have helped the poor where they have been tried, that’s why poor Democratic voters strongly support vouchers. Unfortunately it is also why wealthy Republican voters aren’t so crazy about the idea. They often prefer to keep their suburban schools lily white.

    Peter, Those are good points. I recall reading last year that the US government surpassed Canada’s government, as a share of GDP.

  55. Gravatar of Doc Merlin Doc Merlin
    24. January 2010 at 13:45

    “Doc Merlin, You misunderstood my point. I have always categorized libertarian utilitarians as right wing liberals. Others call them classical liberals. And I have always categorized more socialistic liberals as left wing liberals. Others call them modern liberals. Liberals see cause and effect differently, and hence reach different policy views despite sharing a utilitarian value system.”

    Got yah, Scott.

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