Voice For Liberty

Category: Economics

  • Speculators selfishly provide a public service

    Speculators are selfish people, acting only to make as much profit as possible for themselves without concern for the welfare of others. By doing so, they provide a valuable public service.

    That’s not what we hear in this moment of rising oil and gasoline prices. News commentators from across the political spectrum condemn speculators, blaming them for rising gasoline prices.

    The mechanism of the speculator is to buy something like oil when prices are low, then to sell it when prices are high. By doing so he earns a profit. (An alternative is to sell things he does not yet own when prices are high, and then buy to fulfill his obligation when prices are low.)

    The speculator, in this definition, does not hope to profit by processing and distributing the commodity he is buying and selling, as does an oil company or flour miller. He simply hopes to make a profit based on the changing prices — up or down — of oil or wheat.

    It is said that speculators are buying oil now and therefore driving up the price. That’s probably true, and it illustrates one of the beneficial services that speculators provide: they reduce volatility in prices. If speculators are correct and the price of oil spikes sometime soon, the present buying by speculators makes the spike less steep. It also induces consumers to conserve.

    Writing about speculation in food markets, Walter Block explains the beneficial effects:

    First, the speculator lessens the effects of famine by storing food in times of plenty, through a motive of personal profit. He buys and stores food against the day when it might be scarce, enabling him to sell at a higher price. The consequences of his activity are far-reaching. They act as a signal to other people in the society, who are encouraged by the speculator’s activity to do likewise. Consumers are encouraged to eat less and save more, importers to import more, farmers to improve their crop yields, builders to erect more storage facilities, and merchants to store more food. Thus, fulfilling the doctrine of the “invisible hand,” the speculator, by his profit-seeking activity, causes more food to be stored during years of plenty than otherwise would have been the case, thereby lessening the effects of the lean years to come.

    If the spike in prices does occur, what will speculators do? They will sell their oil, and that action will drive down prices, making the spike less steep. Here the speculator makes a profit by providing the service of making the oil shortage less severe. His hoarding of oil, bought when prices were low, makes it available in times of need, and less expensive, too. The speculator is rarely given credit for that in public, although this is how the speculator earns a profit.

    It is possible for speculators to do harm, however. If the speculator buys, he drives up prices. Then suppose the price of oil falls, and the speculator is forced to sell. His actions have increased the volatility of oil prices and have sent false price signals to the market. Citing again Block’s food example: “What if he is wrong? What if he predicts years of plenty — and by selling, encourages others to do likewise — and lean years follow? In this case, wouldn’t he be responsible for increasing the severity of the famine? Yes. If the speculator is wrong, he would be responsible for a great deal of harm.”

    In these cases, the speculator has suffered financial losses. These loses are a powerful market force that drives “bad” speculators — meaning those who guess wrong about future prices — out of the market.

    The real danger is when government attempts to speculate. That’s a possibility at the current moment, as many are recommending that the U.S. government sell oil from the strategic petroleum reserve in an effort to lower the cost of oil. That’s speculation — the oil was bought at a time when the price was lower, and is now contemplated being sold at a higher price.

    The problem with government speculation is that government does not face the market discipline that private-sector speculators face. When they are wrong, they lose their capital. They go out of business. Government faces no such discipline. When government is wrong, it goes on.

    Government attempts at regulating speculators are certain to fail, too. Almost any such regulation will seek to reduce the profit potential of speculation. But that is what drives the speculators and makes the system work. Without the potential for profits, speculators will not take the risk of losses, and they will not perform their beneficial function.

  • Brinkmanship with jobs

    By H. Edward Flentje.

    Most Wichita-area residents breathed a sigh of relief last December when former Governor Mark Parkinson, along with city and county officials, inked a $45 million deal for aviation manufacturer Hawker Beechcraft to maintain 4,000 jobs in Wichita.

    The deal was cut after months of community drama in which company officials threatened to uproot the 75-year-old Wichita company and move it, lock, stock, and barrel, to Louisiana. The company had also demanded that union contracts be set aside and vowed to send pieces of the company to Mexico. These threats came after Hawker Beechcraft had cut its Kansas workforce by one-third over the prior two years in response to the economic downturn.

    Welcome to the new world of economic development — playing brinkmanship with jobs. This tactic is led by a new breed of hired guns, mostly outsiders and consultants who have little or no attachment to the targeted community. On behalf of corporate clients, they specialize in playing states and communities off against each other — threatening state and local officials with plant closures or moves to another state. In the process taxpayers, employees, and anyone else available are squeezed for all they are worth.

    The work of economic development used to be simpler: applying a limited set of incentives to attract new businesses and new jobs or encourage existing businesses to add jobs. In my short stint as Wichita’s interim city manager in 2008 I had no difficulty recommending to the city council and state officials a substantial package of incentives for Cessna to build a complete new airplane in Wichita and create 1,000 new jobs. The joint initiative of the State of Kansas, Hutchinson, Reno County, and South Hutchinson to land global giant Siemens in Hutchinson with 400 new jobs in a completely new industry of wind energy applied this approach.

    But the Hawker Beechcraft deal is different, focused on saving existing jobs, not creating new jobs, and the result diverts millions in limited taxpayer funds, primarily state income tax revenues, from state coffers to a company’s benefit, simply to have an existing business stay put.

    State lawmakers first opened the door for applying income tax revenues to “job retention” in 2000 under a program called IMPACT (an acronym for “investment in major projects and comprehensive training” act), set a high threshold for eligibility, and placed strict limitations on the use of funds.

    Since then, lawmakers have repeatedly loosened requirements and given more encouragement to this game of brinkmanship. Originally, the law required an eligible company to make a capital investment of at least $250 million and maintain 1,000 jobs in the state. Today, no capital investment is required, and the job bar has been slashed to 250 jobs in metropolitan areas and 100 in nonmetropolitan areas.

    The Kansas Secretary of Commerce has to sign off on these deals, and to date has approved only nine according to Commerce officials. The winners are large corporate organizations with familiar names—Learjet, Sprint, Applebee’s Services, Boeing, Goodyear, and Black & Veatch, in addition to Hawker Beechcraft—all located in one of three Kansas counties, Johnson, Sedgwick, and Shawnee.

    But word gets around in the world of economic development, and demands will escalate. The barn door has been flung open as well over 500 Kansas businesses are now eligible for state assistance, a tenfold increase over the year 2000, thanks to lawmakers. The expanding game of brinkmanship with jobs leaves state and local officials more vulnerable and can be expected to divert millions more in state tax revenues from state government’s primary obligations in response to the demands of companies that choose to play.

    Flentje is a professor at Wichita State University and co-author of the new book on Kansas politics Kansas Politics and Government: The Clash of Political Cultures.

  • Tax increment financing: TIF has a cost

    Tax increment financing, or TIF districts, is slated to be used as one of the primary means to raise money for the “public investment” portion of the costs of the revitalization of downtown Wichita. Touted by its supporters as being without cost, or good for the entire city, or the only way to get a project started, these arguments make sense only to those who see only the immediate effects of something and are unwilling — or unable — to see the secondary effects of this harmful form of government intervention.

    Cato Institute Senior Fellow Randal O’Toole has written extensively on the subject of urban planning, development, and tax increment financing (TIF) districts. The following article contains many points that the Wichita City Council may wish to consider as it decides whether to rely on this form of financing for downtown projects, or for projects anywhere in the city.

    O’Toole was in Wichita last year. Coverage of a lecture he delivered at that time is Randal O’Toole discusses urban planning in Wichita. The author of The Best-Laid Plans: How Government Planning Harms Your Quality of Life, Your Pocketbook, and Your Future, O’Toole’s latest book is Gridlock: Why We’re Stuck in Traffic and What to Do About It.

    TIF is Not “Free Money”

    By Randal O’Toole

    Originally created with good intentions, tax-increment financing (TIF) has become a way for city officials to enhance their power by taking money from schools and other essential urban services and giving it to politically connected developers. It is also often used to promote the social engineering goals of urban planners.

    TIF is based on the idea that public improvements to a neighborhood or district will lead developers to invest in that district. To finance such public improvements, cities are allowed to keep the “increment” or increased property taxes collected from the area. Typically, planners estimate in advance how much new property tax the city can collect and then sell bonds that will be repaid out of those taxes. The revenues from the bonds are used to pay for the improvements.

    TIF was invented in California in 1952 in response to a problem found in many cities after World War II. At the beginning of and during the war, most urban residents lived in apartments. After the war, huge numbers of people moved to single-family homes in the suburbs. This left inner-city neighborhoods with high vacancy rates. Since few wanted to rent the cramped housing in such neighborhoods, the landowners did not keep the housing in good condition, and the neighborhoods became “blighted.”

    So the California legislature allowed cities to create “redevelopment districts.” Typically, the cities evicted the residents of the districts and tore down the housing, thus leaving bare land that developers could use to build whatever met market demand. It sometimes worked, but often did not, and to this day some neighborhoods of New York City, New Jersey, and other urban areas remain little more than gravel pits.

    Eventually, every state but Arizona legalized TIFs — North Dakota doing so in 1973. (Arizona and some other states use a similar scheme involving sales taxes.) Thousands of cities have established TIF districts. But experience has proven that they don’t work as well as hoped.

    TIF is not “free money.” Studies have found that, at best, TIF is a zero-sum game, meaning for every winner in the TIF game others lose an equal amount. In other words, TIF does not increase the total amount of development that takes place in a city or region; it merely transfers development from one part of the region to another.

    The new developments in the TIF districts consume fire, police, and other services, but since they don’t pay for those services, people in the rest of the city either have to pay higher taxes or accept a lower level of services. This means people outside the district lose twice: first when developments that might have enhanced their property values are enticed into the TIF district and second when they pay more taxes or receive less services because of the TIF district.

    Not only does TIF not stimulate urban growth, it may even slow it down. One study found that TIF is actually a negative-sum game because businesses that might have located or expanded in the cities decide to move to another place that has lower taxes or higher levels of urban services.

    TIF puts city officials on the verge of corruption, favoring some developers and property owners over others. TIF creates what economists call a moral hazard for developers. If you are a developer and your competitors are getting subsidies, you may simply fold your hands and wait until someone offers you a subsidy before you make any investments in new development. In many cities, TIF is a major source of government corruption, as city leaders hand tax dollars over to developers who then make campaign contributions to re-elect those leaders.

    TIF isn’t even necessary to promote redevelopment of declining neighborhoods. Eventually, property values fall low enough that people start to buy and restore or replace buildings in those districts. Rather than use TIF and eminent domain to redevelop a warehouse district, Anaheim recently decided to merely get out of the way of developers of what became known as the Platinum Triangle. Since then, developers have invested billions of dollars in the district.

    TIF is no longer about blight. Today, the inner-city slums that TIF was created to replace are long gone, yet TIF continues to grow. Bismarck wants to create a quiet rail zone. Fargo wants to revitalize its downtown. Whenever any kind of development “need” arises, city officials are happy to steal money from fire, police, schools and other services that rely on property taxes and use it to fund that need.

    Some states require cities to find that a neighborhood is blighted before they can use TIF. San Jose planners once found that a third of their city was blighted, including one posh neighborhood that was supposedly a slum because the residents had failed to rake the leaves from the private tennis courts in their backyards. Some cities go so far as to declare prime farmland to be “blighted” so they can maximize their share of the revenues when that land is developed.

    TIF today is often part of a social engineering agenda that Americans should reject. With no more slums to clear, urban planners see themselves as having a new mission: not to restore blighted neighborhoods but to re-engineer society to fit their fantasies of how people should live. Automobiles are evil, the planners think, and getting people to live in high-density housing will lead them to drive less because they won’t have as far to go to get anywhere. So cities like Denver, Minneapolis, and Portland are using TIF to subsidize high-density developments.

    Ironically, we seem to have come full circle. Once used to subsidize the removal of high-density developments that few wanted to live in, TIF is now used to subsidize the construction of high-density developments that few want to live in. After all, if there was truly a demand for such high-density housing, no subsidies would be needed.

    While we like to think that government officials have our best interests at heart, TIF is just too much of a temptation for many cities to resist. Two Democratic legislators in Colorado want to reform TIF in that state so that cities can’t declare farms to be blighted. A bill doing just that was proposed in, but not passed by, North Dakota’s 2003 legislature.

    But that doesn’t go far enough. Legislators should recognize that TIF no longer has a reason to exist, and it didn’t even work when it did. They should repeal the laws allowing cities to use TIF and encourage cities to instead rely on developers who build things that people want, not things that planners think they should have.

  • Wind power again reaps subsidy

    The editorial page of the Wall Street Journal is at the forefront of letting Americans know just how bad an investment our country is making in wind power, as well as other forms of renewable energy. A recent Review and Outlook piece titled The Wind Subsidy Bubble: Green pork should be a GOP budget target holds these facts:

    • The recent tax bill has a $3 billion grant for wind projects.
    • The 2009 stimulus bill had $30 billion for wind.
    • Wind power installations are way down from recent years.
    • The 2008 stimulus bill forces taxpayers to pay 30% of a renewable energy project’s costs. Wind energy also get a tax credit for each unit of power produced.
    • “Subsidies for renewable energy cost taxpayers about $475,000 for every job generated.”
    • “The wind industry claims to employ 85,000 Americans. That’s almost certainly an exaggeration, but if it is true it compares with roughly 140,000 miners and others directly employed by the coal industry. Wind accounts for a little more than 1% of electricity generation and coal almost 50%. So it takes at least 25 times more workers to produce a kilowatt of electricity from wind as from coal.”

    This information is timely as Kansas Governor Mark Parkinson recently released a list of his “achievements,” three of which involve increasing wind power in Kansas.

    Incoming Kansas governor Sam Brownback is in favor of wind energy too, and he also supports federal subsidies and mandates for ethanol production and use. In endorsing Brownback the Kansas Association of Ethanol Producers said “… no other public official has done more to promote the merits of ethanol than Sam Brownback. Whereas ethanol is the future of America’s fuel supply, Sam Brownback is the future of Kansas.”

    The Wall Street Journal has also long been opposed to this intervention in the market for ethanol, recently quoting a report by a group of U.S. Senators: “Historically our government has helped a product compete in one of three ways: subsidize it, protect it from competition, or require its use. We understand that ethanol may be the only product receiving all three forms of support from the U.S. government at this time.”

  • Wind power: a wise investment for Wichita and Kansas?

    Writing in The Wall Street Journal, Robert Bryce explains the terrible economics now facing the wind power energy, with emphasis on T. Boone Pickens, who has made a big splash with his plans to invest in wind power. A few takeaways:

    • Pickens’ $2 billion investment in buying wind turbines has left him with “a slew of turbines he can’t use.”
    • U.S. government subsidies amount to $6.44 per million BTUs generated by wind, but natural gas costs just $4 now. These low prices may be around for years, with gas market futures contracts below $6 through 2017.
    • Even with the subsidy, gas can’t compete with wind. Wind power installations are down 72 percent in 2010 as compared to 2009. That trend is expected to continue.
    • “Texas Comptroller Susan Combs reported that property tax breaks for wind projects in the Lone Star State cost nearly $1.6 million per job.”
    • Because Canada has renewable energy mandates, Pickens hopes to sell his turbines there.

    With the economics of wind power looking so grim and with $2 billion of turbines sitting around looking for a buyer, we have to question the wisdom of Wichita Mayor Carl Brewer recruiting wind power companies to come to Wichita.

    Incoming Kansas governor Sam Brownback is a supporter of renewable energy standards. These standards require utility companies to produce a certain level of power from renewable sources, which in Kansas is primarily wind. When Kansas electric generator Westar announced plans to increase its wind energy portfolio, Brownback said “Kansas wind is an important resource for our state that will provide clean energy for our residents and businesses and contribute to our economic growth. I applaud Westar Energy’s leadership in wind energy.”

    A Wind Power Boonedoggle

    T. Boone Pickens badly misjudged the supply and price of natural gas.
    By Robert Bryce

    After 30 months, countless TV appearances, and $80 million spent on an extravagant PR campaign, T. Boone Pickens has finally admitted the obvious: The wind energy business isn’t a very good one.

    The Dallas-based entrepreneur, who has relentlessly promoted his “Pickens Plan” since July 4, 2008, announced earlier this month that he’s abandoning the wind business to focus on natural gas.

    Continue reading at The Wall Street Journal (subscription required) or at Bryce’s site (free)

  • Growth of Wichita’s Koch Industries profiled

    Two recent Wichita Eagle articles profiled Wichita-based Koch Industries and its recent growth.

    In Wichita, Koch employs about 2,300 workers, and about 50,000 across the U.S. in nearly all the states. When standard economic multipliers are used, these Koch jobs support about 203,000 total jobs.

    While Koch’s headquarters are in Wichita, Kansas ranks seventh among the states in the number of Koch employees, with Georgia, Texas, Arkansas, Wisconsin, Alabama, and South Carolina having more Koch employees.

    Of note in the article Koch cautious in acquiring other businesses:

    • Koch has been cautious in its acquisitions, looking for acquisitions that provide a “long-term, sustainable advantage.”
    • A fit with Koch’s culture is necessary. That culture is described in Charles Koch’s 2007 book The Science of Success: How Market-Based Management Built the World’s Largest Private Company. More information on this book, including excerpts, is available at The Science of Success.
    • Besides the costs of acquisition, Koch has spent $10 billion on capital improvements since 2003.
    • Nationwide Koch has 1,500 job openings, including need for workers in accounting, finance, and information technology in Wichita.

    A report created by Harrah Analytics of Koch’s economic impact in the U.S. is available at Koch Companies Creating Jobs Nationwide.

    The second article, Fertilizer helps Koch grow describes a Koch anhydrous ammonia plant near Enid, Oklahoma. This plant produces 3,000 tons per day, described as 10 percent of the country’s production. The article describes Koch’s efforts to comply with emissions regulations.

    Also, the article describes how a partially Koch-owned plant in Venezuela was seized by Hugo Chavez as that country moved away from a market economy to a socialized economy.

  • Timothy Sandefur: The right to earn a living

    Last Friday’s meeting (December 10) of the Wichita Pachyderm Club featured noted Cato Institute scholar, Principal Attorney at the Pacific Legal Foundation, and author Timothy Sandefur. He discussed his recent book The Right to Earn a Living: Economic Freedom and the Law. A description of the book at Amazon.com reads: “America’s founders thought the right to earn a living was so basic and obvious that it didn’t need to be mentioned in the Bill of Rights. Yet today that right is burdened by a wide array of government rules and regulations that play favorites, rewrite contracts, encourage frivolous lawsuits, seize private property, and manipulate economic choices to achieve outcomes that bureaucrats favor. The Right to Earn a Living charts the history of this fundamental human right, from the constitutional system that was designed to protect it by limiting government’s powers, to the Civil War Amendments that expanded protection to all Americans, regardless of race. It then focuses on the Progressive-era judges who began to erode those protections, and concludes with today’s controversies over abusive occupational licensing laws, freedom of speech in advertising, regulatory takings, and much more.”

    I haven’t had the opportunity to write coverage of Sandefur’s talk, but following is an audio recording of the event. Dion Lefler of the Wichita Eagle covered the story at Pachyderm speaker lauded for blasting judges.

    Audio recording: Timothy Sandefur speaking to the Wichita Pachyderm Club, December 10, 2010.
    [powerpress]

  • Obama’s spending stimulus failed

    The school of thinking known as Keynesian economics holds that government should actively and aggressively manage the economy, most importantly by stepping up spending when demand is low. Through this deficit spending, it is said that government action can increase employment. This government spending purportedly accomplishes this through a multiplier effect, as dollars are spent again and again.

    The value of the spending multiplier — is it big or small? — is an important question. Also, the multiplier effect may be different for government spending versus private spending.

    Now, we’re starting to understand why Keynesian economics doesn’t work. Writing in the Wall Street Journal, Stanford economist Michael J. Boskin summarizes recent research that finds that the spending multiplier is small, and actually turns negative by the start of the second year. Furthermore, the government spending crowds out private sector spending. The effect of Obama’s 2009 stimulus bill is estimated at 0.2 percent of GDP, an amount described as “puny.”

    Tax cuts, however, are estimated to have a multiplier of 3.0, with “substantial tax cuts” having a multiplier of up to 5.0.

    In context, Obama’s economic advisers, at the time he took office, estimated that the spending multiplier for government purchases was 1.57, while the multiplier for tax cuts was 0.99.

    Of the new studies finding a small spending multiplier, Boskin writes: “These empirical studies leave many leading economists dubious about the ability of government spending to boost the economy in the short run. Worse, the large long-term costs of debt-financed spending are ignored in most studies of short-run fiscal stimulus and even more so in the political debate.”

    In conclusion, he writes: “The complexity of a dynamic market economy is not easily captured even by sophisticated modeling (an idea stressed by Friedrich Hayek and Robert Solow). But based on the best economic evidence, we should reject increased spending and increased taxes.” He calls for reductions in personal and corporate marginal tax rates and an “enforceable gradual phase-down of the spending explosion of recent years.”

    We should note that Obama and many of those in government are easily seduced by the allure of Keynesian deficit spending. It’s government, after all, that gets to spend the money. Republicans, even those who consider themselves conservative, have been seduced in this way, too.

    Tax cuts, on the other hand, leave money and spending decisions in the private sector.

    Why the Spending Stimulus Failed

    New economic research shows why lower tax rates do far more to spur growth.

    By Michael J. Boskin

    President Obama and congressional leaders meeting yesterday confronted calls for four key fiscal decisions: short-run fiscal stimulus, medium-term fiscal consolidation, and long-run tax and entitlement reform. Mr. Obama wants more spending, especially on infrastructure, and higher tax rates on income, capital gains and dividends (by allowing the lower Bush rates to expire). The intellectual and political left argues that the failed $814 billion stimulus in 2009 wasn’t big enough, and that spending control any time soon will derail the economy.

    But economic theory, history and statistical studies reveal that more taxes and spending are more likely to harm than help the economy. Those who demand spending control and oppose tax hikes hold the intellectual high ground.

    Continue reading at the Wall Street Journal (subscription not required)

  • Myth of Obama tax cuts

    As the nation’s attention is focused on whether Congress will extend the Bush tax cuts of 2001 and 2003, some are calling attention to the Obama tax cuts and calling for their extension.

    These tax “cuts” — and I use quotes deliberately — are part of the stimulus bill passed in February 2009. Polls show that very people know of these tax cuts.

    So what are the Obama tax cuts? There was one program that qualified — sort of — as a “cut,” and several tax credit programs. More information about these programs from the Obama Administration is at Recovery.gov,

    The largest item that benefited most people is the Making Work Pay Tax Credit, a two-year program that rebates $400 per year to individual taxpayers, or $800 per year for married couples. This is not a reduction in marginal tax rates, although the program will reduce the average tax rate that people pay. At its core, it is simply a reduction in the overall amount of tax someone must pay.

    This tax credit is not associated with any positive effort or activity by the recipients other than doing what they already do. The same criticism applies to the Bush tax rebate in 2008, too.

    Besides the Making Work Pay Tax Credit, the Obama tax cuts consist of other tax credits that apply not to everyone, but only to people who qualify.

    For example, a child care tax credit pays up to $1,200 per year in child care expenses. Obviously, the only people who can claim this credit are working people with children who chose to place them in daycare. Beyond that, it is not a “tax cut” by any stretch of the imagination. Properly, it is a spending program implemented through the tax system. Sometimes called tax expenditures, these measures often escape the usual scrutiny that spending receives. Since they’re billed as a “tax cut,” they sound like a good thing to most people, as few like paying taxes.

    If we need any more evidence that these programs are really spending disguised as tax cuts, consider the description of the child care tax credit as provided by the Internal Revenue Service: “It is a refundable credit, which means taxpayers may receive refunds even when they do not owe any tax.”

    That’s right. Even if you have no income tax liability, you can still get a tax credit — that is, a payment from the government.

    For tax cuts to be productive in growing the economy, they have to be associated with something positive, namely with work, saving, or investment. What many people positively respond to is a reduction in marginal tax rates, that is, the tax that must be paid on the next dollar earned.

    Programs that reduce the average tax rate like Obama’s Making Work Pay Tax Credit and the Bush tax rebates of 2008 aren’t effective because they don’t affect the marginal rate — the rate paid on the next dollar earned. This is not to say that I am not in favor of these programs. Anything that reduces the burden of taxes is welcome. But they are not the type of tax cuts that spur economic growth.

    Who responds most positively to reductions in marginal tax rates? As Jeffrey A. Miron explains, it is the most economically productive members of society:

    The Bush cuts provided lower taxes on ordinary income, especially for taxpayers at the high end of the income distribution. These are some of the most energetic and productive people in society; raising tax rates would discourage their effort and entrepreneurship. High-income taxpayers also have multiple ways of avoiding high tax rates, so any revenue gain from raising rates would be modest. The Bush cuts also lowered taxes on dividend and capital gains income; maintaining these lower rates is even more important for economic performance. Capital is mobile: when it is taxed heavily here, it flees somewhere else, meaning lower investment and employment in the United States. And because capital income taxes discourage investment or drive it overseas, they generate little if any tax revenue. (Jeffrey A. Miron, “Why the Bush Tax Cuts Worked”)

    It is these “energetic and productive” people that are responsible for a great deal of business activity and job creation. When these people take steps to avoid taxes it means less productive economic activity and more unproductive tax shelters.

    In Slaying Leviathan: The Moral Case for Tax Reform, author Leslie Carbone explains the harm of high marginal taxes, especially progressive taxes, where rates become higher as more income is earned:

    The discouragement of earning money by working, saving, or investing inherent in any income tax is exacerbated by progressivity. While any high tax rates are economically destructive, high marginal rates are even worse, because high marginal rates particularly discourage productivity and inhibit economic growth. … By lowering potential pay off, high investment taxes especially discourage risky investment. Discouragement of risky investment squelches technological advancement, because new technologies are the most risky. This means our progressive tax system actually reduces progress and inhibits improve quality of life.”

    If the goal of the Obama Administration is to create private sector economic growth instead of growth in government, it needs to keep the Bush tax cuts in place and avoid increases in marginal tax rates for everyone, especially the most productive members of society. A better strategy would be to reduce these tax rates farther to create even more economic growth.

    There is a lesson to be learned locally, too. Kansas needs to cut its marginal tax rates, both for personal income and for corporations. Miron spoke of capital leaving the United States because of high taxes. It’s even easier for capital — and its accompanying jobs — to move from one U.S. state to another. States with low tax burdens are experiencing growth in jobs and population, while high tax states have losses in both areas. Kansas is in the middle of the pack, but moving in the wrong direction.

    The current economic development strategy of Kansas and many of its cities and counties is to offer targeted incentives to attract new industry and keep current companies from leaving. A better strategy in the long run is to join the ranks of low tax burden states.