Voice For Liberty

Tag: Economics

  • Evaluating economic development incentives

    The evaluation of economic development incentives requires thinking at the margin, not the entirety.

    When considering the effect of economic development incentives, cities like Wichita use a benefit-cost analysis to determine whether the incentive is in the best interests of the city. The analysis usually also considers the county, state, and school districts, although these jurisdictions have no say over whether the incentive is granted, with a few exceptions. The idea is that by paying money now or forgiving future taxes, the city gains even more in increased tax collections. This is then pitched as a good deal for taxpayers: The city gets more jobs (usually) and a profit, too.

    Economic activity usually generates tax revenue that flows to governmental agencies. When people work, they pay income taxes. When they buy stuff, they pay sales taxes. When they create new property, it is taxed. This happens whether or not the economic activity is a result of government incentive.

    When calculating benefit-cost ratios, government takes credit for the increase in tax revenue from a company receiving economic development incentives. Government often says that without the incentive, the company would not have located in Wichita. Or, without the incentive, it would not have expanded in Wichita. Now, it is claimed that incentives are necessary to persuade companies to consider remaining in Wichita rather than moving somewhere else.

    But there are a few problems with the arguments that cities and their economic development agencies promote. One is that the increase in tax revenue happens regardless of whether the company has received incentives. What about all the companies that locate to or expand in Wichita without receiving incentives? How do we calculate the benefit-cost ratio when a company receives no incentives? The answer is it can’t be calculated, as there is no government cost. Instead, there is only benefit.

    Then, we don’t often ask why do some companies need incentives, and others do not? Do the companies that receive incentives really need them? Why do some companies receive incentives multiple times?

    Related is that jurisdictions may grant relatively small incentives and then take credit for the entire deal. I’ve been told that when economic development agencies learn of a company moving to an area or expanding their Wichita operations, they swoop in with small incentives and take credit for the entire deal. The agency is then able to point to a small incentive and take credit for the entire deal. As you can imagine, it’s difficult to get the involved parties to speak on the record about this.

    Further, governments may not credit the contribution of other governments. In the past when the Wichita economic development office presented information about an incentive it proposed to offer to a company, it would sometimes list the incentives the company is receiving from other governments. As an example, when the city offered incentives to NetApp in 2012, the city’s contribution was given as a maximum of $418,000. The agenda material mentioned — obliquely — that the State of Kansas was involved in the incentive package. Inquiry to the Kansas Department of Commerce revealed that the state had promoted incentives worth $35,160,017 to NetApp. Wichita’s incentive contribution is just 1.2 percent of what the state offered, which makes us wonder if the Wichita incentive was truly needed.

    The importance of marginal thinking

    When evaluating economic development incentives, we often fail to properly evaluate the marginal gains. Here’s an example of the importance of looking at marginal gains rather than the whole. In 2012, the City of Wichita developed a program called New HOME (New Home Ownership Made Easy). The crux of the program is to rebate Wichita city property taxes for five years to those who buy newly-built homes in certain neighborhoods under certain conditions.

    Wichita City HallThe important question is how much new activity this program will induce. Often government takes credit for all economic activity that takes place. This ignores the economic activity that was going to take place naturally — in this case, new homes that are going to be built even without this subsidy program. According to data compiled by Wichita Area Builders Association and the WSU Center for Economic Development and Business Research — this is the data that was current at the time the Wichita city council made its decision to authorize the program — in 2011 462 new homes were started in the City of Wichita. The HOME program contemplated subsidizing 1,000 homes in a period of 22 months. That’s a rate of 545 homes per year — not much more than the present rate of 462 per year. But, the city has to give up collecting property tax on all these homes — even the ones that would be built anyway.

    What we’re talking about is possibly inducing a small amount of additional activity over what would happen naturally and organically. But we have to subsidize a very large number of houses in order to achieve that. The lesson is that we need to evaluate the costs of this program based on the marginal activity it may induce, not all activity. For more, see Wichita new home tax rebate program: The analysis.

  • What is the evidence on taxes and growth?

    … results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy.

    From Tax Foundation.

    What is the evidence on taxes and growth?

    By William McBride

    The idea that taxes affect economic growth has become politically contentious and the subject of much debate in the press and among advocacy groups. That is in part because there are competing theories about what drives economic growth. Some subscribe to Keynesian, demand-side factors, others Neo-classical, supply-side factors, while yet others subscribe to some mixture of the two or something entirely unique. The facts, historical and geographical variation in key parameters for example, should shed light on the debate. However, the economy is sufficiently complex that virtually any theory can find some support in the data.

    TaxFor instance, the Congressional Research Service (CRS) has found support for the theory that taxes have no effect on economic growth by looking at the U.S. experience since World War II and the dramatic variation in the statutory top marginal rate on individual income. They find the fastest economic growth occurred in the 1950s when the top rate was more than ninety percent. However, their study ignores the most basic problems with this sort of statistical analysis, including: the variation in the tax base to which the individual income tax applies; the variation in other taxes, particularly the corporate tax; the short-term versus long-term effects of tax policy; and reverse causality, whereby economic growth affects tax rates. These problems are all well known in the academic literature and have been dealt with in various ways, making the CRS study unpublishable in any peer-reviewed academic journal.

    So what does the academic literature say about the empirical relationship between taxes and economic growth? While there are a variety of methods and data sources, the results consistently point to significant negative effects of taxes on economic growth even after controlling for various other factors such as government spending, business cycle conditions, and monetary policy. In this review of the literature, I find twenty-six such studies going back to 1983, and all but three of those studies, and every study in the last fifteen years, find a negative effect of taxes on growth. Of those studies that distinguish between types of taxes, corporate income taxes are found to be most harmful, followed by personal income taxes, consumption taxes and property taxes.

    Continue reading at Tax Foundation.

  • Foundations of a Free Society

    Described as “An introduction to the core principles that define a free society,” I highly recommend this short book. It’s written by Eamonn Butler of the Adam Smith Institute and published by Institute of Economic Affairs, a British think tank whose mission is to “improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.” (Being written in British English, a few words are spelled wrongly now and then.)

    Eamonn Butler
    Eamonn Butler
    The book may be purchased or downloaded at no charge at Foundations of a Free Society. Here is the summary of the book, as provided by the author:

    • Freedom creates prosperity. It unleashes human talent, invention and innovation, creating wealth where none existed before. Societies that have embraced freedom have made themselves rich. Those that have not have remained poor.
    • People in a free society do not become rich by exploiting others, as the elites of less-free countries do. They cannot become rich by making others poorer. They become rich only by providing others with what they want and making other people’s lives better.
    • The chief beneficiaries of the economic dynamism of free societies are the poor. Free societies are economically more equal than non-free societies. The poor in the most-free societies enjoy luxuries that were undreamed of just a few years ago, luxuries available only to the ruling elites of non- free countries.
    • International trade gives entrepreneurs new market opportunities and has helped lift more than a billion people out of abject poverty in the last twenty years. Freedom is truly one of the most benign and productive forces in human history.
    • Attempts by governments to equalise wealth or income are counter-productive. They destroy the incentives for hard work and enterprise and discourage people from building up the capital that boosts the productivity of the whole society.
    • A free society is a spontaneous society. It builds up from the actions of individuals, following the rules that promote peaceful cooperation. It is not imposed from above by political authorities.
    • Government has a very limited role in a free society. It exists to prevent harm being done to its citizens by maintaining and enforcing justice. It does not try to impose material equality and it does not prohibit activities just because some people consider them disagreeable or offensive. Leaders cannot plunder citizens for their own benefit, grant favours to their friends, or use their power against their enemies.
    • The government of a free society is constrained by the rule of law. Its laws apply to everyone equally. There must be?due process of law in all cases, with fair trials and no lengthy detention without trial. People accused of offences must be treated as innocent until proved guilty, and individuals must not be harassed by being prosecuted several times for the same offence.
    • Tolerating other people’s ideas and lifestyles benefits society. Truth is not always obvious; it emerges in the battle of ideas. We cannot trust censors to suppress only wrong ideas. They may mistakenly suppress ideas and ways of acting that would greatly benefit society in the future.
    • Communications technology is making it more difficult for authoritarian governments to hide their actions from the rest of the world. As a result, more and more countries are opening up to trade and tourism, and new ideas are spreading. More people see the benefits of economic and social freedom, and are demanding them.
  • WichitaLiberty.TV: Can anyone make a pencil?

    WichitaLiberty.TV: Can anyone make a pencil?

    In this excerpt from WichitaLiberty.TV, I introduce the video “I, Pencil” and then show the movie as created by Competitive Enterprise Institute. More about this movie may be found at ipencilmovie.org. View below, or click here to view at YouTube.

  • Commercial property taxes in Wichita are high

    Commercial property taxes in Wichita are high

    An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.

    The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014” and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.

    A pdf version of this table is available.
    A pdf version of this table is available; click here.
    In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.

    This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.

    Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.

    For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.

    Wichita commercial property tax rates compared to national average
    Wichita commercial property tax rates compared to national average
    Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.

    In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.

  • ‘Public Choice’ explains much of government and politics

    ‘Public Choice’ explains much of government and politics

    Public Choice - A PrimerIf you’ve wondered why government is as it is, the school of public choice economics offers insight and explanation. The Institute of Economic Affairs, a London think tank, has published Public Choice — A Primer. This short book explains the topic of public choice. By understanding it, we can learn more about how government and its actors operate.

    Here’s a description of public choice from the book’s web page:

    “Market failure” is a term widely used by politicians, journalists and university and A-level economics students and teachers. However, those who use the term often lack any sense of proportion about the ability of government to correct market failures. This arises from the lack of general knowledge — and the lack of coverage in economics syllabuses — of Public Choice economics.

    Public Choice economics applies realistic insights about human behaviour to the process of government, and is extremely helpful for all those who have an interest in — or work in — public policy to understand this discipline. If we assumes that at least some of those involved in the political process — whether elected representatives, bureaucrats, regulators, public sector workers or electors — will act in their own self-interest rather than in the general public interest, it should give us much less confidence that the government can “correct” market failure.”

    Here is the executive summary of the book:

    • Public Choice applies the methods of economics to the theory and practice of politics and government. This approach has given us important insights into the nature of democratic decision-making.
    • Just as self-interest motivates people’s private commercial choices, it also affects their communal decisions. People also “economise” as voters, lobby groups, politicians and officials, aiming to maximise the outcome they personally desire, for minimum effort. Consequently the well-developed tools of economics — such as profit and loss, price and efficiency — can be used to analyse politics too.
    • Collective decision-making is necessary in some areas. However, the fact that the market may fail to provide adequately in such areas does not necessarily mean that government can do things better. There is “government failure” too. Political decision-making is not a dispassionate pursuit of the “public interest,” but can involve a struggle between different personal and group interests.
    • There is no single “public interest” anyway. We live in a world of value-pluralism: different people have different values and different interests. Competition between competing interests is inevitable. This makes it vital to study how such competing interests and demands are resolved by the political process.
    • The self-interest of political parties lies in getting the votes they need to win power and position. They may pursue the “median voter” — the position at the centre, where voters bunch. Government officials will also have their own interests, which may include maximising their budgets.
    • In this struggle between interests, small groups with sharply focused interests have more influence in decision-making than much larger groups with more diffused concerns, such as consumers and taxpayers. The influence of interest groups may be further increased because electors are “rationally ignorant” of the political debate, knowing that their single vote is unlikely to make a difference, and that the future effects of any policy are unpredictable.
    • Because of the enormous benefits that can be won from the political process, it is rational for interest groups to spend large sums on lobbying for special privileges — an activity known as “rent seeking.”
    • Interest groups can increase their effect still further by “logrolling” — agreeing to trade votes and support each other’s favoured initiatives. These factors make interest group minorities particularly powerful in systems of representative democracy, such as legislatures.
    • In direct democracy, using mechanisms such as referenda, the majority voting rule that is commonly adopted allows just 51 per cent of the population to exploit the other 49 per cent — as in the old joke that “democracy is two wolves and a sheep deciding who shall eat whom for dinner.” In representative democracies, much smaller proportions of the electorate can have undue influence.
    • Because of the problem of minorities being exploited — or minorities exploiting majorities — many Public Choice theorists argue that political decision-making needs to be constrained by constitutional rules.

    The book may be purchased, or downloaded at no cost in several formats.

  • GDP change by metro area by industry

    Data from Bureau of Economic Analysis, part of the U.S. Department of Commerce. To access the interactive version of the visualization, click here.

    GDP Change by Metro Area by Industry
    GDP Change by Metro Area by Industry
  • Wichita sales tax hike harms low income families most severely

    Wichita sales tax hike harms low income families most severely

    Analysis of household expenditure data shows that a proposed sales tax in Wichita affects low income families in greatest proportion, confirming the regressive nature of sales taxes.

    One of the criticisms of a sales tax is that it is regressive. That is, it affects low-income families in greatest proportion. This is an important consideration to explore, because in November Wichita voters will decide whether to create a new city sales tax of one cent per dollar. If enacted, the sales tax in Wichita would rise from 7.15 percent to 8.15 percent.

    It’s an important issue because to hear some people talk, it seems as though they are saying the proposed tax is “one penny.” Anyone can afford that, they say. But the tax is an extra penny on each dollar spent, meaning that the cost of, say, fifty dollars of food at the grocery store increases by fifty cents, not one penny.

    Further, we hear the sales tax spoken of as being a one percent increase. That’s true, if we mean a one percent increase in the cost of most things we buy. And one percent, after all, is just one percent. Not a big deal, people say. But considering the sales tax we pay, a relevant calculation is this: (8.15 – 7.15) / 7.15 = 14 percent. Which is to say, the amount of sales tax we pay will rise by 14 percent.

    To explore the effect of the proposed sales tax on families of different incomes, I gathered data from the U.S. Census Bureau, specifically table 1101, which is “Quintiles of income before taxes: Annual expenditure means, shares, standard errors, and coefficient of variation, Consumer Expenditure Survey, 2012, (Selected Values).” This table divides families into five quintiles. It gives annual expenditures for each quintile in various categories. For each category, I judged whether it is subject to sales tax. For example, for housing, I indicated it is not subject to sales tax. This is not totally accurate, as some of the spending in this category may be for taxable items like maintenance and repair supplies. Food is subject to sales tax in Kansas, although low-income families may apply for a rebate of the tax. Despite these shortcomings, I feel this data gives us an approximation of the effect of the sales tax. (Click on the table to view a larger version, or see below for how to obtain the data.)

    As you might imagine, as income rises, so does total taxable expenditures. Of interest, the percent of expenditures that are taxable is relatively constant across income levels.

    Click for larger.
    An important finding is the bottom line of the table, which shows the increase in cost due to the proposed sales tax as percent of income after taxes. This calculates the relative impact of the proposed sales tax increase as a percent of income. It is here that we expect to see the regressive nature of a sales tax appear. For all consumers, the increase in cost is 0.35 percent. For the lowest class of income, the increase in cost is 0.97 percent of income. It falls to 0.26 percent for the highest income class.

    This means that the lowest income class of families experience an increase nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. This is the regressive nature of sales taxes illustrated in numbers, and is something that Wichita policy makers and voters should consider.

    I’ve made the data available as a Google Docs spreadsheet. Click here for access.

  • Kansas sales tax on groceries is among the highest

    Kansas sales tax on groceries is among the highest

    Kansas has nearly the highest statewide sales tax rate for groceries. Cities and counties often add even more tax on food.

    Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintile. Click for larger version.
    Additional cost of proposed Wichita sales tax as percent of after-tax income, by income quintile. Click for larger version.
    Only 14 states apply sales tax to food purchased at grocery stores for home consumption. This is generally in recognition that sales taxes are highly regressive. My research shows that the lowest income class of families experience a cost nearly four times the magnitude as do the highest income families, as a percentage of after-tax income. See Wichita sales tax hike would hit low income families hardest.

    When we look at statewide sales tax rates applied to food, we see that Mississippi has the highest sales tax rate for food at 7.00 percent. Kansas is next at 6.15 percent, then Idaho at 6.00 percent.

    Cities and counties often have additional sales taxes. Sedgwick County adds one percent for a total sales tax rate of 7.15 percent. If the proposed Wichita sales tax succeeds, the sales tax in Wichita, including on groceries, will be 8.15 percent.

    It could be that some cities in other states have combined sales tax rates higher than what Wichita currently has, and what Wichita will have if the proposed sales tax passes. As an example, Oklahoma has a statewide sales tax of 4.5 percent that applies to groceries. With city and county taxes added, the rate in Oklahoma City is 8.375 percent. If the proposed sales tax passes, Wichita would be right behind at 8.15 percent.

    Of note, those in Kansas have the possibility of receiving a food sales tax credit of $125. But this is something that must be applied for, and qualifying conditions must be met. Also, the credit is nonrefundable, meaning that applicants must have income tax liability of at least $125 to receive the full credit.

    The following table shows the sales tax rate for states that apply sales tax to food. All other states have either no sales tax, or no sales tax on groceries. View below, or click here to open in a new window.