Kim Crockett, President

Kim contributed this piece to a Center of the American Experiment Symposium entitled “How Can We Better Encourage and Reinforce the Most Entrepreneurial and Talented Among Us?” To put it succintly, Kim thinks we should just get out of the way.

“In 1942, Joseph Schumpeter agreed with Karl Marx that capitalism would collapse from within and be replaced by socialism, but not in the revolutionary way old Karl predicted (and not quite the way Schumpeter predicted either, but his insight is still compelling). Schumpeter described a great irony that is playing out now: Capitalism contains the seeds of its own destruction.

The great, private wealth generated by a free marketplace is now used by the state to support a progressive, socialist vision. Simply put, capitalism is funding socialism and it is capitalism—not the state—that is withering on the vine. The power of the state to tax and regulate, combined with its insatiable appetite for cash and authority, is discouraging our entrepreneurial spirit and creating great uncertainty. The intellectual elite, so hostile to democratic capitalism yet dependent on its wealth and liberal spirit, campaign relentlessly against business through their domination of the media, academia, and the arts. Our dear fellow citizens, with a growing, sometimes militant, sense of entitlement, vote for candidates who promise to take the risk out of life at someone else’s expense.

Private enterprise and taxpayers (a much smaller group than citizens, many of whom do not pay federal taxes) are laboring to support a massive, corrupt bureaucracy, which directly or indirectly employs a significant percentage of the population and thus grows unchecked by the democratic process. Public employees now enjoy greater salaries and benefits than their counterparts in the private sector. Government, currently our leading growth industry, has run up deficits both annual and structural that stagger the imagination. The modern corporation, though nimble and innovative, often joins the government and its political enemies at the table in order to avoid being on the menu.

We are talking about encouraging entrepreneurs in this symposium because most everyone is looking to them and economic growth to get us out of this mess, which, while daunting, would be no match for American private enterprise, if the state would just get out of the way and stay there. Right now, the entrepreneur is like Gulliver on the beach, trying to get up but unable to do so because he is tied down by the Lilliputians.

The financial crisis and ensuing recession were caused largely by government-created obscenities like Fannie Mae and Freddie Mac. Yet President Obama and Congress pile on bailouts and stimulus spending, new regulatory schemes, and massive legislation based on faulty premises and bad science (e.g., ObamaCare, Cap and Trade). All of this only further distorts markets and adds to the cost of business. An arrogant and guilty Congress dragoons executives with its subpoena power to deflect attention from its central role in our economy’s collapse. Senators Barney Frank and Chris Dodd should be tarred, feathered, and run out of town on a rail. Instead, they are still calling the shots, though Dodd’s impending retirement (and other political shake-ups) may be a sign that all is not lost.

Will we prove Schumpeter wrong and at least extend the greatest experiment in freedom and prosperity for the next generation? This Congress is hostile to free markets, and the courts abandoned economic rights long ago. President Obama would like the economy to recover, but only so he can fund an enlarged welfare state.

Therefore, to whom can we turn to defend American enterprise and free the entrepreneur? The people, We the People.

Liberals and conservatives alike must familiarize themselves with the concept of a limited federal government of enumerated powers. We must elect representatives who understand that means rolling back the state. We must reinvent core services, including K-12 education, while shifting social services back to an already vibrant charitable sector. Public pensions, the big daddy of icebergs for the ship of state, must be reformed. We the People must get our hands out of each other’s pockets so our children do not have to work like mules for the state while dwelling in the mediocrity of socialism. We have tipped, but we have not yet fallen.”

Climategate has now been “reviewed” several times by organizations we should be able to trust; a special committee of the British Parliament, Penn State, an environmental agency of the Netherlands and most recently the University of East Anglia itself.

The Minnesot Free Market Institute (and other members of the No Cap and Trade coalition) approach these “reviews” with great skepticism. The reviews seem less than indepedent in their methodology and conclusions; the self-dealing is just compounded . Moreover, we are impressed with the speed with which they were all done. It seems that the institutions who are committed to the UN’s view of  global warming (which relies on CRU data) were in quite a hurry to do damage control following Climategate.

The Wall Street Journal, which shares our skepticism, covered the latest review here: http://online.wsj.com/article/SB10001424052748703394204575367483847033948.html

You can read more at the Volokh Conspiracy (by Jonathan Adler), including international commentary about the quality of these reviews here:  http://volokh.com/2010/07/11/climategate-revisited/  .

We think there is a better way to insure a clean environment and recommend to you the “free market environmentalism” approach taken by the Property and Environmental Research Center (PERC) in Bozeman, Montana. Please visit them at http://www.perc.org/  .

Indeed, before the Legislative Advisory Commission, state economist Tom Stinson estimated Gov. Tim Pawlenty’s spending cuts will cost Minnesota 3,000 to 4,700 jobs. He also modeled the impact of a tax increase on job loss. The Pioneer Press reported “the $1 billion income tax increase that the Democratic-controlled Legislature passed and Pawlenty vetoed in May would have cost the state an estimated 1,000 jobs over the next two years.”

Unfortunately, in eagerness to report or spin Stinson’s numbers, the press, progressive think tanks and DFL legislators misunderstood the purpose of Stinson’s work and didn’t get the basic story straight. In the measured terms of a professional, Stinson confirmed to me that the coverage of his testimony was “not entirely accurate” and interpretation of his data was somewhat “simplistic.”

His job as an economist is not to make political or policy judgments, Stinson said, but to provide a common basis of information and understanding from which better political and policy judgments can be made.

I fear he misreads the motivation of the DFL-dominated commission.

When House Majority Leader Tony Sertich, DFL-Chisholm, declares that “Governor Pawlenty’s budget proposal is going to cause three to five times as many job losses in the state as the legislative proposal,” he is “not entirely accurate” and “simplistic.” In his eagerness to exploit Stinson’s data, he misses larger policy implications. And that is the problem.

First, Stinson’s research did not analyze the DFL bill vetoed by the governor (as reported and repeated). The vetoed bill included income tax increases and pass-through tax increases on credit card companies and on alcohol products. Stinson was asked to evaluate the governor’s unallotments in terms of job loss. A professional, he also modeled a hypothetical $1 billion income tax increase (over two years) because he was “trying to make sure people understood that there are no easy answers.”

In other words, Stinson came not to praise or bury Pawlenty. Short-term job loss is one data point among many trade-offs inherent in the budgeting process, but it is not the only trade-off. In fact, the trade-off between tax increases and spending cuts results from a higher-level trade-off — between a balanced budget and making a recession worse.

Progressive think tanks often quote Nobel laureate and Columbia University professor Joseph Stiglitz saying that a reduction in government spending is more harmful to the economy in the short run than an increase in taxes. What they fail to note (but Stiglitz emphasizes) is the balanced-budget trade-off that puts policy-makers in a situation that is ultimately harmful to the economy.

“It is worth emphasizing,” Stiglitz writes, “that any state spending reductions or tax increases are counterproductive at this time: they restrain the economy at time when it is already slowing.”

So, let’s be honest: The debate over tax increases or spending cuts is not about improving the state’s economy. The choice is not between “good and bad” or “better and worse”; the choice is between “bad and worse.”

Stinson’s model does not make value judgments about how the loss of specific job types affects the state economy. Nor does it consider the value of freeing unproductive resources for other uses, nor does it provide any criteria for making those judgments. Those are among the political and policy questions that must be addressed on a case-by-case basis, which won’t happen while the Legislative Advisory Committee remains intent on misusing data to beat up the governor.

The legislative end game is neither “stupid” DFL tax increases nor “evil” GOP spending cuts (nor some really stupid and evil “bipartisan” combination); the end game is enabling Minnesota to be a competitive player in the global competition for the capital that creates productive jobs in the private sector. To correct that problem requires reform of the tax system and a redefinition of the role of government, and that won’t happen if the Legislative Advisory Council stubbornly continues turning data points into talking points, which makes for provocative newspaper headlines but precious little progress.

Craig Westover is a contributing columnist to the Pioneer Press Opinion Page, a senior policy fellow at the Minnesota Free Market Institute (mnfmi.org) and a member of the Republican Party Liberty Caucus. His e-mail address is westover4@yahoo.com.

This commentary originally appeared in the St. Paul Pioneer Press July 15, 2009.

Let’s look at Fein’s principles in detail, contrasting them with a free-market health-care system, keeping in mind that the health care system we have today is NOT a free-market system but a heavily regulated managed-care system — single-payer-lite.

Fein’s principles Nos. 1, 2 and 3 define the classic trade-off among access, quality, cost. His first principle of a single-payer system is “automatic enrollment, which would lead to universal coverage.” His second principle is that “benefits ought to be really comprehensive … going from prevention, doctor, hospital, pharmaceuticals, to dental, metal health — all medically necessary services.” Principle three is that “these things should be publically financed.”

Every system — whether a manufacturing system, a sales system, the education system or the health care system — has the same three (and only three) outputs and addresses the same three questions: “How many of what kind at what cost? In health care, those three questions are expressed, “What quality of care (kind) can we provide at what cost to how many people?” Trade-offs are necessary to achieve the optimum (not perfect) system.

In a free-market health-care system, the optimum solution is determined by the pricing mechanism and individual choice. Each of the three variables is truly variable — that is given a market where physicians determine service and price and the individual is responsible for his care costs, a person might choose to have his annual check-up done by a local clinic rather than the Mayo Clinic. Given his family history, his doctor might decide he needs a specific procedure at a different interval than “the average patient.” It is these kinds of individual decisions made by millions of individuals that create an optimum health care system.

‘Variables’ aren’t variable
In Fein’s single-payer model, the “variables” are not variable at all. One of the three variables is fixed (universal coverage); consequently, the other two must be consciously managed from outside the system. Everyone cannot receive comprehensive health care (however “comprehensive” is defined) except at very high cost (or with very high taxes). If costs are fixed (as they must be at some level) then all that remains to be managed is the definition of “comprehensive.” That is why the Obama health plan calls for creation of a third-party board to determine the cost-effectiveness of specific medical treatment for specific classes of people and decide if the treatment will be covered. “Comprehensive” medical care means “quality” medical care is what government says it is, not necessarily what the patient wants.

Whereas in a free-market system millions of medical decisions are made with immediate cost and quality information available to doctors and patients, in a single-payer system, health-care decisions are governed by a relative few individuals necessarily making aggregate assumptions about individual patient situations because they cannot possibly have instant access to data required to make a decision about any individual patient.

That would be “you.”

Trade-offs among access, quality and cost in a health-care system are inevitable even if Fein does not acknowledge them. In a single-payer system with universal coverage, at some point, someone other than you and your doctor will be making decisions that materially dictate and limit treatment options available to you and your family.

Fein’s principle No. 4 is that single-payer eliminates “administrative waste” that results from having multiple payers. His principle No. 5 is that single-payer maximizes choice compared to “our present private insurance system.” Before we can discuss those two principles it is necessary to debunk the misconception Fein implies — that our “present private insurance system” is equivalent to “free-market health care” and that the present managed-care system is the same as a “private health insurance system.”

In free market, patients control the money
In a free-market health-care system, patients control the money that is spent on their health care. That money might be theirs, it might come from an insurance settlement, it might be a health-care voucher by a government program, but in each case, the patient decides how his money will be spent. In turn, in a free-market system, doctors determine what services they will provide and at what price. Doctors compete for individual patients on price and quality of care. Finally, in a free-market health-care system, insurance companies offer policies that meet the differing resources and tolerance for risk of individual consumers. They also have control of products and price. Insurance companies compete for customers based on price and comprehensiveness of coverage.

True health insurance (as opposed to prepaid medical care) has little to do with access to actual medical treatment. Health insurance, like any other insurance product, is concerned with asset protection. The purpose of health insurance is turning unpredictable and unaffordable expense into predictable, affordable expense. Insurance companies offer a variety of policies at different premium levels and deductibles that consumers will buy depending on their needs, resources and tolerance for risk.

In today’s prepaid managed-care system, insurance companies control (via government regulation) which services will be covered and how much physicians will be paid for those services. Even Fein acknowledges that in today’s regulated environment consumer choices are limited. Because a single entity controls both demand and supply of health care, there is no competitive pricing mechanism and consequently no accurate regulator on prices. Cost can’t be controlled if there is no mechanism for determining price and demand at a price.

Three outputs, three questions
Recall that any system has the same three outputs and addresses the same three questions — “How many of what kind at what cost? In a private health-insurance system, those three questions are expressed as “How many policies can be written, covering which situations at what cost?” In the current system, by law, “covering what situation” is mandated. Minnesota has more than 60 insurance mandates requiring specific coverage, for example. When one variable is fixed, the other two must be consciously managed from outside the system. Hence, on top of necessary administrative costs, we get unnecessary administrative costs imposed by regulation.

Because a third party, government, has fixed the extent of coverage, private companies are limited as to the policies they can provide and the price at which they can provide them. To keep costs down, they must either limit service provided or reduce payments to service providers. That does not change with the advent of a single-payer system. A single-payer system is not essentially different from the managed-care system we have today. The only difference is eliminating the regulated private health-care insurers and replacing them with a regimented bureaucracy.

That brings us back to Fein’s single-payer health care principles Nos. 4 and 5: eliminating administrative waste and maximizing choice.

I’ll forgo arguing with Fein’s statistics on administration costs other than to say determining administrative cost depends a lot on what is included as “administration” and what isn’t, and Fein’s numbers are based on some fairly biased assumptions — as would be my assumptions to the contrary. However, the fundamental irony, as the Cato Institute’s Michael Tanner points out, is that folks like Fein praise one of the greatest failings of socialized medicine, lack of administration, as if it were a virtue.

Administration is key
Economist Tyler Cowen notes administrative costs like monitoring, marketing and overhead costs of private insurance companies are what enable those companies to offer coverage for expensive medical treatments. Competing insurance companies spend money evaluating claims and setting pricing structures so that there is an accurate measure of what coverage actually costs relative to need. Without that review mechanism, it is impossible to limit health-care costs without reducing service. Without the consulting function of insurance agents, individuals will either buy more coverage than they need and pay more for it than they should, or find themselves underinsured and taking on more financial risk than warranted.

Tanner adds, “If European health-care systems appear to have lower administrative costs, it is because, rather than scrutinizing claims, they limit the overall amount they will spend on medical services. Of course, that just means they shift costs to patients who either must pay for medical services themselves, or deal with the costs of waiting.” Going back to the access, quality, cost triumvirate, if claims are not reviewed then cost must be shifted or care limited, or “administrative saving” or the consequences of lax oversight must be passed to taxpayers.

In his principle No. 5, as he did with the definition of “comprehensive,” Fein obscures the concept of “choice” in health care. “The program in the country with the most choice is Medicare,” he writes. “You have the choice of physician, a choice of hospital; so, again, single payer would lead to increased choice.”

Indeed, as Fein envisions single-payer, it would lead to increased choice compared to today’s system. But remember, the system we have today is not a free market system, which by definition requires that patients control their health care dollars and choose their own physicians and by extension hospitals and other treatment facilities. The system we have today, thanks to government regulation, is a managed care system where different costs for “in-network” and “out-of-network” care are unavoidable because doctors are competing for pools of patients provided by health plans based on how little reimbursement they will take; doctors are not competing for patients based on value to the patient.

However, what Fein calls “choice” turns out to be anything but, as his principle No. 6 illustrates.

In his sixth principle, Fein again tries to reassure with the idea that a single-payer system really delivers health care through a “nonprofit, privately controlled system.” Doctors, he says, “would not be employed by the government; hospitals would not be owned by the government. What you would have is public financing and collection of money by the single payer, but the private delivery system would continue.”

Sort of like General Motors, I guess.

Choice, but not much of a choice
What Fein doesn’t make clear is that while patients in a single-payer system might choose from among private doctors and private hospitals, there will be little difference among doctors and hospitals in the procedures and treatments they are allowed to perform. There is a big difference between choosing among McDonald’s, Burger King and Subway (a free market) and “choosing” any (but only) McDonald’s. Again, in a single-payer system at some level, medical choices for the individual must be made by a third party based on aggregate rather than individual considerations — you just can’t get “a flame-broil Whopper Jr. for a buck” at Subway.

A second point Fein ignores in his choice argument is that with a single-payer system there is little to no motivation to innovate. Using Fein’s Medicare analogy, the single-payer determines both service descriptions and reimbursement rates. Innovations, by the definition of “innovation,” are not in the system. Medical innovations by their nature are, in initial stages, very expensive, and until perfected, produce unpredictable results. Where is the motivation to innovate if a) one must buck the system at one’s own expense to put the procedure on the service schedule, and b) one will be able to price the innovation to compensate for developing it.

Removing the profit motive stifles innovation; that reduces choice, it does not increase it.

Concluding, Fein provides us with the single-payer analogy of Medicare for all. “So what we talk about is Medicare 2.0,” he writes, “an expanded program of Medicare for all and an improved program that deals with many of these other programs. That would be the way a single-payer program would operate in the United States.”

OK, let’s assume Medicare provides “comprehensive” medical care at affordable cost (a debatable point). Why is that so? It is because the private health-care market picks up the tab for subsidized, below-market Medicare patient care; non-Medicare patients pay much more for the same services. When you extend Medicare to everyone, who is left to pick up the slack?

The dirty little secret today is that increasing numbers of physicians are simply not taking new Medicare patients. They continue to provide care as their patients age into Medicare, but the reimbursement rates for Medicare are so low that private physicians simply cannot afford to take on new Medicare patients. We’re not talking the ever-available criticism of “greed.” We are talking government reimbursements that are so low that they do not cover the cost of treatment and overhead, let alone any expectation of profit.

This situation points out another consequence of a single-payer system that Fein ignores: A Medicare-for-all scenario necessarily requires a nonvoluntary requirement on physicians to provide care irrespective of their own interests. The individual sovereignty of health-care providers, an unalienable right, must be sacrificed for the manufactured “right to health care.” As must the patient’s unalienable right to make his own health-care decisions.

Trade-offs would be imposed from on high
In his MinnPost interview, Fein has given us a clear picture of a single-payer system. What he has not offered is the trade-offs such a system must necessarily impose from on high by boards and bureaucrats, unlike in a free-market health care system where trade-offs are determined by individuals and their doctors. A single-payer system is a classic example of the dichotomy between freedom and perfection: A free society can never be perfect; a perfect society can never be free. The ultimate trade-off offered by a single-payment health care system is between the unfulfillable promise of perfection and the frustration of imperfection engendered by individual freedom.

In a true free-market system, not the heavily regulated managed-care health-care system we have today, individuals and their doctors decide how trade-offs will be made based on their individual situations. In a single-payer system, third-party government boards must necessarily make cost-based decisions about individual medical care based only on aggregate data. A free-market health-care system encourages innovation because innovators reap the rewards of their effort; a single-payer system discourages innovation because the system doesn’t know how to value innovation. A free-market health-care system establishes an optimum (not perfect) relationship among access, quality and cost; a single-payer system providing universal coverage distorts market signals by the necessity to system control costs, and consequently misallocates costs and redefines “quality.”

Ultimately the question that the public must answer vis-à-vis single payer health care is “Who do you want making decisions about health care for you and your family — you and your doctor, or somebody else?

Craig Westover, a senior policy fellow with the Minnesota Free Market Institute, is a contributing columnist to the Pioneer Press Opinion Page and a contributor to MinnPost.

This piece originally appeared at MinnPost.Com — COMMUNITY VOICES | THU, JUN 25 2009 7:00 AM

Lowi coined the term “interest-group liberalism” to describe policy-making through deference to organized lobbies. Interest-group liberalism rests on two fundamental beliefs: Government is a positive force and a champion of good, and virtually all interest-group demands are legitimate. Consequently, a primary function of government becomes balancing and advancing any and all organized petitions.

The “end of liberalism” comes about when the appeasement process evolves the perfect storm of unrestrained bureaucratic growth, an unmanageable web of conflicting regulations and an unsustainable skyrocketing budget. Are we there yet, at the end?

Not by a long shot, and the reason is simple: Interest-group liberalism is the prevailing political philosophy of the American public, of Democrats and of Republicans — all the post-election Republican talk of a return to “conservative values” and “conservative principles” notwithstanding.

Slate writer Jacob Weisberg picked up on Lowi’s theme in a 2005 piece analyzing the governing philosophy of then President George Bush. When Democrats were in power, Weisberg noted, they were beholden to unions, lobbies for women’s rights, civil rights and gay rights, senior citizens lobbies, welfare advocates, Hollywood and trial lawyers. The hallmark of Democratic governing was a focus on policies that meant more to those groups than mattered to the welfare of the country at large.

When Republicans assumed power in 2000, the implied promise was the end of liberalism. Instead, Bush-era Republicans practiced their own brand of interest-group liberalism. Out with the old and in with military contractors, evangelical Christians, wealthy investors, gun owners and an alternative conservative media — new regime, new supplicants, but the same process.

Like the repentant weight-watcher who will do whatever it takes to slim down except diet and exercise, after getting hammered in the past two election cycles Republicans seem willing to do whatever it takes to restore conservative “values” — except adhere to conservative “principles.” Consider the touting by Republican Rep. Erik Paulsen of a legislative amendment he authored.

“Our military veterans who own businesses face unique challenges, and government must ensure the policies in place to assist them are achieving their goals,” Paulsen said in a press release. The “Job Creation through Entrepreneurship Act,” to which Paulsen’s amendment ensuring benefits for veterans was attached, also includes specific largess for women, Native Americans and a new grant program for Small Business Development Centers. It passed the House 406-15.

Paulsen and Republican Rep. John Kline voting for a bill that champions small business and veterans is certainly in keeping with “conservative values” (GOP Rep. Michele Bachmann did not vote). But using public funds to create private benefits for multiple interest groups by expanding the federal bureaucracy and deficit spending most certainly violates the conservative principles of limited government and fiscal responsibility (not to mention constitutional fidelity).

Such interest-group liberalism turns logrolling (legislators trading votes) from “a necessary evil into a virtue.” So at a state level, when southern Minnesota legislators earmark state funds for an international volleyball center in Rochester, there is nary a peep from their Arrowhead compatriots who expect reciprocal support in anticipation of a photo-op at a Duluth arena expansion. Both outstate areas support a budget-draining light-rail system between Minneapolis and St. Paul. A combined financial obligation on all Minnesotans, these projects respectively mean more to Rochester, Duluth and the Twin Cities than they matter to the welfare of the state at large.

The irony is that by practicing interest-group liberalism, both Democrats and Republicans are conservatively protecting an unsustainable status quo. Chances of actual reform — say, replacing the inefficient corporate income tax with a more efficient broad-based, low-rate sales tax — is problematic, not because of any flaw in economic logic, but because Democrats and Republicans both have supporters threatened by the reform. Their here-and-now concerns matter more, politically, than the future economic welfare of the state.

While many are outraged at government largess to interest groups other than their own, few are eager to gore their own oxen for the sake of principle. Nonetheless, unless we the people demand reform, it’s more likely the Twins will sweep a series in Yankee Stadium than we will ever achieve an “end of liberalism.”

This commentary originally appeared in the St. Paul Pioneer Press Thursday, May 28, 2009.

Those numbers are accurate. They come right out of the Minnesota Tax Incidence Study, a biennial report of who pays how much in state and local taxes. And the Minnesota report even earns the kudos of center-right economists for its intellectual rigor and clear statement of assumptions and limits — a rigor and integrity lacking, however, when tax burden percentages are tossed out as disembodied “facts.”

Among many relevant but ignored economic issues affecting interpretation of the Tax Incidence Study, three stand out.

First, the Tax Incidence Study is a snapshot of income distribution at a specific point in time and does not consider the significant changes in income that occur over a person’s lifetime. Consequently, the study implies more income inequality than is reality over a person’s working life.

A report provided by the U.S. Treasury Department found that more than 50 percent of taxpayers were in a different tax bracket (higher or lower) at the end of a 10-year study period than at its beginning. Although an insignificant percentage in the lowest tax bracket made it to the top bracket in just 10 years, only 33 percent remained in the lowest bracket — and 32 percent elevated themselves to the 15 percent tax bracket.

Likewise, a small percentage of those who in Year 1 were in the 28 percent tax bracket and above dropped to the lowest income levels. However, after 10 years, a significant percentage of once upper-income earners were in the 25 percent, or middle income, tax bracket. Over the 10-year timeframe, income levels trended toward the middle-income tax brackets.

Discounting income mobility ignores the impact of taxes on the ability of people to both pay back debt they incurred in low-income-earning years and save for later, low-income-earning years. Legislating people into a higher tax bracket punishes education, saving and upward mobility.

Take the case (reported by Yahoo News) of Van Moore, who graduated from optometry school $150,000 in debt. His first job brought in less than $20,000 a year. Then he made $50,000 for several years, all the while paying on his student loan, which still carries a balance. Now he is making just above $250,000, the arbitrary dividing line between “the rich” and the rest of us. A higher tax penalizes Moore for borrowing money in his low-income years to educate himself so he could earn more in the future.

A second misuse of the Tax Incidence Study is making it a barometer of “ability to pay.” The measure of income is very important to creation of a meaningful tax incidence study. The Minnesota study uses Federal Gross Income as its measure of income because the law requires that it use “the broadest measure of income available.” Using a broad-based definition of income and a narrow definition of tax liability skews the study findings to appear more regressive than the tax system actually is.

My colleague at the Minnesota Free Market Institute, economist King Banaian, suggests two ways to eliminate that problem. One could deduct federal tax payments from federal gross income, or one could calculate the tax incidence including federal taxes paid (neither technique currently allowed by the state law mandating the Tax Incidence Study). The law notwithstanding, the combined federal, state and local tax system is progressive. The Congressional Budget office calculates the effective federal tax rate is only 4.3 percent on taxpayers in the bottom 20 percent of income earners, but 25.8 percent on taxpayers in the top 20 percent of income earners.

A third issue: Even accepting “fairness” as the overriding objective, the progressive solution of higher state income taxes actually increases, not decreases, the pre-tax income gap.

“Fairness” in the perfect progressive world means middle- and upper-income earners each pay 12 percent of their incomes in state and local taxes. Of course, some rich guy paying 12 percent doesn’t reduce the out-of-pocket tax burden on a middle-income person, but progressives aren’t talking effective taxation; they’re talking “fairness.” Here’s what really happens.

A uniquely skilled individual commanding a high salary can work just about anywhere he chooses. The mobile worker, the kind who pays the most taxes, will gravitate to where his net income, not gross income, is highest. To lure and keep highly productive individuals in Minnesota, Minnesota employers, including school districts looking for superintendents and universities seeking nationally known professors, must pay higher gross salaries to compete with low-tax states.

Higher salaries for those already earning top dollar don’t just increase the salary gap; they contribute to higher consumer prices and lower wages for non-mobile workers — the rest of us. When a company pays top-earners more to compensate for high tax rates, it means fewer dollars available to pay the rest of a company’s employees, further increasing the real wage gap irrespective of what the Tax Incidence percentages indicate. Is that really “fair”?

Bottom line, there are tradeoffs between a tax system based on economic principle, tax burden and efficiency objectives and a tax system motivated by distributional effects and equity objectives.

The public would be better served understanding and debating those tradeoffs than by class-baiting Sunday morning sound bites.

Craig Westover is a contributing columnist to the Pioneer Press Opinion Page and a senior policy fellow at the Minnesota Free Market Institute (mnfmi.org). His e-mail address is westover4@yahoo.com.

This commentary originally appeared in the St. Paul Pioneer Press, Friday April 24. 2009.

What do you want to build? Why? And how do you propose to take care of it? Those are the questions legislators ought to address says Dean, but seldom do. Instead, the state builds new and expands rather than repairs and maintain just what it needs. Dean has a solution.

–Craig Westover

As an architect, I like to see stuff get built. But as a conservative, I hate to see the state waste money. As a conservative architect, I get pissed off when I see the state spend money on cheap ugly-ass buildings that do not work well and fall apart quickly.

The state does need to spend money on public buildings. We also need to spend money to keep them up. Bonding makes the most sense to pay for it. The real questions are: What do you want to build? Why? And how do you propose to take care of it? We have traditionally set our budget at no more than three percent of general revenue. This year, after scolding the GOP for attempting to break the limit in the past (credit card spending) the DFL wants to blow by the limit generally accepted by the bond houses as fiscally prudent to keep our rating.

Staying below the three percent level makes sense to me. That means we really can not spend the $300M-plus. Not even the $250M proposed by the house. Typically when the senate proposes $300M and the house $250M, they usually come together at $550M.

Vitruvius wrote that a building should have “firmness, commodity, and delight.” In other words, it should be durable, it should meet its purpose, and it should be pleasing to look at.

We need to focus on his first part, “firmness.” Where we have fallen down in the past is on the proportion of money we spend to maintain buildings. Why fix a building up when you can build a new one? This trend has given the state more square footage of building space (because we do not tend to sell buildings either) and a sicker stock of poorly maintained buildings.

If they were vacant, I would not be so troubled. Problem is, we keep filling them with more folks who collect money from the government. As we litterally grow government (buildings), I am convinced there is a natural reaction to fill them with government people.

The second area where we can do better is in the area of spending the money. No, I’m serious. We have hundreds of millions of dollars let by the legislature that agencies are sitting on to implement their schemes in the future.

Today I am offering an amendment to the house bonding bill that does two things. First, it cancels a whole bunch of previously bonded projects that the agencies are sitting on (from trails to the theatre-mobile in Mpls. Next, it spends the money on only ugly projects like roof repairs, road installations, flood clean upand roof replacements.

This Guest Post was written by Rep. Matt Dean of Stillwater.

Update: See “Potholes on the Road to Serfdom.“

*****

C’mon, Charlie. Vigilance, the price of freedom and all that. When a principle is being constantly violated, why is it a sin to constantly remind people? And really, Charlie, if progressives don’t recognize the difference between the public good of education and non-essential government services, do they really have the wherewithal to govern? Is it any wonder that government intervention is virtually unrestrained?

And while you grant government the delusion of adequacy, you hold the free market to the standard of perfection. Of course, the free market is not the perfect engine of wealth creation. It is simply the best. When private companies lose money, they are effectively destroying wealth. No question. Here is the difference.

First, the wealth they are destroying is private wealth freely invested in anticipation of profit. The penalty for bad investment is paid by those making the bad decisions. (If fraud is involved, that is another story, but there is legal recourse for that, as there should be.) No one is coerced into making a private investment, as one is “forced” to invest in more costly, less efficient sources of energy production when government “invests,” or forced to invest in a failing automobile company as when government “invests.”

Second, a failing company ultimately goes out of business (baring, surprise, government intervention!) and ceases its drain on the wealth of the community. Government “rewards” programs that fail with more funding and more authority. Case in point, the Treasury Department has failed miserably to come up with a plan to “fix” the economy, so now it wants more money and more authority; GM is “too big to fail.”

Finally let’s address this point, not with an animated gif, but with some logic: “We’ve just been through a couple decades in which the objective of the smart money was not to create jobs, but to exploit the fault lines, chinks and timing of complex financial markets.”

I happen to agree with that, but rather than a problem with free markets, it is a problem of too much government intervention. A long recognized characteristic of human nature, and principle of economics, is that human beings acquire property in one of two ways – through their own efforts or through plunder, whichever is easier. Government, the rule of law, serves the legitimate function of making plunder the more difficult by enforcing force and fraud laws and increasing regulation that enhances the probability contracts will be honored. Laws preventing the use of force and fraud in voluntary contractual agreements may be overly burdensome in some cases, but they are always legitimate.

The situation of recent years, and the Enron et al scandals are also examples, government has intervened in the process, not to protect the process, but to manipulate the process with noble but misplaced intent to direct the outcome of voluntary agreements. Government regulation mandating how money must be loaned, government tweaking unequally the supply of money and the demand for credit, government micromanaging every transaction that went awry with a broad-based law (think mark-to-market) created those chinks and timing opportunities that made legal plunder more attractive than actually creating wealth. Had government kept to its proper role of preventing force and fraud, and done that job as thoroughly as it should, money would have flowed to its most efficient use, no housing bubble, and the economy would have made numerous self-corrections – minor pain for some, to be sure, but overall aggregate growth and opportunity.

As Milton Friedman noted, Charlie, “Underlying most arguments against the free market is a lack of belief in freedom itself.” And that, Charlie, is what is ultimately frightening about the progressive world view.

Sorry I could not contain this comment to a silly graphic.