The California of the Midwest

As revealed by the Cincinnati Enquirer's columnist Peter Bronson:

"Here's a sign you won't see on the bridge from Kentucky: "Welcome to Ohio, the high-tax California of the Midwest."

In fact, Ohio taxes are ninth highest in the nation, but most residents don't know it. Most politicians hope to keep it that way - except for Ohio's most conservative Republican, Secretary of State Ken Blackwell, and the most conservative Democrat, Hamilton County Auditor Dusty Rhodes.

Bronson concisely lays out the Golden State-like fiscal irresponsibility currently playing out in the heart of the heart of the country and then (dare I say sagely?) cites John Hood's great article on chronic state budget problems in the November issue of Reason:

An article in the October Reason Magazine underlines Blackwell's scorching criticism of his own party: Watch out for those tax-and-spend Republicans. Between 1997 and 2002, spending in Republican-controlled states such as Ohio actually rose slightly faster than in Democrat-controlled states.

(Let me whisper that stories like Hood's are another reason to subscribe to the print edition of Reason. If you did, you'd have read that article by now, as well as an assortment of other goodies, all in a dazzling four-color layout, for just $15 a year. Subscribers receive their copies a month of more before any new magazine content gets posted to the Web site.)

Bronson's whole col is here.

Comments

[Rick Barton]

I know, in the US congress the Republicans are much more frugal. Check out the National Tax Payer Union site: ntu.com The top 10 on their rating scale, in both the house and senate, are Republicans.

John Hood's article in the October issue of Reason
(there is not another one in November is there? Just a typo, right Nick?) is quite an interesting read and makes some good, telling points. But, I have trouble with the map at the start of the piece. The map; titled "Fiscal health of the states", allocates ratings based on "spending, bond ratings and taxes". But bond ratings are based, in part, on the ability of the state governments to extract taxes from the people. When a state passes a tax limitation amendment it's bond rating typically falls. It should not be construed from the map, that states whose governments are in poor fiscal health necessarily means that the people in those states are more heavily taxed or the economies of those states are in worse shape. Colorado is a case in point. On the map, it is accorded a "Poor" (the lowest) rating. Colorado has relatively low state government taxes (I think with in the lowest ten) and state spending. It's response to the recession has not been to raise taxes and spending; a mistake that other states have made. Colorado passed a constitutional amendment which limits both spending and tax increases. A citizen initiative, led by anti-tax crusader Doug Bruce, it was praised by Milton Friedman recently in an interview on this site. A couple years ago Colorado's Governor Owens won "The most fiscally responsible governor" award from Stephen Moore and the The Club for Growth.

[Rick Barton]

Concerning the US congress and spending; I forgot to point out that although the Republicans are demonstratably far more frugal then the Democrats, spending has gone up much much faster under Bush then Clinton. This is because the Republicans have yielded to Bush's budget requests where as with Clinton they were quite unwilling to. There is evidence that they might be reverting to their more responsible ways and prodding from us will certainly help.

[Gene Berkman]

Rick

I would not get too excited about "frugal" Republicans in Congress. A few are frugal, and get high ratings, but if you look at all the scores, it is pathetic.
And the scores are not based on starting at zero - they just rate actual votes - so a vote to cut $500 million out of a $30 billion item is a vote for frugality.

News note - Ken Blackwell was Chair of the Forbes for President Campaign in 2000.

[czar]

Why would I pay for Reason? After all, it's just someone else's intellectual property... and as far as the writers at Reason are concerned, that doesn't exist. By getting Reason for free, I'm just falling in line with good old libertarian philosophy.

[Rick Barton]

Gene,

The disparity is pretty big though:
In the house 27 earn "A" "Taxpayers' Friend Award." rating from the NTU. All Republicans. In the Senate 9 do. Again, All Republicans

To compare the whole of both parties:
From the NTU site: Taxpayer Scores, Senate:
Republican median: 63% average 62%
Democratic median: 17% average 19%
Taxpayer Scores, House:
Republican median: 57% average 58%
Democratic median: 22% average 23%

[Ruthless]

RE who taxes-and-spends more, REPUGNANTcans or democRATS:

Think of the later as the accelerator and the former as the brake.
Sure the brake gets most of the credit for restraint, but the car is still doing 90 miles an hour rounding a curve.
Whose fault is it?
The driver. That is the voter who pays no taxes. That's the way she goes in a democracy.

[John Hood]

Rick:

Regarding the map and state rankings of fiscal soundness accompanying my article, they were crafted by Reason editors based on a study published a while back in USA Today. I completely agree with you about Colorado -- it's been one of the few bright spots on the fiscal map this year.

[Douglas Fletcher]

Rick,

Send us the outline next time, ok?

[Rick Barton]

Douglas Fletcher,
Sorry about that.

[Jean Bart]

So when is Reason going to start really begging like NPR or PBS?

[Rick Barton]

Jean Bart,
At least Reason is honorable though, in that it doesn't receive tax dollars.

[D Lusional]

You could pay for the subscription and read the 1 or 2 articeles that aren't on the web site - or just wait util they link them here.

[Nick Gillespie]

In the interest of full information, I should point out that *all* the material from the print edition eventually does get posted to Reason Online. The two main selling points of a print subscription are a) you get the material in a much more timely fashion and b) the print magazine is a pleasure to behold, filled with interesting graphics and images. An additional selling point is that the print subs (along with tax-deductible donations to Reason Foundation [www.reason.org], the nonprofit that publishes the magazine) allow us to keep the lights on at Reason Online.

Now back to our regular program...

[Rick Barton]

Reason is an island of well..reason, in a sea of delusion. Support it!

[Robert Hutchinson]

Let me whisper that stories like Hood's are another reason to subscribe to the print edition of Reason.

Ooh, all this blog-based advertising just reminded me of the screw-up with my "free issue" earlier this year. If anyone reading this goes that route, ignore what's said about how if you don't want to subscribe after reading the first issue, ignore the bill. If you don't write "cancel" on the damn thing and send it back, expect your standard collection threats.

(Why I didn't subscribe? Surprisingly little useful or interesting content. Oh, well.)

[Mike]

Arnold Schwarzenegger is a Reason fan, apparently.

[Evilcor]

Shameful plug Nick. Irony can be hard to detect online, but one might have hoped you'd have been above so shameless a pitch.

[joe]

Keep in mind, voting for a tax cut that increases the deficit is counted as a plus on the Taxpayers Union scale, even though such a vote ultimately means the taxpayers will end up paying the amount anyway, plus interest.

Fiscally responsible does not equal conservative, and hasn't for a long time.

[arjay]

Just sent $25 to Reason Foundation instead of ACLU. Figured I should contribute to a real pro-freedom outfit.

[joe]

Rick,

The revenue increase from a capital gains cut is illusory and fleeting. It appears for a year or two, as the "pent up demand" to realize potential capital income is releases, and everyone who had been holding, sells. Then in disappears. But I'm sure you already know this.

[Anonymous]

Nick's pitch was hardly "shameful" and the remaining question is why asking for support from folks who enjoy Reason online for free or who appreciate the work that Reason does is out of line.

[Rick Barton]

Joe, You wrote:
"Keep in mind, voting for a tax cut that increases the deficit is counted as a plus on the Taxpayers Union scale..."

Actually, the main focus of of the NTU is spending. From the NTU site: "NTU rates congress" page:

"The Taxpayer Score measures the strength of support for reducing spending and opposing higher taxes. In general, a higher score is better because it means a member of Congress voted to spend less money."

"Every year National Taxpayers Union (NTU) rates U.S. Representatives and Senators on their actual votes--every vote that affects taxes, spending, and debt."

"A zero score would indicate that the member of Congress approved every spending proposal and opposed every pro-taxpayer reform."

"NTU believes a score qualifying for a grade of "A" indicates the member is one of the strongest supporters of responsible tax and spending policies."

Also, just wanted to say that tax cuts don't always raise the debt. Capital gains tax cuts almost always bring in more revenue and tax rate cuts often do, since they encourage economic activity.

[Rick Barton]

I like the "Club for Growth" approach to the RINO (Republicans In Name Only) problem. http://www.clubforgrowth.org/rino.php

[Rick Barton]

joe,
On a capital gains tax elimination, it seems pretty straight forward to me. A capital gains tax elimination would cause growth of wealth by lowering the costs associated with the creation of capital and investment, and by increasing economic incentives. Reductions in the capital gains tax have been shown to do just that. A study by the economic consulting firm, Standard and Poor?s DRI, found that the 1997 capital gains tax cut significantly stimulated both economic growth and higher stock prices. In fact, they discovered that the additional revenues from higher stock prices, greater turnover, and faster growth completely offset the original estimated revenue losses from the lower capital gains tax rate.

The taxation of capital gains represents the double taxation of income and a significant drag on economic growth. When a stock appreciates in value it does so after an increase in profits and dividends, both of which are taxed, making a capital gains tax a second or third layer of taxation. Such multiple taxation is unfair and should be ended immediately.

[Rick Barton]

Also, Low-income families receive the highest percentage of benefits from capital gains tax cuts because one-third of Americans earning less than $30,000 per year own stock and would, therefore, directly benefit from both a capital gains tax cut/elimination and from an increase in the capital gains loss tax deduction.

[joe]

A does not follow B there, Rick. The poorest 1/3 of Americans would have to own more than 1/3 of stocks (and real estate) for such a cut to primarily benefit them. Also, capital gains would have to be taxed at a flat rate. Neither of these statements is true.

[Rick Barton]

joe,
It's not about the poorest 1/3 of Americans. Its about the one-third of Americans earning less than $30,000 per year who own stock. But
You're still right; A does not follow B.
What I meant to write was that a reduction in the capital gains tax would benefit those low-income families by the highest percentage ( with regard to the tax itself) because any significant reduction would mean elimination of the tax for them but not for higher income families, since, as you point out, it is not a flat rate tax. BTW, it's a good thing; is it not? that one-third of Americans who earn less than $30,000 per year own stock.

[joe]

Yes, it's a good thing that lower income people have more investments than their lower income parents. Does it make up for the fact that they don't have a pension?

But giving a poor person a 100% cut in the $19 he pays in a certain tax does not mean he has gotten a bigger cut, in any honest or important way, than another person who got $50,000 knocked off of his $million tax bill.

[Rick Barton]

Poor people shouldn't be paying taxes at all; from a practical perspective. From a perspective
of fairness, none of us should.

"Does it make up for the fact that they don't have a pension?"

Maybe; depends on the investment, but remember,
the less government takes, the more people have to set aside.

[joe]

Which people? Someone raising two kids on $19k per year (higher than federal minimum) isn't going to be setting anything aside. The only way she gets to retire at all is to redistribute money from those with greater wealth. There's your fairness perspective.

Though I'm glad to see you're not calling them "lucky duckies."

[Rick Barton]

Everything she buys on her $19k per year would be a lot cheaper with out all those taxes being part of the cost of production and as taxes are reduced there is more money from which to bid hers and everyone else's salaries up.

[Flem Snopes]

what the...? "Hamilton County Auditor Dusty Rhodes"? wasn't my boy one of the founding fathers of the WWF? i swear i saw him dealing blows on the noggins of such titans as the Iron Sheik and Prof. Tanaka down in the Tampa Civic Center back in the day.

good to see guys like this re-invent themselves into public service thisaway

[joe]

Rick,

All else being equal, cutting any tax will spur economic activity, since it's a cost that's being eliminated. (Of course, all else isn't equal, there will be either spending cuts, higher deficits, lower surpluses, or increased taxes elsewhere, but that's another thread.) However, cutting the capital gains tax is one of the least effective economy-boosters, since it tends to spur what amount to accounting changes(moving an amount of money from assets to cash) rather than productive activity like hiring, building, or buying goods and services. Compare this to, say, an equal cut in the payroll tax.

The short-term increase in revenue realized from a capital gains tax cut is not the result of additional economic activity, but of people altering the timing of sales that they would have done anyway. Now, you can argue longterm that lower taxes of any sort are better than higher taxes, but you'd have to drink a lot of discredited supply side Kool Aid to attribute anything but a tine portion of the two year spike in capital gains reciepts to actual economic stimulus.

[John Hood]

Joe:

The argument that cutting the tax rate on capital gains results in an economic boost is not related simply to the "unlocking" effect on investments, though that does have both short-term and long-term implications (it reduces the transaction cost of selling securities, which can affect the propensity to buy them).

The broader issue is investment itself. You seem to think that there is a fixed amount of investment going on, so that changing the capital-gains rate only influences the timing of capital-gains realizations. But because a lower rate increases the after-tax return on investment, the pool of funds for investment will grow. That has a strong influence on future economic growth -- quite likely a stronger influence, dollar-for-nominal-dollar, than cutting payroll taxes would.

Keynesians would disagree, since they are fixated on consumer spending and believe that increasing savings and investment is a bad thing. They propose payroll-tax cuts not even for the employment effect but primarily because it would put money "in the hands of those likely to spend it instead of save it."

Just plain dumb.

[joe]

Nice post, John. But the assertion I was responding to was not "Cutting the capital gains tax increases economic growth." It was "Cutting the capital gains tax increases capital gains tax receipts." Rick was alluding to evidence that these receipts went up in the years immediately following a CG tax cut. I was explaing why this increase was illusory. Even if you are 100% correct, the economic growth you'd expect would not be sufficient to achieve greater revenue from a lower tax rate for years, if at all (which is why those who wish to cut this tax never sell it as a way to finance a new program). It most certainly would not spike immediately after the cut, then drop back to (or close to) its previous level.

Your swipe at Keynesians ignores that fact that proposals for payroll tax cuts are favored as short term stimulus measures, not long-term structural changes. In a recession, a payroll tax cut that puts money in the hands of people who will immediately spend it makes a lot more sense than a CG tax cut as a stimulus measure, since people whose investements are losing money don't pay taxes on them anyway, and those who actually did see their investments grow are probably smart enough to sit on the money until the economy turns around.

[John Hood]

Joe:

No, can't quite agree with you take on this. First, because capital-gains tax cuts develop the economy over time, it is possible for actual dollar revenues to the government to be somewhat higher than they would have been if the rate was kept higher. Obviously, this is question of details: where the rate starts and how far it drops. The notion of a Laffer curve is undeniable, I think, but its shape is debatable.

On stimulating the economy through payroll-tax cuts, I'm with Milton Friedman on this. Most people are rational enough to respond to government "cash-showering" attempts at stimulus by considering their long-run, not short-term, needs. Some will go out and splurge, but many will use cash refunds and the like to pay off credit-card debts.

Plus, government attempts to stimulate will almost always be poorly timed, usually falling too late.

[joe]

John,

You're not disagreeing with me, since I haven't offered an opinion on the long-term impacts.

'Most people are rational enough to respond to government "cash-showering" attempts at stimulus by considering their long-run, not short-term, needs.'

Lot of assumptions you're making. First, that "most people" is a large enough group to make the actions of the rest irrelevant. Second, that long-run needs preclude immediate spending, like fixing the car so it won't die and keep you from getting to work in a month, or doing that roof work you've been putting off.

[Rick Barton]

Joe,
Sorry, I'm not following you. I think the record of cutting the capital gains tax is so good for producing economic activity and real wealth that it argues for the compleat elimination of the capital gains tax.

[Jessica Saunders]

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DATE: 01/20/2004 04:58:42
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