Sunday, December 18, 2011

Phased-in state tax cuts would boost capital

Published in The Tennessean, Sunday, December 18, 2011

by Richard J. Grant

Economists call it the “shortsightedness effect.” Government decisions tend to be biased against actions with easily recognized current costs and less-obvious future benefits. Politicians prefer it to be the other way around. They prefer the benefits to show up before the next election — the costs later.

It also applies to tax policy and the timing of tax revenue. Such is the dilemma faced by the governor of Tennessee. Gov. Bill Haslam is worried about a legislative proposal to eliminate Tennessee’s estate tax and its Hall Income Tax on dividends and interest. The governor knows that both of these taxes hurt the state’s economic development. As he put it, they “chase capital away from the state.”

Enough capital is chased away by these taxes to have reduced Tennesseans’ income growth measurably. Recent research by economists Arthur Laf-fer and Wayne Winegarden compared Tennessee to other states with similar policy characteristics. In general, they found that states with the lowest personal and corporate income tax rates had the highest rates of employment and economic growth over the past decade. This high-growth effect was especially pronounced for right-to-work states.

But Tennessee tended to lag in economic performance when compared to other states in each of these categories. Laffer and Winegarden identified Tennessee’s estate tax and the tax on investment income as the main culprits.

So why is Haslam worried? The issue is timing. The governor knows that states without personal income taxes have more stable tax revenues. Also, the elimination of estate, gift and Hall taxes would result in higher economic growth and higher total revenues from sales taxes. These tax cuts would pay for themselves, but not instantly.

State tax revenues fell significantly during the recent economic downturn, and the recovery has been slower than expected. Although the estate and Hall income taxes combined contribute only 2.8 percent of the state’s total revenue, Tennessee has depended on federal transfers to maintain budget balance. When every dollar counts, the governor is right to worry about short-term revenue needs. He also needs to worry about excessive government spending.

Here’s the trade-off. The trouble with waiting for better times is that it delays the income growth that would result from the tax cuts. It also delays the growth in sales tax revenues that would more than make up for the tiny estate and Hall tax revenues. The sooner the cuts are legislated and brought into effect, the higher will be Tennesseans’ lifetime earnings and their spending power.

Proactive legislators should be able to construct a bill that incrementally reduces the tax rates and raises the exemptions. The phase-out of the taxes can be timed according to estimates of net revenue needs. The important thing is to get the legislation enacted so that everyone can make firmer plans and markets can adjust to the state’s improved investment environment.

For many reasons, Tennessee is a fine place to live. But for those who do well in business, and for those who build their investments, incentives change as they grow older. States with lower tax rates on dividends and interest attract more investors. States with neither gift nor estate taxes are more family-friendly. Fewer family farms and businesses are sold to pay taxes.

Shortsightedness is expensive. The legislature can give the governor the tax cuts he needs when he needs them, which is now.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, December 11, 2011

Progressivism is not progress

A shortened version was published in The Tennessean, Sunday, December 11, 2011

by Richard J. Grant

“What does not kill him makes him stronger,” wrote Friedrich Nietzsche. This oft-quoted phrase, usually out of context, is misunderstood almost as often – for it is not necessarily true. That which does not kill him leaves him stronger than he would be if he were dead.

Thus history is presented to us as a string of non sequiturs dressed up as a necessary unfolding of events. We look back fondly at our leaders of the past assuming that, if we survived the crisis of that time, whatever our leaders did must have been wise.

We know better, but are sometimes susceptible to rhetoric that reaches into the haze of history to retrieve moral authority from precedent. So it was that President Barack Obama arrived in Kansas last week in search of reflected glory, invoking the memory of a speech by Theodore Roosevelt a century ago.

That President Roosevelt served as a Republican is useful as a rhetorical wedge to drive into the philosophical cracks of present-day Republicanism. Roosevelt did not invent the regulatory state, nor was he the first with a predilection to impose his conception of the good on other people at home and abroad. But Roosevelt was the first president to launch a conscious attack against private property and free markets.

Historian Daniel Boorstin saw Americans’ lack of interest in political philosophy as giving us an advantage over Europe. We were less likely to be led astray by rousing ideologies. But the progressive movement that captured the mind of Theodore Roosevelt was often recognized, indeed praised, as an import of German socialism. German influence on the American college system in the late 1800s is well-known. Philosophical imports were part of the package.

In his 1910 speech, Roosevelt showed a greater philosophical confidence than he had during his two presidential terms. Laying out what he called a “New Nationalism,” he claimed that “We are face-to-face with new conceptions of the relations of property to human welfare.”

Anticipating Obama, he invoked the false opposition of “the rights of property as against the rights of men,” and then claimed that supporters of property rights had pushed their claims “too far.” He showed Obama how to create a strawman, the man “who holds that every human right is secondary to his profit,” and then oppose it with a similarly deceptive construct, “the advocate of human welfare,” who maintains that every man holds his property “subject to the general right of the community to regulate its use to whatever degree the public welfare may require it.”

But who is to decide what constitutes the “public welfare”? That is always the question left open by the authoritarian mind. Roosevelt continued, again anticipating Obama, “Let us admit also the right to regulate the terms and conditions of labor,” in essence claiming to government the right to control all human relations.

Roosevelt's Progressive Party failed, but the philosophical damage was widespread. By the time that government policies had precipitated the economic crisis of 1929, American voters were unequipped to choose wisely. The era of big government had begun: two steps forward, one step back. Now we have a president who is trying to leap forward.

Roosevelt's progressivism did not kill us, nor did it make us stronger. The Obama presidency could make us stronger; but only if we have now learned our lesson.



Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, December 04, 2011

Estate, gift taxes are a drag on economy

Published in The Tennessean, Sunday, December 4, 2011

by Richard J. Grant

Some taxes are just not worth the trouble. There are many ways in which a tax can end up costing us more than the revenue it generates. This is especially true when the tax rates are high and the tax base is narrow enough that people can shift to other activities that are less heavily taxed. Resources shift into second-best uses.

Taxes reduce the ability of individuals to accumulate capital. Although some government spending is devoted to long-term capital projects, such as roads and bridges, most of it is shifted into consumption. As social programs become a larger proportion of governmental spending, governments increasingly inhibit our ability to maintain and create capital. With less capital, our future incomes will unfortunately be lower than they would have been.

While this implies a lower future standard of living for individuals, it also implies a lower capacity for the future provision of government services. With less capital and lower incomes than we might otherwise have had, the tax base is lower. Future tax revenues cannot be as high as they would have been.

Perhaps the purpose of the tax is not to raise revenue but to discourage the activity that is being taxed. To discourage officially undesirable activities such as smoking and certain types of industrial pollution, we can estimate the amount of taxation needed to reduce these activities to acceptable levels. We know that when we tax something we tend to get less of it.

This is why a particular tax usually generates less revenue than its governmental sponsors had hoped to receive. People really do work less when they no longer believe that their next dollar of after-tax income is worth the effort. People really do shift their capital away from highly taxed investments. People also move themselves to other countries or states, albeit reluctantly, when the tax savings make it worthwhile.

Such mobility is most feasible for people with higher levels of wealth or income. This is what makes the estate tax one of those not worth the trouble.

Arthur Laffer and Wayne Winegarden of Laffer Associates have recently concluded a study on “The Economic Consequences of Tennessee's Gift and Estate Tax.” Tennessee is one of only 19 states with a separate estate tax and one of only two states with a gift tax. Tennessee has the single lowest exemptions for both its estate tax and its gift tax, which makes them more burdensome.

Gift and estate taxes contribute less than one percent of Tennessee's total tax revenues. They also make Tennessee less attractive to high net-worth people, many of whom would be inclined to invest and build businesses locally. Pennies gained, dollars lost.

Laffer and Winegarden estimate that had Tennessee eliminated its gift and estate taxes 10 years ago, Tennessee's economy would have been over 14 percent larger in 2010 and there would have been more than 200,000 additional jobs in the state. Also, the greater prosperity would have brought state and local governments more than $7 billion in extra tax revenues.

Although Tennessee is a right-to-work state with no income tax (except on interest and dividends), low corporate taxes and a low overall tax burden, its economy has significantly underperformed other states that can boast the same advantages. The difference seems to be Tennessee's gift and estate taxes.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011