Tuesday, August 29, 2006

100 Years of non-violent Government Changes

In the past 100 years, how many of the world's approximately 200 countries have either not had a violent overthrow of their government or have not been occupied by a foreign power?

The answer is only 8.

New Zealand
South Africa
United Kingdom
United States

You may think more countries belong on the list. But Mexico had its revolution in 1910 (not really ending until the 1920s, but the consitution was established in 1917), most of Europe was occupied by the Germans or Russians during World War II. Most of Africa was colonized until the 1960s. I wonder if South Africa really belongs on the list, as it was a nominal British colony after the Boer War (1899-1902), but Transvaal had home rule beginning in 1906, and the Orange Free State in 1907, and the Union of South Africa wasn't created until 1910 (when it became a self-governing dominion under the British crown). So if we move the start date to 1910, then South Africa joins the list, because although it had a racist government, it was never occupied by a foreign power since that date and it did not have a violent overthrow of its government when the transition to majority rule took place in 1994.

In any event, it's interesting, but probably coincidental, that of the 8 countries, 6 of them have their institutions and legal codes rooted in the British system (the exceptions being Sweden and Switzerland).

100 years is not a huge amount of time, and while it seems unlikely that in 100 years, there will be only 8 countries who haven't been occupied or haven't had a violent transition of power, things can change pretty quickly. I wonder if 100 years ago anyone thought only 8 countries would make it for 100 years without being occupied or having a violent overthrow.

Saturday, August 26, 2006

HOV lanes and People who need to get there fast

Why do traffic jams exist? The answer is either 1) there's an obstruction: a wreck, construction, tree in the road, etc., and thus the capacity of the road is limited [reduced supply]; 2) there are too many cars on the road versus the capacity of the road [increased demand], 3) there's not an obstruction, but there's some event that causes people to slow down to have a look (like a wreck that's been moved off the road so it no longer is blocking traffic).

Most traffic jams result because of the capacity issue. There are simply too many cars for the road (and this often leads to wrecks, which causes further delays). The problem with highways is that the cost is almost always fixed, regardless of the time of day that the road is being used. Roads are funded through gasoline taxes and tolls, and tolls are usually fixed. Furthermore, while the lanes going into the city may be backed up for a few hours each day in the morning, most of the time it's smooth sailing.

Traffic jams cost drivers money in that they can't be doing something else, like working (this is "opportunity cost"). For an unemployed guy driving somewhere, the opportunity cost of sitting in a traffic jam is basically negligible. For a lawyer who sits in a traffic jam, the opportunity cost can be quite high.

Governments have two methods of reducing traffic jams resulting from capacity issues: increase supply or decrease demand. Increasing supply means adding more lanes, or alternate routes: an expensive proposition. States currently have fairly clumsy methods of reducing demand during peak periods: one of the more prevalent methods is to promote carpooling through HOV lanes, adding public transportation with more robust schedules during peak times, etc.

Why not charge drivers a high toll during peak periods? The key would be to have lower tolls outside the peak periods, when there's excess capacity. This would encourage some drivers to shift their work schedules so they'd start and end work during non-peak times (the first to do so would be workers who could shift their hours without a great impact [such as computer programmers]).

In addition to having the toll be reduced (or even eliminated) during non-peak times, there would also have to be a good collection mechanism (probably via electronic devices like EZPass) in place so that drivers wouldn't have to wait to pay a toll, thus negating the benefit of paying the toll in the first place. I believe that the technology to do this exists well enough right now.

Convert the HOV lanes into "pay to drive faster" lanes. This way, poor people could afford to drive, it would just take them longer (but they don't value their time that highly). Meanwhile, people whose time was very valuable could pay to drive in the HOV lanes.

What would the cost of the pay lanes have to be? Well, there would have to be some sort of mechanism to determine the price: at what price does traffic again move at the speed limit? That's where the price should be set.

Roads are a limited resource, and when you have a fixed price (i.e., the gasoline tax or a fixed toll) for a scarce good, you are going to get a shortage of that good (in this case, the good is a lane of pavement as long as your car and four car lengths to the next car). By raising the price of the good, you get rid of the shortage.

While local governments would probably make money by implementing this system, I do not think it should be viewed by municipalities as a way to keep getting lots of money (rather, it should be viewed like fines: attempting to control behavior). With current technology, it would probably be quite easy to reset the price every month for each hour window based on the demand. The price would be set so that at any given time, there would not be a backup (so most of the night, there should probably be no toll).

Many of you might say this would just hurt the poor working man who needs to get to work by a certain time, and why should he be penalized (if free lanes didn't exist next to pay lanes). My answer would be that he could leave earlier when there were no tolls. If he wants to consume a limited resource, he needs to pay for it (at 5:00 AM, roads usually aren't a limited resource, so tolls then could be free). He could carpool with others who wanted to drive during the peak period but could not afford to do so alone. Or he could lobby his employer to shift his working hours. If his employer refused, he might then find alternative employment that did allow for more flexible hours. This would eventually cause employers to have to raise their wages for lower-income people who work normal business hours. It would also provide an incentive for people who had normal working hours to live closer to their employer (or at least not in the same direction as all other commuters).

By having rates that vary according to demand, we'd eliminate the shortages. That's what done in almost every other facet of our lives, so why not with the highways as well?

Tuesday, August 15, 2006

Why Subsidize Multinational Corporations?

I'm a free-market capitalist. I don't think corporations are evil. I think that they can almost always provide a good or service more efficiently than a governmental entity.

However, many suburbs give various tax abatements to encourage corporations to move their headquarters or factory or whatever to their community. I think that this practice is ridiculous and patently unfair, even if the company is providing a bunch of jobs, even if it's helping local businesses such as restaurants, even if it's a net win for the community under whatever metric.

For instance, UBS AG got $145 million in incentives, primarily tax credits, when it moved its headquarters from New York City to Stamford, CT.

However, if no municipality had offered UBS AG a tax incentive, it wouldn't have gone out of business. It would have either kept its headquarters in New York, or it would have moved someplace else. It may not have chosen Stamford without the tax breaks, but it would have chosen SOMEWHERE. Yet when municipalities compete with each other, all that ends up happening is that the large corporation ends up paying less in taxes, but everyone else has to pay more.

Now, you may ask yourself, how can someone who says he is so much in favor of free markets be against competition? Isn't competition the basis of free markets?

Yes, competition is essential for a free market to work. And I would have no problem if Stamford or Westport of Newark or Jersey City or whomever lowered their property tax rates for EVERYONE. However, a government picking and choosing what companies it provides tax incentives to simply creates distortions. Instead of the market deciding what companies will be located where, personal connections and other arbitrary factors lead to cities giving tax breaks to one company and the expense of the others. If a 10 person boutique firm moves from NYC to Stamford, no one gets a tax break. Why should UBS get a tax break simply because it's larger?

Suppose UBS paid the same property tax rate as every other business in Stamford. But then at the end of the year, Stamford decided to write a check to UBS for the amount of its taxes paid. Would that make you upset? Because that's essentially what Stamford has done.

I say this even if you can produce some analysis that after the inital 10 year (or however long it may be) tax holiday, UBS will pay taxes, and that will be a net win for Stamford. Except that they weren't paying taxes for 10 years. You may say, well they wouldn't have paid taxes if they hadn't moved here. But they would have had to have been SOMEWHERE and they'd be paying taxes there if no municipality offered these ridiculous tax breaks.

When property taxes aren't assessed at the same rate for all properties (and properties need to be reassessed regularly), then you've got an unfair system. You have the high ratepayers subsidizing the lower ratepayers. In a few cases, you may be able to get away with multiple rates (a special rate for a particular sewer district, or lower taxes for commercial properties on the theory that they don't send kids to school or whatever). But other than these few cases, keep property taxes at the same (hopefully very low) rate across a municipality. Don't tax someone at one rate simply because they may threaten to leave, or wouldn't have come, or whatever. If your tax rates are such that companies won't locate there without incentives, here's a thought: lower your taxes for everyone. Maybe the problem is that your taxes are too high.

Wednesday, August 09, 2006

Conservatives and Property Taxes

What is it about conservatives that causes many of them to propose and embrace completely crazy property tax "reform"?

The latest is Ron Paul, a libertarian-Republican congressman from Texas who is often regarded as being the most free-market congressman, and who's revered by various free-market think tanks. He says that he wishes that in Texas, the state legislature would consider the following proposal:

Specifically, end the practice of annual assessments. Properties should be reassessed for tax purposes only when sold or ownership is otherwise transferred. The current system is terrifying for seniors forced to pay more and more each year, with no idea where they will find the money. And unlike other bills, property taxes must be paid or else one’s home can be taken away. My office hears from seniors who may have no choice but to leave Texas altogether because they cannot live with the uncertainty of arbitrary property tax increases. They literally fear losing their homes.

Now, I'm all for lower taxes, but they have to be lower for everyone. Ron Paul's proposal is simply crazy, and for several reasons.

First, it gives no incentive for people to elect conservatives who want to limit spending. Why? Because, under his proposal, their taxes cannot go up! Normally, when a community goes off and elects some liberals who want to spend a lot of money, they find that their taxes go up (and then as the tax base shrinks, their taxes go up some more). They start to question what value they're getting. However, Paul's proposal completely decouples these two things. The local populace can vote for all kinds of things, knowing that future home buyers are going to have to foot the bill.

Second, his proposal is simply unfair. It amounts to a subsidy from new homeowners to long-term homeowners. This is because without annual assessments, the increased tax burden will fall on the new homeowners. If you want lower taxes, fine. But if you don't apply the taxes uniformly, then you're not really having lower taxes, you have subsidizing by the unfavored group to the favored group. What about corporations or limited partnerships? The LP or LLC or whatever will own the property. Shares in that company can change hands, but without revaluation, the property taxes will be fixed in time.

Third, why should the government discourage mobility? Our economy is dynamic because people move to where the jobs are. (Compare this to a country like Germany, where people rarely move from one region to another). When the kids have left for college, the parents can buy a smaller house. But under this scenario of Paul's, there's a reward for not relocating, in lower property taxes. And downsizing to a smaller house may result in significantly higher property taxes. So people will be reluctant to relocate.

It also makes the cost of housing more expensive for younger people, who must buy a new house and therefore must shoulder a larger tax burden than older people who have lived in the same place.

Imagine the following quote:

Specifically, end the practice of annual rent increases. Rents should be raised only when the tenant ends the lease. The current system is terrifying for seniors forced to pay more and more each year, with no idea where they will find the money. And unlike other bills, rents must be paid or else one can be evicted. My office hears from seniors who may have no choice but to leave Texas altogether because they cannot live with the uncertainty of arbitrary rent increases. They literally fear losing their homes.

So how is a fixed property tax different from rent control? Now, you can say that you own the property and shouldn't be forced to pay taxes on it. Fine, but then do away with property taxes for everyone and find a different revenue stream, like the sales tax or income tax, to fund the government. The fact is, the government needs some money. Even the most die-hard libertarian realizes you need a court system, a law enforcement system, and some other items. You can debate how much government is ideal, but you need some. Therefore, you need some taxes. If you don't like property taxes, then abolish them for everyone. But if you are going to impose property taxes, impose them equitably.

Don't assess two identical houses at massively different rates. As for the argument that seniors cannot afford the increased taxes, there are sadly no guarantees in life. You buy an SUV and gas prices skyrocket, and you can't get gas at the old fixed price. Rents go up. When prices rise, you can either pay, or not purchase that product anymore. Not purchasing here implies that either you vote for conservatives who lower taxes, or you sell your house so you need not pay property taxes anymore.

Property taxes going up means that your house value is probably rising as well. This means that you could take out a Home Equity Line of Credit and pay the property taxes. Due to price appreciation, when you sell the house, you can pay the loan back.

Conservatives often propose similar schemes to Ron Paul's for property taxes. California has it in the form of Proposition 13. However, I think that conservatives would be better served if they proposed limits on increases in spending, or if they set a maximum tax rate on properties, but allowed those properties to be regularly reassessed. Taxes should be low, but they should also be fair.

Any tax cut that is not distributed among all people fairly is essentially a subsidy. Suppose that all houses in a neighborhood were regularly reassessed, and then were taxed at 1%. Everyone sent in their checks. Then the government figured out what the assessed rate was whenever you bought the house, and sent you a check for the difference. Some people would get nothing, some people would get a little and some people would get a lot.

Would you object to that? If not, why not? And if so, don't you also object to Ron Paul's proposal? Because in the end, it's the same thing. Everyone has the exact same cash flow under both my scenario and Ron Paul's proposal.

Keep this in mind during any property tax reform. Never altering the assessment creates massive distortions.