Download Taxes, Spending, Economic Growth, and Budget

Economic Freedom: What
It Is and Why It Matters
DEAN STANSEL
ASSOCIATE PROFESSOR OF ECONOMICS
FLORIDA GULF COAST UNIVERSITY
HTTP://WWW.DEANSTANSEL.COM
O'Neil Center for Global Markets & Freedom
• I start there in January as a Research Associate
Professor.
• The O'Neil Center was established in 2008 by
William J. "Bill" O'Neil (BBA, '55) and his wife Fay
C. O'Neil to study the impact of competitive
market forces on freedom and prosperity in the
global economy.
• O'Neil is an American entrepreneur, stockbroker
and writer, who founded the business newspaper
Investor's Business Daily and the stock brokerage
firm William O'Neil & Co. Inc.
• He bought a seat on the NYSE at age 30 (the
youngest at that time ever to do so).
2
Personal Freedom Matters Too
3
Personal Freedom Matters Too
4
5
Prison Population Grows 25X Faster
than Population
Increase, 1980-present
800%
800%
700%
600%
500%
400%
300%
200%
100%
0%
33%
U.S. Population
Federal Prison
Population
6
Land of the Free?
2000 EFW Rankings
1-Hong Kong
2-United States
3-Switzerland
4-Singapore
5-New Zealand
6-United Kingdom
7-Canada
8-Netherlands
9-Ireland
10-Australia
7
Land of the Free?
2000 EFW Rankings
1-Hong Kong
2-United States
3-Switzerland
4-Singapore
5-New Zealand
6-United Kingdom
7-Canada
8-Netherlands
9-Ireland
10-Australia
Current Rankings
1-Hong Kong, 2-Singapore
3-New Zealand
4-Switzerland
5-United Arab Emirates
6-Mauritius, 7-Jordan
8-Ireland, 9-Canada
10-UK, 11T-Australia & Georgia
13T-Chile & Qatar
15-Taiwan,
16-United States
8
1) What is “economic freedom”?
2) Where do we rank (U.S.,
Florida, and West Palm Beach
area)?
3) Why?
4) Why does it matter?
9
“It is no crime to be ignorant of
economics, which is, after all, a
specialized discipline and one that
most people consider to be a
‘dismal science.’ But it is totally
irresponsible to have a loud and
vociferous opinion on economic
subjects while remaining in this
state of ignorance.”
-- Murray Rothbard, Austrian Economist
10
Economic Freedom Project
What is it?
An initiative to help publicize the
findings of the Economic Freedom of
the World report and the Economic
Freedom of North America report and
economic freedom in general.
11
What Is Economic Freedom?
“Individuals have economic
freedom when property they
acquire without the use of force,
fraud, or theft is protected from
physical invasions by others and
they are free to use, exchange,
or give their property as long as
their actions do not violate the
identical rights of others.”
12
5 Components of Economic
Freedom of the World Index
1.
2.
3.
4.
Size of government
Legal system & property rights
Sound money
Freedom to trade
internationally
5. Regulation
13
How Do We Rank?
•U.S. is down to 16th place from 5th in
2008 and 2nd in 2000.
•Florida ranks 21st, up from 23rd the
previous year. It ranked as high as
10th in 2002.
•Because an unusually large portion of
our revenues come from tourists and
part-year residents, we rank too low. The
upcoming 2015 report corrects for this.
•Available at:
www.freetheworld.com/efna.html
14
Other Rankings
•Mercatus Center index (Freedom
in the 50 States) ranks FL 17th
•Tax Foundation’s most recent
annual State Business Tax Climate
Index ranks FL 5th (based on tax
rates of the 5 major state and
local taxes).
15
16
17
An Economic Freedom
Index of U.S. Metropolitan Areas
Dean Stansel
Florida Gulf Coast University
[email protected]
Journal of Regional Analysis and Policy, 43, 1 (2013): 3-20.
http://www.jrap-journal.org/ or http://t.co/xfKmP2VHjO
Rank TOP 10 AREAS
1
Naples-Marco Island, FL MSA
Overall
EFI
8.52
2
Fort Walton Beach-Crestview-Destin, FL MSA
8.39
3
Manchester-Nashua, NH MSA
8.37
4
West Palm Beach-Boca Raton-Boynton Beach, FL MD
8.34
5
Bradenton-Sarasota-Venice, FL MSA
8.33
6
Sebastian-Vero Beach, FL MSA
8.33
7
Rockingham County-Strafford County, NH MD
8.23
8
Palm Bay-Melbourne-Titusville, FL MSA
8.17
9
Sioux Falls, SD MSA
8.11
10
Tampa-St. Petersburg-Clearwater, FL MSA
8.07
Rank BOTTOM 10 AREAS
384 El Centro, CA MSA
Overall
EFI
3.32
383 Visalia-Porterville, CA MSA
4.19
382 Merced, CA MSA
4.31
381 Kingston, NY MSA
4.48
380 Glens Falls, NY MSA
4.50
379 Bakersfield, CA MSA
4.57
378
4.60
New York-White Plains-Wayne, NY-NJ MD
377 Modesto, CA MSA
4.66
376 Fresno, CA MSA
4.79
375 Wenatchee-East Wenatchee, WA MSA
4.88
Summary of Results
•All of top 10 are in states with no tax on
labor income (FL, NH, SD)
•9 of bottom 10 are in California or New
York (and 15 of bottom 20)
Economic Freedom in South Florida
•West Palm Beach ranked 4th out
of the 384 metropolitan areas in
the U.S.
•It ranked 3rd out of 22 metro
areas in Florida.
•Ft. Lauderdale: 34/384 & 13/22
•Miami: 73/384 & 20/22.
22
Why Has Economic
Freedom Declined?
•Federal spending has more than
doubled since 2000 and tripled since
1990.
•Personal income has only gone up
by about 70% since 2000.
•We have an over-spending
problem, NOT an under-taxing
problem.
Table 1.1—SUMMARY OF RECEIPTS, OUTLAYS, AND SURPLUSES OR DEFICITS
(in millions of dollars)
Total
Year
1990
2000
2004
2008
2012
2015 estimate
Receipts
1,031,958
2,025,191
1,880,114
2,523,991
2,449,988
3,176,072
Outlays
Surplus or
Deficit (−)
1,252,993
-221,036
1,788,950
236,241
2,292,841
-412,727
2,982,544
-458,553
3,536,951 -1,086,963
3,758,577
-582,505
Source: Historical Tables of the Budget, FY2016, Office of
Management and Budget.
http://www.whitehouse.gov/omb/budget/Historicals
24
Spending & Deficits at
Post-WW2 High
•As a percent of GDP, federal spending
hit a post-WW2 high of 24.4% in 2009.
•The federal deficit as a percent of GDP
has also been at its highest level since
WW2.
•It hit 10% in 2009.
•It exceeded 5% four years in a row,
but is now down below 4%.
Source: Historical Tables of the Budget, FY2016,
Office of Management and Budget.
http://www.whitehouse.gov/omb/budget/Historic
als
25
Entitlement Spending
•Cato Institute found that welfare pays
more than:
•the starting wage for a secretary in 39
states.
•the average first year wage for a
teacher in 11 states.
•an entry-level computer programmer
in the 3 most generous states.
Obamacare
•AKA, The Unaffordable Care Act
•Higher taxes
•Higher spending
•Regulatory uncertainty
•Unintended consequences
27
Debt as % of GDP at Post-WW2 High
28
Tax Freedom Day
•The Tax Foundation
•Was April 24th this year.
•3 days later than last year.
•14 days later than in 2009.
•If we include deficits, which
require higher future taxes, it
was 14 days later (May 8)
29
The President’s $1 Trillion Tax Hike
30
Expanding
Tax Code
31
Cost of Tax Compliance
•$37 billion in 2012 preparing
federal individual, business, and
employment tax returns.
•3.24 billion hours
•The equivalent of 369,858 years
• Source: McCaherty, “The Cost of Tax
Compliance,” Tax Foundation, Sep. 2014.
32
•According to the OECD “the United States
has the most progressive income tax
system among industrialized nations. … The
richest 10 percent of households in the
United States (those making $112,124 or
more) contribute a greater share of taxes
(45.1 percent of all income taxes) than
their counterparts in any other
industrialized nation.”
•The OECD average is 31.6 percent. The
next highest is Italy at about 42%. Only a
handful of others are above 35%.
33
Source: http://mercatus.org/publication/progressivity-taxes-oecd-countries-mid-2000s
34
Source: Dan Mitchell, Cato Institute, http://danieljmitchell.wordpress.com/
International Tax Competitiveness
•The U.S. ranks 32nd out of the 34
OECD countries.
•Highest corporate tax rate
•Double taxation of capital gains and
dividends
•1 of only 6 with a “worldwide system
of taxation”
• Source: Pomerleau & Lundeen, "2014
International Tax Competitiveness Index," Tax
Foundation, September 15, 2014.
35
Regulatory Burden Is High
and Rising
•The Federal Register contains
81,000 pages of regulations.
•It would take more than 2 years
to read through all of it.
36
Cost of Federal Regulations
•$2 trillion in 2012
•$9,991 per employee, all industries
•$19,564 per employee in the
manufacturing industry
•$34,671 per employee in the
manufacturing industry (small
businesses, < 50 employees)
• Source: Crain & Crain, “The Cost of Federal Regulation to the
U.S. Economy, Manufacturing & Small Business,” National
Association of Manufacturers, Sep. 2014.
37
Sen. George McGovern (D-SD)
• “I also wish that during the years I
was in public office, I had had this
firsthand experience about the
difficulties business people face
every day. That knowledge would
have made me a better U.S. senator
and a more understanding
presidential contender.”
• Source: George Mc Govern, “A Politician's Dream Is a
Businessman's Nightmare,” Wall Street Journal, 6/1/92.
38
“And if I spend somebody
else’s money on somebody
else, I’m not concerned about
how much it is, and I’m not
concerned about what I get.
And that’s government.”
-- Milton Friedman
39
Economic Freedom
Why does it matter?
Areas with more economic freedom
have higher: GDP, GDP growth,
Income of the poorest 10%, Income
share of the poorest 10%, political
freedom, civil liberties, life
satisfaction, literacy, life expectancy,
and cleaner environments
And, lower: unemployment, child
labor, infant mortality rates, and
corruption
40
Per Capita Income Is Much Higher in
Nations with Higher Economic Freedom
Per Capita GDP Growth Is Positively Correlated with
Economic Freedom in States
2
1
from Nationa MEan)
Average Growth in Real GDP
per Capita (percent) (Deviations
3
0
-1.5
-1
-0.5
0
0.5
1
1.5
2
-1
-2
-3
-4
Average Growth in Economic Freedom at the AllGovernment Level (percent) (Deviations from National Mean)
42
Unemployment Is Much Lower in Metro Areas
with Higher Economic Freedom
8%
Unemployment Rate, 2002
7%
6.8%
5.9%
6%
5.4%
5%
5.0%
5.3%
4%
3%
2%
1%
0%
Least Free
Fourth
Third
Second
Economic Freedom Quintiles
Most Free
Related Research
•Stansel, Dean. “Why Are Some Cities
Growing While Others Are
Shrinking?” Cato Journal, 31, 2
(Spring/Summer 2011), 285-303.
•Stansel, Dean. “Higher Taxes, Less
Growth: The Impact of Tax Burden
on Economic Growth in U.S.
Metropolitan Areas,” Policy Brief,
April 2009, National Foundation for
American Policy, Arlington, Virginia,
www.nfap.com.
44
Lower Tax Areas Grow Faster
157.3%
Percentage Change, 1980-2007
160%
140%
120%
107.6%
100%
80%
75.5%
64.4%
60%
40%
40.1%
21.3%
20%
0%
Population
Employment
Real Personal
Income
10 Lowest-Tax Large Metro Areas
10 Highest-Tax Large Metro Areas
45
Lower Tax Areas Grow Faster
16%
14.7%
Economic Growth
14%
12%
10%
9.4%
8.6%
8.2%
8%
6.1%
6%
4%
2.6%
2%
0%
Population Growth,
2000-2007
Employment Growth,
2000-2006
Real Personal Income
Growth, 2000-2006
50 Lowest-Tax Metro Areas
50 Highest-Tax Metro Areas
46
Lower Tax Areas Grow Faster
State & Local Taxes as a Percentage of
Income, 1977-2002 Average
14%
13%
12%
Correlation Coefficient: -0.405
11%
10%
9%
8%
7%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
Employment Growth, 1980-2007
47
State & Local Taxes as a % of Income, 19772002 Average
High-Growth Areas Have Lower Taxes
11.0%
11.0%
10.7%
10.6%
10.5%
10.0%
9.5%
9.4%
9.2%
9.3%
9.0%
8.5%
8.0%
Population Growth,
1980-2007
Employment
Growth, 1980-2007
Real Personal
Income Growth,
1980-2007
10 Highest-Growth Large Metro Areas
10 Lowest-Growth Large Metro Areas
48
1997 State & Local Taxes as a Percentage of
Income
High-Growth Areas Have Lower Taxes
11.2%
11.2%
11.0%
10.8%
10.8%
10.8%
10.6%
10.4%
10.4%
10.2%
10.3%
10.1%
10.0%
9.8%
9.6%
9.4%
Population Growth,
2000-2007
Employment Growth,
2000-2006
Real Personal Income
Growth, 2000-2006
50 Highest-Growth Metro Areas
50 Lowest-Growth Metro Areas
49
Metro Area
State &
Real
Local Taxes
Employ- Personal
as a %
ment Income
of Income,
Population Growth, Growth,
1977-2002
2007
1980
Growth, 1980- 1980Average Population Population 1980-2007 2007
2007
372-area average
9.7%
663,324
480,746
43.6%
73.0% 112.0%
Cape Coral-Fort Myers, FL MSA
9.0%
588,129
208,050
182.7%
225.7% 364.5%
Savannah, GA MSA
9.9%
329,307
231,691
42.1%
93.2% 129.4%
Tampa-St. Petersburg-Clearwater, FL
MSA
8.4%
2,715,273 1,626,975
66.9%
126.3% 152.2%
Miami-Miami Beach-Kendall, FL MD
9.6%
2,382,961 1,643,132
45.0%
59.9%
Bradenton-Sarasota-Venice, FL MSA
8.0%
685,002
354,724
93.1%
158.6% 221.1%
Charleston-North CharlestonSummerville, SC MSA
9.5%
630,434
433,615
45.4%
88.4% 143.9%
99.2%
50
“…no human wisdom or
knowledge could ever be
sufficient … for the proper
performance of … the duty of
superintending the industry of
private people, and of directing it
towards the employments most
suitable to the interest of the
society.”
-- Adam Smith, The Wealth of Nations
51
Source: Dan Mitchell, Cato Institute, http://danieljmitchell.wordpress.com/
52
53
The Fed & Quantitative Easing
•Towards the end of the last
recession, the Fed began a policy
of “quantitative easing”
•Bought $4.5 trillion in assets from
commercial banks and other financial
institutions
•Economic theory says that should
increase inflation
•Consumer Price Index hasn’t risen
much
54
Where’s the Inflation
•Dow Jones Industrial Average has
skyrocketed
•More than doubled
•From 7,063 in Feb. 2009
•To an all-time high of 18,133 in Feb.
2015
•That’s a 17% annual inflation rate
55
56
Consumer Power in Health Care
•Lasik surgery
•Not covered by most health
insurance plans
•Price has fallen dramatically over the
years
• Cosmetic surgery is another example.
• “Price” of other medical procedures
has risen much faster than inflation
57
Government Intervention in
Higher Education
•Federal student aid topped $169
billion in the 2013–2014 academic
year – an increase of 105 percent
over the past decade.
•In 2014, the $33 billion Pell Grant
program provided grants to 9 million
college students, making it the
largest share of the federal
education budget.
58
Government Intervention in
Higher Education (cont.)
•Since 1980, tuition and fees at public and
private universities have grown at least
twice as fast as the rate of inflation.
•60 percent of bachelor’s degree holders
leave school with more than $26,000 in
student loan debt
•Cumulative student loan debt now
exceeds $1 trillion.
• Source: Lindsey Burke, “4 Key Reforms That
Could Make College More Affordable,” The
Daily Signal, Sep. 15, 2014.
59
60
61
Prescription for Growth
INCREASE
ECONOMIC
FREEDOM
1. Rein-in spending
2. Lower taxes
3. Reduce the regulatory burden
62
63
Tax Reform
•Itemized deductions shrunk the tax
base by $1.2 trillion in 2011, 14% of
AGI.
•Tax rates could be reduced by
nearly one-fifth if those loopholes
were eliminated.
Source: Stansel & Randazzo, “Unmasking the Mortgage
Interest Deduction,” Reason Foundation, 2013.
64
Mortgage Interest Deduction
•Largest loophole is the mortgage
interest deduction
•Only about 25% of taxpayers claim
it.
•Consumers on the margin b/w
renting & buying are harmed due
to higher housing prices.
•They are also much less likely to
claim the MID if they DO buy b/c
they tend to have lower income.
65
Regulatory Reform
•Regulatory Improvement Act
•Establish a Regulatory Improvement
Commission
•identify regulations to repeal
•send them to Congress for an up or
down vote as a total package with
no amendments
•Similar to the Base Closure and
Realignment Commission of the 1990’s
66
The Good News…
67
Government Shutdowns
•About 2 years ago “non-essential”
federal government employees
were off the job for well over a
week, and...
•Lee County (FL) Soil and Water
District recently voted to shut itself
down.
68
Nation’s Leader Rejects Keynesian
Economics, Acknowledges that
Real Jobs Are Created by the
Private Sector
“We need to put an end to
illusions: it’s not the public sector
that creates jobs. To believe that
injecting billions … [into the
economy] is the key to growth is
an idea of the past.”
69
Nation’s Leader … Acknowledges
that Real Jobs Are Created by the
Private Sector
That quote was from Alexander
Stubb, the Prime Minister of
Finland, not the President of the
United States.
Source:
https://danieljmitchell.wordpress.com/2014/10/03/n
ations-leader-rejects-keynesian-economicsacknowledges-that-real-jobs-are-created-by-theprivate-sector/
70
“Capitalism has been the most
effective ideology we have known
in taking people out of extreme
poverty.”
-- Bono
71
•Economic Freedom Project
•http://www.economicfreedom.org/
•https://www.facebook.com/economicfre
edom
•Fraser Institute
•http://www.fraserinstitute.org/
•http://www.freetheworld.com/
•Economic Freedom of the World
•Economic Freedom of North America
•Human Freedom Index of the World
73
Economic Freedom: What It Is
and Why It Matters
DEAN STANSEL
ASSOCIATE PROFESSOR OF ECONOMICS
FLORIDA GULF COAST UNIVERSITY
S T A R TING JA N . 1 : R E S EAR CH A S S OCIAT E P R OF E SSOR
O’ N EI L CE N TER F OR GLOB AL MA R K ETS & F R E E D OM
COX S CH OOL OF B U S I NESS, S OU TH ERN ME T H ODI ST U N I VE RSI TY
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