The Missouri Budget Project Is Wrong

February 5, 2010

The Missouri Budget Project Is Wrong

When you keep repeating an error that others have corrected for you and explained to you multiple times why it is incorrect, it ceases to be merely an error — you border on becoming willfully obtuse. Such is the case with the Missouri Budget Project’s continuing claim in its talks and writings about the Missouri “Fair Tax” bill that the legislation would require an 11-percent state sales tax in order for the state to maintain its revenue stream after eliminating the state income tax. As Show-Me Institute executive vice president and University of Missouri–Columbia economics professor Joseph Haslag demonstrated in a recent case study that he wrote with Show-Me Institute intern Abhi Sivasailam, that revenue-neutral rate would be about 5.8 percent.

There are certainly legitimate arguments one might make against the Fair Tax proposal — simply stating, perhaps, a belief in in the fairness of progressive income taxation, wherein one’s tax burden automatically increases with income. I would disagree with that argument, but it is a perfectly legitimate argument to make because it doesn’t employ a demonstrably false set of facts. Repeating a figure based on a faulty set of assumptions about a proposal in order to score political points through fear, however, is not a legitimate form of argument.

The Missouri Budget Project again used its 11-percent sales tax figure in a Saint Louis Beacon op-ed today. Only a few days ago, I witnessed two economists tell the author of the MBP piece that her number was incorrect. They corrected her politely and professionally, and explained why it is wrong. Months ago, the MPB also received a copy of the Show-Me Institute’s case study, which went into great detail on the question and explained again why their 11-percent estimate is far too high. Unfortunately, they’ve continued to repeat their unreliable figure at every opportunity.

If you want to argue against Fair Tax legislation, that is fine with me. And, yes, it is likely that different people will come up with somewhat different estimates for how high the revenue-neutral replacement level of the sales tax would need to be. But if your estimate differs so dramatically from everybody else who has studied the issue that it appears to be just plain wrong, you should cease using it once that has been brought to your attention — or attempt to demonstrate where your opponents’ reasoning is faulty, in a detailed, systematic way. And if you don’t, people should stop taking you seriously.

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3 Comments »

This has been their modus operandi since their inception.

The Beacon staff is primarily composed of all the bleeding heart libs that retired from the STLPD. They apparently can’t help themselves other than printing irreputuable information that supports their bleeding heart causes.

If they had any economic intelligence, they would see that those who they oppress with welfare programs would be better off with a better economic environment.

Comment by Carl Bearden — February 5, 2010 @ 3:37 p.m.
You’ve missed a pretty fundamental point in this blog post: MBP’s 11 percent estimate is absolutely more accurate than yours. I’ll try to explain as concisely as possible.

What’s at issue here is how high the “fair tax” rate would have to be in Missouri. This depends primarily on how big the tax base (that is, the total amount of spending that could be taxed under this plan) would be. And the difference between what you say and what MBP says is really so straightforward. Here it is:

1) You guys think that the tax base under this bill can be estimated by looking at data from the Bureau of Economic Analysis– in particular a measure of spending called “Personal Consumption Expenditures” or PCE.

2) MBP thinks that you can’t just grab the PCE measure of spending and assert that it all could be taxed by Missouri. You have to subtract a bunch of stuff that is either illegal to tax (food stamps) or impractical (health care spending by governments; the imputed rental value of owner-occupied homes). When you subtract this stuff, you end up with a much smaller tax base, which of course means a much higher rate.

I’ll say this more simply: if MBP is right that you have to subtract all these untaxable things from PCE (or even some of them), then your rate estimate is dead wrong. If, on the other hand, MBP is wrong, and one can simply take the total amount of PCE, subtract the one specified exemption in the bill (higher education stuff), and the result is your tax base, then your rate estimate could be right.

And the basic fact is this: you guys have not explained in this blog post, or in anything you’ve ever published, why your approach to PCE is right and the MBP’s approach of subtracting untaxable things is wrong.

Me, I happen to think this is because you guys have been caught with your pants down on this one– you made a simple (although certainly forgivable) mistake in your fall 2009 paper and you don’t want to draw attention to it. And that’s why you don’t say a word about whether your oversimplified use of PCE data is correct in the post above. And I definitely think that, in your words, “people should stop taking you seriously” unless you can explain why this particular element of the methodology in your fall 2009 paper is right.

I say your mistake is “forgivable” because I can see how someone who’s not familiar with the PCE data would see a thing called “personal consumption expenditures” and assume that it means what it sounds like it means. And I think that’s what you guys did. But it’s really only “forgivable” if you guys now own up to the fact that you were wrong to use the data as you did.

So please, enlighten us: I’ve said here, as MBP as previously, that your approach to calculating the tax base in your fall 2009 paper is just wrong. You haven’t rebutted this assertion at all. How about giving it a try right here?

Fair warning: I’ll be emailing a link to this blog post to any newspaper folks I can find who have written about the Missouri “fair tax” bill. I’ll wait until Thursday 2/11 to do so in order to give you time to respond. Thanks!

Comment by Matt — February 8, 2010 @ 9:04 p.m.
Matt

Your comment is right in that as the tax base shrinks, the rate that obtains revenue neutrality is correct. MBP and others have asserted that PCE is untenable as a tax base and that certain things must be exempted. I agree that some elements, most notably the imputed value of housing services, are challenging. However, challenges do not make it impossible. Besides, the bills offer new houses as being subject to the tax. So, if implemented, the value of new house purchases would partially offset the imputed value of housing services. Our base of $158 billion would shrink to about $150 billion, but it would not raise the rate to anything close to nine percent. If the BEA can come up with a measure/estimate of imputed housing services, it is possible to establish a measure of imputed housing services that could be taxed. You may not like it, but the question is whether it is viable. In my view, it is.

Along those lines, every time something is exempted, the rebate must shrink since the rebate is based on the concept of a refund on things that people buy that are subject to the tax. If you want to talk about accuracy, you should be aware that MBP and others have fixed the rebate while shrinking the tax base. In other words, they change the definition of the tax base and apply that definition while keeping the old definition of the tax base when they compute the rebate. There are two equations in two unknowns and the definitions must be the same across the two equations. MBP, citing ITEP, violate this definition across the two equations. Since my calculations are made as transparent as possible, you can check my math. No one is questioning the accuracy of my arithmetic. Indeed, you are asserting my assumptions are wrong. Under your premises, my assumptions are wrong. I do not accept your premises. I digress, but I want things to be as transparent as possible.

Your primary question, as I read it, is why the PCE is justified as a tax base. In my view, PCE offers a tax base that does not exhibit the same volatility as the current tax base. The cyclical component of consumer spending is about 70 percent of the volatility in income. I concede that MBP likes another tax base. Theirs is not wrong. Neither is mine. I will turn to the properties of the different tax bases that make one a more stable tax base than another. The evidence indicates that PCE is less volatile than the tax base that is put forward by MBP.

The strongest case for PCE, in my view, is that reducing the tax rate on income results in faster growth. Neither MBP nor you have offered an alternative that increases the economy’s growth rate. No doubt, the tax on PCE is distortionary. To do the right experiment, we need a model of economic growth that accounts for facts observed in the world. The Ak model does so. Moreover, the economy’s equilibrium growth rate is a function of the income tax rate. By my calculations, reducing the income tax rate adds more than one-half percentage point to the state’s annual growth rate. This growth more than offsets the excess burden associated with the tax on consumer spending.

If a reasonable objective is for policy to do the least damage; that is, to maximize the standard of living of the median Missourian, then a policy that taxes broad-based consumption instead of income is a policy that achieves this goal. Such change can be scary. My understanding is based on the starting premise that people will adapt to a rule change. Conditioned on the premise that people have nearly infinite-sized wants, the equilibrium with no income tax and a broad-based sales tax will result in a higher standard of living.

Comment by Joe Haslag — February 9, 2010 @ 8:34 a.m.

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This has been their modus operandi since their inception.

The Beacon staff is primarily composed of all the bleeding heart libs that retired from the STLPD. They apparently can’t help themselves other than printing irreputuable information that supports their bleeding heart causes.

If they had any economic intelligence, they would see that those who they oppress with welfare programs would be better off with a better economic environment.

Comment by Carl Bearden — February 5, 2010 @ 3:37 p.m.

You’ve missed a pretty fundamental point in this blog post: MBP’s 11 percent estimate is absolutely more accurate than yours. I’ll try to explain as concisely as possible.

What’s at issue here is how high the “fair tax” rate would have to be in Missouri. This depends primarily on how big the tax base (that is, the total amount of spending that could be taxed under this plan) would be. And the difference between what you say and what MBP says is really so straightforward. Here it is:

1) You guys think that the tax base under this bill can be estimated by looking at data from the Bureau of Economic Analysis– in particular a measure of spending called “Personal Consumption Expenditures” or PCE.

2) MBP thinks that you can’t just grab the PCE measure of spending and assert that it all could be taxed by Missouri. You have to subtract a bunch of stuff that is either illegal to tax (food stamps) or impractical (health care spending by governments; the imputed rental value of owner-occupied homes). When you subtract this stuff, you end up with a much smaller tax base, which of course means a much higher rate.

I’ll say this more simply: if MBP is right that you have to subtract all these untaxable things from PCE (or even some of them), then your rate estimate is dead wrong. If, on the other hand, MBP is wrong, and one can simply take the total amount of PCE, subtract the one specified exemption in the bill (higher education stuff), and the result is your tax base, then your rate estimate could be right.

And the basic fact is this: you guys have not explained in this blog post, or in anything you’ve ever published, why your approach to PCE is right and the MBP’s approach of subtracting untaxable things is wrong.

Me, I happen to think this is because you guys have been caught with your pants down on this one– you made a simple (although certainly forgivable) mistake in your fall 2009 paper and you don’t want to draw attention to it. And that’s why you don’t say a word about whether your oversimplified use of PCE data is correct in the post above. And I definitely think that, in your words, “people should stop taking you seriously” unless you can explain why this particular element of the methodology in your fall 2009 paper is right.

I say your mistake is “forgivable” because I can see how someone who’s not familiar with the PCE data would see a thing called “personal consumption expenditures” and assume that it means what it sounds like it means. And I think that’s what you guys did. But it’s really only “forgivable” if you guys now own up to the fact that you were wrong to use the data as you did.

So please, enlighten us: I’ve said here, as MBP as previously, that your approach to calculating the tax base in your fall 2009 paper is just wrong. You haven’t rebutted this assertion at all. How about giving it a try right here?

Fair warning: I’ll be emailing a link to this blog post to any newspaper folks I can find who have written about the Missouri “fair tax” bill. I’ll wait until Thursday 2/11 to do so in order to give you time to respond. Thanks!

Comment by Matt — February 8, 2010 @ 9:04 p.m.

Matt

Your comment is right in that as the tax base shrinks, the rate that obtains revenue neutrality is correct. MBP and others have asserted that PCE is untenable as a tax base and that certain things must be exempted. I agree that some elements, most notably the imputed value of housing services, are challenging. However, challenges do not make it impossible. Besides, the bills offer new houses as being subject to the tax. So, if implemented, the value of new house purchases would partially offset the imputed value of housing services. Our base of $158 billion would shrink to about $150 billion, but it would not raise the rate to anything close to nine percent. If the BEA can come up with a measure/estimate of imputed housing services, it is possible to establish a measure of imputed housing services that could be taxed. You may not like it, but the question is whether it is viable. In my view, it is.

Along those lines, every time something is exempted, the rebate must shrink since the rebate is based on the concept of a refund on things that people buy that are subject to the tax. If you want to talk about accuracy, you should be aware that MBP and others have fixed the rebate while shrinking the tax base. In other words, they change the definition of the tax base and apply that definition while keeping the old definition of the tax base when they compute the rebate. There are two equations in two unknowns and the definitions must be the same across the two equations. MBP, citing ITEP, violate this definition across the two equations. Since my calculations are made as transparent as possible, you can check my math. No one is questioning the accuracy of my arithmetic. Indeed, you are asserting my assumptions are wrong. Under your premises, my assumptions are wrong. I do not accept your premises. I digress, but I want things to be as transparent as possible.

Your primary question, as I read it, is why the PCE is justified as a tax base. In my view, PCE offers a tax base that does not exhibit the same volatility as the current tax base. The cyclical component of consumer spending is about 70 percent of the volatility in income. I concede that MBP likes another tax base. Theirs is not wrong. Neither is mine. I will turn to the properties of the different tax bases that make one a more stable tax base than another. The evidence indicates that PCE is less volatile than the tax base that is put forward by MBP.

The strongest case for PCE, in my view, is that reducing the tax rate on income results in faster growth. Neither MBP nor you have offered an alternative that increases the economy’s growth rate. No doubt, the tax on PCE is distortionary. To do the right experiment, we need a model of economic growth that accounts for facts observed in the world. The Ak model does so. Moreover, the economy’s equilibrium growth rate is a function of the income tax rate. By my calculations, reducing the income tax rate adds more than one-half percentage point to the state’s annual growth rate. This growth more than offsets the excess burden associated with the tax on consumer spending.

If a reasonable objective is for policy to do the least damage; that is, to maximize the standard of living of the median Missourian, then a policy that taxes broad-based consumption instead of income is a policy that achieves this goal. Such change can be scary. My understanding is based on the starting premise that people will adapt to a rule change. Conditioned on the premise that people have nearly infinite-sized wants, the equilibrium with no income tax and a broad-based sales tax will result in a higher standard of living.

Comment by Joe Haslag — February 9, 2010 @ 8:34 a.m.

February 5, 2010