Budget cuts that raise costs

By David Cay Johnston
August 30, 2011

By David Cay Johnston
The opinions expressed are his own.

The Obama administration’s support for killing off the U.S. Statistical Abstract underscores what’s wrong with Washington’s approach to cutting the budget. This nearly thousand-page compendium of official data is in its 130th and evidently last edition since 1878. It is published online and in print.

Taxpayers will save the $2.9 million it costs in a year to compile the data from a multitude of government, academic, nonprofit and industry websites.

But how much time will be wasted hunting for data without this ready reference? How much will state and local taxpayers pay for the extra time reference desk librarians need to answer questions? How many questions will go unanswered? And what of the Statistical Abstract’s value in quickly and efficiently pointing to other sources for a deeper look that spares researchers having to hunt through the vast array of government and private websites?

Corporations, entrepreneurs, researchers and state and local taxpayers will pay much more than what the federal government saves.

It’s a perfect example of what’s wrong with Washington’s approach. The conventional wisdom, a dogma for some, is that federal spending must be cut because government costs more than we can afford.

Yet as the impending demise of the Statistical Abstract exemplifies, proposals for cutting government spending put forth by Democrats and Republicans alike will make the federal government less costly while making America worse off economically.

FISCAL SAND

The mindless rush to embrace spending cuts will throw fiscal sand in the gears of the economy instead of applying the right amount of grease.

The sum the federal government would spend to produce the Statistical Abstract amounts to less than Washington will spend in the first 25 seconds of fiscal 2012, which begins in a month on Oct. 1. Come up with 379,737 more cuts of this size and the projected budget deficit vanishes, at least in the minds of politicians who have conveniently forgotten the concept of cost-benefit analysis.

Last year the online site was accessed 5.6 million times. If the absence of a Statistical Abstract increases search time by even two minutes, then the cost, based on the all-in average pay of reference librarians, will be about five times the federal savings. Were Congress to order up a cost-benefit study, the figure would be a loser, costing society at least $5 for every dollar of tax money saved.

I would not be surprised if the cost to entrepreneurs, businesses and nonprofits was $100 for each federal dollar saved given the pay researchers get and how long it can take to locate data.

The Obama administration is far from unique in failing to think through the implications of spending cuts. Consider Representative Paul Ryan, the Wisconsin Republican who is treated by the press corps as a serious and informed budget expert.

PENNY WISE…

Ryan has twice put forth plans that he accurately says would save the government over the next 75 years the equivalent of more than $5 trillion immediately.

What Ryan did not say is that using the same official data he relied on, the Ryan plan would raise private spending on healthcare by $39 trillion, as liberal economist Dean Baker showed using pure spreadsheet mechanics and the same data source as Ryan. Spending nearly $8 to save $1 is, like killing the Statistical Abstract, just plain foolish.

Of course if the Ryan plan were to become law, that $39 trillion would not be spent because people would not be able to afford it. Many of them would just die sooner, and more painfully, because affordable healthcare would become beyond their reach.

Our Washington politicians are thinking the same way as a girlfriend from long ago whose shiny almost-new Camaro ran like a clunker. She thought not changing the oil saved money. Penny wise and pound foolish.

The truth almost no one in Washington dares speak is that raising taxes can actually put more money in your pocket. My neighbors and I learned this a few years ago when we voted to raise our taxes. For every dollar of added tax my wife and I paid this year we enjoy $1.86 more in our pockets.

How can raising taxes put more money in your pocket? By increasing efficiency.

This year we paid $210 in higher property taxes to finance trash collection and sidewalk snowplowing. Purchased retail, those services would cost about $600. So we spent $210 to save $390. That translates into a savings of $1.86 for every dollar of increased tax. As an added bonus we have just one garbage truck a week down our street, not a different company’s truck everyday, and garbage cans on the street only on Thursday mornings.

What matters in public finance is not how much government spends, so much as what it buys with our tax dollars. But don’t count on the new “Super Congress 12″ committee to undertake serious cost-benefit analysis because cutting spending has become dogma and reality-based policies would be economic heresy.

4 comments

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We often hear about negative externalities (e.g., since I do not pay for the pollution caused by my car exhaust, I have no economic incentive to reduce the level of those exhausts). Here, we have a positive externality (the trivial cost of Statistical Abstract results in significant savings to others who don’t have search around for necessary information).

Posted by StuartLevine | Report as abusive

When a community provides a service that people value, land value rises within the community. Reliable electricity, clean water, sewage removal and processing, schools, trash pickup, well-maintained streets, sidewalks, stormwater runoff, libraries, emergency services to handle small- and large-scale emergencies — many services many of us on the east coast have had reason to be particularly conscious of this week — all these things make a community a good place to live. People who can afford to live in these places generally prefer to live in them.

So how should we finance these things? Through taxes on wages, sales (goods and, in some places, services) and buildings? Or through taxes on land value?

When we tax wages, sales and buildings, we put a burden on productive activity. We get less of it.

When we tax land value, some good things happen (though some of us are not conditioned to think it good):

1. While the use-value of land does not drop, the selling price does. In the places where most people live, land represents the larger share of the price of housing.

2. Well located land — land close to the services people value — gets used more intensively.

3. Land speculation becomes less and less profitable.

4. Sprawl is slowed, even reversed, as the incentives funnel development into infill. Empty lots disappear; boarded up buildings get rehabbed; businesses can afford the locations and space they need. And without the annual burden of taxes on improvements, maintenance is improved.

Taxing land value is efficient. It is also wise, just, administrable, and generally fits Adam Smith’s criteria for a good tax. Even Milton Friedman, the Mikey of taxation, called it the “least bad” tax — arguably after Lowell Harriss pointed it out.

It also tends to decrease wealth concentration and income concentration. Maybe that’s why it is passed over so quickly in most economics courses.

Every worthwhile investment in infrastructure raises land values by more than the cost of the project. Why on earth should we finance such projects through something other than a tax on land value?

I pay less to maintain my car if I drive it in places where the potholes are promptly and properly filled. I am willing to pay more to live in such places. How should those services be financed? Through taxes on land value. My landlord pays it, or I as homeowner pay it. Either way, we get what we pay for.

You might appreciate Fred Foldvary’s “The Ultimate Tax Reform,” which comes in two versions; read the short one first.

Posted by LVTfan | Report as abusive

Much of what we buy with our public dollars goes into maintaining or increasing land values in the places where those dollars are spent.

Shouldn’t much, even most or all, of that spending be financed via collecting back some significant share of the annual value of the benefited land?

The conventional property tax falls on buildings as well as land, and thus has some undesirable effects that could be easily avoided by omitting buildings and other improvements to land from the tax base.

But the question is a larger one: shouldn’t we be financing public goods by collecting natural public revenue before we tax sales or wages or other evidences of individual production?

Posted by LVTfan | Report as abusive

CarlOmunificent, economists and political leaders found the same job growth outcomes during WWII after everything else failed previously to lift the nation out of the Great Depression. Why we don’t teach this stuff in junior high or highshchool is beyond me.

Posted by coyotle | Report as abusive