The new Canadian budget includes estimates of marginal effective corporate tax rates for major countries (page 149). These rates measure the tax load on new investments, such as a manufacturing company buying new machines and expanding a plant.

A chart in the report, which I’ve replicated below, shows that the Canadians have chopped their rate to less than half of the U.S. rate, 17 percent vs. 34.8 percent. The U.S. rate is also far higher than the average OECD rate of 20.2 percent.

The economic effect of this is straightforward: our higher rate means less capital investment, which in turn means fewer jobs, reduced productivity, and lower wage and income levels.

Come on America, we can do better than that. It’s time for federal policymakers to stop stalling and simply slice the U.S. federal statutory rate from 35 percent to 20 percent or less. All this gibber-gabber about corporate loopholes and base-broadening is a waste of time. Just cut the rate, please. The Canadians have shown that the government probably won’t even lose any revenue.

See here for more on effective corporate tax rates.

Canada’s federal government introduced a budget yesterday that includes new estimates of corporate tax revenues. I’ve discussed how Canada has cut its statutory corporate tax rate to a fraction of the U.S. rate, yet Canada raises more revenue. The new budget shows that the Canadian federal 15 percent tax raised 1.9 percent of GDP in revenue in 2012, while the U.S. federal tax at 35 percent raised just 1.6 percent, per CBO.

U.S. revenues are below normal levels right now, so let’s look further out at the steady-state projections for the two countries. Canada’s budget projection to 2018 shows that corporate tax revenues under the 15 percent rate are expected to stabilize at 1.9 percent of GDP. U.S. projections by the CBO show that corporate tax revenues will rise to 2.6 percent and then fall back to 2.0 percent in the longer-term. So the Canadian corporate tax will raise 95 percent as much as the U.S. tax even though the Canadian rate is just 43 percent of the American rate. The upshot is that worries about proposed U.S. corporate tax cuts reducing revenues are misplaced. If the U.S. federal government chopped its 35 percent rate, the tax base would expand automatically over time and the government would probably lose little if any revenue.

The following charts compare U.S. and Canadian rates and revenues:

…then can’t everyone else adopt a little free trade of their own? This is from the NY Times:

Take a walk down an aisle at Pro Hockey Life, an emporium of the Canadian national sport here on the capital’s southern fringe, and a customer comes away with a decidedly non-Canadian feel. Almost every pad, mask, stick and skate is made elsewhere — mostly in Asia, often by foreign-owned manufacturers. Just about the only thing Canadian about buying hockey equipment in Canada has for years been the tariff on imported goods. Now, even that quirk of Canadian hockey history is going away. On Thursday, the finance minister, Jim Flaherty, announced that the Conservative government would end import tariffs on all sports equipment, except bicycles, on April 1. The tariffs were as high as 18 percent.

It may be just a small step (glide?), but it’s good news for free trade nonetheless. So what prompted the change?

The government’s decision to eliminate tariffs that were protecting a largely nonexistent industry seems to have more to do with online shopping and the rise of the Canadian dollar to parity with its American counterpart. For example, many of the skates at Pro Hockey Life priced from $500 to $700, a surprisingly large category, are available from American online retailers at prices that are at least $100 lower because of low tariffs in the United States.

I was a big fan of online shopping anyway. If it can help get rid of tariffs, even better!

We expect our schools to keep our children safe from bullies. But what should parents do when their assigned government school becomes the bully?

That’s what happened to the parents of Eileen Parkman, a Hawaiian second-grader who courageously stood up to several fifth-grade boys who were kicking and stomping a defenseless autistic child as he was curled up in the fetal position. The bullies then set their sights on Eileen, whom they threw to the ground and stepped on. The Maui Autism Center gave her an award for her bravery, but the boys continued to hit and kick her and throw balls at her face on several subsequent occasions. School officials at Kamali’i Elementary in Maui were apparently unable to stop the bullying, so Eileen’s parents decided to pull her out of the dangerous environment.

That’s when the school officials became bullies themselves:

It took Sean Parkman a while to remove Eileen from enrollment at Kamali’i. After the first incident, he was told the situation would be remedied, he said. But when Eileen endured more retaliation, Parkman said he received no help from school officials. He and his mother offered to help serve as school field monitors, but they were turned away, he said. Parkman said school officials told him that if he pulled Eileen from the school, then officials would report him to Child Protective Services because he could be violating school attendance policies. So, he held off. But after taking Eileen to doctors several times after getting beaten, doctors warned Parkman that Eileen was not safe. He then removed her from the school.

In other words, the school officials gave the Parkmans an untenable choice: keep your daughter in an unsafe environment, or men with guns might come take your daughter away. After a few trips to the doctors, the Parkmans decided to risk the possibility of the latter rather than have their daughter continue to face the certainty of the former.

It’s impossible to know why exactly the school officials behaved as they did—they clammed up when reporters started asking questions—but it would not be surprising if the officials were at least partly motivated by the state’s school funding formula, which allocates money based partially on enrollment. Fewer students mean fewer dollars. If they can’t please parents who want to leave, school officials can threaten them with a parent’s worst nightmare.

If Hawaii had had a school choice program, most of the grief following the initial incident could have been avoided. If the school officials knew that the parents had other options, they would have had to remedy the situation in order to keep Eileen at their school, and they would have had no recourse to threats. Fortunately, the Parkmans had the resources to provide a tutor for their daughter, but many families don’t have that option. Discussions of school choice often revolve around academic performance, but there are other reasons that a family might want to choose another school and bullying is one of them.

Unfortunately, this bullying incident is far from unique. Bullying, especially of students with special needs, is abhorrently pervasive:

Sixty percent of students with disabilities reported being bullied compared to 25 percent of the general student population, according to a 2008 citation from the British Journal of Learning Support, which was cited in the 2011 report, “Walk a Mile in Their Shoes: Bullying and the Child with Special Needs.” According to the book “Insights from across Fields and around the World” (2009), only 10 studies have been conducted in the U.S. on bullying and developmental disabilities. All studies found that children with disabilities were two to three times more likely to be victims of bullying than their nondisabled peers.

School choice is not a panacea for all the challenges facing our education system, but it can mean the world to a child who can escape from her tormentors and learn in a safe environment.

On Wednesday, the Oakland school board voted 4–3 to close three of California’s highest performing schools: the American Indian Model (AIM) charter schools. When Ben Chavis took over the American Indian Public Charter School just over a decade ago, it was the worst peformer in Oakland—an utter shambles. Today, it and the two sister schools Chavis created are among the highest-performing in the entire state. I know—I did the math. In a 2011 study comparing the performance of all of California’s charter school networks, I found that AIM was #1 by a wide margin. For contrast, I included in the study two of the state’s most elite, academically selective high schools: Lowell in San Francisco and Gretchen Whitney outside of Los Angeles. After controlling for student characteristics and peer effects, the AIM network beat them both—not just on the official state tests, but on the Advanced Placement tests administered by the College Board as well. More remarkable, AIM accomplished all that while spending less per pupil than the Oakland Unified School District, whose performance is abysmal by comparison. And that’s the great irony of the school board’s vote to close the AIM schools: the board accuses Ben Chavis, who is now retired, of fiscal irregularities or mismanagement during his tenure. Think about that: The board’s own schools are expensive failures. The AIM network is an incredibly cost-effective success. Yet somehow Chavis is the one accused of mishandling a budget? The core of the allegations seems to be that Chavis, who has a real-estate business, leased space to his schools and made money from that transaction, while vaulting AIM schools to stratospheric success. So, naturally, we should punish his schools. $#%#?!?

Even if Chavis is found guilty of some impropriety (the district’s allegations are now almost a year old, yet no charges have been filed against him), the man is retired. What purpose is served, what possible justice could there be, in closing down the brilliantly successful schools with which he is no longer involved? The bigger picture is this: It isn’t simply the Oakland school board that is broken, it’s our entire approach to organizing and funding education. In every other field, our greatest innovators and achievers are handsomely rewarded for their contributions to the welfare of their fellow citizens. As a result, innovation has flourished in those other fields. But in education, great achievers and innovators are not comparably rewarded. In fact, some of the very greatest have been driven out of the system. By shutting education out of the free enterprise system, closing it off from the freedoms and incentives of the marketplace, we have stunted its development. And with it, the development of our children. The AIM schools will appeal the board’s vote. If enough people from the Bay Area voice their desire to see the vote overturned, sanity and humanity may yet prevail.

Angus Burgin has written a valuable book The Great Persuasion, which accounts for an interesting, political science reading of the development of the Mont Pelerin Society and the progress of free market advocacy in the post WWII period. It is a thoughtful book, coming from a scholar who is definitely not a libertarian but at the same time understands and values the role of ideas in the political debate.

Professor Burgin has more recently published a rather shocking — at least to me — op-ed on Bloomberg​.com. His point is aptly summarized by a slightly esoteric title: “As Republican Hail Hayek, Their Plans Advance Friedman”. Personally, I rejoice at seeing history of political thought to progress to the stage of political commentary. Plus, Hayek appears to be the good guy of the story: two cheers for Professor Burgin.

He aims to vindicate Hayek’s subtleties, from an inappropriate use of the Austrian economist as a rallying point. To this end, he goes back to one of the central points of his book. According to Burgin, within the Mont Pelerin Society and the classical liberal movement at large, we havemoved from a Hayek-hegemony to a Friedman-hegemony. Whereas the first was more focused on first principles, the latter was more policy-oriented (see also this EconTalk with Russ Roberts). “The rise of Milton Friedman represents both the realization of Hayek’s dream of inspiring broad popular support for the benefits free markets have to offer, and the failure of his ambition to create a new social philosophy that would moderate the excesses of prior modes of market advocacy”. This is a controversial reading: for one thing, there are differences between Manchester and Chicago but also, quite frankly, the free market movement does not look like that much of a well ordered army, ready to follow his generals, at least to me.

In his column, however, Professor Burgin makes his point by writing that:

Where Hayek perceived a host of areas that might be improved by regulation, Friedman saw almost none.

Well, is that true? Hayek and Friedman wrote very different kind of books. Hayek the-social-scientist is Hayek the-free-market advocate: there is no lack of continuity between the two. Friedman was both a theoretical economist and the most splendid public advocate of free market ideas. The two Friedmans wrote differently, for different audiences. As a free market publicist, Friedman dealt at length with specific policy issues, often pointing out the sheer stupidity of government regulation. But what Hayek did was showing that the stupidity, and in truth the unviability of central planning rested on the very nature of the knowledge upon which social life depends. Such knowledge cannot be concentrated in a single brain, not necessarily because it is knowledge of “complicated” things but because it is diffused throughout society.

As Hayek wrote:

The skipper who earns his living from using otherwise empty or half filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differencies of commodity prices — are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

Can, in principle, regulation ameliorate the workings of market? Perhaps yes — but consider the opportunity cost. Through the imperfect workings of markets, knowledge is generated and processed and used to allow for the social coordination of individual plans. There are mistakes, for sure: but through someone’s mistake the market feeds others’ opportunities. It might be true that some specific intervention may smoothen this process — who knows? But such a fabric of socially useful knowledge is fragile indeed, and a system based upon external intervention is more likely to jeopardize it all. If knowledge is dispersed, how could a single decision maker have a view wide enough to know how to “better” a complex economy?

This is why Hayek was always stressing the need for general, universally applicable laws — against norms that are tailored to specific circumstances and, at the end of the day, specific economic actors.

It is true that Hayek uses, in The Constitution of Liberty in particular, a language which is not inimical to all kind of regulation (“the range and variety of government action that is, at least in principle, reconcilable with a free system is (…) considerable”). However, he approved of the use of government coercive powers only insofar they “serve general and timeless purposes, not specific ends”. What we today call “regulations” are precisely rules with specific ends.

In short, Hayek’s work is certainly less a public policy beacon than Milton Friedman’s is. Was he less or more amicable to regulation than Friedman? He may sound, in The Constitution of Liberty or The Road to Serfdom, friendlier to some general outlines of regulation — but keep in mind he was quite skeptical of antitrust and favored the denationalization of money versus central banking. Neither of these views can be seen as mainstream among mild, middle-of-the-roadish economists. 

More importantly, to be fair, no libertarians read Hayek nor Friedman as searching for all answers to all problems. The relevant question is what they teach us, so that we can interpret everydays’ life.

One thing is for sure. Hayek’s constant appeal to humility in front of reality, his stress over understanding the free market as a complex ecosystem and not simply a “machine” that could be easily turned this or that way, is irreconcilable with Dodd-Frank, to name but an egregious example of the fatal conceit in action.

Cigarette butt, to be specific.

All over the world, governments impose draconian taxes on tobacco, and then they are surprised when projected revenues don’t materialize. We’ve seen this in Bulgaria and Romania,

and we’ve seen this Laffer Curve effect in Washington, DC, and Michigan.

Even the Government Accountability Office has found big Laffer Curve effects from tobacco taxation.

And now we’re seeing the same result in Ireland.

Here are some details from an Irish newspaper.

[N]ew Department of Finance figures showing that tobacco excise tax receipts are falling dramatically short of targets, even though taxes have increased and the number of people smoking has remained constant… [T]he latest upsurge in [cigarette] smuggling … is costing the state hundreds of millions in lost revenue. Criminal gangs are openly selling smuggled cigarettes on the streets of central Dublin and other cities, door to door and at fairs and markets. Counterfeit cigarettes can be brought to the Irish market at a cost of just 20 cents a pack and sold on the black market at €4.50. The average selling price of legitimate cigarettes is €9.20 a pack. …Ireland has the most expensive cigarettes in the European Union, meaning that smugglers can make big profits by offering them at cheaper prices.

I had to laugh at the part of the article that says, “receipts are falling dramatically short of targets, even though taxes have increased.”

This is what’s called the Fox Butterfield effect, when a leftist expresses puzzlement about something that’s actually common sense. Named

after a former New York Times reporter who was baffled that more people were in prison at the same time that crime rates were falling, it also shows up in tax policy when statists are surprised that tax revenues don’t automatically rise when tax rates become oppressive.

Ireland, by the way, should know better. About the only good policy left in the Emerald Isle is the low corporate tax rate. And as you can see in this video, that policy has yielded very good results.

My favorite example from that video, needless to say, is what happened during the Reagan years, when the rich paid much more to the IRS after their tax rates were slashed.

P.S. You won’t be surprised to learn that a branch of the United Nations is pushing for global taxation of tobacco. To paraphrase Douglas MacArthur, “Bad ideas never die, they become global.”