A Response to the "AntiTax"
This OpEd is addressed to Andrew of Popular Liberty. And why should you listen to me specifically? Well, I am the Mises Caucus organizer of Ohio, as well as holding 3 state level positions (though the views I express here are my own and not those of the whole caucus or state party). Ohio already has 2 libertarian Mayors, as well as a half dozen city council members. While I am not some dictator, I do talk to them and pass along ideas that I believe work. This is, I believe, your target audience and this OpEd is me publicly vetting an idea before giving it my seal of approval.
First, let me try to sum up the AntiTax theory. I will be drawing from episode 624 of Free Man Beyond the Wall, where you explain it in detail (
), as well as your subscribe star article on the topic (https://www.subscribestar.com/posts/409181).
To put it simply, the city should take a large chunk of its reserves and invest it in the stock market with a money manager. Then, the interest from that investment will be turned around and used to replace taxes. In your plan, due to competitive intercity pressure, local officials will not raise the taxes, but rather use this opportunity to lower taxes to drive more business into the town. After all, it is the most accountable form of government, and where competition is fiercest.
Andrew goes into a lot more detail, especially over the specific numbers, in the subscribe star piece, and I would recommend reading it since a lot of my response will be targeting his numbers.
I have a number of criticisms, but largely, they boil down to this: I don’t believe that the situation that Andrew is painting corresponds to the real world. That is not to say that what he is saying is impossible, or would never work. I know that a large enough bit of invested wealth can cover all given expenses, and I am on the financial independence retire early train, so I better understand how a well managed fund can provide long term earnings.
With that said, I am critiquing this because I want more good ideas to promote liberty. If my disagreements with it are missing the mark and it is a good idea, I am happy to jump on board the AntiTax train. I just don’t want to put a lot of time and resources into an idea that takes us nowhere.
As my core example, I will be using Lockhart, Texas. Not only was it host to a recent Post Libertarian roundtable on Buck Johnson’s podcast, but it also has a population of 13,652, pretty close to the 14,000 person theoretical example. Here is their audit report from 2019 (I felt it was more fair to use a normal year): https://www.lockhart-tx.org/page/open/1551/0/2019%20CAFR.pdf
With that said, let’s get into how the AntiTax theory disagrees with reality.
Cities already invest:
This is a pretty big hole in the argument up front. The selling point of the AntiTax, at least how you sell it to the government, is partially that they get more money to spend right off the bat. However, the city is already investing and getting returns on their reserves, as seen in the investment revenue line item on page 5. When I have looked at other cities' financial audits or reports, I see the same thing, unless the city is in debt. Around half of the 6 cities that I looked at for this examination were in debt, and that would make this plan entirely impossible without cutting spending or raising taxes.The math doesn’t add up:
(See these charts for reference: https://docs.google.com/spreadsheets/d/14NRQTBYT5mXrReulgKPAzTFRdM1OOjdCESCgjCtRR6I/edit?usp=sharing )
I am going to focus just on the article for this section, since on the podcast, it seems that you misspoke around minute 14, and stated that all of the investment returns would be directly used to pay down taxes, which would obviously not allow for the investment to grow.
A. The real inflation rate:
The real inflation rate is 3% as a long term average (source: https://www.usinflationcalculator.com/inflation/historical-inflation-rates/). You used 0.5% for your calculations, which changes the long term stock market average yearly gains from 9.5% to 7%. If I was being really precise, the average inflation rate is actually closer to 3.3%, but I will use 3% for now.
When I correct your figure 1 chart (see the spreadsheet shared above), the inflection point (after which taxes start being reduced on net) goes from 16 years in the future to 103. You are calling the AntiTax a tax free future for your children, but it would instead be one for your great, great, grandchildren.B. Taxes raise automatically with inflation:
Your article and charts claim that a city chooses to raise their taxes by a given percent a year to compensate for inflation, but that is simply not the case. Taxes are percentages of money spent and the worth of various properties. When inflation raises those prices, taxes rise along with the prices. Taxes rise with inflation by default. If what you instead meant was that governments choose whether or not to raise spending to be in line with inflation, that would be correct sometimes, but often they pass laws to tie spending to CPI, and spending is generally rising faster than inflation, not slower.
If we assume that you still somehow managed to cut the yearly increase in half (your figure 2 chart) while taking less money out of the investments, it would still take 42 years to hit the inflection point. So, 42 years of cutting government spending relative to inflation, and the AntiTax, and it still takes that long to start cutting taxes. That doesn’t seem like a very effective policy.C. Real city budget and reserve totals:
Lockhart Texas has a 33% reserves to expense ratio (from the bottom of page iii. I believe that I understood the document correctly, but am not an auditor or accountant, so not completely sure. I would appreciate a fact check on this). Many other towns that I looked at had a worst reserve ratio, or were even in net debt.
When I created a table (table 3) that started with initial investment at a third of the total taxes, and put in the correct inflation rate, but 130 years in, the AntiTax had not hit an inflection point, and I stopped checking. For this program to work, you will need to find some unicorn of a town that is so financially sound that they have more reserves than yearly revenue, yet somehow so financially illiterate that they don’t know that investing is a good idea. I don’t think many towns like that exist, if any.D. Organizations generally prefer specific dollar values taken out instead of percentages of earning:
This is an issue with living off of investments in general, but long story short, if you don’t want to cut your spending by half every recession (which is a nightmare for long term planning), you would want some predictable dollar value coming out of the investments every year. What does that mean? It means that lean years will have a larger impact on gains than good years, and it will slow the growth of the investments even further. This is why people trying to live off of their wealth in perpetuity can only withdraw 4% a year, even though the stock market gains 7% a year on average (after inflation).
E. Hedge funds normally charge more, and make less:
Hedge funds normally charge around 2% of capital, plus 20% on profits. This is not to say that a city may not be in a good position to negotiate for a better deal, just that I am not sure if a 1% overall fee with no fee on profits is realistic. Also, Andrew claimed that hedge funds returns are “usually 1-2% AUM and 10-20% above S&P500’s performance, assessed annually”. I don’t know where that number comes from, but it is not consistent with the data that I have seen, where hedge funds are usually underperforming the market long term, but with lower volatility. Here is one source on the topic: https://stockanalysis.com/can-you-beat-the-market/
With that said, if you move to a computer managed fund like a Vanguard mutual fund, there are some higher risk ones which match the market long term and have far lower fees (it is hard to beat 0.04% for low fees). Once again, I would recommend looking at the early retirement community for advice here, since they invest for the very long haul and want a sustainable withdrawal rate. (https://www.mrmoneymustache.com/2011/05/18/how-to-make-money-in-the-stock-market/)
Cities can and do raise taxes/Cities can compete with increased spending, not just reduced taxes:
This criticism is more about Andrew’s projected downstream effects of the policy. If there is so much fierce competition between cities, then how do they ever raise taxes? And there are a few answers there (I know that where I live near Columbus every town uses every other town’s tax increase as justification for their own), but one of the big ones is services. If you are trying to draw in more people, better roads, nicer schools, and so on, do as much as lower taxes. Why would a city not use the money from the AntiTax to increase spending and not lower taxes?
Let’s look at education specifically, since it’s over 40% of local government spending and the biggest item on a local government budget (source at end of paragraph). We all know that education spending has been increasing much faster than inflation; this would not be possible if the competitive pressure was so effective at keeping taxes down. People regularly move to areas with higher cost of living for better schools, and the tax burden is just a factor in the cost of living.
(source: https://www.urban.org/policy-centers/cross-center-initiatives/state-and-local-finance-initiative/state-and-local-backgrounders/state-and-local-expenditures )
Beyond that, someone could take the core of the idea, and then ignore the rest of it. It is literally just investing, as soon as someone hears the idea to invest reserves, they can just do it on their own and throw the money into the local parks and shopping districts.
Investing in infrastructure and the like can get better returns than the stock market:
And the crazy thing? The cities might even be right to do that. Companies regularly outperform the overall stock market. Infrastructure can pay well more than the 7% annualized returns of the stock market if done right. And while I think that the government will probably mess it up, they would have a solid argument to try.This whole model assumes no population growth or immigration:
Your city starts doing really well. The schools are funded, taxes are low, everything is great. Then what happens? The population doubles as people immigrate in mass. For classic taxes, this isn’t a problem, since the tax base grows to match. But for the AntiTax? The amount of services to pay for just doubled, and the AntiTax is still growing at the same rate.Success in this way will also raise property value, which raises the tax burden:
Also if you are trying to match the current tax rate, people getting wealthier, home prices going up, and spending going up all raise the amount brought in by taxes as well. This is not an impossible problem, but it definitely adds a few years to your timelines.Public choice theory. The larger the amount of money, the stronger the incentive to take over (the weakest argument, but still worth mentioning):
Back when the federal government first came around, it took money from the rich states to pay the debts of the poor states. Right now, it doesn’t bother, but if some small town of 14,000 people was sitting on $1 billion? Expect new taxes on cities. Also, all of a sudden, local races will be a lot more competitive with a lot more on the line. Corporations coming in and lobbying for a piece of the pie and all that. Because at the end of the day, you don’t control the reigns of power or the invested money. Any random person who gets voted in does.Good times make weak men:
At the end of the day, this system is essentially welfare. Everyone in the city, 100 years in the future, will get all of this stuff for free without working for it. It is not random happenstance that the children of the rich become pampered, degenerate socialists, and you will be literally creating a city of trust fund babies.
If this all did work, I am a bit worried that that would be the end result. Luckily, this program would not work in my, or my children’s lifetimes.Differences with a sovereign wealth fund:
You have compared it to a sovereign wealth fund, but I believe there are some important differences in circumstances:
You cannot implement closed borders or extremely harsh citizenship requirements like Dubai or Norway. And each person coming in dilutes the fund.
Sovereign wealth funds are normally jump started by a bunch of nationalized wealth. Cities don’t generally have a government run oil company, and I wouldn’t want them to. So the wealth to start the fund would necessarily come from the citizens (or has at some point in the past).Sovereign wealth funds aren’t all that great. Norway has the biggest in the world, but still have a ~39% tax to GDP ratio, compared to ~24% for the US. 44 other countries have them, and even some states in the US like Texas do, but you don’t see it making that big of a difference. Venezuela even had one but mostly destroyed it. Dubai is the example that people like to point to, but 1/45 isn’t great odds. I don’t think a country having one is that much of a game changer.
With all of those criticisms, where do I agree with the AntiTax? Well, if you have a city with reserves, and they are not investing them, they probably should. If that interest is used to decrease taxes instead of just increasing spending, that would be great. I just don’t think it actually changes that much. I don’t see it as the silver bullet you describe it as, and even if it was, I don’t want to wait 100 years for my freedom.
Some final feedback: I think that the AntiTax could work as a model to fund a group. It is just a variation of a trust fund or someone retiring early, though I think that some incentives are stacked against you. However, if you want to succeed in any reasonable time frame, this would require doing what the early retirement people do: Every year add more money to the investment fund from the general budget instead of pulling from it. Only start pulling from the fund when it has reached a point where it can sustain itself indefinitely (google the 4% rule for more on this). But if a city in real life really had the extra funds to do that, I would rather just cut taxes in the present. After all, I think that individuals manage their money better than the state, or at the very least are more morally entitled to it. Also, use a robot investor like Vanguard index funds. You will get the same 7% average return after inflation, but with almost no fees.
Edit:
Response by Andrew: https://www.subscribestar.com/posts/409181
Response by Drake to Andrew’s Response: