Talking AntiTax Take 2
First, I want to thank Andrew for his response to my first piece, found here:
https://www.subscribestar.com/posts/440075
Though, I am a bit curious why he put my name in quotes . . .
(my earlier piece:
)
(Andrew’s original article: https://www.subscribestar.com/posts/409181 )
I think it is fair that I may have been too aggressive in the first piece, and as I said in the first response “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.”
In response to me being misleading, I did run my piece by a number of other people, who felt that they were fair responses. At the very least, these seem to be questions or gaps that other people felt existed in your current explanations of the AntiTax. If there was a better, more thorough, explanation of the plan that I should have read and referenced, please let me know and I will happily read that.
With that said, let's dig in!
Here are the updated arguments. Anything that I think that Andrew has fully rebutted, I have striked through. Any argument that is new based on my expanded understanding from his rebuttal, I have italicized.
Cities already investThe math doesn’t add up
A. The Real Inflation Rate
B. Taxes Raise Automatically with Inflation
i. Not all expenses are under city council control
C. Real city budget and reserve totals
D. Organizations generally prefer specific dollar values taken out instead of percentages of earning:
E. Hedge funds normally charge more, and make lessCities can and do raise taxes/Cities can compete with increased spending, not just reduced taxes
Investing in infrastructure and the like can get better returns than the stock market
This whole model assumes no population growth or immigration
A. Success in this way will also raise property value, which raises the tax burden
Public choice theory. The larger the amount of money, the stronger the incentive to take over
Good times make weak men
A. “At the end of the day, this system is essentially welfare”
Differences with a sovereign wealth fund
The more complex the system, the harder to implement and maintain
This whole thing may be illegal under state law anyways
Also, I will say up front that a couple of my points were off the mark, and I will be happy to concede them. Now, let's get into it one at a time:
Cities already invest:
Andrew was right and I was wrong. As I stated in my piece, I was only looking at the 2019 financial report, and I looked at the total investment return, and saw around a 4% return for the year, and didn’t look any deeper since many money managers underperform the market to increase stability. I am still not sure if the total or the government activity only section of investment revenue is correct, since the city states that it pools investment dollars, but overall, Andrew was right and I am happy to withdraw that objection.
The 2019 report didn’t have the investment objectives section at all, unlike the 2021 report, so I missed it. However, now that I know that it exists, I got interested in why their investment objectives and policy are written the way they are, and went into it with some more depth. See objection #10.
The Math doesn’t add up:
In this section, I first want to iron out some terms. I believe that Andrew and I were talking past each other due to using different definitions for the same terms (which happens unfortunately often in politics). These are the definitions that I will be using going forward.
Classic Tax Burden: This is the amount of Revenue that would be raised by the previous tax system if nothing changes. If there was a 1% property tax and a 2% sales tax, this would be the amount of revenue to the city is that same tax is applied going forward in time
Government Expenditures: This is the amount that the government spends. This is teacher’s pay, paving the roads, and whatever else.
Now, let's get to it!
A. The Real Inflation Rate:
I agree that the Cantillon effect is real and that prices do not rise in a geographically homogeneous manner. However, the Cantillon effect is mostly talking about a time differential in inflation, not that it never rises in some areas.
Also, the reason for the housing prices rising in California and New York has as much to do with other terrible policies (previous rent controls, zoning laws, restrictions on multi-family housing, etc.) as inflation.
The well connected areas get the money first, and get the benefit of spending it first, before the inflation has spread. By their wallet being inflated, but the prices not yet having adjusted, those connected to the banking system get to fleece the system and steal from the less connected. However, the money does eventually make its way through to everywhere else. This has increased with globalization, and now when the price on Amazon rises, prices go up everywhere at once. If you look at long run inflation, and the average inflation over decades is what really matters for this conversation, everywhere is hit. Here is a comparison on rural vs urban CPI from the New York Fed, for some supporting data: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr173.pdf
I will address your comment about cutting the inflation rate in point 2.b.
B. Taxes Raise Automatically with Inflation:
This is where Classic Tax Burden vs Government Expenditure distinction becomes important. Decreasing the amount that a government employee is paid does not decrease the Classic Tax Burden, it decreases Government Expenditure and either increases a surplus or reduces a deficit. Taxes refer to the revenue that the government is stealing from its citizens.
Regarding the classic tax burden, it does raise automatically with inflation. Say that you have a house worth $400,000. You have a property tax of 1% a year. You will pay $4,000 in taxes that year. If there is price inflation of 3% and your house is revaluated by the government at $412,000, your tax burden will be $4,120 next year. The government didn’t vote to raise the tax burden, the taxes went up automatically with inflation.
Looking at the example that you used to prove your point, I have a number of disagreements.
1. You were looking at the expenses, not the tax revenue. Even in your example the tax revenue went up.
2. 2020 is an abnormal year, which is why I was using the 2019 report, linked below. Of course public works spending decreases when you are not legally allowed to go outside and build things.
3. I don’t really care about the 1 year variation, that is pretty irrelevant to the overall point. I care about the long term trends, and finding 1 specific year where the trends go the other way doesn’t prove anything.
If you are going to say “How one ignores both facts and incentives is beyond me”, please make sure that you have your facts in order and are not insulting me when I was using a different report. I specifically used the 2019 report to avoid the statistical confusion from covid, as noted in my first piece.
https://www.lockhart-tx.org/page/open/1551/0/2019%20CAFR.pdfi. Not all expenses are under city council control:
Even if you are restricting the conversation to expenses, that is not all under the control of the city government. Schools (which are around 40% of local government expenses) are often paid for by levies passed by the voters. There are unions and long term contracts guaranteeing raises, there are public pressures, and the realities of the hiring market. If you stop giving cops cost of living wage increases every year, they may all leave for other cities, since competition works both ways. And while I wouldn’t have much of a problem with it, the Republican base that can remove your city council probably would.
Funny thing that I didn’t realize about the way that schools are set up: it isn’t even included in the local government budget. There was another $20 million in expenses and revenue that would need to be covered by the AntiTax: https://www.usnews.com/education/k12/texas/districts/lockhart-isd-100073C. Real city budget and reserve totals:
I believe that the investment income is for both the Governmental Activities and Business Type Activities side of Lockhart, which would mean $17 million in reserves compared to $30 Million in expenses. Though, since I am not 100% sure that is the case, I am willing to concede that part of it.
Also, when doing my first check of their finances, I missed the fact that education costs are handled separately and are another $20 million in taxes and expenses. https://www.usnews.com/education/k12/texas/districts/lockhart-isd-100073D. Organizations generally prefer specific dollar values:
Retirees withdrawal rate is determined, generally, by taking 4% of their total stockpile, then adjusting that flat number by inflation yearly. They do not take out 4% of whatever their stockpile is that given year:
https://www.fidelity.com/viewpoints/retirement/how-long-will-savings-last
I don’t have a good source for the statement on organizations as a whole. That is just what I have personally observed. If you want to make a budget for the next fiscal year, but the money available could vary up or down by 20%, that is pretty hard to do.
I am also wondering how this system would actually work. Would you just take the normal amount in tax withholding and give back what the AntiTax paid for? Would you have to tax people more at the end of the year if the stock market suddenly dips? People like stability; telling them that they will not be able to plan how much they need to pay in taxes would make planning for the future pretty difficult. Financial instability can lower time preference, which would make it harder to save and invest.
And what is the downside to all of this? It depends. I think that if this was just one idea from the pile to pick when the situation is right, there isn’t much downside. But if this is a major strategy and primary aim of the liberty movement, there is a significant opportunity cost in time, money, and political capital. Don’t get me wrong, the cost may be worth it, but I am not sure, which is why I wanted to start this conversation.
E. Hedge Funds normally charge more and make less:
I think that Andrew and I have come together and pretty much agree on this one. His explanation about the added layer on an investor making the money less likely to be recklessly withdrawn makes sense.
Cities can and do raise taxes/Cities can compete with increased spending, not just reduced taxes:
I am glad to see you have an answer to this, but I am not sure if it fully addresses the problem. Here is my understanding of your response:
People would be given partial control over the 3% yearly withdrawal from the AntiTax that goes into the general fund. If someone would rather increase spending in an area rather than reduce taxes, they can direct their fund to do that.
I think that that would help, but I don’t know if it is an overall fix. For example, what if the requested increase is greater than the allocated funds? And would people have to allocate their funds in perpetuity?
But overall, I think that this response doesn’t address the root issue I am trying to point out. Your rationale for lowering the tax rate is that it gives your city a competitive advantage. However, higher spending on things like education also gives a competitive advantage. If there is not some inherent reason why a politician would prefer the tax cut to the extra stuff, I don’t see this as the AntiTax creating an incentive structure that is more positive than the alternatives.Investing in infrastructure and the like can get better returns than the stock market:
I agree that the government should not be trusted with the money, and I would not want them to try to manage investing in the city. I am more saying that Lockhart has far more in capital assets than financial. If you are trying to convince a politician to go for the long term investments, you don’t just need to convince him that the long term is more important than the short term, but also that all of the other competing long term investments (like new snow plows, playgrounds, or police cars) are worse ideas. And I think that it is a hard case to make to them in many ways.
However, I think Andrew’s point about activism and lobbying being a solution is a fair one. Though those state level regulations may come back to bite in number 10 . . .This whole model assumes no population growth or immigration. Success in this way will also raise property value, which raises the tax burden:
I think that there was a miscommunication here. My point was about population generally, not the left.
https://worldpopulationreview.com/countries/united-states-population
The US population is on the rise, and is pretty much universally projected to keep rising for another 50 years, at least.
Population growth is still happening in rural America, even if it is slower than the suburbs.
https://www.pewresearch.org/social-trends/2018/05/22/demographic-and-economic-trends-in-urban-suburban-and-rural-communities/
But overall, my complaint is that I don’t think 10,000 towns are possible, at least in the next couple of decades. There are only 20,000 total cities in the US, and many don’t have the necessary funds. Political organizing is hard and expensive work. Winning many of these seats may be easy, but you need to find someone willing to take on a second full time job, who also lives in the right area, and has the right beliefs. Finding enough people who fit these criteria will be your limiting factor.
Let’s assume you do get 1,000 towns, or maybe you only get 100 for the first ten years and it grows in number from there, even then you run into the issue of population growth. If a town starts doing so well that it is a good and attractive place to live, people will move there en masse. Companies will move in with the lower tax burden, they will bring workers who they pay to live there, and so on. All of a sudden the town’s population has increased by 50%. I don’t think that this is the end of the world, but it definitely does slow down the timeline of the AntiTax hitting an inflection point.
The property tax issue is a smaller problem in the same vein.Public choice theory. The larger the amount of money, the stronger the incentive to take over (the weakest argument, but still worth mentioning):
Bureaucracy will make it harder for a corrupt mayor or city council to twist the fund. However, bureaucracy can be self-serving and corrupt in its own right. I will talk about your response to this in point #9.Good times make weak men:
Let me clarify this point a bit. I am not saying that this system is morally equivalent to welfare (which is what the left says). I think that in terms of outcomes to individuals receiving it, it has many of the same negative effects as welfare.
I have no moral problem with trust funds. However, I can recognize that a rich kid with a trust fund who never has to pay for anything will often be developmentally damaged by this.
Much in the same way that people now cannot imagine how roads would exist without the government, you are providing a pain free way to the government to provide more and more services. In much the same way Milton Friedman's tax withholding made the government more effective, but made the incentives and outcomes far worse, I worry about this system.
To take one specific example, the city of Lockhart runs their water treatment plant. If people grow up knowing that the government can provide services for free, why not the water which is needed to live? From there, why isn’t clean, free water a natural right for everyone?
I grew up spending a decent bit of time in third world countries, and I do think that the lack of hardship in the US is one of the things driving people towards democratic socialism and the like, and I worry that this system would make that worse.
Differences with a sovereign wealth fund:
I mainly raised this point since you brought up sovereign wealth funds and their effects when describing and arguing for the AntiTax. If you do not consider them similar enough to compare, I am happy to drop them from the argument.
The more complex the system, the harder to implement and maintain:
I did not fully understand how many other systems and procedures were tied into the AntiTax, and how much heavy lifting an abstract idea of incentives was doing. Andrew will occasionally drop something like decriminalizing all drugs as a way to support the AntiTax, and kind of sidestepping the issue of that process being far more complicated than the AntiTax itself. Even decriminalizing weed for personal use is difficult in most red cities, much less selling weed or decriming harder drugs. (This is ignoring the cases when drugs are legalized but regulated so heavily the blackmarket persists, or when legalizing drugs encourages lefties to move in).
It is similar to some of these bureaucratic systems and incentives based taxes Andrew talks about. They are complicated to set up, poorly followed, and create more points of weakness in your system. A similar thing happens with the idea of everyone getting control over their portion of the AntiTax. It sounds neat, and it may have some utility, but it isn’t that easy. Many of these cities have restrictions on how money can be spent and allocated, or money that is entirely out of the city council’s reach (like education funding). This seems like a more convoluted system the more I learn about it, and if nothing else, I would love to have a write up of what all subsystems Andrew considers necessary to run the AntiTax, since at this point I literally don’t know.
Simple is often best, especially in a small town where the city counselors come and go and just do this as a part time gig. If the system is too complex, they can’t manage it, and it turns into the bureaucrats running the show with the elected officials as sigure heads. And in a town of 14,000, I don’t want to create a system where more and more bureaucrats exist and thriveThis whole thing may be illegal under state law anyways:
When you shared the 2021 investment objectives, one part stood out to me:
So I did some digging on the Texas government code, and it seems that cities are now allowed to invest in stocks, even through a mutual fund or money manager. The only money funds that they are allowed to invest in are money market mutual funds.
https://statutes.capitol.texas.gov/docs/GV/htm/GV.2256.htm
Those like that you highlighted as being problematic (only going for the safest kind of investment), come from the state law:
Looking at another state to see if this is an aberration, I found the same thing in California (see the diagram on page 14). While it is a bit looser, they restrict mutual funds to at most 20% of the portfolio.
https://www.treasurer.ca.gov/cdiac/laig/guideline.pdf
That is not to say that it makes things impossible. And some states may not have this restriction. However, it does make the AntiTax a lot less attractive as a proposal, and explains why cities invest the way that they do: they legally have to.
Final thoughts:
I want to thank Andrew once again for responding, and I hope to follow up on the conversation. I agree that liberty will not run on autopilot, and my goal is to go for the most effective reforms that I can. The ones with the most effect for the least effort, since I unfortunately don’t have an army of millions and 20,000 bitcoin in the bank.
I want to talk through these ideas to find which plans need more of a spotlight, and move us to a world of more voluntary exchange and choice. I do agree fundamentally with Andrew; what we need is not some ideal utopian anarchy that magically fixes all problems, but a system that takes people as they are and creates incentives to self-perpetuate liberty as much as possible. We just disagree on how to get there, and what exactly that system should look like.