Sin taxes are always popular with legislators. People volunteer to pay them, and volunteers garner little public sympathy.
Maryland legislators are proposing to levy a new tax of ten cents per eight ounces of alcoholic beverage sold in the State. A news story today shows how proponents of sin taxes tend to also be in favor of sin.
Local governments across the country arte having to cut services to balance their budgets. Roanoke (VA) has cut curbside leaf collection, and the result is a vibrant private market.
California is at the vanguard of pricing electricity by the time of day it is used. The reason is that it costs more to produce (or buy) electricity at peak times. By charging prices linked to marginal cost, electricity consumers can be motivated to use power when it is less expensive.
The movement toward marginal cost pricing is encountering opposition.
Economic incentive schemes are popular among economists and increasingly embraced by legislators. Cap-and-trade to control greenhouse gas emissions is perhaps the most visible of these incentive schemes. Pigouvian taxes are the other, and news today from an unexpected source provides useful and interesting lessons in how such taxes can work -- and how they can degenerate into plain vanilla taxes.
We have provided several analyses of the AIG bonus controversy, most recently on the political risk that now may poison private sector participation in the Treasury Department's new Pulic-Private Investment Partnership Investment Program, which includes the Legacy Loans Program and Legacy Assets Program. The effectiveness of this program hinges on aggressive private sector participation. However, recent actions by the House of Representatives to impose a 90% tax on bonus payments (H.R. 1586), and repeated statements of opprobrium from President Obama and the actions of New York Attorney General Andrew Cuomo and others, signal to investors that the government will not be a reliable partner.
In particular, prudent investors should expect that if they make "too much" money -- where "too much" is defined after the fact, based on political criteria -- the government will act to confiscate these profits. H.R. 1586 indicates that the government is willing to confiscate profits indiscriminately, for example by taxing away bonuses that AIG was contractually obligated to to pay to employees who had volunteered to work for the company to clean up financial messes create by others.
According to the Associated Press, Congress understands the destructive effects of the incentives it has now created, and it is trying to find a way out. It seems to have discovered such a path, but the path likely will fail because it does not involve admitting error.
In short, the House's action, which President Obama did not contemporaneously discourage, creates the precedent that the government may choose not to honor the legal commitments it makes to investors who participate in the Treasury Department's new program. If investors earn "too much" in profit -- a term that would be defined subjectively after the fact -- they may be prevented from realizing these earnings. It is reasonable for prudent investors to discount the government's credibility.
The Obama Administration could have included strong language promising to protect these property rights in its Legacy Loans Program, but it did not do so. Such a promise might prove to be unenforceable in fact, but the absence of a promise means there is nothing yet for investors to rely upon. This uncertainty may (or may not) be resolved when the Treasury Department issues implementing regulations. For now, the cleanup of underwater financial assets has entered a zone in which political risk -- uncertainty about the government's reliability -- may be as great or greater than financial risk.
Even if Treasury's regulations appear bulletproof, it is not clear they can ever constrain Congress from undermining them. Finally, nothing can constrain other political actors, such as New York Attorney General Andrew Cuomo, from exercising other legal and extralegal powers. As an example of extralegal power, Washington Post staff writer Brady Dennis says Cuomo threatened to publicize the recipients names, thereby exposing them to public ridicule and potential risk of physical harm, if they did not agree to return their bonuses:
[AIG's] chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo.
"We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week," Pasciucco wrote. "To the extent that we meet certain participation targets, it is not expected that the names would be released at all."
Yesterday afternoon, 18 of the 25 most senior Financial Products executives had agreed to return their retention payments, amounting to more than $50 million thus far. Company officials expect more employees to follow suit.
"They are doing the right thing," Cuomo said on a conference call with reporters, adding that he now saw no need to reveal the names.
Returning one's bonus is not the end of it, however. Recipients still will be subject to significant taxes. We address that issue today.
The annual meeting of the American Economic Association should be expected to teach many lessons in economics. Friday's lesson occurred away from the convention hotel. More...
Health care is a major domestic policy issue in this year's federal election campaigns. Two States have initiatives on the ballot concerning health care. They reflect very different public policy perspectives.
Arizona's is a constitutional amendment that would prohibit the legislature from enacting any law that would restrict the right to purchase legal health care services.
Montana's is a statute that would expand the State's Child Health Insurance Program (CHIP) and authorize new regulations mandating coverage.
The text of the Arizona and Montana initiatives is reprinted below.
Washington Post staff writer Tim Craig reports that the Virginia legislature is expected to repeal the law that authorized the voluntary tax on bad Virginia drivers. The action follows a Virgina Supreme Court decision issued on February 29 declaring unconstitutional the legislature's other 2006 transportation policy innovation -- the creation of unelected regional authorities with the power to levy taxes. More...
New York State Governor Eliot Spitzer has proposed to plug part of an expected $4.4 billion budget deficit by enacting a tax on illegal drugs. Similar laws have been enacted elsewhere to enable law enforcement to charge drugs distributors and dealers with another form of tax evasion. (Chances are they already evade federal and state income taxes.)
Are there any conditions in which this proposal could raise significant revenue? More...
The Los Angeles Times reports that cancer risks in Southern California from air toxics declined in 2006 by 17%. Any decline in cancer risk is good news. How good is it? More...
The Associated Press reports that Oregon's Board of Higher Education is considering a plan that would offer in-state tuition to qualified graduates of Oregon high schools who are not in the U.S. legally. More...
This week, New York Governor Elliot Spitzer abandoned his plan for a three-tiered driver license program that would have allowed illegal aliens to obtain an inferior-form license. More...
