Here is a must-read analysis by William Voegeli on the long-term results of tax competition between Texas and California.
Many tough passages:
It’s not surprising, then, that an intense debate rages over which model is more satisfactory and sustainable. What is surprising is the growing evidence that the low-benefit, low-tax alternative succeeds not only on its own terms but also according to the criteria used by defenders of high benefits and high taxes.
Whatever theoretical claims are made for imposing high taxes to provide generous government benefits, the practical reality is that these public goods are, increasingly, neither public nor good: their beneficiaries are mostly the service providers themselves, and their quality is poor…
… The high-benefit, high-tax model can work, but only if the high taxes actually purchase high benefits—that is, public goods that far surpass the quality of those available to people who pay low taxes.
… the CEO of a manufacturing company in suburban Los Angeles told a Times reporter that his business suffered less from California’s high taxes than from its ineffectual services … According to a report issued earlier this year by McKinsey & Company, Texas students “are, on average, one to two years of learning ahead of California students of the same age,” though expenditures per public school student are 12 percent higher in California…
What does it all mean?
The ultimate check on tax-and-spend oppression is the freedom to leave – to take yourself and your business somewhere else (hence the Berlin Wall, the most blatant ever move to stop that happening). Thus people are leaving California at the the rate of some 3300 per week. Texas is gaining people at the rate of 1500 people. Those numbers (and their effects) compound up.
For California’s governmental-industrial complex, a new liberal administration and Congress in Washington offer plausible hope for a happy Hollywood ending. Federal aid will replace the dollars that California’s taxpayers, fed up with the state’s lousy benefits and high taxes, refuse to provide.
Americans will continue to vote with their feet, either by leaving California or disdaining relocation there, but their votes won’t matter, at least in the short term. Under the coming bailout, the new 49ers—Americans in the other 49 states, that is—will be extended the privilege of paying California’s taxes. At least they won’t have to put up with its public services…
What does all this have to do with the EU, let alone Bosnia?
Harmonising taxes and state activity across a wide political space works only for as long as the elite running the system behave responsibly. When they lose control of their own appetites for spending taxpayers’ money and associated ‘control’, things trend downwards fast.
California is a superb case of public sector profligacy and obduracy fulfilling Mrs Thatcher’s dictum: the problem with Socialism is that you run out of other people’s money.
California now has to tax other states via federal bail-outs to pay its way. And for how long will those states put up with that?
Virtue/restraint are being penalised. Wasn’t there once something about ‘no taxation without representation?’
Here in the EU it is not so easy for language and other reasons for people to vote with their feet. So we see constant pressure on the UK from Brussels to stop ‘unfair’ tax and ‘social’ competition (demands for tax harmonisation, Working Time Directive). Yet without the ability by member states to compete for comparative advantage in these areas, the way would be open for unchecked government stupidity across the EU on a vast scale.
Tax competition in an arrangement like the EU is not a problem or a bug – it is the core feature which keeps the system as a whole sane.
Which is why the long-term threat to the UK’s EU membership as currently constituted may become the refusal by UK voters to deprive themselves of the flexibility they think is needed to make their country work – the more so since the pain of extricating ourselves from the ruin of Labour policy since 1997 is going to be so intense:
UK public borrowing is forecast to rise to 15 percent of GDP this year and public debt is approaching 100 percent of GDP, leaving the public finances in “the worst shape for more than 50 years,” said Bootle, who is Managing Director of Capital Economics Limited and was a Treasury adviser under Britain’s last Conservative government, which exited power in 1997.
As for Bosnia, the same issue in effect is running. The Bosniac elite in Sarajevo with intermittent support from some in the ‘international community’ want BH-wide government harmonisation and the constitutional changes they think must occur for that to work.
Yet the fastest way to harmonise the space across Bosnia would be for the larger Federation entity to become super efficient and economically booming with Serbs welcomed into a good share of top positions, so that Serbs clamour to leave Republika Srpska and live there. Instead the Federation is inefficient, wasteful and over-governed, to the point of near-bankruptcy.
In these circumstances (and ignoring for now their own nationalistic cynicism), the Bosnian Serbs not unreasonably fear that Sarajevo’s demands for ‘harmonisation’ are all about extending to Republika Srpska negative forms of majority/Bosniak control (including ethnic discrimination) rather than any real desire to make the country as a whole ‘work better’.
In other words, the absence of ‘harmonisation’ ought to be inducing tax and overall efficiency competition between the two Entities to attract people and investment. And it is. But Republika Srpska is on the whole winning that competition, and sees no reason to surrender its edge.
Back to California/Texas. The bottom line from William Voegeli?
The optimistic assessment is that things are going to get worse in California before they get better. The pessimistic assessment is that they’re going to get worse before they get much worse.
Here too, alas?