Weldon Cooper Revisited

 

In a recent post of Steve’s, members of this blog got into an extended discussion of the methodology used by the Weldon Cooper Center at UVa. to evaluate the effect of tax incentives, specifically its projecting the “impact of raising income taxes by the amount exempted.”  As promised, I contacted a senior executive at Weldon Cooper whom I know and asked for some clarification.

His answer was fairly lengthy, so I will quote key portions and try to summarize his position:

“The answer to your question is that every dollar spent has an opportunity cost.  As you point out, one way the opportunity cost can be measured is the value of the best alternative way you could have spent the money.  Another way is the cost to the economy of extracting a marginal dollar from the economy with a tax instrument….Every tax has some cost in terms of consumption foregone.”

“One cost of a tax is that it might cause some firm or some person to choose to be elsewhere.  This is not a ‘conservative’ idea.  It is just a standard result of microeconomics.  But we must not lose sight of the fact that how the money is spent is important as well.  People and firms value public safety, education services, infrastructure, clean environment, good administration and all the rest.  These things are not free.”

He objected to the characterization in BR of the Weldon Cooper method as “dynamic scoring”, saying, “this is incorrect and is a politically charged assertion.  It doesn’t make us ‘conservative’ to account for opportunity cost and [the effect on the economy of extracting a marginal dollar with a tax instrument].”

In summary, he asserts that any fair analysis must take account of all the effects of government spending.  On the one hand, “every tax has some cost in terms of consumption forgone.”  On the other hand, taxes are used to provide services to citizens that can be best provided by government, rather than the market.

Hall-Sizemore take:  I was off-base in my earlier characterization of the Weldon Cooper approach  as being an “assumption that, were it not for the incentives, those revenues would not have been needed. Thus, there was a ‘tax increase’ needed to produce the revenues.”  It is, in reality, a way of measuring the opportunity cost in terms of the effect of the marginal cost of raising the funds.  It also is a way of consistently comparing different types of economic development incentives.

Actually, balancing of opportunity costs occurs annually in the budget process.  Both the Governor and the legislature do it.  Either the legislature or the executive could determine that the projected revenue was in excess of what was needed to provide a good mix of services in an efficient way and therefore propose reducing the tax rate, rather than expand services.  (Those issues dominated the discussion in last year’s session.)  More often, the opposite is the case—the “needs” and the “wants” of the agencies exceed the amount of projected revenue and the executive and legislature decide that the opportunity cost should be borne by the government.  Thus, the marginal cost to the economy of raising taxes takes precedence over the cost of foregoing expansion of existing services or initiating new ones.

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8 responses to “Weldon Cooper Revisited

  1. So the marginal utility of an additional dollar of spending by government is assumed to be equal to the marginal utility of an additional dollar kept and spent by the taxpayer. Doesn’t answer the question, who’s dollar is it in the first place? Who earned it?

  2. yes I still have a problem with the opportunity cost idea because essentially what it is saying is that when we pay taxes for a policeman we are losing opportunity somewhere else.it’s like saying that when we pay taxes for government that what we’re getting from government has no value and that every time we spend money for government we are losing opportunity in the economy that’s simply not true

    • No one is saying that what we get from government has no value. As one of the quotes I cited points out, “People and firms value public safety, education services, infrastructure, clean environment, good administration and all the rest.”
      In your last phrase, you are getting at a concept that was not addressed by the Weldon Cooper executive because he was not asked about it. It is true that government spending has a multiplier effect. I don’t know enough about microeconomics to speculate whether government spending or private spending has a larger multiplier effect. Certainly, if the government takes money from individuals, via taxation, that would ordinarily be “idle” (sitting in CDs, etc.) and puts it into circulation via spending it, then the multiplier for government would be greater. But, at this point, we would be getting into complex modeling scenarios that are way over my head.

  3. The answer is obvious. The taxpayer earned the money in the first place. As a member of society, his elected representatives have extracted from him, in the form of taxes, some of those dollars to pay for things from the government for the public good, such as public safety, education, etc. If he does not like how those representatives spend his and other taxpayers’ money, he is free to oust them from office (as they did in Hanover County). If he cannot succeed in convincing enough of his fellow taxpayers to oust enough of the scoundrels in office, he is free to go live on a deserted island in the Pacific and pay no taxes.

  4. Dick – The multiplier effect is one thing but when someone says at the top that money spent by the govt has an “opportunity cost”, I consider that to be in the same realm as Supply-side economics which seems to presume that any money spent on govt is money not spent in the private economy where it would be presumably more efficiently allocated by a market economy and as a consequence – generate more tax revenues even after taxes are cut.

    Some money spent on Govt may well be wasted and better allocated in the private economy but the reverse is true also. People spend money on all sorts of frivolous things then expect the govt to “help” them with their medical care, retirement – etc so the govt “takes” their money to pay for Social Security/Medicare and some folks say when the govt does this, it incurs an opportunity “cost”. Ditto when the govt “takes” our money and spends it on GPS satellites, the FAA or NTSB, or even something as basic as traffic signals.

    According to some – any/all money “taken” by the govt incurs an “opportunity cost” – it’s never broken down further – it’s just an all inclusive idiom.

    I expect that kind of thinking from the Conservative/Libertarian think tanks and Conservative politicians but when I hear Weldon Cooper treading on that same turf, then I fear that they have lost some of their objectivity about the purpose, role – legitimacy of government, taxes and spending.

  5. Opportunity cost is real. Every time I spend a dollar on something, I don’t have that dollar to invest or spend on something else. Every dollar of taxes paid takes that dollar from the private sector where it could have been invested or saved. That is an opportunity cost.

    But, as we all recognize, government is necessary for society to function. And for government to function it needs funding. We, therefore, must pay taxes or fees to allow the government to operate. At some level, there is likely general consensus that the value of the tax dollars spend outweigh the opportunity costs. But I submit that the level of consensus is far from being sufficient to cover the massive amounts of money spent by government and the associated uses.

    At one level, Dick is correct. If we don’t like how and how much is being spent, we can vote out the incumbent. That certainly happens, at least on a time-by-time basis.

    But there is insufficient visibility for government spending. Whether one is coming from the left, center or right, there are plenty of programs and funding levels about which large number of individuals would object. And Washington and state capitals are full of lobbyists, some paid, some not, who are seeking appropriations and more appropriations. Couple that with a go-along-to-get-along mentality, government at all levels is totally out of control.

    Some argue for requiring supermajorities to pass appropriations and/or tax legislation as is done in a number of states. That would force a greater level of consensus and make legislators work together. A possible problem is exempting fees, tuition, and the like from the controls. As Dick noted some days ago, our colleges and universities just raise tuition if the appropriations are insufficient to support business as usual.

  6. I just want to point out that there IS ALSO “opportunity cost” if you do not have a teacher or a policeman or a traffic light or water/sewer.

    The discussion trades “opportunity cost” from the private economy versus the “value” of the services provided for taxes.

    I’d argue that it’s true on BOTH SIDES of the equation – that on the tax-paid services side there is ALSO – “opportunity cost” if we choose to not tax and not fund and instead let that money go into the private economy.

    The problem here is that we treat tax-funded services as “amenities” that we choose to provide instead of letting that money go into the private economy.

    The reality is that if you don’t have State Troopers – you have “opportunity costs” also – that of lawlessness and crime – and loss of property and life, etc. Treating that as if it has “some” value but not as much as the opportunity cost if that money were directed instead into the private economy..

    that is a political philosophy – NOT really an objective assessment of “value” and “cost” – on both sides.

    And THAT’s what gets us into these debates about the “cost” of government, it’s flaws and “failures” – as if the private economy doesn’t also have the same issues.

    I’ll grant Conservatives their views on this but I’ll not grant Weldon Cooper (or JLARC or other supposed non-partisan govt agency) adopting the predominant view of Conservatives and basically not acknowledging that taxes that fund necessary government services are NOT “opportunity cost” for some unquantified “value” as if we could do without and do better if we just took that tax money and returned it to the economy to be “more productive” – but we CHOOSE to spend it for less productive govt services.

    That kind of thinking leads us down a lot of rabbit-holes these days.

    Not having teachers, NOT having police or fire/rescue, NOT having safe highways – and letting all that money go into the private economy is how 3rd world countries work and our Conservative folks seem to have difficulty dealing with these realities and prefer their ideology as their “comfort”.

  7. I would be more convinced about the idea of “opportunity cost” if we could quantify “value” provided versus opportunity lost and be able to say if it’s a one-for-one trade or a lopsided winner/loser trade.

    It just cannot be that ANY tax – no matter how much and for what purpose is ALWAYS a dead opportunity cost compared to that money going into the private economy.

    When the concept is that ANY tax – no matter how much is an opportunity cost – undefined as to how much – then we’re really talking not about quantifiable numbers – facts – but rather some philosophical concept that is more a belief than a quantifiable result.

    If you cannot do that – or even if you can but your equation is not one that is a common and universally accepted one then it boils down to what one believes and that does not belong in any Weldon Cooper analysis.

    If we actually had hard numbers – we could, in fact, look at various taxes for various purposes and render an opinion as to whether that collected tax actually compared well (or not well) to the opportunity cost.

    We could say, for instance, that if we cut fuel taxes by half that the resulting increase in congestion and accidents was less than what the opportunity cost of putting that money into the private economy would do.

    So – if you can’t really do that – then who would you believe as to the veracity of the claim? It simply would be an arguable point without any real proof.

    So why is Weldon Cooper engaged in this kind of subjective thinking if they cannot quantify the claim in any real sense?

    It’s in the political realm – and should not be in any Government realm – for instance, what if we took what Weldon Cooper is saying and started incorporating it into our budget process we’d cut taxes that went for state troopers or K-12 or transportation on the premise that the money would be far better spent in the private sector – to not have that as a loss – an opportunity cost? Or turn it around and we say we WILL tax and spend it on troopers and K-12 because we THINK it is “worth” it. We have no real numbers to prove it – it just becomes what various folks believe.

    The General Assembly would then want WC to recommend what a “proper” fuel tax should be (or not).

    And no – this is not liberal miasma –

    Take VDOT – and roads – and whether it’s better to collect taxes to pay for roads or to collect tolls instead – perhaps tolls imposed by the private sector – such that the tolls actually produce more value than the taxes.

    I’d totally support that – if the numbers showed it but I’d not support it because someone said they thought it but did not have numbers to prove it.

    So that’s where Weldon Cooper needs to go on this.

    If they say there is “opportunity cost” then they need to show that cost and the calculations that they used to get there.

    Otherwise, I fear some folks with personal beliefs have gotten “inside” of Weldon Cooper and are pushing their subjective ideas rather than being objective.

    Once they cross that line – their reputation and credibility will be harmed. People will start believing that they have become partisan and an organization that was trusted no matter one’s personal politics will have lost it’s reputation as unbiased.

    Serious stuff.

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