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At the Ballot Box: Considering Trade-offs on 101, 60 and 61 10 October 2010

Posted by magicdufflepud in Economics, Policy.
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Unless you’ve been living under a rock–which, in Colorado, is entirely possible–you’ve heard about Proposition 101 and all those two amendments in the 60s. If any of them passes in November, the nation’s gaze will settle on our state. Someone Massachusetts will spit out his latte and ask “Dude, Colorado. WTF?” Around here, folks are calling the proposed changes the Armageddon amendments, but if you prefer “Ragnarok amendments” or the “amendments of the eschaton,” I doubt anyone would stop you. The evangelicals out the might even support the idea. I guess it’s cool if Colorado brings about the rapture. Anyway, point is that if you live in Colorado, you face a set of proposals that will, if enacted, turn Colorado on its head. I’ll leave you to decide whether that’s a good thing, but I’m hoping to give you a hand in assessing the impacts of each.

Because so much money is at stake here we need to understand taxing and spending and cuts thereto. We need a framework for making decisions.

Spending any time arguing with someone about tax cuts, and you’ll eventually hear the line “Proposal X takes away Y dollars from program Z” followed shortly thereafter with a statement, always said with an air of finality, “And we simply can’t afford to cut that much from program Z.” And on the other side of the argument, you’ll get, “Proposal X returns Y dollars to taxpayers’ pockets.” Both sounds reasonable, hence the finality, but rarely do you hear them addressed together. Let’s take a moment to examine what’s going on.

If we accept the argument that taxes exist in part to pay for government services (and set aside the arguments that they serve redistributive and behavioral purposes as well), then tax money looks largely the same as money spent purchasing anything else. We’re buying roads, education, social services and so forth because we see value in the products. It’s that kind of thinking that passed Amendment 23, mandating higher levels of funding for Colorado schools. Our tax dollars pay for things we believe we need to live in a civil society.

So when considering tax cuts, we can begin drawing analogies to the purchases we might make on our own. If we choose not to spend money on a new car, for instance, we might keep $350 a month to spend on other things we need or enjoy. Same with tax dollars. If we cut taxes, we’ll now have Y dollars left in our pockets to purchase things other than roads, education, etc. That’s the argument the tax cutters make. “More money in our pockets.”

Taking both sides into account, we must decide whether the trade-off makes sense. Maybe our current car is a clunker with no hope for repair. It guzzles gas and threatens to fall apart at every other turn. $350 a month for a new car solves those problems. The same goes for state services. We might all be able put more toward repairs to our houses, for example, but is it worth it to take that money from higher ed? When we take tax revenue from the government we’ll lose certain certain services, as well.

Cutting taxing and spending is a trade-off, not the one-sided disaster (or success) story so often offered against (or in support of) it.

With all that in mind, we ought to consider two factors when making our decisions: 1) the relationship between tax revenue collected and the quality of services provided and 2) the minimum level of services we’re willing to accept.

To illustrate the importance, take a look a these two graphs:

 

 

Low impact on service quality

 

 

High impact on service quality

 

In both these graphs, we’re willing to to accept nothing below the same non-zero threshold of service quality. This is the level of service we expect from the government, irrespective of the money we pocket through tax breaks*. In the first graph, however, you’ll see that our return on investment is much lower. More money to government improves government services only slightly. In the second graph, small increases in revenue result in large increases in service quality. To think about this more concretely, try replacing the x-axis with “spending per-pupil” and the y-axis with “test scores.” In the first case, we get relatively little improvement when we spend more money. Maybe it would be better to spend it elsewhere. In the second case, we see enormous gains. Spending more money here gets us a lot.

Bringing this back to the original discussion, we need to consider exactly what we lose when we cut taxes and curtail spending. We need to know how effectively Colorado spends taxpayers’  money. And then, we need to know, based on that relationship between revenue and service quality, whether the cuts proposed via Prop. 101 and Amendments 60 and 61 will take us below the minimums we expect from government. If we think those cuts will take us below our minimum expectations, then we need to oppose them, and if we think they’ll remain above the minimum, then we need to weigh the service lost against our own gains. Not an easy task, but when so much money hangs in the balance, we need to base our decisions on something stronger than whimsy. This provides a framework.

But if all that sounds too time consuming and wonkish, then yes, all the ballot proposal mentioned will cut funding below those minimum expectations eventually and in some cases immediately, depending upon the program. But take the time. Make your own assessment.

* Despite the discussion of trade-offs, sometimes we require a minimum when making decisions. In your own life, you might be choose to live in cheaper and cheaper places so that you can afford to spend money on other things, but at some point you reach a lower bound. You have to live somewhere, so your trade-off becomes one between money and homelessness–not a realistic decision. Same with government: you expect police and fire protection, roads, some form of public education, etc. A minimum exists.

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