More Competition = Better Government

by Pejman Yousefzadeh on April 15, 2012

An excellent piece by Greg Mankiw. The following passage is especially worthy of note:

. . . Over the last few decades, corporate tax rates have fallen around the world. As of April 1, when Japan cut its tax rate, the United States was left with the world’s highest statutory corporate tax rate. This is one reason corporate tax reform is now high on the policy agenda. President Obama has proposed cutting the rate to 28 percent from its current 35 percent, while Mitt Romney — for whom I am an adviser — has proposed cutting it to 25 percent. While their proposals differ in some key details, it is noteworthy that they agree on the direction this rate should head.

Conservatives applaud such competition among governments. They are skeptical of government power, and they see competition as a check on its potential abuse. Because people and capital will flee from places where their tax dollars do not deliver commensurate value, government officials have little latitude to pursue personal agendas that are substantially adverse to any group of citizens.

This logic leads naturally to the principle of federalism. Because exiting a state or locality is easier than leaving the nation, some policy options should be available to state and local governments but not to the federal government. The founding fathers were no fools.

HEALTH care reform is a case in point. Anyone who finds the Massachusetts health insurance mandate objectionable can easily move to live-free-or-die New Hampshire. A national mandate leaves people with fewer options. This is one way the health reform advanced by Mr. Romney as governor differs from that pursued by President Obama, and why the Massachusetts law raises fewer constitutional objections than does the national one.

While conservatives embrace governmental competition, liberals have good reason to worry about it. The left has a more expansive view of the role of public policy. Liberals want the government not only to provide public services but also to redistribute economic resources. In the words of President Obama, they want to “spread the wealth around.”

Yet redistribution is harder when people and capital are free to move to other jurisdictions that offer better deals. If you are going to take from Peter to pay Paul, Peter may well decide to leave. It is perhaps no surprise that state and local tax systems are less progressive than the federal one.

The only point that I would add is that those who don’t like competition are usually afraid that if forced to compete, they will lose. The fact that an entire political movement is scared that competition might negatively impact the implementation of its ideas tells you all you need to know about how lacking in rigor those ideas are.

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