SB 2437

Testimony. SB 2437
DATE: Monday, February 01, 2010
TIME: 1:15PM
PLACE: Conference Room 225

To: Senate and House Education Committee members
From: Malcolm Kirkpatrick
In re: SB 2437

Please DO NOT support SB 2437 as written.

This bill proposes to address a shortfall in tax receipts with an increase in the rate at which the State taxes commercial activity. An implicit assumption behind this bill is that the proposed rate increase will generate increased revenues. A further assumption behind this bill is that the State will spend the generated revenues wisely.

Both assumptions are probably false.

Across the US, tax receipts declined as commercial activity declined. Tax receipts will recover when commercial activity recovers. Taxes have the same effect as fines. You can without mistake consider a tax as a fine on the taxed activity. Taxes reduce the entrepreneur's incentive to start a business, the investor's incentive to lend, and the tradesman's incentive to practice his trade.

Hawaii is not the only State under financial stress. Look to California to see Hawaii's future. California faces a $10 billion per year projected budget shortfall where ever-increasing demands by an unrestrained public sector have caused a collapse in real estate prices and new business start-ups. Anyone who buys land in California paints a target on his back. Anyone who opens a business in that State volunteers to be bled white. Investors and productive workers have fled. They will flee Hawaii, also.

SB 2437 lacks any indication that Hawaii's legislature intends to reduce the demands made upon the productive private sector by this State's bloated public sector. Hawaii's tax-subsidized K-Ph.D. education industry exhibits the defects of tax-subsidized State-monopoly industries elsewhere. Across industries, across countries, monopolies deliver wretched goods and services at high cost and subsidized goods are over-consumed.

The people of Hawaii are among the highest taxed in the US, as measured by total State and local expenditures per capita. Hawaii's State-monopoly school system cost taxpayers nearly $15,000 per pupil to operate in the 2005-2006 school year, when the DOE (2008 Digest of Education Statistics) reported total revenues over $2,703,718,000(table 172) and total enrollment of 180,728 (table 34). $2,703,718,000/180728= $14,960

The nearly $3 billion per year DOE budget total does not include two large additional costs of this system. The cost of the State-monopoly school system includes the opportunity cost to students of the time they spend in school and the cost to society of the lost innovation in instructional methods which a competitive market would generate. The lost opportunity cost appears as reduced lifetime earnings, reduced longevity, losses due to crime, and the cost of prison for the poor kids whose lives we trash.

For all this cost to the people of Hawaii, the tax-subsidized State-monopoly education industry delivers a level of performance which puts Hawaii in the national cellar. By some measures we are dead last. The 1996 TIMSS placed Singapore at the top of international rankings and the US among the laggards among the world's industrial democracies. The Singapore fifth (5th) percentile score (TIMSS 8th grade Math) was higher than the US fiftieth (50th) percentile score. With Hawaii's DOE delivering instruction which puts Hawaii students in the national cellar, Hawaii's valedictorians will be shining Singapore's janitors' shoes.

Will higher tax rates repair Hawaii's dysfunctional school system?

Arthur Laffer summarized the relation between tax rates and tax revenues with the notorious Laffer Curve, the inverted parabola. Critics who ridicule the Laffer Curve reveal more about themselves than about Dr. Laffer. Charles L. Schultze, who served as chairman of the United States Council of Economic Advisers during the Carter Administration and as director of the U.S. Bureau of the Budget from 1965-67 during the Johnson Administration and as President of the American Economic Association, called the Laffer curve a straightforeward consequence of standard economic analysis.

Increased tax rates will not generate increased revenue, and the Hawaii's K-PhD State-monopoly education industry will not improve with more money.

Across the US, between 1920 and 2006, total expenditure per pupil in average daily attendance increased from $685 to $11,643 and current expenditure per pupil in average daily attendance increased from $571 to $10,041, in constant 2007 dollars, according to table 181 of the 2008 Digest of Education Statistics.

In Hawaii, current expenditure per pupil in fall enrollment has increased from $4,280 in 1970 to $10,131 in inflation-adjusted dollars, according to table 184 of the 2008 Digest of Education Statistics.

It does not take 12 years at $10,758 (table 182, current expenditures per pupil in Fall enrollment, 2005-2006), or $14,960 to teach a normal child to read and compute. Most vocational training occurs more effectively on the job than in a classroom. State provision of History, Civics, Economics, or other "social studies" is a threat to democracy, just as State operation of news media would be (is, in totalitarian countries).

Until Hawaii's politicians reject the demands of Hawaii's predatory public sector, investors will shun this State and entrepreneurs will take their business overseas or underground.

Thank you for this opportunity to speak.

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