On Nov. 8, Typhoon Haiyan barreled through the Philippines causing a 16-foot storm surge, torrential rains, and engulfing everything in sight with its 160 miles-per-hour winds — a Category 5 hurricane. The typhoon was a tragedy and my prayers go out to those families who are now struggling. The costs of these natural disasters are mind-boggling when the loss of human life, physical capital, and rebuilding efforts are all taken into account. In these situations, claims are frequently made that government aid is the optimal solution for disaster relief and the economies of this community will flourish thanks to rebuilding efforts. This view is based on erroneous assumptions.
ADVERTISINGTyphoon Haiyan caused mass destruction leaving property mangled across the region, killing approximately 4,000 people, and leaving thousands more injured or lost in the debris. The Economist reports that "early estimates of the economic costs are about $15 billion." The costs could have been much higher if the storm had not passed through one of the poorest regions in the world.
5To give some perspective, Hurricane Katrina was a weaker (Category 3) hurricane with 125 miles-per-hour winds when it made landfall near New Orleans in 2005, causing $125 billion in damages. In fact, Katrina holds the record for costliest Atlantic hurricane. Although Hurricane Katrina was a weaker storm, the economic costs were more than eight times greater because of greater economic development and prosperity along the U.S. coast than in the Philippines.
These catastrophic reports make it perplexing to read articles explaining how Typhoon Haiyan and other destructive events, such as 9/11 and Japan’s 2011 tsunami, boost economic growth. Proponents of this view argue that these disasters provide an economic stimulus due to the "jacuzzi effect," whereby upgrades and innovations are made in the wake of catastrophic events that might not have occurred if not for the disaster.
If we followed this rationale to its logical conclusion, we should burn buildings, throw rocks through windows, and pray for more natural disasters to stimulate economic growth.
The "broken window fallacy," conversely, demonstrates how unseen costs and unintended consequences must be considered when assessing the costs from a destructive event. In economics, the cost of a foregone alternative when pursuing a course of action is an "opportunity cost." This important concept must be considered when accounting for the costs of a disaster.
After any disaster, explicit costs can easily be tallied (e.g. bridges, buildings, machines, etc.) Implicit costs can go unnoticed (e.g. time, effort, lives lost, etc.) including what the funds could have been spent on instead of going toward rebuilding the region (i.e. opportunity costs.) Instead of spending money on demolishing destroyed houses and rebuilding them, imagine public and private funds spent on generating economic development in poor areas, improving failed schools, and upgrading dilapidated hospitals.
Furthermore, assistance in these situations is often delayed, due to the bureaucratic nightmare that is public sector aid. In general, government aid means well. The lack of incentives for the tracking of resources makes this type of aid ineffective and inefficient and thus the aid typically goes to inept or, worse, corrupt governments. Private sector resources from profit and non-profit entities provide aid much more efficiently because they have the incentive to track their funds appropriately and send dollars directly to those who need it most. Moreover, public sector funds come from the productive private sector, reducing donations to more efficient private sector entities — another opportunity cost.
While the region affected by Typhoon Haiyan may see a "jacuzzi effect" from a boost in their gross domestic product for a couple quarters during the reconstruction, there will be a drop in their standard of living that will not show up in the data. Specifically, the "broken window fallacy" from the lost productivity of the 4,000 deceased, the lower output due to the $15 billion in destroyed capital, and the resources employed to clean up and rebuild the region hit by this devastating storm are a drag on long-term economic growth.
As we question how disasters affect an economy, let us remember the opportunity costs associated with rebuilding efforts and inefficient government aid, not jump to erroneous conclusions about the economic and societal consequences of these events.
Fairness, like beauty, is in the eye of the beholder. This popular sentiment holds true in the free market, where prices are determined by buyers and sellers instead of by a third party picking winners and losers. Unfortunately, the real estate market in Texas has become overly politicized, leading to questions about the fairness of its property taxes.
ADVERTISINGCommercial property owners have been appealing the appraised value of their property, attempting to have it lowered. In some cases, the final value of the property has even been placed below their eventual sales price, to lower tax liability. Thus, the property tax burden in Texas has shifted from commercial property owners to homeowners. Although increasing transparency in the property tax system by mandating the sales price of a commercial property be reported is an option, there is a better alternative to avoid this issue entirely: abolish property taxes.
Appraisals of commercial property are nothing more than educated guesses, formulated before a final sale assigns a market value. Abolishing property taxes would eliminate an inefficient tax system that distorts property-related decisions and hinders the proper functioning of the economy.
A Texas Public Policy Foundation study found that property taxes are "less stable than consumption taxes; create larger economic distortions; are less related to taxpayers’ ability to pay; are more expensive and more complicated to administer; and discourage capital intensive industries from moving to Texas." Property taxes place undue burdens on all property owners, primarily discouraging investment in private property — a key building block of economic prosperity. To raise lost property tax revenue, the legislature should consider broadening the base and increasing the rate of the state’s sale tax from its current rate of 6.25%.
The report continues to say that, "keeping the sale of property in the sales tax permits the total sales tax rate to be lower (due to the broader sales tax base) while still removing many of the adverse impacts from the property tax. Alternative tax rates and tax bases that include property sales in the sales tax base are: 15.7% if the current sales tax base is used; and 11.0% if all services that are taxed in at least one state are taxed in Texas."
The study also finds that switching from a property tax to a consumption-based tax system could increase personal income in Texas by as much as $3.7 billion in the first year and by at least $23 billion over five years compared with the current tax structure. In addition, faster economic growth would lead to an average net gain of 231,000 jobs over a five-year horizon.
Increasing property owners’ incomes by eliminating their property tax liability allows them to use the additional dollars to purchase goods, hire employees, make property improvements, and take on other more productive ventures.
The Tax Foundation’s 2014 State Business Tax Climate Index lowered Texas’ business climate ranking to number 11 (in the nation,) which was largely due to the state’s property tax ranking falling three spots to number 35. Abolishing this tax will not only increase financial resources for consumers, but it will also increase the state's competitive edge on a national level.
By shifting the state’s property tax system to one based on consumption, the Texas Legislature could eliminate distortionary effects and increase economic prosperity. Instead of trying to make a tax system more "fair," property taxes should be abolished and Texans should be given the opportunity to reach their full potential.
Vance Ginn, Ph.D.