Taxes And Growth

One of the most reliable laments I post to this blog is the absolute refusal of many policymakers  to base their decisions on evidence. We live in a time when experience and reality are no match for the preferred ideologies of our lawmakers. (In all fairness, that phenomenon is probably not new, but it has certainly become more obvious.)

Marketwatch is a business publication that focused upon that disconnect in an article from early May. The title was”Texas, California and Indiana offer surprising lessons about low taxes and economic growth” and the subtitle–which trumpeted the basic conclusion–was “Indiana slashed taxes. Yet wages have fallen even further behind the national average.”

If the subtitle was insufficiently clear, the introductory paragraphs left no doubt:

Among the most common claims of state economic development officials is that higher taxes drive down growth and cause businesses and people to relocate to low-tax states. If you listen to cable news, you are likely to hear dire stories of people fleeing high-tax states in droves.

Yet the high-tax parts of both California and Texas are growing faster than the low-tax parts of both states. And growth in Indiana, which has cut corporate and personal income taxes in the past decade as well as put a cap on property taxes, is dismal.

I tend to foam at the mouth whenever I encounter a reference to Indiana’s property tax cap–not only is the cap bad policy, not only does it disproportionately strangle urban areas in our rural-privileged state, but in an unconscionable move to elevate political game playing over responsible governance, former Governor Daniels constitutionalized the cap–ensuring that, even if subsequent evidence of its counter-productivity emerged, the measure would be virtually impossible to reverse.

The article wasn’t aimed at the multiple flaws of the tax cap, however, so I will leave my extended diatribe for another day.

Why is it that prescriptions for lower taxes, like other seemingly obvious economic “cause and effect” formulations, turns out to be contradicted by real-world evidence?

Modern economic research consistently reports that lower taxes tend to promote growth and migration, but only when all other factors are held constant.

Here’s the rub: It is straightforward to create a model holding all these other factors constant, but in the real world, they never are constant. So the role of taxes has to be weighed against the value of what tax dollars provide.

It took me a long time to recognize the importance of that insight. I used to think it was obvious that a higher minimum wage would depress job creation–until I realized that such a result required all things being equal–and all things are rarely, if ever, equal. The “obvious” result ignored–among other things–the effects of low-wage workers’ increased buying power. We now have real-world evidence from jurisdictions that raised the minimum wage that the “obvious” result isn’t necessarily the actual result.

In the case of economic growth, the article looks at the rivalry between Texas and California, and finds (surprise!) that the popular rhetoric doesn’t reflect reality.

Stories about people “fleeing” California for Texas are common, and Elon Musk’s high-profile announcement that he was moving to Texas fuels the anecdote-driven news cycle. Taxes per capita are higher in California than in Texas, giving weight to the story that low taxes are driving this migration.

In fact, in the last year for which we have data, two out of every 1,000 Californians departed for Texas, while 1.2 of every 1,000 Texans moved to California. This is hardly a notable exodus, and it hardly explains why a rational Texan would head to California. Something else has to be going on.

Furthermore, as the article notes, people are more likely to move from city to city within a state than they are to move out of state, and tax rates vary far more between local governments than between states.

In California, the total state and local taxes in the highest-taxed place were more than three times that of the low-tax county. In Texas, the difference is three times as large as in California.

Further contradicting the preferred story, it turns out that population growth in both California and in Texas is concentrated in the higher-tax places. That’s because–as city planners have long insisted–what matters most isn’t the tax rate (although it certainly factors in) but the quality of life. It’s value for the dollar.

 Taxes represent one price for living in a particular city or town, but value — not price — is the key decision variable.

For the average family, value comes from tangible amenities like safe, livable neighborhoods, high-quality schools and great parks and trails. They go far beyond natural amenities such as beaches and mountains.

That’s a lesson I doubt Indiana’s gerrymandered legislators will ever learn.

 

 

 

17 thoughts on “Taxes And Growth

  1. And Kansas is the best example of all. We also know that quality of life affects happiness and some of the happiest folks in the world live in the high-tax Scandinavian countries. But ideology trumps fact.

  2. It was due to that property tax cap here that the following property assessment was raised which raised the amount of property taxes proportionately. What has happened in that area of local government since those early days I can’t say but I DREAD seeing our next property tax assessment when sale amounts of low to low-middle-income homes in my small isolated neighborhood in the shadow of Raytheon skyrocketed to over $100,000. The total lack of infrastructure maintenance by city-county should have been a clue to the true value of this and ignored surrounding areas. Part of the problem also throughout the surrounding area is the lack of enforcing zoning regulations on individual properties.

    Questionable use of tax dollars for infrastructure repair and maintenance increased for me during my ride to and from my son and daughter-in-law’s home in a housing development on the far south side on Franklin Road. Newly paved from East Washington south in low-traffic areas through acres of farmland and a few widely spaced housing developments off of Franklin Road while high-traffic areas through residential and business areas on deplorable, vehicle damaging streets and roads north of Washington Street continue to worsen.

    “Taxes represent one price for living in a particular city or town, but value — not price — is the key decision variable.

    For the average family, value comes from tangible amenities like safe, livable neighborhoods, high-quality schools and great parks and trails. They go far beyond natural amenities such as beaches and mountains.”

  3. We have the social progress and happiness index that support those findings as well. There is also the general wellness of the area which is ranked as well.

    I like this comment, “They go far beyond natural amenities such as beaches and mountains.” Since we don’t, you’d think Indiana would compensate by being more progressive or leaning more on IU Bloomington. Well, since our state is gerrymandered to favor the rural Republicans, we’ll never be progressive in any facet. We get high rankings from CEO’s which means they get to exploit workers and the environment. That’s all that matters in the world.

    In Muncie, we lost several HQs because the executive class had to hear about how long of a commute it was from Indy to Muncie from their spouses. Of course, the newspaper never passed that tidbit along.

    Also, a big chunk of our professors and physicians commute into Muncie from Hamilton County as well.

    If there was a vote by professors, Ball State would move to Fishers to reduce their commute time. It was funny, when Jo Anne Gora was President, the real estate packages included Hamilton County real estate and bragged about the 45-minute commute. LOL

    I’m still expecting a big announcement from Todd Young shortly about monies coming to Indiana chipmakers, but I guess it got slowed down by Bibi’s $1 billion request for Israel. Fun times.

  4. The evidence about taxes not being “depressing” has been around for decades. When Washington state raised its taxes, naysayers cried out that people and jobs would move to Oregon. But that did not happen. Nevertheless, the naysayers have not learned that lesson.

  5. Please DO foam at the mouth on the topic in a future blog post! The one contributing factor that certainly did NOT remain constant was education attainment. Indiana has been stuck near the bottom in terms of % of population above 25 with a four year baccalaureate degree at 26.5% vs 32.1% nationally, and ranging from 10.5% in LaGrange County (the lawyers and teachers) and 59.3% in Hamilton County, one of the most prosperous in the US.

    Instead of investing heavily in its human capital Indiana government has consistently reduced the share of GPD and taxes devoted to early child development through post-doctoral research year after year after year at the same time it has funneled EDC/TIF funds to help chase $10-$15/hr factory jobs and also hand out tax cuts to businesses and the wealthy.

    It continues to bank its future on a thoroughly discounted capitalist model of educating our children: relentless standardization and commoditization of educational programming, de-professionalizing the education teacher workforce, and creation of a disjointed system of public, semi-public and private schools to compete for students and teachers.

    It has done nothing for kids but make public education more expensive for Indiana taxpayer and no return on investment measured by any means, including the most important one: educational attainment and income growth.

    On a positive note the blogosphere expunged a major source of pollution yesterday when the former guy killed his new blog, largely because he was FURIOUS that no one was reading it. Now THERE’S competition for you. Keep writing Sheila and I’ll keep reading and commenting, for better or worse.

  6. Pascal,

    Does anybody ever learn that lesson? The evidence has been there since the minimum wage was born. Raising the wage has never resulted in fewer jobs and minimum wage jobs have never been isolated to teenage summer employment. As far as taxes are concerned, was there anybody who couldn’t foresee that the tRump corporate tax cut would mostly be used to buy back stock, raising the price per share and enriching the CEO, COO, and CFO of every company that did it?

  7. Republican branding and framing has wailed about taxes since Lincoln was shot. Republicans want world class everything – for themselves and their donors, want to turn the middle class into the serfs of big business and think that all will be well.

    Never mind that in a consumer-based economy, the consumers MUST have money with which to consume. O.K. Lower the consumer’s taxes and tax those who have all the money, right? LOL. The 2% -10% with all the money would rather feed their children to sharks than pay taxes. They’d rather hire expensive tax lawyers (more rich people) to shelter their taxes in other countries thus depriving our economy of even more capital.

    As mentioned in comments above, tax cuts do NOTHING for the well-being of the communities being “rewarded” by voting for Republicans. The main point is that we cannot have a world-class society and country on the cheap. EVERY single society in all of history has failed and collapsed when the “leaders” tried that strategy.

    The United States is next on the block of failure as long as Republicans shift money to their rich donors. Hell, even Eisenhower knew that starving the middle classes was a bad idea. He also presided over a 75+% tax rate on the richest among us and corporate America.

    Anybody remember that?

  8. Republicanism was defined by Ronald Reagan. In 1981, Ronald Reagan told us, “Government is not a solution to our problem; government is the problem.”

    They have never recovered from that delusion. They believed it because all they expect in life is high profits and low expenditures and apparently they don’t understand the concept of investment for growth, only for wealth accumulation.

  9. The other side to the coin is not just the states that engage in low tax rates, there are countries which are tax havens for the large multi-national corporations.

    The Guardian has an excellent article today on tax avoidance by the multi-nationals.

    An Irish subsidiary of Microsoft made a profit of $315bn (£222bn) last year but paid no corporation tax, as it is “resident” for tax purposes in Bermuda.

    The company, Microsoft Round Island One, posted profits last year equal to nearly three-quarters of Ireland’s entire gross domestic product (GDP) – despite having zero employees.

    The revelation of how much money Microsoft has saved by routing via Ireland comes as world leaders hammer out an agreement to tackle multinational tax avoidance before the G7 meeting in Cornwall later this month.

    Microsoft Round Island One, states in its accounts that it has “no employees other than the directors”. In its tax statement it says: “As the company is tax resident in Bermuda, no tax is chargeable on income.”

    Bermuda does not levy corporation tax.

    The company paid a $24.5bn dividend to Microsoft Corporation during the financial year, followed by a further special dividend of $30.5bn. Tax transparency campaigners described the “tax aggression displayed by Microsoft, and facilitated by Ireland” as “beyond belief”.

    Income tax is paid on profits, but the researchers said the Silicon Six companies (Microsoft, Amazon, Facebook, Google’s owner, Alphabet, Netflix and Apple ) deliberately shift income to low-tax jurisdictions to pay less tax. https://www.theguardian.com/world/2021/jun/03/microsoft-irish-subsidiary-paid-zero-corporate-tax-on-220bn-profit-last-year

    We also have the non-profits that exist. Some people get all misty eyed with tears when some wealthy foundation doles out some money for a “good cause”. These foundations get the cover in sense of buying indulgences.

    We probably would not need all these “good cause” foundations if corporations and the 1% paid their fair share in taxes.

  10. What Dave K wrote. The C of C, as usual, lies, because lower taxes go directly to corporate bottom line relief and not capital and employment expansion as advertised. Thus when Kansas went virtually taxless businesses and individuals left town for states with higher taxes for other and better reasons, some of which are enumerated in Sheila’s effort.

    The corollary of you get what you pay for is that you don’t get what you don’t pay for. It’s a real world and I have yet to understand (other than via C of C propaganda) why ordinary Americans vote for lower corporate taxes which result in stock buybacks, increased executive compensation and enhanced opportunity for shareholder capital gains. I suspect without knowing that these are largely the same propaganda prone voters who think President Biden is not the president. Uh. . .

  11. The Indiana property tax cap in itself is not evil. The fact that it is written into the constitution might be a mistake. With that part of the reform came a few other fixes that did eliminate some evil things, like the previous “computed assessment value”. As somebody that has now owned the same house for 30+ years, our assessed value is still ridiculously low compared to some of our neighbors because the assessment gets adjusted when a property sells and is based on the the selling price. Like the IRS the assessors office seems to be perpetually underfunded.

    As Shelia points out, Indiana has cut personal and business income taxes at a time when there is no possibility to make up for it with property taxes.

    I will say that, with the Rural vs City gerrymandering that Indiana Republicans are so good at, options for the city to raise more taxes are almost zero. An example is the wage tax. About 60+% of the people that work in Indianapolis, don’t live in Indianapolis. They commute everyday, putting wear and tear on the streets. They expect adequate police protection for the businesses they work at, and for themselves, but they don’t pay for any of those services through the wage taxes. It almost all goes to the suburban county they actually live in.

    In addition, the city center is filled with huge tax exempt organizations, mainly hospitals that make billions in profit, and state and federal government office buildings. There should be at least “user fees”.

  12. Richard Allen pointed to an excellent article published by Forbes in his post above that is directly related to Sheila’s position today:. “What do you do when the Congressional Research Service, the completely non-partisan arm of the Library of Congress that has been advising Congress—and only Congress—on matters of policy and law for nearly a century, produces a research study that finds absolutely no correlation between the top tax rates and economic growth, thereby destroying a key tenet of conservative economic theory?”.

    My experience in urban Redevelopment when both local and regional government have tax increment financing tools to incent private sector investment then there is a proven track record tax policy can produce growth. Tax increment financing is an intentional tax increase measured over time. It requires intentional work based on the evidence of smart planning and patience. Alongside a complex plan is relevant social intervention to compensate anticipated relocation. It is chess game that requires strategic level participation of intelligent folk from both public and private sector who bring their ‘long game’ to the table.

  13. Every time I can hardly see the white and yellow lines on the streets at night and every time I go over the poorly repaired seems on 86th st just west of Michigan Rd., I think about how this state has under taxed corporations.

    If we are going to do this, then they need to agree to use some of their profits for infrastructure maintenance in their communities.

    I think people migrate to where the good paying jobs are or to places where they can actually get a job.

  14. Seems like legislatures are moved by how something is framed. Read George Lakoff, Thinking Points. The difference in values between conservatives and liberals is vast as is the way of defending those values. He also has some stuff on UTube.

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