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What is an Appropriate Tax Rate? (and Other Questions)

November 18th, 2008

A reader asks several questions in response to my 11/5 post, How Do Taxes Destroy Productivity? I would like to take a few minutes to respond to his (her?) inquiries.

Is your argument about the NJ “vig” that NJ’s economy suffered as a result of this tax? That NJ experienced negative economic growth, or increased unemployment as a result of this policy? Also, since the boat industry lost 7,600 employees nationwide in a year, does your argument extend to the claim that a tax change in NJ caused job losses in other states?

I don’t know whether NJ’s economy suffered. I try not to deal in abstractions like “national economies” or “state economies.” The only thing that matters are personal economies, and I can tell you with absolute certainty, that at least 7,600 people were directly made worse off by the imposition of that luxury tax on yachts. Moreover, since the luxury tax failed to generate the expected revenue (because shortsighted politicians assumed perfect price inelasticity of demand for luxury yachts), the rest of the constituents who arguably depended on the goods and services to be thereby provided, also suffered.

Are you aware that most jobs in the U.S. are created in states with relatively high tax rates? Or that the major new growth industries here (i.e. computers, media, biotech, finance) are all based in the highest tax states of CA, MA, NY, and NJ? Discuss.

I’d be glad to discuss, if you could frame it a little more clearly. When you mention “relatively high tax rates,” are you talking about sales tax? New York has a relatively low sales tax (4%), and although NJ and CA have high sales tax rates, so do Tennessee, Mississippi, and Nevada.

Are you talking about income tax? Although California is high on the list of income tax rates, there are a number of states with higher income taxes than NY (6.85% and MA (5.3%) including such dynamos of productivity as Maine (8.5%), Vermont (9.5%), Arkansas (7.0%) and Idaho (7.8%)

In terms of corporate tax rates, by State, the highest are found in IN, PA, DC, MA, AL, RI, and LA. California is #9 on the list, New Jersey comes in at #20, and New York is a paltry #22.

Moreover, there are a number of reasons that some of these states (CA and NY, in particular) might be chosen despite their onerous sales and/or income taxes: If you’ve never been, California is a fucking beautiful state. New York is the financial hub of the world. Both locations offer prestige, and convenience for international trade routes, etc.

In any event, I don’t think the relationship between tax rates and job growth is nearly as strong as you suggest.

Out of curiosity, what would you consider to be an appropriate tax rate?

I will agree for the sake of argument that such a thing as “an appropriate tax rate” exists. Of course, implementing additional taxes on an arbitrary and ad hoc basis would seem to violate any notion of equity or appropriateness. Setting aside the obvious issues I have with taxation as a general principle, let’s remember that in the context of this discussion, I was writing about a specific instance of an arbitrarily imposed “luxury tax”, and the devastation it caused to the shipbuilding industry.

Again, I would like to remind you that in this particular case, the revenue was never realized to provide whatever services would have arguably “justified” the higher taxes.

Do you believe there is a connection between taxes and any services provided by the government? Another way, do our taxes get us anything, or are they solely a redistribution of wealth? Should we take the vig to 0% and have our military earn its money by operating businesses (as in Pakistan)?

Maybe, if we took the vig to 0%, our “leaders” could stop throwing rocks at hornets’ nests in foreign lands? The United States is surrounded by relatively neutral neighbors, and 3,000+ miles of ocean. A state-sponsored, military assault that would require a 1MM man defensive army is inconceivable.

There’s a connection between the taxes you paid and the detainees who were raped and sodomized and urinated on at Abu Ghraib. There’s a connection between the taxes you pay and the bombs dropped indiscriminately on brown people that speak funny languages and wear scarves on their heads. There’s a connection between the taxes you pay, and the systematic exploitation of poor foreigners. There’s a connection between the taxes you pay, and any person who’s ever been imprisoned for smoking a joint.

Of course there is a connection between taxes and services that the government pays for, but by the real question is, “Why does the government get the sole privilege of providing these things?” and furthermore, “Why am I obligated by force of law, to consume these things?” or rather “Why will someone shoot me if I don’t want to buy them?”

There is a gun in the room… Most people are comfortable pointing it at someone else. I’d prefer not to have it in the room, at all.

Comments

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  • RG says on: November 19, 2008 at 5:08 pm

     

    Interesting POVs, all. I am a little disappointed by your fundamental dodge of the thrust of my rather brief questions.

    Let me put it in sound-bite terms:

    No state has ever reduced its taxes to prosper.

    Another way: this is why the rich (read: “High Tax”) countries manage to prosper, in spite of (?) their tax rates. The PC was created in the U.S. when the marginal tax rate was 91%.

    Similarly, you analyze NY, MA, and CA taxes on the basis of their income, sales, and corporate tax rates. However, you totally forgot City of NYC taxes for New York (you didn’t think I was using Syracuse as an example, did you?). Additionally, you forgot property taxes (which must be nonexistent where you live, or you wouldn’t have skipped them). The indisputable point is that the places that create our industries also have the highest tax rates.

    But you think I chose special cases, so let’s examine: Cali is indeed beautiful. But again, did you think I meant that Cali’s industries came from the lower-tax Inland Empire or central Cali? No, those jobs come from the higher tax coastal and Bay regions. Similarly, NY’s engine of growth is the highest-tax part: NYC (which is also the engine of growth for NJ). I missed your argument about why the high tax rate in MA (specifically, the Boston area) does not drag on growth. In any case, you seem rational so I’d love to see a counterexample of a place with a substantially lower overall tax burden that has created a non-extractive (i.e. mining) industry.

    My first point is this: these places create jobs because they are the types of places where people who create jobs want to live. (Incidentally, NYC didn’t just happen to end up as the hub of global finance. They had to work at it e.g. by building subways and schools and bridges.)

    Incidentally, multinationals that relocate to India often request larger tax levies from the government. Why? Because wouldn’t it be better if the government built roads, airports, water, sewer, etc.? A software company does not want to build these facilities. Further, it is a waste of finite resources to duplicate them everywhere.

    My second point is this: society matters. It’s strange to make this argument with a blogger over the U.S.-government developed Internet — obviously you are not very introspective about your place in the world — but I will try. People organize into societies. Those societies have shared values. In our society (let’s call it The Rich World), those values include some notion of addressing Problems of the Commons as well as addressing Common Defense. Any system of human organization that does not address these two fundamental issues will collapse. This is the fundamental characteristic of zero-tax systems.

    I should interrupt myself: you are not at the point of a gun. You may always retire to the other major society on Earth (let’s call it The Developing World) or a non-society (let’s call it Antartica).

    I will not address the question of why a country might need a robust defense mechanism when it is many miles away from any current enemy. Instead, I will leave it as an exercise to the reader (once that reader has become acquainted with the history of World War II).

  • RG says on: November 19, 2008 at 5:18 pm

     

    I should also add that you are taking very contradictory positions from the outset. One cannot talk about taxes destroying productivity without the willingness to look above the individual level.

    You also ignored another key point of my questioning, which you brushed away by not wanting to discuss “abstractions” such as economies. (A very odd position for a financial blogger.) Anyway, the point I was trying to get across was that obviously a tax rise in NJ did not cause job losses in other states; and it didn’t cause those job losses in NJ either. There was likely another cause for all the job losses (perhaps the rise of foreign shipyards, or a drop in consumption over that period, or poor management at the firms in question, or bad unions, etc.).

    Taxes are really not as big a factor in the global economy as dogma would have it.

  • David Z says on: November 19, 2008 at 6:25 pm

     

    RE: 5:08pm

    No nation ever taxed itself into prosperity, either. :)

    FYI, your comments held for moderation, probably b/c you’re not supplying an e-mail address, but I’m not sure. In any event, I don’t want you to think that they’re being deleted or something.

    I really am not trying to dodge your questions. I’ll respond again, in due time, be patient.

  • RG says on: November 19, 2008 at 6:54 pm

     

    The bit about not reducing taxes into prosperity was actually a take on the form you put out there. :-) Point being there’s a middle ground and that the sounds bites don’t work either way.

    RG

  • David Z says on: November 19, 2008 at 8:27 pm

     

    I beg to differ… :)

  • Wavyhill says on: November 19, 2008 at 9:15 pm

     

    I would like to respond to RGs comments on the relation between taxation and productivity. You have identified a correlation between the two, but have assumed the direction of the cause/effect arrow. A more commonsense explanation of the relation is that where there is more productivity, there is more wealth, and where there is more wealth, taxation will grow to consume it. Doesnt it make more sense to suggest that productivity results in taxation, rather than taxation causes productivity? Taxing productivity encourages more productivity: er … hows that again?

  • David Z says on: November 19, 2008 at 10:00 pm

     

    THanks Wavyhill – see my most recent response: No Nation Ever Taxed Itself Into Prosperity, Either. I bring up the idea that taxes follow wealth, not vice-versa.

  • Mike Gogulski says on: November 20, 2008 at 6:28 pm

     

    What is an appropriate tax rate? Why, that at which most people figure the other guy’s getting fucked more than they are.

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