no third solution

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No Nation Ever Taxed Itself Into Prosperity, Either

November 19th, 2008

The title is a reply to a recent comment on What is an Appropriate Tax Rate?, RG said (tongue-in-cheek) that “No state has ever reduced its taxes to prosper.”

No? Ever hear of a little country called Ireland? I hear they’ve been doing pretty well lately.

RG asked some serious and pointed questions, and like always, I try to respond to thoughtful comments.

[Y]ou 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.

Those tax rates were the most readily accessible, and required the least amount of interpretation. Can you blame me for reaching the low-hanging fruit? City sales taxes and/or income taxes are generally very low, and moreover, to the specific point I was trying to make, they are applied with some degree of equity, to all businesses and individuals within the jurisdiction. Property taxes are far from non-existent where I live

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.

I’m not accusing you of special pleading. On the contrary, I don’t find anything special about the cases you did present. I suspect that high tax rates are generally a consequence of wealth, rather than the cause, as you imply. To your question about lower tax burdens being an engine for growth, despite my complaints, the U.S. has a pretty low overall tax burden so it is not really a surprise that many innovations come from here. Also, have you ever heard of Ireland?

Ireland is currently the second richest country in the European Union, with a per capita GDP higher than that of Germany, France and Britain. But in the mid-1980s, the economy was faltering, college graduates were emigrating, and the outlook was bleak…

Ireland may not have created any new industries, but reducing their overall tax burden sure seems to have helped.

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.

If you’re “requesting larger tax levies” aren’t you really paying for these things voluntarily? Wouldn’t it be even better if multinationals didn’t depend on tax revenues generated by subsistence farmers, in order to subsidize the infrastructure that permits them to operate in these locales? Moreover, many large plants to maintain their own security, roads, water, and fire departments.

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.

Oh, I see, because I didn’t recognize that Al Gore invented the internet, I obviously don’t know what I’m talking about? The so-called “problems of the commons” can more often than not, and without too much effort, be attributed to insufficient property rights. This is the nexus of Coase’s seminal work, . Paradoxically, Government should by its very nature, suffer from the tragedy of commons.

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).

So if I don’t like it I should get the fuck out? How thoughtful.

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).

Do you mean the same World War II that was caused by the crippling war reparations after the Great War? John Maynard Keynes, far from my favorite economist, pretty much predicted the end of that story in The Economic Consequences of the Peace.

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.

I’m not playing this game. Any disincentive to production must destroy production. Tax policy is a disincentive, and it is widely recognized as such: tax alcohol to reduce consumption, tax imports to reduce reliance on them, tax gasoline so we’ll use less of it, etc. Why is it that miraculously, when we talk about taxing income, that people are so quick to assume it has the exact opposite effect?

In any event, I’m not arguing for some Benthamite fiction of “the greater good,” primarily because we can no more measure utility today, than could Bentham in his day. But even if we could, the crux of my objection to taxes is a moral one. This entire chain of posts has been, essentially a tangent.

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.)

It’s not an odd position, at all. If your income goes up by $50k next year, and mine stays the same, it is intellectually dishonest to assert that our “collective economy” became more productive. There are no national economies. There are only individual economies. You can group them together by whatever arbitrary lines on a map you think are suitable, but the aggregate is generally meaningless.

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.).

I find it perplexing, actually, that you so flippantly dismiss the very real possibility that the luxury tax had anything to do with the Yacht industry’s downfall, a Congressional study, after all, is the source of the figure “7,600”.

If it didn’t cause the loss of over 7,000 jobs nationwide, then why were people were trying to repeal the luxury tax as early as 6 months after it was enacted. Some dealers were reporting sales down 80% or more. Industries dont’ die overnight.

In addition to the FEE publication I linked to initially (here), you’d do well to read a little bit more about the luxury tax and its effects on the yacht-building industry. You can find some information here, here, here and here.

If you’d like to discuss this further, I’d be happy to exchange e-mails with you. You can reach me through the Contact Me link here or at the top of the page.




no third solution

Blogging about liberty, anarchy, economics and politics