Don’t Raise Taxes to Address Revenue Shortfall, Cut Corporate Welfare

Alex Muresianu

Alex Muresianu

Alex Muresianu is an economics student at Tufts University, and he has written for The American Conservative, the Washington Examiner, and The Federalist.

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6 Responses

  1. Avatar Brandon Berg says:

    But targeted tax breaks have a poor track record, providing only 16 cents of economic growth for every dollar awarded.

    The link you provided doesn’t actually say that. It says that one specific tax credit, Missouri’s historical preservation tax credit, only produced 16 cents in economic benefit (not growth) for every dollar in tax credits. I wouldn’t really expect a historical preservation tax credit to produce much in terms of tangible economic value, since that’s not what it’s for. 16 cents in economic growth in exchange for forgoing a dollar in tax revenues would actually be a pretty good deal, if your goal isn’t to maximize tax revenues at all costs.

    The article also mentions a low return on low-income housing, although it doesn’t say how the “return” was measured. But again, I wouldn’t really expect subsidies for low-income housing to produce a lot of economic benefit. Low-income people get better housing, but it’s not going to drive any real growth.

    You can’t really make any blanket statement about the economic impact of targeted tax credits, because targeted tax credits come in many different shapes and sizes, and some are much more effective than others. For example, the Amazon incentive package was a really good deal for Long Island City. They were only foregoing a fraction of the tax revenues that Amazon, its employees, and the businesses that serve them would have brought in, and now they won’t get any of it.

    I agree that it’s best overall for all jurisdictions to have broad tax bases with low rates, but there’s a collective action problem here where it can still make economic sense for governments to use targeted incentives to attract foreign investment, even if the country as a whole would be better off if nobody did this.Report

  2. Avatar Jaybird says:

    The ultimate coordination problem.

    But also, how do you get people to just up and want to move to Joplin? (A city I picked because I put “cities in Missouri” into Google and I’ve heard of it but it’s not *TOO* big and I didn’t want to use Branson.)

    A nice 3 bedroom, 2 bathroom house with a two-car garage (if they’re both Yarises) and 1650 square feet can run you about $160,000. Plop that into a mortgage rate calculator on Google (Google says 3.92%, which is nuts) and you’ve got a monthly of $757 (plus taxes and PMI and whatnot).

    Pretty sweet!

    How’s the crime…

    Oh.

    Anyway, if you want businesses to move to Missouri, you’re going to have to ultimately be a place where the people who work at those businesses want to live.

    You’re absolutely right. Dump the incentives. Hell, maybe even raise the taxes. Pay the cops. Make Joplin a place where you can walk to Applebee’s from your house on a Friday night and it’ll be a lot easier to meet the budget for the state due to the ability to retain the people who move there and buy their houses with cash.Report

    • Avatar PD Shaw in reply to Jaybird says:

      You just happened to pick the city that in 2011 was hit by the deadliest tornado in the U.S. since 1947?

      I think part of the underlying issue is that Missouri’s two largest metro areas, St. Louis and Kansas City, straddle state lines. A lot of competitive tax policies are going to be within the metros — business wants to build plant in STL or KC, but which side of the line?Report

      • Avatar Jaybird in reply to PD Shaw says:

        It also reminded me of Janis Joplin.

        We can do another city, if you want.

        Columbia? Springfield?

        Columbia has a real nice split-level 4 bed 3 bath 1896 square feet (with a two car garage and the cars can be subarus! or you can put all of your stuff in half the garage and park your subaru in the other half) for 147,900. Not bad.

        Springfield has a nice 3 bed 2 bath 1763 square foot house with a two Yaris garage for $172,000 but the one that caught my eye was the 2 bed 1 bath 874 square foot house that was available for $34,900. Your mortgage payment? About $200 bucks a month. Looking at the pictures, yeah, it needs a little work. One hell of a fixer-upper but you can put some floors in, redo the kitchen, and wham! The perfect starter home for a nice infertile couple.

        Jeez. *I* am tempted to get that one.

        What does the crime look like?

        Oh.

        Jeez. Do I even want to look up Columbia? Huh. Columbia is actually pretty good.Report

  3. Avatar James K says:

    Leaving aside the macroeconomic impacts of targeted tax breaks (i.e. whether they generate enough growth to justify the cost), there are strong microeconomic reasons not to employ them. Targeted tax breaks are distortionary, they end up directing resources to businesses based on government fiat, rather than the businesses that are directing the most value to consumers.

    The trick is stopping it since, as Brandon Berg notes above, there is a collective action problem at work here. I also think there are issues relating to the culture of government that make abolishing targeted tax breaks or other discretionary subsidies difficult to abolish.Report

  4. Avatar Pinky says:

    “Economic border war” is a good analogy. But it also highlights the problem. Neither side can unilaterally stop, and if both sides agree to stop, there’s a windfall for the first side to violate the treaty. You can also justify most any action in violation of the treaty. After all, we’re not trying to poach your midsize boron processing plant, we’re just offering good deals to midsize boron processing plants in general.Report

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