October 8, 2012

Taking Issue With the Post-Dispatch on Taxes and Growth

Last week, the St. Louis Post-Dispatch published a staff editorial doubting the idea that the dynamic effects of reducing taxes encourage economic growth, suggesting that “simple solutions” like tax cuts do not always bear fruit.

Investors can, and often do, choose to invest their tax savings elsewhere, either overseas or in financial products that churn money but don’t create many jobs. Individuals amass great fortunes without becoming great industrialists. Companies today are sitting on $2 trillion in cash, which is a lot of oats.

The literature is mixed on the extent to which tax rates alone affect economic growth, but it is bizarre for the Post-Dispatch to assert later in its editorial that “[i]f cutting taxes doesn’t yield growth, increasing them is not likely to do so, either.”  That is an understatement. Ask those in Illinois whether raising taxes is helping that state’s economic growth. The Post-Dispatch suggests that the effect of the government cutting or raising taxes is comparable in effect but ultimately immaterial to whether an economy grows, which any business owner will tell you is absurd. Tax competition affects where capital pools and where businesses set up shop.

What the Post-Dispatch mistakes as a problem of tax rates is in fact a problem of tax structures. Companies do not hold onto money because they like taking the savings they gain from lower taxes to a Scrooge McDuck-style vault. If companies are sitting on money, they are probably doing it for a good reason. One reason might be that the economic environment is so uncertain that companies simply do not want to expose their capital to the risks inherent in the market at that time.

But another reason companies may sit on money is that the costs the tax structure imposes may outstrip the benefit of spending that money. If a company is going to get taxed one, on money that could otherwise be productive in the market place and two, at a confiscatory or otherwise burdensome rate, the company will probably try to protect that capital from taxation for as long as possible.

Therein lies the problem. Taxes on capital are among the most destructive in terms of growth. Among them, taxes on corporate income are possibly the worst. They remove from the economy money that otherwise could have been productive and siphon it away to pay for government programs that oftentimes grow nothing other than themselves. That is a tax structure problem, not a greedy business problem. To grow, an economy needs low, stable rates that do not punish productivity. The Post-Dispatch’s editorial fails to even briefly address this reality.

But maybe that was not the point. As I have noted before, it seems that the Post-Dispatch is always looking for ways of generating new revenues to the government. For example, from earlier this year:

A lot of folks purchased Mega Millions lottery tickets last week dreaming about what they could do with $640 million. Imagine what $4 billion would do for Missouri.

The point is that the way to pay for government services is not to try to more vigorously shake cash free from the money trees of free enterprise. The solution is to not punish the planting of new trees — to encourage productivity, not chop it down in a quest for revenue. Tax hikes are not the answer; fundamental reform to the structure of taxes is.

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