September 1, 2009

The Thing About Taxation

Justin Katz

Oswald Krell is at it, again — proving, this time, that beating a strawman for long enough begins to resemble a pillow fight against one's self:

Low tax states are more violent, have higher rates of teen pregnancy, somewhat higher poverty rates, and lower median incomes.

Do low taxes cause these problems? No. Correlation is not causation.

Rather, to me, what is emerging is the description of an attitude. Low-tax proponents favor "Stand on your own" rhetoric, which is really a coded term for letting the rich shirk their civic obligations. The result is that the bulk of the population is noticibly worse off in low-tax states: more violence, more teen pregnancy, more poverty, lower incomes.

Now, explain to me: why this is an attractive paradigm?

I repeat: The argument for taxes in Rhode Island isn't that low rates are the decisive factor in a given region's economy, and adding social data doesn't change the fact that people and businesses do take the cost of government into consideration.when they plot their financial lives. The question that Rhode Island's progressives are so studiously striving to ignore is that taxation must be judged based on a given state's circumstances, and Rhode Island is overburdened with them, as with other manifestations of big government like mandates and regulations. "We will let you operate your business as you see fit and to keep more of what you earn" need not be innuendo for gun violence and teen pregnancy.

Lower taxes and lightened regulations would encourage economic activity and improve the earning potential of all residents, which I'm reasonably certain would correlate positively with improved social markers in the state, as well. (Krell doesn't provide his sources, so I'll simply offer the hypothesis that Rhode Island fares poorly, by such measures, compared with similar states.)

That's a suggestion that RIFuture-owner Brian Hull should consider, as well:

The recession effect is having a profound impact on the state's economy, but the long-term financing of the state would be better served if the General Assembly would make the "tough choices" and restructure the tax code, shifting the burden away from the vast majority of Rhode Islanders who have seen their incomes shrink and are struggling to make ends meet.

For perspective, don't lose sight of the fact that, in the name of improving the economy, Hull wants both to raise taxes and to shift them toward a particular group. Apart from being manifestly unjust, such a strategy would be economically devastating. What, pray tell, would Hull like to change about this picture:

Me, I'd like to see less red across the board.

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Let's start with the obvious, common sense point: when it comes to location decisions, the impact of taxes is neither zero nor 100%. It lies somewhere in between.

Where it lies is a function of the value one receives in exchange for the taxes one pays, as well as other non-tax factors.

Now let's look at RI. High taxes. Poorly performing public schools. Poorly performing social welfare system. Vast underfunded public pension liabilities, and very strong public sector unions. Bad roads and bridges. Looks to me like rather poor value for money -- you pay high taxes here, but don't get much in exchange.

Now lets look at the non-tax factors that are supposed to offset this when it comes to individuals or companies making location decisions. Beautiful geography, much better weather than Florida (oh, the summers down there!), beaches (when they're open), restaurants, cultural diversity, close to Boston and NYC, Newport, Waterfire, RISD, Brown, etc. etc. etc. -- the usual litany. Of course, offsetting this (the two have to be netted) are a very pro-labor attitude by the General Assembly, generally anti-business attitude by the political power structure, entrenched one party government, low quality labor force, very high energy and health care costs, oh, and did you see what that survey said about the psychological characteristics of the typical Rhode Islander?

Now let's get empirical: If the (net) attractions of the latter truly offset the (net) disincentive created by the poor value of the former, then why aren't businesses beating a path to our door? Why has our population been shrinking? Bottom line: the data seem to indicate that RI isn't a very attractive state in which to locate.

Further evidence: the amount of special deals the General Assembly has had to hand out to induce companies to move here.

Beyond a certain point, the refusal of the RI Future crowd to face empirical reality becomes damning. If all you are going to do is retreat behind your ideologically pure walls, then there really is no point in having a conversation. Nor is there any community. Nor should they expect any sympathy when the state (and their gravy train, welfare and pension payments) ends up in the inevitable wreck.

Companies that successfully turn around have the courage and intellectual honesty to face their problems, and ground their thinking in facts and logical arguments. Those that fail to do this almost always end up in Chapter 11 or Chapter 7. Or in the case of municipalities, Chapter 9.

No prizes for guessing where I think RI will end up.

Posted by: John at September 1, 2009 9:28 PM

Well said, John.

Revealing chart, Justin.

Posted by: Monique at September 2, 2009 8:09 AM
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