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Low business tax utopia myth

Really how important is business taxes?

Here is the TL;DR:

Businesses want the benefit of low taxes (lower immediate expenses) with the benefit of high taxes locations (government provide services that the business would otherwise have to pay).

But low tax utopia fails if no one pays high taxes needed to provide the services.

Basic business realities:

  1. Business depends on customers.
  2. Unemployment results in less customers
  3. Net costs must be lower than net revenue
  4. Customers must perceive a value to purchasing goods/service from the business at the price charged by the business
  5. It doesn’t matter how low cost the workers or the taxes are if there is no customers. A business without customers is out of business.
  6. If a business can get the benefit of a high-tax/high spending state without paying the taxes themselves, this is the best for that business.

Low tax utopia myth

That last point is critical. This is why companies try to get sweetheart tax deals to relocate to a state, city, or region. The business gets a lower tax rate than their competitors just down the street. The business gets the benefits of a quality infrastructure and a quality workforce at a discount.

Where the low tax utopia falls apart is when everyone gets their taxes lowered OR where the taxes are applied regressively so as to directly affect the ability of customers to buy goods.

An experiment has been conducted that proves this point. In 2012, California raised its taxes; Kansas slashed its income taxes and other taxes.

In 2014, California is paying down its debt and is able to fund services at a higher level, unemployment is falling. Obamacare has rolled out, health insurance premiums are dropping. California is planning for the future with a new water project, High Speed Rail, and education funding. California pays more in federal tax dollars than it receives. Governor Brown is cruising to an easy reelection, and as far as I can tell the Democrats are cruising on all statewide offices. I have not seen 1 TV ad nor received any mailer about any statewide office.

In 2014, Kansas’s state revenue is falling, schools are closing, economy is going down, unemployment is rising. Kansan debt is being downgraded by the rating agencies. Kansas is in survival mode. Gov. Sam Brownback is in serious trouble. Republicans are endorsing the Democratic challenger.

To summarize, in Kansas, low taxes resulted:

  1. in less employment
  2. lower services
  3. local businesses losing customers
  4. lower quality of life
  5. lower ability to invest in transportation infrastructure

This article from Forbes does a nice job of highlighting results of the Kansan experiment:

The tax cuts in Kansas have been breathtaking. In 2012, at Brownback’s urging, the legislature cut individual tax rates by 25 percent and repealed the tax on sole proprietorships and other “pass-through” businesses. It also increased the standard deduction (though it eliminated some individual credits as well).

In 2013, the legislature cut taxes again. It passed a measure to gradually lower rates even more over five years. By 2018, the top rate, which was 6.45 percent in 2012, will fall to 3.9 percent. It also partially restored some of the credits it eliminated in 2012. This time, it did raise some offsetting revenue for the first few years but far less than the statutory tax cuts. The Center on Budget & Policy Priorities wrote up a nice summary of all the tax changes.

So what happened after all those tax cuts? Revenues collapsed.

From June, 2013 to June, 2014, all Kansas tax revenue plunged by 11 percent. Individual income taxes fell from $2.9 billion to $2.2 billion and all income tax collections plummeted from $3.3 billion to $2.6 billion, a drop of more than 20 percent.

Besides, while Kansas individual income tax revenues bumped up a bit in 2013 over 2012 (as the fiscal cliff theory would suggest), the increase was only about $23 million. From 2013 to 2014, income tax revenue dropped by far more–by $713 million.

And that brings us to the bottom line. Since the first round of tax cuts, job growth in Kansas has lagged the U.S. economy. So have personal incomes. While more small businesses were formed, many of them were merely individuals taking advantage of the newly tax-free status of those firms by redefining themselves as businesses.

The business boom predicted by tax cut advocates has not happened, and it certainly has not come remotely close to offsetting the static revenue loss from the legislated tax cuts.

As Forbes says:

Kansas Governor Sam Brownback and his state legislature have embarked on a wonderful natural experiment. Once again we are testing the question: Can tax cuts pay for themselves? The answer– yet again– is a resounding no.

Posted in political.

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  1. California is awesome for business ( The myth of the importance of low taxes) | Just wondering…. linked to this post on October 23, 2014

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