Many that are in opposition to pro-growth tax reform, including Paul Krugman, have pointed to recent debt downgrades and a budget shortfall in Kansas as evidence for failed tax cuts. As I explain in conjunction with my coauthor, Jacob Gram, this narrative is intellectually dishonest and not supported by a deeper analysis. Our conclusion: The Kansas tax cuts are not responsible for most of the financial woes, and a premature evaluation is deeply flawed.
I recently entered the Think Freely Media pro-liberty Speech contest. If you could vote for my video, I appreciate it! You can vote once a day. As some context, I was approached to enter and was filmed completely improv, which is why my video is of lesser video quality and also slightly less polished. In the future, I will write a more extensive article on the proven negative consequences of raising the minimum wage (akin to a price floor).
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Massachusetts generated some local press by implementing a tax holiday spanning the weekend. Sales tax holidays are a common policy tool used by politicians purportedly to provide a tax cut and stimulant for the economy. On the surface such a policy action seems like an efficient way to boost a stagnate retail economy, but this is not the truth. The need for such holidays highlights deeper problems in Massachusetts, and tax holidays in general are more of a deceit than a solution.
The main problem I would like to highlight, is in regards to Massachusetts taxes in general. The fact that the state government is calling a tax holiday begs the question: are tax rates already too high in the Bay State? And if so, are these high rates stagnating growth and making MA retailers vulnerable to out of state competition? A review of Massachusetts major tax categories reveals the following:
Data from the Tax Foundation, % use top marginal rates.
A similar review of New Hampshire, finds that the Granite State levies no sales tax, and levies an income tax only on dividend and interest income. And while the state does levy a high corporate income tax, (8.5% highest marginal rate) this is comparable to that of Massachusetts. In fact, the New Hampshire and Massachusetts corporate income tax collections per person are third and fifth highest, respectively. This is not to sanctify New Hampshire as a low tax state. On the contrary, New Hampshire makes up for a lack of sales and income taxes through a heavy property tax regime.
The importance, is that the NH tax structure gives its retailers a competitive price advantage over those in Massachusetts. Considering that major population centers in the Bay State, including Boston, are within an hour driving distance from the border, the normal geographic buffer may not be enough to prevent retailers in MA from bleeding customers. There is no substantive research on the subject that I could locate, however the top comment on a local newspaper article on the Tax Holiday captures the idea perfectly:
“Tax holiday is a big joke. Just go to NH and day you want…have a tax holiday and avoid the crowds!”
The last point I would like to address is in regards to the idea of a tax holiday in general. As I mentioned before, state governments across the nation use the policy mechanism, and on the surface it appears innocent enough. But when one takes a good look at the reasoning, it comes out to being downright deceitful. The premise that the tax holiday creates jobs and stimulates the economy is the first fallacy. A tax holiday mainly causes buyers to change when they buy an item. People will defer certain purchases, or accelerate others, but by and large the influx of purchases is not a stimulant, but rather a concentration of past and future purchases onto a small time window. This rush of purchases also takes away some of the savings that come with the tax holiday. Long lines, traffic, and the increased costs of complying with a tax code made more complicated all cut down on the actual real gains from the holiday. Tax holidays further discriminate against certain kinds of products. In Massachusetts, the discrimination is against products over $2,500. In other states, the restrictions vary immensely. This allows the government to distort the economy, and curry favors with certain industries.
When it comes to the final analysis, the justifications for sales tax holidays both in Massachusetts and across the nation seem weak. The real benefits of such holidays accrue to the politicians that initiate them. The visibility of the holidays, as well as the seemingly true but realistically false economic benefits that can be claimed make them a popular tool. In Massachusetts, policymakers must ask themselves what the real problems with the tax code are. If they do so, they will find that permanently lowering rates is a much more neutral way to grow the economy, while also avoiding retail sales losses to NH, with its “permanent” tax holiday. As the Tax Foundation so beautifully puts it:
“If tax relief for consumers looks good for a few days, why not give it to them all year long?”
During the time that I worked with the American Legislative Exchange Council, I had the pleasure of contributing to the production of Rich States, Poor States, a book that uses a set of metrics to rank states both in economic performance and in economic outlook. The book further studies different trends that happened in the year prior to publication.
One great section in the book examines the differences in U-Haul rental rates when moving between states. Interesting enough, U-Haul rates are higher when moving to a low tax, low regulation, right to work state from a high regulation, high tax state than the other way around. For example, renting a van from Austin to Los Angeles only costs about $689, but going from Los Angeles to Austin costs $1548. Given that the distance is the same, the difference in price (which is over 2 times in this case) must largely be accounted for by a difference in demand. This is because UHaul must pay workers to drive vans back to Los Angeles, or else there would be a van build up in Austin and corresponding van deficit in Los Angeles. Of course, the reason that more people are moving to Austin from LA is a result of many factors, but there seems to be strong evidence that business environment is a key factor.
Check out the report, and specifically look at your state!