Sunday, May 29, 2016
Taxation, the States, and Trade
The State of Connecticut, and other states, are having increasing difficulty meeting the conflicting demands of a declining tax base and increasing need for its services. Next year the state must cut over $1 Billion of valuable and even critical services in order to balance its budget.
A recent article in Forbes ascribes the cause of the deteriorating tax base to the imposition of a personal income tax 25 years ago. (25 Years, $13 Billion Lost: Connecticut Income Tax Continues To Fail) *
But let’s look at something else which could be a cause: According to “State Smart,” ** the state of Connecticut, in 2014, paid out $53 Billion dollars to the United States government in taxes. However, that year, it only received am estimated $45 billion in benefits from the federal government. Every year the people of the Connecticut give out to other states $8 billion. The state and local share of that $8 Billion, (about 13%) works out to about $1 Billion in lost taxes. And that is just one year.
It is up to the state’s Congressional delegation to address this problem, if they can. In the meantime, the state is running the race with one foot in a bucket. While bad, this can be mitigated. The problem for the state, since it is easier for rich people, and more generally for businesses and corporations, to move than the working and the poor, is that the state is only allowed a regressive tax system. Since Connecticut is stuck in the shadow of pricey New York City, it must also pay more for what it buys. These are not insurmountable problems. They mean, however, that the state must attract enough wealth generating business activities that the tax load is not so burdensome upon the poor and the working class that it cannot be mitigated by proper state expenditures. And this means the state must have tax policies, and spending policies, and regulatory policies, which are attractive to those kinds of business activities which bring in money.
For instance, Corporations collect wealth from their many operations, and the place they accumulate the most of this wealth is at their headquarters. Other business activities which accumulate wealth are corporate offices in general, laboratories and factories. All of these activities bring money into their communities, and into the state.
These are activities the state wishes to attract and encourage. While it cannot directly subsidize them, (Well, nominally, it could,) it can capitalize the infrastructure these businesses rely upon. Investing in roads and railroads, human capital, but perhaps even more importantly efficient institutions and the resolving of conflicts, including those inevitable conflicts businesses have with the state itself. This will reduce the many costs of doing business in this or any state, and enhance the profit margins.
For comparison, stores, in particular chain stores such as Walmart, Home Depot, CVS, McDonalds, (and Amazon) and so forth, take money out of communities, and out of the state. Walmart itself takes several billions of dollars out of the state of Connecticut each year, and sends those dollars off to Arkansas. Much of the money which goes to the larger cable and telecommunications also leaves the state. This loss of money the state can, with proper taxes, and by taking the part of the communities and local store owners in their struggle with these large retail chains, diminish.
There are other activities, which themselves do not generate wealth, but merely rearrange the ownership of wealth. These may also be taxed. Some of these businesses, like real estate, cannot leave. The others, since they do not actually generate wealth, may be allowed to leave without penalty to the state’s economy. These would include many personal services of all kinds. Most of these personal services are elective, and raising their costs would not affect the well being of most people directly. Most especially, these taxes would not have a critical affect on the well being of the poor. For those services which were not elective, such as child care, the needs of the poor could be supported. Indeed, for something like child care, the state would in general have and interest in subsidizing it for all possible clients, as this would form a more attractive workforce environment and this would be something to attract businesses.
The state is in the business of allocating resources. Taxes take those resources from one use and expenditures put them to another. In many cases, this fulfills social needs that the market cannot fill. Quite simply, the market simply cannot supply any particular thing or service to everybody. The laws of supply and demand guarantee that there will always be those who cannot afford fuel, who cannot afford shelter, who cannot afford adequate food, without intervention into the marketplace. Private intervention, that is, charity, cannot suffice. For the charitable will find themselves at a competitive disadvantage to the mean and selfish.
As the production of resources within the state declines, the state must reach out to the production of other states, by attracting the functions of businesses which accumulate the production from other states. And the state government must adopt policies which attract those functions. It is only once this income is spent by the corporations and businesses that the state attracts, that the state can begin to collect taxes on it. And increasingly, the state becomes unable to directly tax its own production. As due to increasing offshoring, domestic production declines, (And without tariffs, taxes cannot be collected on production in foreign countries,) competition for the remaining factories, other remaining production facilities and the headquarters of domestic enterprises, the offices and laboratories, will intensify. Only the intervention of the US government can stop this spiral to the bottom. But in the absence of such intervention, a state government which understands this reality, and which is able to adapt to it will, for a time, prosper.
So only the actions of a government can assure that the needs of all of society are met. A government which fails in this, will eventually fail altogether, one piece at a time, as first the bottom, and then each higher level of society falls below its ability to sustain itself. Only by capturing an adequate share of the incomes of the very wealthy can the government succeed at this. But first it must attract these incomes to itself.
Since all taxation is against production, the government must capture all productive streams, in order to extract necessary income. Any streams it does not capture will be more competitive than those which must bear the additional cost of taxation. When an economy runs a trade deficit, it must also tax foreign production, since otherwise domestic production will be uncompetitive with foreign production, and domestic production will be replaced, and government revenues decline.
Non-productive activities must also be taxed. Otherwise, economic activity will preferentially go to non-productive activities, since these will have the greater nominal profits. In particular, the non-productive activities of the wealthy must be taxed, to prevent decapitalization of the economy.
* http://www.forbes.com/sites/rexsinquefield/2016/05/23/25-years-13-billion-lost-connecticut-income-tax-continues-to-fail/#589c29771b80 (and others)