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Wednesday, February 20, 2013

CBPP: The Case Against Cutting State Personal Income Taxes

CBPPCenter on Budget and Policy Priorities:  Cutting State Personal Income Taxes Won’t Help Small Businesses Create Jobs and May Harm State Economies, by Michael Mazerov:

There is almost nothing in economic theory or empirical research to support an assertion that cutting state personal income taxes will have a significant impact on the emergence, success, or job-creation performance of small businesses.  The vast majority of any revenue forgone from such tax cuts will flow to people who don’t own businesses, and of the limited tax savings that does happen to flow to business owners, the vast majority will be received by people with no intent or authority to hire additional people.  State personal income tax cuts do not increase the cash flow of most small businesses sufficiently to finance the creation of new jobs, and, conversely, small businesses with good growth prospects do not need to rely on their own cash flow to finance expansion.

Neither economic theory nor empirical research support the assertion that personal income tax cuts inherently encourage increased work-effort on the part of small business owners that could generate additional hiring as a side-effect.  Nor is there any evidence that entrepreneurs on the cusp of starting their ventures are likely to be attracted to a state merely because it cuts its personal income taxes.  Perhaps most importantly, a very detailed and careful empirical study commissioned by the U.S. Small Business Administration concluded, in the words of the authors, that there is “no evidence of an economically significant effect of state tax [policy] portfolios on entrepreneurial activity. . . .” 

While there is no compelling evidence that the large state income tax cuts promoted by a number of governors would be a cost-effective means of encouraging entrepreneurship, there is a significant risk that the cuts would seriously impair the ability of these states to fund infrastructure, education, public safety, and other services that are a critical underpinning of a healthy state economy.  Policymakers should therefore reject proposals for state personal income tax cuts as a means of encouraging the birth and growth of small businesses and focus instead on more targeted approaches to assisting these firms.

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Comments

Given the poor performance of economic theorists in general, one might first ask whether there exists "almost [anything] in economic theory or empirical research to support an assertion that [raising an entrepreneur's return] will have a significant impact on the emergence, success, or job-creation performance of small businesses." If not, then forget the study about the effect of taxes.

Posted by: daniel | Feb 20, 2013 5:22:02 AM

The vast majority of any revenue forgone from such tax cuts will flow to people who don’t own businesses..

Then who enjoys that revenue? Employees, consumers? Where's the problem?

, and of the limited tax savings that does happen to flow to business owners, the vast majority will be received by people with no intent or authority to hire additional people.

"the vast majority [of] business owners" don't have the authority to hire? Don't intend to expand operations? You can argue (rightly, I think) that tax rates don't, by themselves, drive business strategy, but "business owners", conventionally understood, drive business decisions.

Policymakers should .... focus instead on more targeted approaches to assisting these firms.

Illinois has high income taxes, but Caterpillar, Staples, and other connected businesses buy indulgences to reduce their burdens, shifting it to others. That "targeted" approach is great for Johann Tetzel, fixers, aides, think-tanks and their policymaker patrons because they sell waivers (sorry, "targeted approaches") for campaign funds (especially on sunset eve), graft, simony and nepotism.

If you favor economic entrepreneurs more than political entrepreneurs, though, forget "targeted approaches" and promulgate objective, neutral, self-executing laws that give little discretion to policy makers on the make; e.g., have comprehensible employment & labor rules; consistent zoning, registration, and licensing rules that don't require regular variances or waivers; broad-based, simple taxes & fees; and a little faith in your fellow man, whether he is a shareholder, proprietor, employee, or customer).

Posted by: Yo Gabba Gabba | Feb 20, 2013 2:46:39 PM

For a cogent explanation of the impotence of redistribution at the state level, read this Cara Griffith article:

http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/CGRH-94TQEZ?OpenDocument

Posted by: AMTbuff | Feb 21, 2013 10:43:51 AM