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John Taylor,
President of the Virginia Institute for Public
Policy, publisher of Virginia Viewpoint.
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Empirical
literature demonstrates that high or increasing
taxes dampen economic growth.
Dr. Richard Vedder, a professor of economics
at Ohio
University, is well-published in this area and most recently
showed ("Been
There, Done That," Feb. 2, 2004) that not
only is business activity slower in high-tax states,
but that individuals tend to move from high-tax
states into low-tax states.
Given the budget difficulties in which state
governments find themselves today, it may be useful
to present the common sense explanation for the
empirical results we observe.
Sherlock
Holmes once told Dr. Watson that the problem with
Watson's attempts to solve mysteries was that he
saw, but he did not observe.
To understand the effects of taxes on
economic activity, we only need to follow Holmes'
advice. We see
businesses providing jobs, and without thinking
about it, we begin to believe that the object of
business is to hire workers.
Yet, the object of business is to produce
goods and services. In
a market economy a business exists to produce
something that people are willing to buy.
That business can only continue to exist if
it produces something at a cost that is less than,
or equal to, what consumers are willing to pay to
purchase the product.
If
it costs ACME Hat Company $15 to produce a hat, then
it will go out of business if its customers are not
willing to pay at least $15 for that hat.
Its customers will not be willing to pay $15
for the hat if BEST Hat Company is selling the same
hat for $10. Thus,
we observe, businesses in Virginia
must be able to produce products at least as cheaply
as those products can be produced elsewhere,
including the cost of transporting the goods or
services.
Taxes
are part of the cost of producing.
If the Commonwealth taxes businesses
directly, then this will make it more expensive to
produce in Virginia
than would be the case without the taxes.
If the state government taxes the income or
wages of workers, then those workers will find it
more attractive to live and work somewhere else, and
thus Virginia’s businesses will have to offer higher wages to
keep their employees.
If the commonwealth taxes the purchases of
consumers, then the price at which businesses must
sell their products will have to be lower, since the
consumer does not care if the $10 she pays for the
hat is made up of $9 in payment to the ACME Hat
Company and $1 to Virginia, or $10 to the ACME Hat Company.
She still is only willing to pay $10 for the
hat. If the
state government taxes the property used to produce
hats, then this cost has to be covered in what ACME
charges for its hats just as if its electricity
costs were higher.
Virginians,
as are other Americans, are well aware that if ACME
finds it less expensive to produce hats in
Delaware
or Indonesia, it will be forced to locate there.
If ACME does not produce where it is the
least expensive, then its competitors will.
In this scenario we can expect consumers to
buy BEST hats for $10 while the $15 ACME hats sit on
the shelves until ACME ultimately goes out of
business. This
is how the market system works, and while I may wish
it to be otherwise, particularly if I work for ACME
Hats in
Richmond
, the reality is that consumers benefit from this
system and we have no choice but to recognize and
accept how the system works.
No
reasonable person would suggest that Virginia
should refrain from levying any taxes, because there
are government activities that make it cheaper to
produce. A
court system and police departments make contracts
enforceable which reduces the cost of production.
Fire departments reduce the insurance costs
for buildings and equipment.
Admittedly, these government services require
taxes.
Nevertheless,
we must understand that economic realities dictate
that private sector investment flows to where it
will receive the highest return, and that both
employers and employees vote with their feet.
(See California).
If the
Commonwealth
of
Virginia
can control its urge to tax, spend, and incur debt,
economic growth and job creation will be the result.
--
June 07, 2004
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