- Leftist analysis of tax cuts are inadequate and miss the mark
- Tax rates do matter – just ask the solar and Hollywood film production lobbyists
Government apologists use simplistic and at times overtly hypocritical arguments to criticize tax cuts.
A classic example comes from this article by the radical left-wing NC Justice Center:
“Tax rates don’t drive economic growth – public investments do. Cutting income taxes will create few, if any jobs … Businesses hire when demand for what they sell goes up. That’s much more important than what their taxes are; savings from a state income tax cut matter very little to hiring decisions.”
The statement that businesses hire “when demand for what they sell goes up” is naïve and highly inadequate. For starters, entrepreneurs are by necessity forward-looking; they must anticipate consumer demand ahead of time because it takes time to arrange or expand the production process necessary to bring the finished goods to market.
As economist Ludwig von Mises wrote in Human Action, “What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future.”
Many entrepreneurs who wait until consumer demand rises before they respond by expanding output and hiring workers are too late. By the time their increased output is completed and brought to market, consumer demand for their product may have fallen again or shifted elsewhere.
Indeed, superior foresight of the future is the very cause of profit. “The only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers,” Mises added.
Moreover, even in cases where consumer demand for a product remains high, and producers have the ability to quickly expand production to meet that demand, it still may not be profitable for them to do so.
What matters to entrepreneurs in not simply consumer demand, but the ability to earn profit. Profit is the premium between the cost they pay for the factors of production against the price they obtain for the finished product.
Increased consumer demand for the finished good alone is not sufficient to entice investment. The cost of factors of production – which can include labor, capital goods and land – also plays a significant factor. And the costs for these factors of production are determined by the relative supply and demand for them. “The price necessary to call forth a non-specific factor is the highest price this factor can earn elsewhere – an opportunity cost. What it can attain elsewhere is basically determined by the state of consumer demand elsewhere,” wrote economist Murray Rothbard.
In other words, entrepreneurs compete with each other to buy (or rent) land, hire workers, build facilities, and so forth. If state government also enters this bidding competition, however, the price of certain factors of production will rise, raising the production costs for certain businesses. For instance, say the state bids up the price of concrete and steel and the wages of construction workers due to government spending on new highways and school buildings. These higher production costs may make business expansions that rely on these factors unprofitable in spite of heightened consumer demand.
But what of those cases in which entrepreneurs enjoy sustained increases in demand, and expanded production does remain profitable? One must still ask: profitable compared to what?
What sort of profit margins could the entrepreneur attain in other states? With higher tax rates in North Carolina compared to other states, costs of doing business may be more attractive elsewhere. Entrepreneurs could more profitably meet their consumers’ demand by moving to another state that doesn’t impose as high a taxation cost.
Notice too how the Justice Center article leaves out what factors actually cause consumer demand to increase (or fall). They pay no mind to the impact higher tax rates would have on consumer demand. Higher taxes penalize the decision to work and invest. As a result, we see less economic activity, which leads to less income. When consumers have less income, demand for goods falls.
“But higher amounts of ‘public investment’ means that government employees, contractors and welfare program recipients have more money to spend; that will increase consumer demand,” may be one leftist reply.
Rising demand by the recipients of taxpayer funds, however, only comes at the expense of falling demand by taxpayers who finance the rising government spending. The government’s forcible confiscation of wealth from some to give to others is a zero sum game. More realistically, however, it has a negative net affect when factoring in the negative incentives at play via the higher tax rates needed to facilitate this forced transfer.
Finally, there is the blatant hypocrisy found in the ludicrous statement: “And without rising demand no business will hire – no matter how big a tax cut they get.”
Maybe these folks should ask the solar and Hollywood production industries about how profitable tax cuts can be. For years, we’ve been reminded that the state’s solar tax credit “has generated a solar power boom that has created jobs.” Meanwhile, we have also been warned that without the film production tax credit “film and video production can and will move elsewhere.”
No mention of consumer demand, only taxes. Apparently “cutting taxes” for these industries created plenty of jobs – in those industries.
Are these leftists so blinded that they don’t see the blatant hypocrisy of claiming “tax cuts don’t help” while insisting that solar and film production industries will die without their targeted tax cuts?