In Part 1 of Toxic Agenda: Poverty in North Carolina, we focused on the Left’s failed policies, and the increased toll they would take if the Left were to once again regain control of North Carolina state government.
This article will focus on alternative approaches to reduce poverty. As mentioned in the first part, the only way to reduce poverty is through increased productivity. It is increased productivity that generates a greater abundance of the goods and services that improve our standard of living, and this greater abundance makes more of these life-improving goods and services accessible to more of society’s poorest.
Public policies that better incentivize investments in productivity will help reduce poverty. Those policies that disincentivize such investments, or otherwise take resources away from productive investments, will create relative scarcity of goods and services, leading to higher poverty rates.
State policies that create barriers to productive investment need to be removed or reduced in order to alleviate poverty. Included below are three areas North Carolina legislators could immediately address to continue the positive economic momentum of the state and help reduce poverty. Of course, this list is far from exhaustive, but are highly achievable in the near term.
Eliminate the Corporate Income Tax
Research shows that the corporate income tax is the most harmful to economic growth of the major taxes. North Carolina’s corporate income tax rate is 3 percent, and will fall to 2.5 percent next year. It will be the lowest rate among states that levy a corporate tax. Thanks to the 2013 tax reforms, the rate has fallen from a regional high of 6.9 percent.
Opponents of eliminating or reducing the corporate tax claim it would just be a break for “rich corporations.” The truth, however, is that the corporate tax is really a tax on workers. Studies have proven that the corporate tax burden falls on workers in the form of lower wages. Eliminating the corporate tax will help to increase worker wages – witness the numerous raises and bonuses announced by major companies across the country after the federal corporate tax was reduced.
Eliminating the corporate income tax will create more opportunities for the poor to escape poverty and government dependence, through more jobs and higher incomes.
And as an added benefit, eliminating the corporate income tax will take away one of the primary sources for political cronyism. Many state corporate welfare programs use breaks in the corporate income tax to incentivize politically-connected corporations to invest in North Carolina. Such programs empower the political class with greater control over our economy and create a climate rife for corruption.
Abolish the Capital Gains Tax
Capital gains taxes are levied against the increase in value of an asset – like real property or stock shares – between the time it is bought to the time it is sold. In effect, however, capital gains amount to double taxation. Assets are purchased using after-tax income, and when a person invests that income and it earns a return, that return is then also taxed.
The consequence of a capital gains tax is less of the very economic growth required to reduce poverty. As Roy Cordato of the John Locke Foundation wrote: “In a broader economic sense, because economic growth springs from such capital investments, including the return on investments made in small businesses across the state, the taxation of capital gains is a penalty on growth.”
Eliminating this barrier to economic growth would no doubt make a positive contribution toward poverty reduction.
Reduce Regulations, Licensing Requirements
Two more significant barriers to economic growth are burdensome regulations and unnecessary occupational licensing.
Occupational licensing creates higher barriers to entry for people to merely practice their occupation. Such barriers include fees, mandatory training and required testing. A May 2018 study by the Mercatus Center at George Mason University found “North Carolina licenses 188 occupations, including such rarely licensed professions as floor sander, sign language interpreter, and locksmith.” Indeed, 22 percent of the state’s workforce is licensed, with another 8.4 percent certified.
These barriers to entry are most difficult to overcome for those living in poverty. The Mercatus paper points out that a “2017 study by the Institute for Justice (IJ) examined occupational licensure laws for 102 lower-income occupations and found that North Carolina requires a license for 67 of them.”
The study found that these barriers to lower-income jobs are not easy to clear: “On average, the Tar Heel State requires 234 days of experience and training, $199 in fees, and one exam for each of those 67 occupations. Makeup artists, auctioneers, and security alarm installers face steep fines for operating without a license.”
Low-skilled, low-income people are confronted with oftentimes insurmountable obstacles to entering the workforce to practice their chosen profession. Such requirements represent yet more government policies that trap people in poverty.
Moreover, such barriers help insulate existing professionals from competition, the restricted competition allows for higher prices to be charged by the incumbent professionals. Higher prices for everyday services harms the poor disproportionately.
Eliminating many of these occupational licensing requirements, and otherwise lowering the fees associated with the remaining licenses, will make it easier on the poor to break into the occupation of their choice and climb out of poverty.
More specifically, North Carolina could honor occupational licenses acquired in other states, to spare new residents the time, money and hassle to jump through another set of hoops just to ply their trade in the Tar Heel State. Moreover, legislators should consider joining Tennessee and Arizona in passing a “Right to Earn a Living Act.” Such an act essentially limits any occupational entry regulations to those that can be justified on the basis of public health, safety or welfare objectives.
With regard to regulations, a significant portion of regulatory rules are overly burdensome or out of date, and impose compliance costs on businesses that could otherwise be directed toward creating jobs or increasing wages through investments in productivity.
In 2013, North Carolina legislators took a positive step in reducing unneeded red tape when they passed a sunset provision and periodic review for state rules. According to a report by Jon Sanders of the John Locke Foundation, such legislation was overdue: “The reform created a systematic approach to dealing with a growing heap of state rules. By 2013, the total stock of state rules had grown to over 22,500. Some applied to state government, but the rest affected private individuals and businesses in countless ways.”
Under the legislation, state rules that go without a review for ten years will sunset, while those rules that do undergo review will be repealed or kept on the books. This reform has been a good first step toward streamlining North Carolina’s bloated bureaucratic rulebook, but as Sanders points out, more can be done.
For instance, tighter scrutiny on those rules that are renewed in the review process. Send them back through the adoption process as if they were new rules so legislators can debate their merits in a new light. Also, require that for every new rule adopted and added to the books, two must be removed. This will stem the tide of new rule creation, and ensure new rules are justified because they will be weighed against the loss of two existing rules.
Legislators may also want to work with state agencies and establish a goal for red tape reduction, for example a 33 percent reduction of rules in three years.
In Part 1 of this two-part series, we discussed how the Left’s favored welfare policies have failed to reduce poverty. Arguably, such policies have made poverty worse by creating perverse incentives that serve to trap people in poverty. Government programs reduce the resources available for investments in productivity – which is the only means of truly reducing poverty.
Data presented also showed a strong correlation between fatherless homes and higher rates of poverty. Indeed, families with no father in the home were roughly five times as likely to be in poverty than two-parent households. Any discussion about poverty that ignores this fact is irresponsibly incomplete.
In Part 2, several recommendations that would remove barriers to economic growth were discussed. Increased productivity is the only means by which to reduce poverty in any meaningful sense. A greater abundance of goods and services being produced by given inputs will put more resources within reach of a greater number of low-income people.
While far from a complete list, legislators can immediately help address poverty by: eliminating the state corporate income tax and capital gains tax, reducing burdensome regulations and make it easier for North Carolinians to practice their profession by tearing down occupational licensing requirements.
North Carolina has largely been addressing poverty in the wrong way. It’s time to do better.