The North Carolina Budget & Tax Center, an outfit driven by Marxist ideology, put out this brief trying to convince people that somehow tax increases don’t adversely affect job growth.
How do they back up this fantasy-world claim?
First, they try the “oh, $1.3 billion in new taxes really isn’t much, so nobody will change their behavior” approach:
When fully implemented the tax increase package included in the final budget will generate $1.3 billion per year. Though not insignificant, this amount is not likely to alter North Carolina’s overall tax levels compared to the previous year’s or compared to other states.
Relative to the size of the overall state economy, the tax increase package is modest. NC Gross State Product (GSP), a rough measure of the size of the state’s economy, was $400.1 billion in 2008
The “its not that bad” justification sounds pretty desperate to me. At any rate, perhaps a more relavant comparison is to measure the new tax burden compared to the revenues the current tax system would have brought in. As I noted in this article, the increase in the state tax burden will not be insignificant:
The agreed-upon tax package raises the tax burden on struggling North Carolinians by nearly 6 percent above the currently existing tax structure. The change amounts to a severe cost-of-living increase on citizens at a time of historically high unemployment and bleak prospects for economic growth. How do state legislators expect North Carolina families already struggling to pay their bills to come up with another six percent to give to the State?
Later, they use some “data” after the 2001 tax hikes to say those new taxes didn’t slow economic growth:
During the period from 2001-02 to 2006-07, a period during which the 2001 tax increases were in place, the average income of the households that moved to North Carolina was $1,512 higher than the incomes of those who moved away.
Hmm, no figures on relative job growth, unemployment or income growth. (I provide some analysis of that here; and the results don’t look very good for NC.) BTC just offers up some figures about the incomes of who moved in and who moved out of the state, and for some reason these “advocates of the poor” don’t attempt to explain why folks with lower incomes felt the need to leave NC after 2001.
In short, the BTC brief does nothing to bolster its claim that higher taxes have no effect on job growth. Any basic Econ 101 theory will describe how job and economic growth is based largely upon the accumulation and investment of new capital and the proper incentive structure. When government raises taxes it primarily does two things:
- It reduces the amount of capital available for productive investment, and replaces it with politicized government spending. Gov’t spending is pure consumption (and not investment spending), meaning it consumes resources that otherwise could have been available for productive investment and job growth. The lower amounts of capital accumulation, the slower the economic growth.
- It destroys the incentives for entrepreneurs to engage in productive investment. Higher taxes by definition lower the expected after-tax returns for investment. On the margins, higher tax rates will make business expansion and new investments less profitable. The higher tax rates, then, will make new investment less appealing to entrepeneurs. As a result, more will choose to invest their money in, say, government bonds which offer a higher return than their prospective business investment because of the higher tax rates on the business investment.
The lack of economic understanding being represented by the Budget & Tax Center is appalling, and before they offer up any more “analysis,” perhaps they should consider this quote from Murray Rothbard :
““It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”