The Tax Foundation released its 2010 State Business Tax Climate Index today, which evaluates states’ competitiveness vis-à-vis each other. Variables examined include corporate tax, individual income tax, sales tax, unemployment tax and property tax.
According to Kail Padgitt, the study’s author:
The ideal tax system, whether at the local, state or federal level, is simple, transparent, stable, neutral to business activity, and pro-growth. In such an ideal system, individuals and businesses would spend a minimum amount of resources to comply with the tax system, understand the true cost of the tax system, base their economic decisions solely on the merits of the transactions, without regard to tax implications, and not have the tax system impede their growth and prosperity. … [T]he most competitive tax systems, and the ones that score best in the SBTCI, are those that create the fewest economic distortions by enforcing the most simple, pro-growth tax systems characterized by broad bases and low rates.
Translating from wonk into English, the takeaway is simple enough – the best system is one where the burden from taxes isn’t too onerous, the system is simple and easy to understand, and it raises revenue at a low rate from many (rather than a confusing system taxing a few at a punitive rate.) People will pay when they know what they’re supposed to be doing and don’t feel like they’re being bled dry; individuals and companies will not have to spend time or money avoiding taxes or chasing subsidies, so they can go about their business in a straightforward manner. The government raises enough for basic services by getting a little bit from everyone. Everyone wins, right?
Wrong.
Unfortunately, this clear-cut system doesn’t do much for politicians because it doesn’t leave room to dole out concessions to favored constituencies – and let’s be honest, that’s their bread and butter. (Hence the 7500-plus page insanely complicated federal tax code that no mere mortal can comprehend.) But when it’s that confusing, it’s a lot harder to pinpoint exactly what’s coming in from where, so there’s less accountability when it goes back out. So if some people get an extra airport or a few water taxis here or there, the average American can’t be as mad because they don’t know the total bulk of taxes they’ve been hit with on all fronts.
Art Laffer points out in today’s Wall Street Journal the folly of such tax-and-spend government policies.
A government simply cannot tax a country into prosperity. If there were one warning I’d give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.
In the Simpsons episode “Radioactive Man,” the town of Springfield tries to exploit the film crew via taxes and price gouging, eventually harassing them enough that the crew shuts their operation and moves back to Hollywood. States would be well-served to watch this episode and learn from it – when the government raises taxes on businesses, businesses respond by paying workers less, offering fewer benefits, or by hiring fewer workers. If a simpler system exists elsewhere – be it South Dakota, New Hampshire, or anywhere else – businesses will relocate in search of greener pastures where they can operate more easily. Attracting entrepreneurs and companies with business-friendly economic policies to should be the first priority of any state administration.