State Taxes

An article in The New Republic by Ed Kilgore identifies a trend among newly-Tea Party influenced State governments to reduce corporate taxes and progressive income taxes in favor of higher consumption taxes (which, as we all know, affect lower-income residents more than upper-income ones).

This may seem deliberately mean-spirited, but I don't think that's the case.  Republicans believe, as a matter of ideological faith (and therefore a belief that contrary facts won't change) that lower taxes will result in economic growth and greater tax revenues.  However, even if you accept the Republican belief system, the reduction of corporate taxes ultimately will not yield a benefit.

The concept of reducing corporate taxes in, say, South Carolina, is that businesses will be incentivized to move to South Carolina--or, if already there, they will not be induced to move out of state-- because of the favorable tax climate.  But this is a zero-sum game.  South Carolina's lower taxes might induce a company to move from, say, New Jersey, to South Carolina.  Realizing it is losing business to South Carolina, New Jersey will respond by lowering its corporate taxes.

Eventually, all states reduce their corporate taxes in an effort to retain or attract business.  The result is that corporate taxes nationally have been reduced--to the benefit of businesses--but not a single new job has been created.  All that happens is that jobs relocate from one state to another.  South Carolina's gain is New Jersey's loss  The states become willing participants in a sucker's game--competing for business against the other states.

One can't blame South Carolina or the other states mentioned in Kilgore's article for trying to compete for jobs by creating favorable business climates and, in particular, reducing corporate taxes.  But it's important to recognize that corporate tax cuts don't "create" jobs, they just shuffle the deck.

From the perspective of a national economy, this sort of tax reduction isn't productive at all.  But this is a problem inherent in the Federalist system.  One solution would be to adopt a national corporate tax that would replace individual state corporate taxes.  The national corporate tax revenues would be distributed back to the states based on the place of origin.  This would create a level playing field and avoid the "race to the bottom" effect of having the states competing with each other with respect to tax rates.  Of course, the chances of a rational policy such as this actually being adopted is nil.