Tuesday, February 13, 2007

How Taxes Create Incentives for Self Destructive Behavior

The Utah Taxpayer has a bizarre post. They say that sales tax structures create a false economy where cities prefer to have retail stores move in than industy. This helps explain why there is so much RDA money sunk into building Malls and Walmarts, while real industry is left to sprawl on its own on the outskirts of town. The industry may bring in more money into the community. The retail store brings in sales tax directly into the pocket of the city.

This weird economy leads to strange behavior where cities give incentives to retail, and throw up zoning challenges to manufacturing.

The post has a great quote: "Retail happens on its own. It does not need to be subsidized."

To a large extent, retail has a zero sum gain. Pulling a new store into the Salt Lake Valley really doesn't bring in that much new money. The new store might shuffle sales tax dollars between the municipalities in the valley, but does not bring in much new wealth.

Now, I do understand that not all retail is a zero sum gain. Local First notes that locally owned stores tend to keep a higher percentage of consumer money in town because both salaries and profits stay in the community.

A city planner, however, who is only looking at sales tax revenue may not take into the account the positive effects of local ownership. Sales tax from a chain store looks just like sales tax from a locally owned business. City planners just looking at sales tax would see that local stores are already there. So, he-she-or-it would be tempted to spend some of the taxes collected from local businesses to attract in remotely owned competition. Every city planner knows that the city that gets the Walmart gets the sales tax revenue.


Charles D said...

This is a common problem, not just in Utah. The issue in many states is that because of Federal cutbacks and State tax cuts (largely politically driven), the costs of many essential public services fall on county and local governments. Most of the jurisdictions are severely limited in the types of tax measures they can use, and there are finite limits to the rates at which these taxes (usually property and sales tax) are viable.

When a municipality must fund services its residents demand from sales and property tax, a big-box retailer is a real prize. They can abate the property taxes to encourage the developer and hope to get back something in sales tax. It's a short term gain, but long-term it's a loser. Most of the store's revenues leave the jurisdiction and most of the jobs are relatively low wage often leaving the workers partially dependent on government programs.

A manufacturing plant with high-wage jobs will demand the same property tax abatements but provides no direct revenue to offset them in the short term. Yes, they have more high paying jobs for residents, but those residents may spend those dollars outside the jurisdiction.

The solution is to radically alter the tax structure. Property and sales taxes are both regressive and hurt low income or fixed income people. A progressive income tax with revenue sharing from the federal and state levels could result in more intelligent development.

y-intercept said...

Sales tax is actually neutral, it is neither progressive nor regressive. When municipalities take sales tax off necessities and charities, it becomes progressive.

Property tax is not inherently regressive either. Savage Inequalities by Kozol points out that when you earmark property taxes for schools, you create a situation where crowded school districts charge a higher property tax rate than small districts filled with rich people. When you have lower rates in rich neighborhoods and higher rates in poor neighborhoods, then it is regressive.

In other words, a particular tax is not inherently progressive or regressive. The implementation of a tax might be progressive or recessive.

Robert de Fremery makes a pretty good case for higher property taxes. He thinks property tax should be equal to the publically created value of land. That way rich landlords would not be able to draw idle income from publically created value. He believes that taxing the public value of land does not get passed through to the renters. What it does is simply take the speculative profit from land owners and gives it to the government. If De Fremery's thesis is true, taxing the public value of land would counter the forces of land speculation and would lead to lower rents for the poor.

I could talk until I am blue in the face about why I think taxing passive income as opposed to taxing the active income from workers would do more to help the working poor, but I doubt you would ever believe me. The idea that we should place the primary taxes on labor, of course, comes from Marx's theory of labor. I think he was as off base on that notion as he was with the Dialectics.

I think the most progressive method is to get the taxes off of labor, and put them on the exploitation of resources (such as the gas tax), and on idle speculation such as De Fremery's idea of taxing public value of land. (De Fremery separates the public value of land from private value.

Charles D said...

You have a point or two there. When I refer to a progessive income tax, I am not specifying that the taxable income should only come from labor - far from it. One of the problems of our current system is that makes exceptions for all types of non-labor-derived income that ends up making the tax even more regressive.

I suppose one could take the position that it is possible to implement most any tax in a non-regressive manner, but the political reality is otherwise. It's nice to exempt food and drugs from the sales tax, but it still leaves lower income families with larger tax burdens simply because they must spend virtually all their income, while higher income families can save or invest.

(Dude, I've never read Marx and am not interested in doing so. Instead of trying to pigeonhole my comments your commie box, let's just have a discussion.)

y-intercept said...

Your are right that I should not be pigeonholing your arguments. I am actually trying to work on a different problem.

The problem I am working on is as follows. It appears to me that toward the end of the enlightenment, there appeared a new style of think. The American founders were still using old think. The French revolution used the new think.

In Germany, Hegel and Marx perfected this new think. This new think became the defining characteristic of the modern era. It is in both the left and right.

Joseph Smith picked up on the new think. The other area where new think became common in the US was the populist causes of preserving slavery and in finding ways to steal land from the indians.

Anyway, in the world at large, the new think led to atrocity after atrocity.

The post modern era is defined by a great disallusionment with the modern era. The problem, of course, is that our culture is still infused with the remnants of this new think. This massive divide between the left and right is a remnant of the modern era.

Few people seriously study Marx these days. However, since the Diaclectics had defined the way we think about things for so long it has permeated our language and logic.

My mind got messed up when I came in contact with that crowd Horowitz was in when he was young. His group was really in to finding ways to manipulate the debate. I figured out what they were doing and how they were doing it. I can't for the life of me figure out how to undo the subliminal manipulation of debate that occurs.

Unfortunately, George Bush is the flip side of the method. Feeling that the debate is hopelessly corrupted, Bush may have fallen for the Machiavellian view that the debate is secondary and the real discourse in the actions of the leaders.

I do not believe that you are a commie, I just noticed that a lot of your posts on reach upward were using the method.

I do the same thing because it was the way I was taught to engage in discourse.

The problem is that the method destroys discourse.

Scott Hinrichs said...

When I read "throw up zoning challenges," it conjured an image in my head that made me laugh. Did you do that on purpose?