With all the debate about taxes right now during the fiscal cliff talks, there's a lot of discussion about incentives and what motivates companies to expand and create jobs and what doesn't. I got into a recent discussion over at The Money Illusion as Sumner kept calling Obama a "liar" over tax rates. It seems that his point is that if you throw in the new tax to fund ObamaCare the new tax rate will be not 39.6% but about 2.8% higher. Whether or not that should be thrown in or not-it seems arbitrary as it's not really an income tax; I mean why not throw in every tax into the figuring income tax-how about the payroll tax and state and local taxes? Because these other taxes are not the income tax.
Still many commentators at Scott's also think that there should be no capital gains tax-as this taxes the same income twice. This idea never makes any sense to me and still doesn't. In any case this is held to greatly disincentivize business which is seen as extremely sensitive to such taxes. Yet even the great Reagan raised capital gains and dividend taxes as part of the 1986 tax reform deal.
A piece that came out of a study the NYTimes did brings the debate over incentives to another very common idea in politics: the need to give businesses all kinds of tax credits for them to come to your state, county, or city and stay a long time creating lots of jobs. Yet when the returns gained from the bevy of business tax credits are tallied, it's not clear what is actually gained.
Literally, it's not clear. That's the first problem: no one in government seems to even know how to calculate what the true benefits are.
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.
"The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid."
“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.
So it's very tough to have a real accounting. Even when jobs are created it's not clear that they wouldn't have been created anyway. How do you assess how many jobs would not have been created otherwise?
Then there are all the companies that pledge to stay in a town, county, or state for the long haul and then leave.
In the end, the money that towns across America gave General Motors did not matter.
"When the automaker released a list of factories it was closing during bankruptcy three years ago, communities that had considered themselves G.M.’s business partners were among the targets."
"For years, mayors and governors anxious about local jobs had agreed to G.M.’s demands for cash rewards, free buildings, worker training and lucrative tax breaks. As late as 2007, the company was telling local officials that these sorts of incentives would “further G.M.’s strong relationship” with them and be a “win/win situation,” according to town council notes from one Michigan community."
"Yet at least 50 properties on the 2009 liquidation list were in towns and states that had awarded incentives, adding up to billions in taxpayer dollars, according to data compiled by The New York Times."
"Some officials, desperate to keep G.M., offered more. Ohio was proposing a $56 million deal to save its Moraine plant, and Wisconsin, fighting for its Janesville factory, offered $153 million.
But their overtures were to no avail. G.M. walked away and, thanks to a federal bailout, is once again profitable. The towns have not been so fortunate, having spent scarce funds in exchange for thousands of jobs that no longer exist."
"One township, Ypsilanti, Mich., is suing over the automaker’s departure. “You can’t just make these promises and throw them around like they’re spare change in the drawer,” said Doug Winters, the township’s attorney."
"Yet across the country, companies have been doing just that. And the giveaways are adding up to a gigantic bill for taxpayers."
As this underscores, many of the credits are doled out at the barrel of a gun: if the companies don't get the credits, they'll leave. However, as is clear, they may leave anyway. It would be interesting to compare places that have given the credits to those that didn't/ Would there be any precptible difference?
So perhaps this is a way to save money? To cut back on all the tax incentives which prove to be much less incentive? It's at least worth thinking about.