Thursday, December 5, 2013

The Race To The Bottom

One of the benefits of covering Counterpunch is that I get to read articles by Jack Rasmus, a Leftist economist whose work I (critically) admire. The piece in question is entitled Race to the Bottom, a phrase widely used by Leftists opposed to conservative government.

Mr. Rasmus puts the problem this way.
While the official state corporate tax rates range from 5% to 10%, states in aggregate are averaging only about 2% effectively in corporate tax payments. States across the US have been in a ‘race to the bottom’ to grant more and more corporate tax loopholes and exceptions in order to lure corporations from other states to their state.
In his view, this is a terrible, no-good phenomenon that cheats workers out of their legitimate wages and benefits. It is the major factor in the current difficulties facing state budgets and pension plans. He offers many suggestions about how to remedy this unfortunate state of affairs.

At least as interesting is the question he doesn't address. If the consequences of corporate tax breaks are so unremittingly bad, then why do states offer them? I can think of three overlapping answers he might offer.

First is corruption--the fix is in. The corporations own the politicians, who then pass out the goodies. Even Tea Party types like me will agree with this to some extent, for this describes crony capitalism. It fits Ayn Rand's account of big business in Atlas Shrugged to a tee.

But empirically, this cannot be the reason for the race to the bottom. If true, the most corrupt states would be the fastest racers. Thus we'd conclude that Texas (generous with the corporate candy) is more corrupt than Illinois (chintzy)--obviously not true. Corruption abounds, to be sure, but in this country it is thankfully still a sideshow.

Second, the relatively few people who get jobs from these schemes are visible and vocal, while the much larger number whose benefits are endangered are disenfranchised. While superficially plausible, this argument can't withstand scrutiny. The people who most profit from a bailout of Detroit, for example, are the disproportionately white, retired city workers, whose pensions have been stiffed. Meanwhile, the chief beneficiaries of Detroit's bankruptcy are the current residents, who certainly fit the description of disenfranchised. Far from reducing inequality, Mr. Rasmus' proposal to top off state and local budgets with corporate dollars will effectively transfer wealth from poor people in need of city services to the suburban middle class.

Finally is the Marxist rationale, which claims that We're poor because the rich people stole all the money. In this view, wealth is a zero-sum game, and the role of the State is to extort money from the working class by force, accomplished in part by lowering corporate tax rates. The dirty truth is hidden by the fig leaf of giving a few people some jobs. But then you'd expect every state to be liberal with the corporate discounts. How can a Marxist explain the difference between New York's high, effective tax rates, vs. Texas' low rates? Are New York's capitalists just a bunch of wimps?

The truth is these corporate tax breaks are popular with voters. When phrased in terms of jobs, voters understand that the private economy is vastly more productive than anything government can do. In this context, it becomes obviously clear that raising taxes hurts the economy and lowering taxes helps the economy. Even poor people--who don't generally pay much in taxes--realize that money paid by private business ultimately comes out of their pocket.

But I don't like the beggar-thy-neighbor approach anymore than Mr. Rasmus, albeit for different reasons. The selective tax breaks for footloose companies is grossly unfair to existing businesses (and their employees). Much better would be an across-the-board decrease in corporate taxes, with no loopholes. That way everybody pays the same low amount. (Ideally, we'd go the full Sweden on this, and abolish corporate taxes altogether.)

Taxes ultimately transfer wealth from productive enterprises to unproductive enterprises. Welfare may be necessary, but it is not a good thing. Likewise with healthcare--disease is a cost, not a benefit. Minimizing government expenditure for these items is essential. Rather than minimizing them, Mr. Rasmus supposes that not a penny of current expenditures is wasted, and every last nickel must be extorted out of the productive economy to pay for them.

Accordingly, his solution comes straight from Ayn Rand.
To avoid the state-state ‘race to the bottom’, an ‘Interstate Corporate Equalization Tax’ should be implemented. Corporations that move their (taxable) headquarters from one state to another should be required to pay the ‘losing’ state a fee equal to the difference in the two states’ corporate income tax for a period of three years into a special fund.
This sounds just like the anti-dog-eat-dog-rule from Atlas Shrugged.
The Anti-dog-eat-dog Rule is passed by the National Alliance of Railroads in section 145, allegedly to prevent "destructive competition" between railroads. The rule gives the Alliance the authority to forbid competition between railroads in certain parts of the country. It was crafted by Orren Boyle as a favor for James Taggart, with the purpose of driving the Phoenix-Durango out of Colorado.
As Ayn Rand effectively describes, eliminating competition just makes everybody poorer. An excellent example is found in the history of the shipping container, where the Interstate Commerce Commission successfully lowered everybody's standard of living for half a century. Obamacare will do the same thing for health care.

By preventing competition between the states, Mr. Rasmus' plan enables government to steal more and more money from their citizens with impunity. His scheme permits any state to raise taxes, and then collect even more revenue from other states via the equalization tax. Folks in Texas will be subsidizing New Yorkers even more than they do today. (Today's subsidy comes from the Federal deduction for state income taxes, from which residents of no-tax states derive no benefit.)

Allowing competition, on the other hand, forces states to grapple with the real issue--what is the optimal size of government? In a competitive environment it's hard to get it wrong: if you have too little government (high crime, homeless people on the streets), or too much government (limited opportunity, high unemployment, low wages) people will vote with their feet and their bank accounts. They'll leave.

Productive enterprises produce wealth. Mr. Rasmus and I both agree that some of that wealth has to be shared with people who, for whatever reason, are unable to support themselves. But Mr. Rasmus goes much further than that--he wants to punish productivity. Anybody who makes any profit, or who earns even a penny more than he does, needs to be beaten down and put out of business.

Mr. Rasmus may not describe himself as pro-poverty, but that is exactly what he is.

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