Thursday, February 1, 2018

Senator von Flatern Talks Taxes

It never ceases to amaze me what arguments people will resort to in order to raise taxes. What is even more remarkable is how, here in Wyoming, the debate over tax base reform has been entirely confused with the debate over the level of taxation itself. 

Senator von Flatern, whom I have a lot of respect for, offers a case in point. He was recently interviewed by PBS Capitol Confidential. There, he explained that low taxes do not attract new businesses. Tax stability, on the other hand, is what businesses are looking for. 

The second part of his argument is correct, and we will get to it in a moment. As for the first part, it would be interesting to hear Senator von Flatern's explanation to why big corporations like Toyota, Nestle, Occidental Petroleum, Carl's Jr. and Jacobs Engineering - to mention a few among thousands - have left California. For many of them, Texas has been the place to go. 

In 2015, a study by business consulting firm Spectrum Location Solutions showed that California had lost 9,000 business headquarters and expansions in a period of seven years. If we are to trust Senator von Flatern, this migration wave had nothing to do with California's high taxes. 

Joseph Vranich of Spectrum Location Solutions begs to differ. He explains:
It’s typical for companies leaving California to experience operating cost savings of 20 up to 35 percent, Vranich said. He said in an email to the Dallas Business Journal that he considers the results of the seven-year, 378-page study “astonishing.” “I even wonder if some kind of ‘business migration history’ has been made,” Vranich wrote in his note.
One of Senator von Flatern's arguments in the PBS interview is that low taxes may work for the "billionaires" who move to Jackson Hole, but it does not work for businesses. This, of course, is economic nonsense. The good senator suggests that when people are the CEOs and owners of big corporations, they do not want to have their businesses operate at as low a cost as possible - but when they turn around and make decisions on their personal finances, then all of a sudden low taxes matter. 

I am not even going to delve into the mile-high pile of research verifying the notion that low taxes are better for businesses than high taxes. I will, however, urge the good senator to take a look at the European Union and its recently issued black list of low-tax jurisdictions. In what amounts to a preamble to totalitarian restrictions on the migration of people and capital, the EU is aggressively trying to discourage its own citizens from moving hard-earned money from the EU to countries and territories where they are allowed to keep more of it. 

Why is the EU doing this? If it has nothing to do with the fact that low-tax jurisdictions have lower taxes than the EU, and if that difference in taxes has nothing to do with the outflow of money from the EU to those low-tax jurisdictions, then what, for Pete's sake, is the reason why the EU is bullying countries and territories with low taxes? Why is the government of Sweden - the world's highest-taxed economy - considering an emigration tax on capital?

The reality, of course, is that Senator von Flatern's suggestion that low taxes don't matter is a well-intended, yet sadly ill-informed way to dismiss the resistance to tax increases here in Wyoming. It would have been much more productive if the good senator had concentrated on the second half of his tax argument, namely that businesses prefer tax stability. 

Specifically, von Flatern argues that businesses look at the Wyoming tax structure, see our dependency on severance taxes and conclude that in the next downturn we are going to raise taxes on others than the minerals companies. That, in turn, would harm those new businesses.

Let us ignore the fact that von Flatern, in this argument, refutes his own point against low taxes. (If low taxes don't matter, why would those businesses worry about future tax hikes?) Let us instead look at the reason why businesses would have a reason to expect future tax hikes.

If severance tax revenue falls by, say, $100, the argument goes that the legislature would then have to raise taxes elsewhere to recover the $100 in lost revenue. This seems like a complete argument, but in reality it is based on what logicians call an "implicit axiom". In other words, a hidden, not-outspoken assumption that guides you to the conclusion of your argument.

Logicians love implicit axioms. You can do whatever you want with them. Economists and politicians, however, should be very concerned about hidden assumptions. They disguise the true nature of an argument, and the real price of policy reforms. 

In this case, the assumption that a drop in severance tax revenue requires a dollar-for-dollar revenue recovery is based on the implicit axiom that government spending remains intact. In other words, the businesses that von Flatern is referring to have good reasons to believe that there will be no cut in government spending in response to a drop in tax revenue here in Wyoming. 

Who is responsible for the fact that spending does not drop in response to reduced tax revenue?

a) Darth Vader
b) Mother Teresa
c) Senator von Flatern and his fellow legislators

In plain English, what Senator von Flatern did not tell the PBS reporter - what he withheld as an implicit axiom throughout the conversation - is the inconvenient little fact when he talks to businesses, he lets them know that there will never be any cuts in government spending here in Wyoming. In his conversations with businesses who are concerned about future tax hikes in Wyoming, he refuses to promise to hold the line on taxes. He refuses to promise that "I would rather cut government spending than sign a bill that raises taxes on you or any other business."

But who can blame the good senator for withholding such ephemeral pieces of information? After all, it is much more fun to be a legislator when you have more money to dole out. Right, senator? 

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