Tuesday, November 20, 2007

Do Companies Really Only Care About Low Taxes?

No. In fact one of the more curious trends in recent years is how business leaders are pushing the government on health care, education, research funding, infrastructure, etc. (Here is but one example from a fairly conservative state) Why? Well, because while it may be true that taxes cut into the immediate bottom line, businesses require lots of social and physical infrastructure - especially modern high-tech industry. Think about what makes a successful business: a skilled and healthy workforce, good ideas and innovations and a reliable physical infrastructure. Its no use having incredibly low taxes if you don't have these, because you can't have a profitable, sustainable business. A skilled and healthy workforce comes from well-educated people who have access to good medical care and who are willing to locate near the company. So what should government do? Provide a good education system that will produce these workers and will attract them to stay when their children enter the school system. Provide a health care system that keeps people healthy and allows small businesses the ability to afford insurance for their workers. Provide the civic and cultural amenities that attracts skilled and educated people. Good ideas and innovations requires investment in higher education and research. Reliable physical infrastructure requires investment in roads, power grids and information networks. These are the things that modern, high-productivity, globally competitive companies want and need.

So if you are going to try and craft government policy to try and attract and spawn these kinds of cutting edge companies what would you do? Sure a low tax burden is desirable, but the first-order concerns are about the human capital environment and the physical infrastructure environment a state provides. To put it another way: paying 10% of my profits in taxes or 20% is immaterial when I cannot turn a profit in the first place. A lower marginal tax rate may be attractive now, but good firms are also very skilled at forecasting (or they wouldn't be so good) and can see if a tax base is unsustainable or is not likely to provide the kind of human capital and physical infrastructure in the future.

Economics is all about incentives and advocates of low taxes will talk constantly about the disincentives that high taxes create - and they are right. But sometimes they seem blind to the entire world of other incentives that exist out there. Good policy comes from understanding all incentives and weighing them carefully just like good economics comes from understanding opportunity costs, not just explicit costs. So what are the opportunity costs of a business locating in Oregon? Hint: it's not the taxes.

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