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Treading Taxes


It came as a shocker in the Richmond Times-Dispatch on Tuesday. The top of the fold lead story -- “Tax no problem, study says” -- was giant, head-thumping news. A Joint Audit and Review Commission study found, shockingly: “Virginia's corporate income tax limited impact on economic development and eliminating it would not make up for lost revenues to the state,” the T-D reports. Translation: Cutting business taxes may not give the state economy a lightning jolt of prosperity, nor do companies looking to relocate here really consider the corporate income tax rate a major factor when deciding which state to infiltrate with new jobs and investment.

The lead story in Thursday's Wall Street Journal Thursday touched on a similar theme: “Deficit Panel Pushes Cuts.” Not tax cutting, but deficit cutting. Turns out a White House commission is pushing for another wholly shocking, politically impossible strategy to reduce the federal deficit by $3.8 trillion over the next decade: Eliminating tax cuts to the middle class, and even raising (gasp!) the gas tax by 15 cents. (There are other recommendations, such as cutting the federal workforce by 10 percent and cutting $100 billion in defense spending. Good luck.)

That this is front page news is a little dispiriting. No one would argue that our state and federal governments shouldn't be more responsible with our money, but there's a fundamental flaw in the prevailing philosophy of the GOP, which holds that reducing taxes, especially for businesses, is the only sensible way to improve the economy.

A stronger, more provable case can be made for exactly the opposite: Government spending, not tax reductions, has a bigger, more positive impact on businesses. 

There are tons of studies in academia that bear this out. Reagan long ago brought us trickle-down economics, the idea that cutting taxes for the rich who run our corporations leads to more capital investment and job creation, which trickles down to the rest of us by way of jobs and income.

That's not to say there isn't some trickle down. It just that it pales in comparison to a more coherent strategy: Increasing taxes for the purposes of improving roads, services and public infrastructure, which translates into improved cost efficiencies for businesses.

It's really simple logic, if not unbelievably unpopular. Improving roads, for example, makes businesses that depend on roads to deliver their products or services more efficient and profitable. In July 2008, we published a cover story on this strange phenomenon:

The no-tax-is-good-for-business philosophy is so pervasive that most macroeconomic textbooks even fail to challenge the assertion, says Arthur H. Goldsmith, an economics professor at Washington and Lee University. What if government spending on public infrastructure such as roads and schools had an equally stimulating effect on the economy? In a research paper published in the spring edition of the Journal of Economic Education, Goldsmith argues precisely this point.

"Borrowing to finance government consumption does crowd out private investment and thereby has the capacity to harm long-run productivity and output," he writes. "However, government investment spending by enhancing public capital improves productivity directly and may promote private investment, by enlarging profit expectations, further promoting productivity growth."

In other words, government spending on infrastructure, such as roads, actually helps make businesses more efficient, and therefore more profitable. So much so that "long-run growth fostered by government investment spending may exceed the detrimental effect on productivity associated with crowding out," Goldsmith writes.

Of course, we shouldn't be so stupid to think that our politicians will wake up tomorrow and, I don't know, propose raising the gas tax to pay for the state's crumbling highways. I won't mention how popular former Gov. Mark Warner passed the largest tax hike in state history and left office with higher approval ratings than George Allen. Warner will need to shed his moderate, Blue Dog leanings before 2012 if wants to have any semblance of a political future. The Tea Party has ensured no such absurdity will occur at least until then. But make no mistake: Taxes are what's holding our economy back.


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