24 July 2017

Why Tax Policy Is Largely Incidental to Economic Development

Two quick things about taxes.

Studies suggest that if you try to increase government revenue by raising tax rates, the rich leave. The result? Your higher tax rates result in about the same tax revenue. So, if your route to making your government more vibrant and healthy is raising tax rates, you'll fail.

Studies also suggest that tax breaks for job formation are really expensive. It looks like you have to pay about $100,000 per job by taking the tax incentive route. So, if your route to making your business sector more vibrant and healthy is lowering tax rates, you'll fail. The rest of the community is unlikely to get $100,000 back in taxes and additional business for each new job created in the area.

Tax policy - whether to raise tax rates for your government or cut tax rates for your businesses - is an admission that you don't have any good ideas for development. 

Economic development is a slow game and has a few elements. 

1. Create an alliance between city leaders, education, and industry to facilitate the creation of wealth and jobs through the creation of new businesses and technologies. Fred Terman at Stanford worked to bring in venture capitalists onto campus to collaborate with his professors and students; his early students included Hewlett and Packard.

2. Welcome and attract the best and brightest from any and everywhere. Do this by hosting conferences on important topics, by developing university programs for emerging technologies, nurturing startups with mentors and financing, and promoting a culture of entrepreneurship starting as early as high school. Alphabet (nee Google) has 70-some thousand employees and - like half of the tech companies in Silicon Valley - was co-founded by an immigrant.

3. Make your city a great place to live. This gets overlooked but ultimately you want to attract employees and entrepreneurs and world-class researchers who can afford to live anywhere and will choose to spend a good portion of their wealth and income to live in an area that they love and is stimulating. This means public works projects like art and museums and it means taking advantage of and incorporating into your city, natural beauty and / or good weather. California has relatively great weather and Seattle - a place that has created an abundance of wealth in the last 30 to 40 years - is surrounded by natural beauty. Edinburgh has developed a vibrant startup scene in part because it is such a great city that Scotland's best and brightest are happy to live there, making it easier for companies to attract talent. Creating a great community also means including a lot of voices in the definition and pursuit of quality of life. 

Bookstore door in Seattle, close to Pike Market
4. Welcome diversity. West Virginia's population has dropped in the last 50 years. California's population has gone up 4X. West Virginia is 92.3% white. California is 37.7%. From the early Silk Road that facilitated trade between folks who live in what is now Europe, Iran, India, and China to Silicon Valley, regions that have brought together people from a variety of cultures and perspectives are the regions that are more creative and prosperous. And diversity doesn't just mean skin color or cultural background. Places like California's Bay Area and Seattle have not just created billions in wealth; anyone who has spent time there will tell you that these areas are also hotbeds of radical ideas. It almost seems like it is the same magnet for diversity that will attract people from other countries, communists, and venture capitalists and if you're unwilling for one or two (or, given it is is diversity, twenty or thirty) of these categories of people and thinkers, you're unlikely to get any of them.

Each of the above points deserve their own blog post - their own set of books, really - but taxes are tools towards these goals, not something that will magically create a better community. You shouldn't invest in Business A instead of Business B simply because Business A said they need less capital. Nor should you be impressed that Business B needs more capital so is obviously building a more impressive business. Capital is necessary to a business just as tax revenue is necessary for a community but the fact of it being higher or lower is largely incidental to whether that business or community will prosper. 

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