A Deeper Dive on The Tax Foundation's Study Still Reveals No Link

A blog about business and economics.
Oct. 10 2013 12:39 PM

A Deeper Dive on The Tax Foundation's Study Still Reveals No Link

Yesterday I eyeballed a Tax Foundation map showing the states with the most and least "business friendly" tax codes and concluded that they'd succeeded in showing that having a business friendly tax code isn't very important.

Mike Maciag at Governing took a more in-depth look and found the same thing. There is a weak negative correlation between business friendly tax codes and wages:

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And a weak positive correlation between business friendly tax codes and employment-to-population ratio:

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In sum, it's a nothingburger. I note that this would confirm the results of a useful Thumbtack survey which found that licensing policies drive business-friendliness but taxes don't.

Two ways to think about this. One is that taxes fund services, so low-tax juridictions gain an edge that's offset by a lack of amenities. Of course having high taxes and then wasting the money on nonsense is going to be a problem. I wonder if you looked specifically at places that spend a lot of money on non-service items (legacy pension costs or interest on old bonds) you might see an impact there.

The other is just that most jobs and businesses really aren't that mobile. The vast majority of people work in local service provision. That's to say they work at medical facilites or restaurants or schools or else they drive cabs or fix roofs. You have to do that stuff where your customers are. Idaho may be a great place to open a restaurant, tax-wise, but the reality is that there are only so many customers for a restaurant in Boise. If you go to Chicago or Dallas you'll find a much deeper market. I'm writing this blog post at a coffee shop in downtown Cleveland. The shop isn't here because downtown Cleveland is an especially great place for a coffee shop. I've blogged from similar coffee shops in downtown Pittsburg and downtown Tulsa and downtown Portland, ME and downtown Fort Worth. All mid-sized American downtowns are a good place for a coffee shop. Trying to move them all to Fort Worth to take advantage of the low taxes would be a fiasco—Fort Worth would be glutted and the customers elsewhere would be unserved.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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