Thursday, July 7, 2011

Lower Taxes for Higher Growth

A new report from the Kentucky Center for Economic Policy (KCEP) claims that, if successful, the momentum within the Kentucky legislature to repeal the corporate income tax would result in “little to no impact on location and investment decisions” of large businesses. KCEP claims that a tax decrease would only enable existing and potentially new Kentucky businesses “to avoid responsibility for helping pay for public services from which they benefit.”

However, the general consensus in the academic literature confirms what common sense tells us: taxes affect incentives, and incentives affect decisions, especially those of job-creating businesses.

If a business can find better bang for its investment dollar in a neighboring region (say, in Tennessee where corporate income taxes are 1.7% lower than in Kentucky), then it will relocate to greener pastures.

According to a review of numerous economic indexes done by Cathy Carey, Ph.D. economist at Western Kentucky University, “The states that grow the fastest, both in population and in GSP (gross state product), and in payroll employment and GSP, tend to have more favorable business climates, including tax structures and lower corporate tax rates.”

KCEP’s call for Kentucky to “eliminate loopholes in its corporate tax and more closely scrutinize credits, subsidies and other tax breaks” would only increase the tax burden on businesses considering an investment in Kentucky, further impoverishing the state.

The unfounded implication of the KCEP study is that government is able to make more wise and efficient decisions with business profits than can private industry.

As the data (and common sense) would have it, lowering the corporate income tax in Kentucky would be a welcome invitation for new business, leading to new jobs and greater prosperity.

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