It Depends at What Period of Capital Flow One Looks
What an improvement is the reemergence of sincere argumentation on RI Future. I may find its new owner, Brian Hull, to be wrong about the implications of taxation, but I trust that he’s attempting to express his opinion to persuade rather than to mislead. Thus, not only may exchanges be fruitful, but the actual assumptions of each side may be addressed:
… any reduction in an individual’s state tax liability does not necessarily lead to investment. The tax savings could be saved, or spent on luxury items (which may or may not be purchased in the state). Lastly, and most importantly, if an investment does actually occur, that investment can occur anywhere in the country or in the world. Wealth flows after opportunities to make money off that wealth, regardless of where the opportunities arise. A potential investor will seek the highest return on his investment, and not necessarily care about investing in his community or state. This shouldn’t come as any surprise to you, so I’m wondering why you’re so glib in correlating tax cuts to economic growth. …
Do you honestly think that a $6,000 tax cut going to an individual making over $419,000 a year will generate job growth in Rhode Island? Do you think all those wealthy Rhode Islanders who got their $6,000 tax cut will join together and invest their tax savings in creating new businesses in the state? I suppose it’s possible, just like it’s possible that I’ll be struck by lightning, or win the lottery (you can’t win if you don’t play), but we both know your claim is specious and the cost to the state necessitated its elimination.
That Brian is addressing capital gains taxes, specifically, is helpful, because it clarifies that the activity being taxed is in one way or another an investment in the state. If one treats a tax cut as no different than a direct handout from the government, like those rebate checks most of us received under misguided Bush policy, as Brian apparently does, then, no, $6,000 to each person in the limited group of really rich people won’t generate much economic activity. But especially in the case of capital gains, that $6,000 is not the investment that the state is seeking with its low-tax policies — the investment that generated the revenue that was taxed at a savings of $6,000 is.
Brian’s mistake is to treat revenue to the state as if it is the only, or at least most important, measure for the Rhode Island community. As a 2008 Poverty Institute fact sheet arguing for the elimination of the capital gains tax cut illustrates (PDF), the tax “savings” to the wealthy investor (in this case claimed to be $4,974) comes from an actual capital gain of $193,113, which itself is only a portion of the investment.
Although Brian is correct that the tax savings may be spent on anything, anywhere, for the tax to be levied in the first place, the investment must have been associated with Rhode Island in some way, whether by benefiting an actual Rhode Islander or by representing an investment in our state by a resident of some other state or nation. A low capital gains tax gives a state’s businesses an advantage in their ability to offer stock options as remuneration as well as to attract investment from elsewhere. It also creates incentive to make money by investing, which one is often begin doing close to home — as with local real estate or nearby companies.
Of course, such cuts and business ventures are operating in a hostile tax and regulatory environment, but in isolation, the effects of a given policy are relative, meaning that it’s better to have a lower tax even if it won’t be a trump card.
Brian also presents a table purporting to illustrate that Rhode Island’s tax burden isn’t particularly heavy. His direct source isn’t obvious, and I don’t have the time, right now, to dig into the numbers for myself, but it appears to measure the actual dollar amount of different taxes — income, sales, property, corporate — as a percentage of actual personal income. The problem with this is that it lumps all Rhode Islanders together and doesn’t really provide much useful information about tax policies effect on taxpayers.
The fact that Rhode Island’s corporate income tax claims 0.4% of personal income (ranking us 26th highest in the country) could mean only that not a lot of Rhode Islanders operate businesses that make money. This possible interpretation is emphasized by the fact that New Hampshire ranks fourth, at 1.1%. Similarly, the fact that Rhode Island ranks 32nd in percent of personal income going to sales and gross receipts taxes could indicate that folks don’t do as much shopping in our state.