STATES AND LOCAL GOVERNMENTS CONSIDER BUSINESS TAX REDUCTIONS TO SPUR ECONOMIC DEVELOPMENT

Wall Street Journal profiles Los Angeles, Minnesota, and Michigan efforts to lower business taxes in an effort to retain and grow jobs – Implementing the famous Laffer curve.

Arthur Laffer is most famous for originating the Laffer curve, an economic theory that states that higher taxes remove funds and motivation for the use of these precious resources in creating jobs and ultimately personal wealth.  The infamous (1972) “Back of the Napkin Laffer Curve” seeks to identify the point on a scale of tax rate vs. business revenue where it is no longer desirable for business to spend time and money in pursuit of additional revenue growth.

The economic literature is filled with commentary on this theory. Laffer a prolific author, has several books discussing his theory and its implications upon the national economy.  More importantly, he authors an annual comparative study of state economic competitiveness published for the National Legislative Exchange Council titled Rich States – Poor States.

http://www.alec.org/am/pdf/tax/09RSPS/26969_REPORT_full.pdf

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In Rich States – Poor States ‘09 Laffer and co-author Stephen Moore give a convincing argument that taxes do influence the location and growth of business.

It’s not surprising that high tax states are concerned about the impact of business taxes.

While there is strong evidence that Laffer’s theory is correct and business taxes do play an important role in economic development, the political economic development policy debate about balancing the need for tax revenue with the source of this revenue, many times clouds ability to implement a clear and sustainable business tax policy. 

This ambiguity leads to state-to-state and community-to-community tax inequities. 

It seems logical and prudent business strategy to take advantage of these inequities when they contribute to business revenue and profits.

Further, its logical that states having inequities would seek changes to produce parity with states that have a business tax competitive advantage.

For economic development practitioners whose success, in part, is directly attributable to economic competitiveness, understanding the impact of business tax inequities and means to remedy these inequities clearly is necessary to increase competitive advantage and success in creating jobs and economic wealth for the communities they serve.

 Author note:  This was prepared by Charles Eckenstahler for presentation at the Purdue North Central “Topics in Regional Economic Development”   class, Spring 2010.

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One Response to “STATES AND LOCAL GOVERNMENTS CONSIDER BUSINESS TAX REDUCTIONS TO SPUR ECONOMIC DEVELOPMENT”

  1. Orphe Says:

    Care to view and comment on your blog? you opinion matters!

    http://www.freedomandprosperity.org/videos/laffercurve1-3/laffercurve1-3.shtml

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