Once more into the Ritchie dear friends

Yes, at it again is Mr. Murphy. Here\’s Ritchie and here\’s the piece he\’s riffing off.

In a nutshell, that tax competition between US States doesn\’t lead to all that many extant businesses moving means that tax competition is bad, M\’Kay?

Nowhere do either of them manage to grasp the important point, that the economy is not a zero sum game. There is not some pre-ordained number of businesses which State are in competition to host. Nor are we limited to competing to host only those businesses that are extant.

In fact, probably the most important number of all is net business creation. Competition for those might be had through tax competition (indeed, clearly is).

We can go even further. I think the median age at death of a business is something like 4 years (for we are endlessly told that 50% of businesses go bust, close down or fold in some manner by their fourth birthday): so the nett business formation numbers are important, yes, but the gross business formation number is going to be, in any one year, a reasonable percentage of the total business stock.

Anyone want to look up the gross (or nett) business formation numbers for Nevada and California (adjusted for population, of course)?

I think we might find at least a correlation between low corporate tax rates and business formation. I.e. that tax competition does have a beneficial effect.

4 thoughts on “Once more into the Ritchie dear friends”

  1. There’s more to life than the headline corporation tax rate. It’s more important to look at sales taxes.

    1. What if the higher tax states spend the money on something that in turn helps businesses, like transport or good education or clamping down on crime, corruption, etc? Unlikely, I know, but you can’t rule it out.

    2. Turning IanB’s argument on its head, assumign equal tax rates, where would an average chap start a business, in frozen Alaska or sunny Florida? The latter. So it may be that Florida can get away with higher taxes than Alaska because it’s like “rent”.

    3. Don’t forget that “all taxes come out of rent”, i.e. high tax rates depress property prices and rents, so you might be paying more of one and less of the other.

    Your basic premise that Ritchie is talking complete and utter shite is valid of course, but there is more to this than meets the eye.

  2. I don’t have the stats to verify but it is my strong belief that over the last decade or more the population of Nevada has increased while that of California has decreased.

    One reason for this (not the only reason by any means) is the cost of living difference. To put it bluntly the same income goes further in Nevada than it does in California. This is evidence that as std economic theory suggests businesses pass their tax costs on to their customers and that their customers gradually move to where their costs are lower

  3. I think there is a clear disconnect here between moving “the business” and moving “business domicile”. Many businesses need to be close to their customers – therefore are going to stay in high population California rather than the middle of the desert. Many businesses depend on highly mobile workers, therefore (Francis’s point about spending power accepted), the bright lights, long beaches and “2 hours, surf to piste” are attractive.

    Corporate HQs, however, can go wherever the tax breaks are – the people with the power are generally well paid enough to afford a flight to LA (if they are ever allowed to take the time off.) Or the legal ones, if that makes a bigger difference to your bottom line. Hence, I believe, the entire point of Delaware.

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