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If you could wipe out a class of government institutions with the stroke of a pen, how far down the list until you got to local economic development agencies. Absent eliminating them, I’d propose renaming them economic devolution agencies. If you thought the lessons of central planning have been learned by the major players in government, they certainly have not been learned at the local and state level.

In a future post, we’ll expose some of the things that these development agencies do. In the meantime, I want to focus on a common idea put forth in many urban redevelopment plans, or many plans for creating enterprise zones, or changes in zoning. It is that if their plans work as intended, tax revenues to the local area would be increased. If ever there was a more blatant display of crass redistributionism, that sentiment is it.

Tax revenues are transfers, period. If for some reason Wintercow starts a business in Fairport, NY, and by doing so he makes consumers of Fairport happier by $100,000 per year and he also increases his(net)  income by $100,000 per year the Village of Fairport is better off by $200,000. Then, after the business is created, some benevolent economic development planner comes along and says, “ah, but Wintercow pays 10% tax on his income and the consumers pay 4% tax (hypothetically) on their purchases, then we are also better off by $12,000 per year.”  That planner is spewing a bunch of nonsense. That $12,000 is simply income from the pockets of (formerly wealthier) producers and consumers and into the clammy hands of the planner. We are not richer by $212,000, regardless of what the planners may think.

This may seem obvious to you, but it is related to a larger point. Often times policy makers will justify government intervention in the form of subsidies, rezoning, etc. on the grounds that increasing tax revenues represent a “positive externality” to the community. And since entrepreneurs do not consider the value of the tax revenues they generate, we perhaps get too few entrepreneurs operating. What a bunch of nonsense. A positive externality can only exist when Wintercow takes an action that confers benefits on others that are purely external to the benefits and costs to him. When I plant a nice garden, my neighbors enjoy it, but typically do not pay me for it, so their “free riding” might mean that they would prefer to see me plant more gardens than I actually do. This is an entirely different argument than saying that if Wintercow plants a garden, then there are more flowers for his neighbors to take from him, and so we should subsidize the planting of Wintercow’s garden.

The problem is actually generalizable. Many government programs, such as subsidizing the health care of others, are done in the name of improving the productivity of others. The thinking here is that since my increased health makes me more productive, that will make the rest of society richer. But if society does not compensate me for this, I may under-invest in my own health.  What is wrong with this view? What is wrong is that the benefits of improved productivity are already paid for by society to me. If I am healthy, I can produce more. But if I produce more things that society values, then they will pay me for those things. In fact, the only way that I can enjoy the rewards of better health is if it enables me to make things society enjoys. And the only way society can enjoy my better health is if they purchase the products that I produce. And if this happens, my wages will increase exactly commensurate with how much more value I am providing to society. There is no uncompensated external benefit to them beyond this. They by definition must already be paying me for the privilege, and so my decisions about whether to be health already internalize all of the relevant information.

If this sounds hard for you, then jump to the obvious extensions of this policy that anything that improves productivity ought to be subsidized. What about my vacations? When I go on vacation I come back refreshed and a better worker. What about the two premium beers per weekend that I wished I could regularly afford. Again, they help me think clearly, and relax, and make me a better teacher come Monday. Would you recommend public subsidies for my Sierra Nevada habit?

And if you want to go that far, that increasing my productivity imparts an external benefit on others, then it would have to logically follow that things which decrease productivity impart external costs on others. And if you want to go there, do you know what policy follows from it? That’s right folks, we ought to heavily tax or eliminate by law or regulate the actions that make us less productive. And what might those actions include? How about retirement? When I retire I no longer produce goods for society, and therefore I selfishly choose too much retirement from the standpoint of “society.” How about child rearing? When I rear children, I am out of the labor force, and again selfishly make choices that harm society (even if my kids may one day be productive). And how about leisure itself? If I consume “too much” leisure, then I certainly reduce output and productivity to society. So ought my leisure time be heavily taxed? Ought retirement be banned?

You cannot argue that productivity enhancing activities ought to be subsidized and at the very same time argue that productivity destroying activities ought to be taxed. The policy implications are much more far reaching than I even lay out here. I don’t think many honest people would be willing to follow them to their logical conclusions.

One Response to “Tax Revenues are Not Benefits”

  1. Harry says:

    I liked the part about their clammy hands.

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