Friday, December 3, 2010

Is Texas Too Business Friendly?

Steve Blow (yes, the folksy Metro columnist of The Dallas Morning News) provoked a political debate yesterday with a column asking whether Texas was *too* business-friendly. He points out that Texas ranks 49 out of 50 states in tax revenue per capita but is near the bottom of the rankings in public school quality, clean air and health care.

I know, it sounds blasphemous for a Texan to suggest it's possible to be *too* business friendly, doesn't it? But Steve Blow tossed the question out there anyway, trolling for bites. After the jump, did his bait attract any fish?

Yes, a big one. Michael Landauer, on The Dallas Morning News editorial board, mentioned the column over on the Opinion blog, adding what Steve Blow was too polite to come right out and say.

"Bottom line: Businesses don't pay a fair share in Texas. That's what makes us business friendly. That's why businesses come here. They know the people of Texas will pick up the tab for education, clean air, etc. But you cannot say that and get elected dog catcher in this state."

Now Landauer really knows how to troll. (I guess that's why he's on the contentious Opinion blog and Steve Blow is on the feel-good Metro blog.) Landauer prompted a fair amount of reader reaction. I want to respond to just one of the comments, one that perpetuates a well-established myth, the myth about who ultimately pays taxes. An anonymous commenter using the alias "Repub" replied,

"Understand there ultimately is no such thing as a business tax. All such taxes are absorbed by the bottom line, which means they are paid by the consumer."

This is wrong for several reasons. First, I could just as easily argue that higher prices lead to consumers demanding higher wages from their employers to pay for those higher prices. So, the taxes really end up getting paid by employers. Of course, this leads to a circular argument with no end.

Second, and more importantly, the price a product fetches in the marketplace is only loosely tied to its cost of production. If there's a surplus of a product, its price will drop, no matter how much it might cost to produce. There are many examples of products that sell for even less than the cost of production. That's why you often hear farmers complain that the price they get for their corn (wheat, soybeans, whatever) is less than what it cost them to produce it. They have no pricing power. If that goes on too long, the producers eventually go out of business, but the situation can persist for a surprisingly long time.

Another commenter, "Tom in Plano" explains who really pays those business taxes:

"You're right that a tax on business will ultimately be paid by people. But you're wrong in assuming that the payment will come from the business' customers.

"Depending on the environment that a business is operating in, those taxes could be paid by investors (lower profits), management (lower executive compensation through smaller bonuses), employees (lower pay or fewer jobs), suppliers (lower prices paid for goods consumed by the business), customers (higher prices), or some combination of the above."

The only thing wrong with this explanation is its nuance. Nuance never put an end to the retelling of a good myth, one that has simplistic truthiness going for it. And the myth that there's no such thing as a business tax has a simplistic truthiness to it. Too bad it's false.

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