Letter: Replace the earnings tax with something fairer
This article first appeared in the St. Louis Beacon, July 29, 2009 - Robert Cropf and Rob Ryan recently wrote an article identifying the merits of the earnings tax. Unfortunately, their arguments fell flat.
They begin by attempting to contradict an argument made by Alex Schulte and myself. They misrepresented our argument. We used an economic model to quantify the deleterious impact that the earnings tax has on the city's income growth, holding everything else constant.
Our main point is that as one looks forward, this proven model can measure what income growth would be if it grows at the historical average rate compared with the rate that it would grow if the earnings tax were removed. I realize this is a subtle distinction, but it is the application of economic science to a question. We are completely happy to provide the model and the calculations to anyone who asks. Until there is a competing set of calculations offered, it is difficult for us to debate. Moreover, the citizens of St. Louis deserve a transparent discussion.
Regarding the role of the earnings tax in harming cities relative to their suburbs, I suggest that reader's review the evidence across 101 cities in the United States. Twenty-four of these cities have earnings tax, and the evidence indicates that cities with higher earnings tax rate suffer income losses relative to their suburbs compared with cities with lower earnings tax rates. Lots of factors determine a city's growth rate. I concede that point, but the evidence across such diverse cities and across time deserves careful interpretation. No doubt further evidence could be marshaled. In the absence of such evidence, real debate suffers.
To Cropf and Ryan's credit, they accurately identified that many taxes are inherently distortionary. The important point is that not all taxes are equally distortionary. Indeed, one tax -- a tax on land value -- is non-distortionary in the sense that the equilibrium quantity is not affected by changing the tax rate on the land value.
Lastly, Cropf and Ryan assert that the city would lose vital services if the earnings tax were removed. Mr. Schulte and I never suggested shrinking the city budget. No one is suggesting that city services be cut. Rather, and herein lies the challenge, the objective is find the way to raise city revenues with the least distortion. We are building a case against the earnings tax because the distortions created are harmful for such a great city. If no one asks hard questions, innovation is stymied. I submit that history shows what happens when we seek to maintain the status quo when other economies allow innovation.
Joseph Haslag is a professor of economics at the University of Missouri Columbia and executive vice president for the Show-Me Institute.