Do taxes drive California’s economy? An analysis by the Institute for the Renewal of the California Dream‘s Senior Fellow Dave Johnson:
The governor says California is in a budget crisis. He says we need to cut the state’s spending “across-the-board,” and the Republicans insist that tax increases and other alternatives are off the table. The media largely seem to be going along with taking discussion of alternatives off the table, and consequently Democrats are too intimidated to bring them up.
But what they are missing is that taxes drive the economy.
Tax-cut proponents say that increasing taxes on the wealthy “takes money out of the economy.” I wonder where they think the money goes? Do they think it just goes up into the air and disappears?
They don’t seem to — or pretend not to — understand that taxes come right back into the economy. It is taxes that pay the salaries of teachers and police officers and that build and maintain our roads. Then that money circulates from those teachers and construction workers to support our stores and movie theaters and restaurants and to buy homes and cars.
What would the effect be of a cut? In California there are approx. 308,000 teachers. The Governor is proposing a 10% “across-the-board” tax cut. Imagine the economic consequences if this cut means laying off 10% of those teachers — 30,000 people? This is not the precise plan but it illustrates that spending cuts do not help the economy of California. In fact it is spending cuts, not tax cuts that “take money out of the economy.”
And anyway we want what our taxes buy us! We want our teachers and firefighters and roads and courts and water & sewer systems. Cuts are not what we want.
Borrowing more money is not the solution, either. One result of the conservative tax-cutting fever of recent years has been massive borrowing at the state and especially the federal level. But people have not been told that borrowing is in reality a spending increase because we have to pay interest on that debt. California is spending $4 billion this year to pay interest on bonds and that is spending that cannot be cut. That is a lot of spending, and we would not have such a serious deficit if we did not have to pay out that $4 billion.
So the solution to the budget shortfall has to include all the tools in our toolbox. First, we have to close tax loopholes. We need to restore the vehicle license fee (which the Governor calls a tax). Then we need an oil-severance tax – we are the only state in the country that drills oil that doesn’t have one! And we have to stop being a “donor state” to the federal government. We send over $50 billion to the feds that we do not get back for programs or services.
Finally, we need tax increases on corporate profits and the wealthy. Here is why: tax money is used to build the very things that ensure our prosperity. It is used to build the economy that enables some of us to become very wealthy and stay that way. Our tax-supported legal system enables and protects businesses and investors. Our tax-supported economic infrastructure defines and regulates the financial system under which investment occurs to build these businesses. Taxes built the physical infrastructure (like schools and roads) that helps us all in ways that everyone understands. But taxes also built and support the legal and economic infrastructure that is crucial for economic growth as well. The Anderson Forecast states that the two keys to a successful economy are infrastructure and education, and that is tax dollars. Entrepreneurs and businesses look for those qualities when determining where to set up shop.
In other words, the wealthy and businesses have benefitted the most from government investment and they have the most money as a result, so they should be contributing the most. And middle-class taxpayers are currently being hammered by a different kind of oil tax — huge increases in gas prices at the pump while the oil companies are recording the most profits by any companies ever. And because of previous spending cuts, the middle class, and particularly our students, are experiencing increases in fees such as college tuition while the benefits of the taxes they pay are going disproportionately to the wealthy.
Of course taxing the very wealthy and corporations might very well take some money out of the Cayman Islands’ or other tax-haven economies, bringing it back to California. (One building in the Cayman Islands is the business address of more than a thousand American corporations.) And increasing taxes on the wealthiest might even cause someone to have to buy a slightly smaller yacht or private jet in order to be used to pay a few hundred teachers or firefighters.
The prosperity we have experienced comes from public investment and that comes from taxes. Cutting spending is like eating our seed corn. It is taxes that drive the economy. Spending cuts hurt us. Borrowing hurts us. It is time for people and companies that are getting wealthy off of our public investment to pay us back.