(Note: On Nov. 13, 2006, Mackinac Center Legislative
Analyst Jack McHugh participated in a "Town Hall Meeting" sponsored by The
Center for Michigan. Below is the written text of McHugh’s speech, in which he
explained why it is important to replace the Single Business Tax with government spending reforms, rather than a new tax.)
I’m here to describe how it’s very possible to eliminate
the SBT and not replace a dime of the revenue. That’s what this conference
should really be about, by the way.
The government-centric conventional wisdom that prevails
near the capitol holds that we must replace the SBT, because it’s impossible to
cut $1.8 billion. This is a variant of the "tax cuts must be paid for" concept, which holds that since government is operating as efficiently as humanly possible right now, and since everything it does is equally vital, any revenue lost to a tax cut in one area must be made up with a tax increase someplace else.
Let me suggest that in a place where the unemployment rate
is approaching double the national average and population may be starting to
decline, "tax cuts must be paid for" not only is out of touch with the real
world, but reveals confusion about whether government exists to serve the
people, or vice versa. It also contributes to fuzzy thinking about business
You often hear the phrase, "Businesses don’t pay taxes,
they pass them on to customers in higher prices, or to labor in lower wages."
Actually, that misrepresents where the burden really falls.
If a firm could raise prices without hurting the bottom
line, it wouldn’t wait for a new tax to do so. If it’s selling to a national or
international market, none of the supply-demand equations change because of a
new state tax.
The same applies to labor. A firm subject to a new tax
can’t just take it out of wages. They were already paying as little as possible
to get the right mix of skill and dependability. If they could have paid less,
they would have done so.
Sometimes you hear that firms competing in a local market
all pay the same tax, so they can all raise prices and no one suffers. Not true.
I’ll use coffee shops to illustrate. Imagine a tax hike forces all the coffee
shops to raise the cappuccino grande price from $2.50 to three-bucks. It’s wrong
to assume that all customers will pay more. At $2.50 I might have bought five
cappuccinos a week. At three-bucks I went to Meijer’s and bought a thermos to
bring my own coffee to work.
Add up all the similar consumer responses and the result is
a deadweight loss in the earnings of every coffee shop in the state. They gain
nothing new from those willing to pay the higher price, and lose the earnings
from those who aren’t willing.
OK, so in the aggregate the real burden doesn’t fall on
consumers or labor. There’s only one place left to squeeze. Investors.
Entrepreneurs. The owners of the company. In my example, a tax hike makes every
coffee shop in the state just a little bit less profitable. The result will be
fewer coffee shops and coffee shop workers in the future than would have been
the case without the tax hike.
Business taxes are nothing less than a tax on investment.
As everyone knows, if you want less of something, you tax it more. If you want
more of it, you tax it less.
If you want more investment in Michigan, and more jobs, you
lower or eliminate business taxes. If you want less investment and fewer jobs,
you spend all your time talking about how to lower business taxes by a lesser
Sometimes we hear, "Shouldn’t businesses pay their fair
share?" That’s really a meaningless question, a silly one even. The right
question for this conference is, "Is it smarter to lower the disincentive to
invest in Michigan more, or to lower it less?" Unless you’re confused about
who’s the master and who’s the servant in the relationship between government
and the people, the answer should be obvious in a state with an economy that’s
sick in large part because it’s not seen as a good place to do business.
Some of those present today
have sought to minimize the role of taxes as a factor in Michigan’s economic
malaise. The Tax Foundation did a comprehensive literature review on this issue,
and found that, as they put it, "The economic literature over the past 50 years
has slowly cohered around" the hypothesis that businesses are responsive to the
lure of low-tax jurisdictions. They concluded that taxes matter a great deal to
business, and that, "Every change to a state’s system makes it . . . more or
less attractive to business."
Alright, now I’ll explain how to replace the SBT with
nothing . . .
(Note: McHugh then
presented a 14-point
proposal on how to accomplish that goal).
Jack McHugh is a legislative
analyst for the Mackinac Center for Public Policy, a research and educational
institute headquartered in Midland, Mich. Permission to reprint in whole or in
part is hereby granted, provided that the author and the Center are properly