John Hood writes today about the silly notion that tax rates don’t impact behavior.
After the North Carolina General Assembly enacted its tax-reform package last month, critics denied it would have a positive effect on the state’s economy. Among other arguments, they advanced the notion that tax rates don’t really influence the behavior of investors, entrepreneurs, workers, and consumers.
It’s not a very sensible notion. If tax rates don’t matter, why did so many families just shop for school supplies during North Carolina’s tax-free weekend? Why do special interests lobby so strenuously to secure and protect their favorite tax breaks? Why have past Democratic politicians enacted tax breaks and credits for such decisions as saving for college or investing in low-income housing?
You don’t have to agree with these tax policies to recognize that they are designed to influence behavior. A tax rate is a price. You incur that price if you make a decision that subjects more of your income to federal, state, or local taxation. Correspondingly, a tax cut reduces the price of earning wages, investing capital, or buying goods and services. To deny that taxes affect economic decisions is akin to denying that prices affect economic decisions. It is, in short, crackpot economics.
And speaking of ridiculous rhetoric from the Left, Dale Folwell, head of the North Carolina Division of Employment Security, addresses my pet peeve here.