Tag Archives: earnings tax

Experimenting with an earnings tax

Imagine a 2 period wealth maximization game. In period one, consumers receive unitless  endowment N and can choose to use that endowment to consume, invest (at some interest rate i) or do nothing. In period 2, consumers choose to consume or do nothing, payoffs are made, and the game ends. We can introduce an exogenous income tax on investments, and an exogenous sales tax on consumption and utilize Monte Carlo simulations to do comparative analysis on different regime states to analyze the hypothesis that taxation of income retards stimulative investment and that a sales tax mechanism is preferable to maximize economic growth.

The basic design seems sound to me. . But flaws are not always obvious. Thoughts?

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Some data on the earning tax

I was curious about the debate over the earnings tax in St. Louis and Kansas City, so I did what people naturally do when they don’t know things; I looked at the data. More particularly, I looked at census data on metropolitican statistical areas (MSA) for the change in population between 2008 and 2009 and matched it to this data set on American cities with an earnings tax of some kind. I didn’t have time to do anything sophisticated here, but the cities with earnings taxes seem to be at the lower end of population growth across the country. I coded for all the MSAs listed in the TaxFoundation data, excluding the larger multi-state MSAs like NYC or DC that have differing income tax restrictions depending on where you are. I also selected all the MSAs listed in states that have some earnings tax wherever you live.

There ended up being 57 MSAs listed in the population data that I identified as having earning taxes. They range from Flint, Michigan with a  -1.12% growth rate in 2008-2009, to Denver, Colorado, who experienced a 2.1% growth rate over the same period. Of these 57 MSAs, 45 are in the bottom half of cities ranked by population grown (the average MSA  in 2008-2009 had a population growth rate of roughly .87%) and 9 were in the upper 50%.

This of course is not the whole story. The data only gives us an incomplete glimpse into what’s happening at a specific moment in time and doesn’t give us any information about trends. I would assume that young cities with high rates of growth might implement an earnings tax but that the tipping point isn’t reached for a while, but without controlling for how long each of these earning taxes have been in place I can’t make that conclusion. There are also many other idiosyncratic determinants of population growth that the data doesn’t allow me to engage. There is also a substantial risk that my data selection is incomplete. Regardless, it is suggestive that close to 90% of identified MSAs with earnings taxes are below the average MSA population growth rate; it suggests that earnings taxes has a dampening if not negative effect on population growth, particularly in cities hit hard by the recession.

If I have time this week I’ll try to expand on this, but no promises. Here is Dr. Haslag from the Show-Me Institute with a more sophisticated analysis and I quote in part:

How much of this phenomenon can actually be attributed to the city earnings tax? Saint Louis and Kansas City are hardly the only earnings-tax-enforcing cities that are losing economic power from their base state. Cities such as Philadelphia, Pennsylvania, and Cincinnati have also seen losses in employment to neighboring states. In fact, from 1998 to 2006, every MSA that includes counties from two or more states, in which one enforces a city income tax, has seen a decline in the ratio of employment within the area subject to an earnings tax relative to total MSA employment, even while similar multistate MSAs without earning taxes have experienced, on average, a modest increase in that ratio during the same period

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