Sunday, December 6, 2009

Why it is wrong to tax business services

There's a lot of talk about taxes in preparation for the next legislative session. Given the nearly $3 billion deficit on top of last year's bigger budget cuts, this isn't surprising. But this should take some serious thinking. Taxes actually can have a positive or a negative effect on an economic recovery.

I can think of two positive effects. One would be taxing things that aren't good for us. These are called sin taxes and raising their price actually decreases their sales. Cigarettes are a good example. A 50 cent per tax would cut consumption but still raise money.

The other positive effect is the impact of a tax on net spending. If you put a tax on wealth where let's say 2/3 of it are spent and the other 1/3 saved, and then used the money for funding general assistance to the poor, the economy would have a net boost in spending and we would be better off.

There are lots of taxes that would have a very negative effect on the recovery. One would be a sales tax on services like lawyers, accountants and architects. The logic is that these services are retail sales like buying clothes are a car.

This is doubly wrong. Most business services simply are not retail sales. They are sales from one business to another. A small software company in Redmond would likely by all three business services mentioned above from other small businesses. This is double taxation and provides a disincentive to go out of the firm and purchase these services. Double taxation distorts economic decision-making and is simply unfair.

The biggest wrong is the impact of a nearly 10% tax on the competitiveness of the business services. The state input output model shows that over half of business services are exported out of the state. Since we would be the only state taxing them we would have a 10% higher cost than any other state or country. One hell of a disincentive. Seattle's biggest industry is business services and it is one of highest paid sectors of the economy. Bad idea.

1 comment:

  1. Neil Advani

    Amazing how simple it can be to communicate with people and have them understand a certain topic, you made my day.