Tax Loophole Analysis Sinks in Its Own Metaphor

Initially, when I saw the title of this piece from the Missouri Budget Project, “Missouri should close tax loopholes,” I expected to agree with the article’s arguments. After all, tax credits and loopholes are inefficient and counterproductive for economic growth. But the piece goes on to call for increasing state revenue as the solution to Missouri’s budget issues.

The author emphasizes the problems with Missouri’s budget by repeatedly comparing it to a “sinking ship.” She calls for tax credit transparency, but taxpayers would benefit even more from tax credit limits or reductions, as the governor has suggested.

The author also suggests raising taxes. At any point, but especially during a recession, taxes impinge on further economic growth because an increase in the tax burden decreases compensation for additional time spent working. The decision to work or not work is a marginal trade-off; the lower per-hour compensation makes other activities — like leisure or spending time with family — more appealing. Economists have shown that economic growth occurs when production increases, but taxes decrease the incentive to work and save.  A recent study released by the Show-Me Institute demonstrates this inverse relationship with taxes and economic growth. Spending cuts are better for Missouri’s overall fiscal health than tax increases because they promote growth and allow money that would have gone toward government spending to instead flow toward generally more efficient market uses.

The 2011 budget relies on $7.22 billion in tax revenue, which is lower than the $8 billion collected before the recession, in fiscal year 2008, but still higher than the $6.97 collected in fiscal year 2010. Within that budget is room to pay for the vital services the author calls for, like schools, roads and health care for the elderly. It is a matter of prioritizing and “rearranging the deck chairs.” If tax credits are not the most efficient expenditure of resources, as the higher education system is currently contending, as the recent audit suggests, and as Show-Me Institute scholars have repeatedly pointed out, then it makes sense for Missouri to place more stringent limits on tax credits. In any case, Missouri’s present and future economy would benefit the most from lower taxation and spending rates, which would promote future growth and higher living standards for the state’s residents.