The Earnings Tax, Marginal Utility, and Our Move
A few articles and blogs have recently criticized the Show-Me Institute for moving to our lovely new location in the Central West End. (One article erroneously cites another blog as having broken the news, when it was actually David Stokes here at Show-Me Daily who reported it first. We’ve also been planning the move for the better part of a year, and it wasn’t a secret.)
Collectively, these pieces suggest that there is some irony in the fact that the Show-Me Institute has long pointed out that the earnings tax creates marginal disincentives for economic growth and location within city boundaries, and yet we moved into the city anyway.
There is a useful economics concept at work here: marginalism. A 1-percent earnings tax is not enough enough of a disincentive to determine the location of all businesses or residents, but all disincentives are marginal to varying degrees. Some number of people at the margin, who would otherwise be near an equilibrium point between the positive and negative aspects of living in the city, will find that the earnings tax tips the balance so that the negatives outweigh the positives, and they move away — or never move to the city at all, despite having considered it as a possibility. For others, the positives will continue to outweigh the negatives. This is something we’ve discussed before here at Show-Me Daily. Work published by the Show-Me Institute has always been careful to note that the earnings tax is only one factor among many in the locational decisions of St. Louis–area individuals and businesses. It serves as a disincentive for nearly everybody, but becomes an actual deterrent only for some.
Taxes on income and production are counterproductive. They diminish the incentive to work (even if only slightly) and encourage business owners to find alternatives for their labor costs, like increasing mechanization. The earnings tax, like an income tax, establishes a marginal incentive for businesses and individuals to find ways around this higher cost for labor and wages in the city, whether that entails moving to a suburb, investing in new machinery, cutting corners in production or service, etc. This all distorts the market to varying degrees. Specific types of taxes on property, on the other hand, are much less distortionary. They encourage development of land and maximization of the property value, bringing (again, marginal) new economic growth to the city.
The earnings tax does not keep everyone out of the city, but it does keep away some. Why this is true is one of the most important insights of the marginal revolution. At any rate, incentives are constantly in flux, and equilibrium points between them change frequently. Right now, it makes sense for the Show-Me Institute to work out of the city. But if the earnings tax hadn’t been in place, who knows? The Show-Me Institute might have moved here five years ago.