Tax Incentives Are Not Necessary for Economic Development: An Example
I spend a lot of time arguing against strategies for economic development that have more costs than benefits. Something that I have been meaning to do is highlight examples of economic development occurring successfully in the absence of tax credits.
After reading my editorial about tax credits that ran yesterday in the Springfield News-Leader, a software entrepreneur based in Springfield emailed me. He wrote the following, which I particularly like:
I have directly created 320 new jobs over a 27 year period and none of these jobs were created because of tax credits. With or without tax credits we would still have created the jobs. The jobs were created because of the much larger business opportunity and return realized and expected, not because of tax credits.
If the state and local government facilitated a tax environment that was low and broadly based (i.e., didn’t favor certain parties over others), then more businesses would be able to achieve this same kind of success. As a positive consequence of such policy, businesses wouldn’t need to seek the favor of the government because they would be successful and viable on their own merits, not because they were propped up by government incentives.
There are several reasons why the government can’t identify business opportunities and future successes as reliably as the unrestricted free market. In particular, the government is slow to react to changes in the economic environment because it is so bogged down in bureaucracy. Additionally, the government is influenced by special interests that have an incentive to maintain the status quo and to tilt the playing field in their favor. Plus, the government does not have special access to perfect information. Just as government officials do not know the socially optimal mix of any set of products and services, they do not have special predictive power.
Examples like this demonstrate that incentives like tax credits are not a necessary criterion for economic development. Quite the contrary — true economic development occurs independent of subsidy.