Testimony: Missouri’s Taxing Environment: Some Ideas For Reform
While a state’s tax policy is not the sole determinant of a state (or a nation’s) economic performance, it can and does affect economic performance. Taxes affect the decisions that people make about spending and investing their money. In addition, tax rates affect where people work and employ their capital. The factors of production — the sources of income — are mobile. Once that is recognized, it is easier to understand how tax rates affect economic growth.
Taxes on capital are considered to be among the most economically harmful. People’s savings fund projects all over the country — indeed, all over the world — because loans can cross political boundaries with electronic ease. Taxes on capital pose a problem for governments because capital is so movable. For a given return to a project, the aftertax return is highest wherever the tax rate is the lowest. Accordingly, if a company or a person wants to avoid being taxed on income, typically they just need to move the capital out of the taxing jurisdiction.
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