David Cay Johnson and taxed by the boss
Reuters brings us a post from David Cay Johnson on a less well known funding mechanism from state coffers to private businesses. Granted there are a lot of others as well. See this post by Kenneth Thomas (link repaired) on how competition between government is different than between private businesses:
Across the United States more than 2,700 companies are collecting state income taxes from hundreds of thousands of workers – and are keeping the money with the states’ approval, says an eye-opening report published on Thursday.
The report from Good Jobs First, a nonprofit taxpayer watchdog organization funded by Ford, Surdna and other major foundations, identifies 16 states that let companies divert some or all of the state income taxes deducted from workers’ paychecks. None of the states requires notifying the workers, whose withholdings are treated as taxes they paid.
General Electric, Goldman Sachs, Procter & Gamble, Chrysler, Ford, General Motors and AMC Theatres enjoy deals to keep state taxes deducted from their workers’ paychecks, the report shows. Foreign companies also enjoy such arrangements, including Electrolux, Nissan, Toyota and a host of Canadian, Japanese and European banks, Good Jobs First says.
Why do state governments do this? Public records show that large companies often pay little or no state income tax in states where they have large operations, as this column has documented. Some companies get discounts on property, sales and other taxes. So how to provide even more subsidies without writing a check? Simple. Let corporations keep the state income taxes deducted from their workers’ paychecks for up to 25 years.
The snappier You tube version is here.
Not exactly news, but something that needs transparency.
The link to the Kenneth Thomas piece doesn’t seem to work.
The link to the Kenneth Thomas piece doesn’t seem to work.
This problem is a standard prisoners’ dilemma. Every state and locality would be better off if none of them pulled this garbage, but each individually is better off if they do.
The fact that Mankiw can’t grasp this should get him booted out of any serious economic circles. In fact, MOST conservative positions are some sort of variant of trying to argue that we would be better off defecting in a prisoners’ dilemma. In the short term, they may even be “right” and have some lame, cherry-picked data to support it. But in the medium run, they are virtually always wrong, as our counter-parties will defect in return.
The only possible result of the job-poaching game that states, localities, and nations play against each other is a series of banana republics. You can’t win a race to the bottom.
The States are bad enough–we get to vote on whether to continue the race to the bottom here in Wisconsin in a couple of weeks. My guess is that Walker will carry the day despite the unofficial policy of “Wisconsin–just like Mississippi only colder”. When it is applied internationally there really is no hope.
Chad, I completely agree. That’s a great way of describing many Republican policies (though some Republicans do see the problems involved with incentives, contra Mankiw).
Mankiw and Republicans are wrong in that respect as well, because they consistently ignore whichever of the income and the substitution effect that contradicts their opinion.
For example, I earn about $25/h take home, or $4500 per month. If the Bush cuts were to expire, that would drop to about $23/h and $4150/month, respectively. Now assuming I could dial in my hours and get paid proportionately (I can’t, nor can most people….this only makes my point stronger and Mankiw’s weaker), would I work more or work less in this situation?
The answer is not obvious. Yes, the substitution effect, which Mankiw is so aware of in this context, indicates that at the margin I should work less because I am earning less per hour, and should be more likely to subsititute work for liesure. But conservatives completely ignore the income effect in this case. I now have $350/month less to spend, which is about a third of my discretionary budget. That’s a big blow to my lifestyle. If anything, I would work MORE if I could, because I’d need to make up at least some of that money. Of course, other people might lean the other way, but for most of us, we either can’t change or wouldn’t change much even if we could. Substitution and income effects largely offset.
The same holds true for my wife, who is currently stay-at-home but will eventuallly move back into the job market. Would a hypothetical disappearance of the Bush cuts make her more or less likely to jump back in? If anything, more likely, as to make up for my lost income. Yes, she would earn a $0.50 or so less an hour, de-motivating her, but my instinct is that the income effect would trump the subsitution effect here as well.
Income effects also affect retirement. Note how early most corporate CEO’s retire, for example. Most seem to be in their late fifties or early sixties. This is because they have far more than they will ever spend, and want to ride out their golden years with their family. It is almost certain that we get LESS work out of these people over their lifetimes because of how much we pay them.
The same is true of us small fries as well. The more my pay goes up, the sooner I will retire. That will likely more than offset any extra “incentive” I have to work harder upon receiving the raise.