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Bad economics for N.C.

By Alexandra Sirota
Special to the Observer

At the University of Chicago, where economist Milton Friedman taught (and where I studied), there was an expression so often used it became the slogan of T-shirts sold on campus. It went: “That’s all well and good in practice, but does it work in theory?”

Such commitment to the abstract world of theory appears to have also taken hold in North Carolina. The problem is the theories are spawning public policies that in practice will lead to truly harmful impacts on North Carolinians and the economy.

The argument goes that the private sector must be unfettered by taxes and regulation in order to create jobs and spur the economy. This, the argument continues, will not only improve North Carolina’s competitiveness but usher in greater economic outcomes for N.C. families and address the heretofore intractable problems of persistent and high poverty. In practice, economic research and just a cursory look at the impact of similar past policies show that these theories are not only likely to fail, but will do more harm.

It is this flawed argument that has motivated the dismantling of the unemployment insurance system and driven income tax cut proposals for the wealthiest taxpayers and profitable corporations. In both cases, not only does the overwhelming empirical evidence show these policy approaches haven’t delivered, but common sense and business leaders’ own statements show that far more complex factors need to be addressed to spur job creation.

The idea of reducing taxes paid by employers as a way to encourage these businesses to add jobs doesn’t make a whole lot of sense when you look at the numbers. Unemployment insurance taxes represent just 0.1 percent of total business costs while total state and local taxes are about 2 percent of business costs. When studies have found that cutting costs could cause modest growth potential for businesses, it would require upwards of a 10 percent reduction in total business costs to achieve that growth potential. And that only seems to deliver some results if you hold everything else constant. In practice that is difficult to do.

Reducing unemployment insurance contributions means reducing the ability of the system to support workers when they have lost their job. As a result of legislation passed early in the session, unemployment insurance will be two-thirds less effective at stabilizing the economy.

We will start to seeing the results immediately. The June 30th loss of federal jobless benefits will lead to a potential decline of $1.2 billion in economic activity through the end of the year. As jobless workers see their modest support to meet basic needs end abruptly or get reduced such that it is insufficient to meet their family’s needs, bills won’t get paid, debt will racke up and families will go without. When families struggle so too will business.

Thus too with the proposed changes to the corporate income tax – which many assume will drive businesses to hire – the reality is not likely to deliver on expectations. A corporate income tax cut must be paid for either with increasing taxes elsewhere or cutting spending on the schools that educate our future workforce or the infrastructure that supports business development. Given too that nearly 90 percent of the tax cut will go to shareholders outside of the state, the benefits to North Carolina are even less likely to materialize. And these income tax cuts largely benefit the wealthiest taxpayers, growing income inequality and putting at risk our state’s strong middle class.

Rather than look to failed theories, it would make sense for our policymakers to pursue what has worked in practice. North Carolina is rich with examples from our history.

It has worked to expand access to and the quality of public education. From early childhood to post-secondary, the state’s investments in education have improved lives considerably. It has also boosted our economy, created better health outcomes and positioned the state to be competitive globally. Establishing effective public-private partnerships, such as the Research Triangle Park and the finance industry in Charlotte and connections to research at public universities, has not only attracted businesses but increased the level of innovation and entrepreneurship in these communities.

Time and again, when business leaders are surveyed about what makes their business thrive it is these kinds of public investments (made possible through taxes) that rank higher than the tax rate itself.

The simplistic theories of trickle-down economics may seem appealing at first glance. But as we know here in North Carolina, it is much better to be than to seem.

Alexandra Sirota is director of the N.C. Budget and Tax Center.
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