The North Carolina Senate’s recently proposed $1 billion tax cut plan was met with howls of protest from the Left. According to the left-wing NC Policy Watch, such tax cuts will cause “underfunding of needed public services in communities across the state,” including classrooms, early learning programs and job retraining programs.
Liberals claim lower tax rates will not generate sufficient revenue for North Carolina to develop its human capital to help drive future economic growth.
But what if it actually were the case that it is higher taxes and liberal welfare state policies advocated by the Left that erode human capital?
From an economic standpoint, there is little disagreement that the level of human capital in society plays a decisive role in its level of prosperity. But even massive investments in human capital will fail if society promotes the wrong incentive structure for people to utilize that vital resource.
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As noted economist Thomas Sowell wrote, “Maximum utilization and dissemination of existing human capital is achieved by incentives that reward those who have it. This induces existing possessors of human capital to use it more extensively for the rewards and – more important in the long run – encourages others to acquire more human capital in order to reap similar rewards.”
When human capital is unleashed, society’s ability to produce a greater abundance of wealth grows. But for people to acquire and use human capital, they must expect that the benefits will outweigh the sacrifices.
Sowell continues: “Redistributional policies, on the other hand, reduce incentives to use human capital, and especially to engage in the difficult task of acquiring it.”
Sadly, far too many politicians fail to observe this last point. Instead, they narrowly focus on ramping up “investments” in government-run education, oblivious to the fact that the welfare state policies they also promote work to stifle any potential gains from the increased human capital. Spending billions of taxpayer dollars on education and job-training programs becomes a relatively pointless exercise.
Why go to the effort of acquiring human capital and figuring how to best utilize it to improve your standard of living, when government taxes take between a third to a half of the rewards of your effort? Why sacrifice so much time and energy when it requires no human capital to collect government welfare benefits?
People respond predictably to incentives. When the successful acquisition and utilization of human capital is punished, there will be less of it. Conversely, when people are rewarded without having to acquire and utilize human capital, more people will choose that path. Our economy’s output suffers, our standard of living falls.
Recent tax cuts and tax-cut proposals show that at least some legislators recognize these realities. The discussion on “investments” in human capital only looks at half the picture. Many of the resources devoted to making human capital more widely available will be for naught if politicians fail to also look at the incentive structures facing those making decisions about acquiring and utilizing their human capital.
Brian Balfour is Executive Vice President of the Civitas Institute in Raleigh (nccivitas.org).