Take Home Assignment #2

Answer both questions.  Each answer should be about 500 words.

1. Several of the assigned short articles on economic development in the syllabus discuss recent state efforts to lure businesses with tax breaks and other incentives. Discuss some of these.  Does research by Lynch, Bartik and others suggest Incentives can be cost-effective means of promoting growth and job creation?  What do meta-studies find about whether tax cuts spur state and local economic development?   Bartik estimates that over the long term, state spending on economic development incentives returns $0.5 on every $1 in state spending/lost revenue.  What are better uses of state funds with much higher returns per $1 spent?

In recent years, numerous states have employed economic development incentives, such as tax breaks and other financial perks, to attract businesses and foster growth. Research by scholars like Lynch and Bartik delves into the effectiveness of these incentives in promoting economic development and job creation. While incentives may initially seem like an attractive strategy, the evidence suggests a more nuanced view. Lynch’s work, for instance, sheds light on the limited success of tax incentives in creating sustained economic growth. These incentives often result in a race-to-the-bottom scenario, where states compete by offering more significant tax breaks, eroding the potential benefits. Bartik’s estimate that state spending on economic development incentives returns only $0.5 on every $1 in state spending or lost revenue indicates a less-than-optimal return on investment. Meta-studies on the subject further underline the complexities surrounding the effectiveness of tax cuts in stimulating state and local economic development. While some studies suggest a positive correlation, others argue that the impact is minimal or even negative. The mixed findings highlight the need for a more comprehensive approach to economic development beyond relying solely on incentives. Better uses of state funds with higher returns per $1 spent may include investing in education and workforce development. A well-educated and skilled workforce is a magnet for businesses, creating a sustainable foundation for long-term economic growth. Additionally, infrastructure development, such as transportation and technology, can enhance a state’s competitiveness and attract businesses without resorting to short-term incentives. In conclusion, while economic development incentives may play a role in attracting businesses, research indicates that their long-term effectiveness is questionable. States would be wise to consider alternative investments that yield higher returns per dollar spent, such as education and infrastructure development.

2. To make their tax systems more progressive, a number of states have proposed raising income tax rates on high earners. Critics of these proposals argue that this will drive high earners to move to low tax states.  Based on the readings by Cristobal Young and by Robert Tannenwald (on blackboard), what does the data and evidence show?  Do high earners move to avoid taxes?  Be detailed and cite relevant data.

The debate over raising income tax rates on high earners to create more progressive tax systems has prompted concerns about the potential migration of wealthy individuals to lower-tax states. The readings by Cristobal Young and Robert Tannenwald provide insights into this issue, examining whether high earners indeed move to avoid taxes. Cristobal Young’s research challenges the conventional wisdom that high earners are highly mobile in response to tax increases. Analyzing data from New Jersey, a state that increased taxes on high earners, Young found limited evidence of tax-induced migration. High-income individuals appeared to be relatively insensitive to tax changes, with the majority choosing to stay put. Robert Tannenwald’s analysis, focusing on state-to-state migration patterns, also challenges the notion that tax considerations are the primary driver for high-income individuals. While some migration occurs, it is influenced by various factors, including job opportunities, family considerations, and lifestyle preferences, rather than just tax rates. The data and evidence, therefore, suggest that the impact of tax increases on high earners’ migration is more nuanced than critics often claim. High earners are not solely motivated by tax considerations when deciding where to reside. Other factors, such as the quality of public services, cultural amenities, and overall quality of life, play significant roles in their decisions. In conclusion, while critics argue that tax increases on high earners will lead to a mass exodus, the research by Young and Tannenwald challenges this narrative. The data indicate that high earners are not as mobile in response to tax changes as commonly believed, and decisions are influenced by a myriad of factors beyond tax rates.