Sunday, July 20, 2008

Incentives Matter

Incentives matter and so do disincentives. Few things provide as significant a disincentive as relatively high tax rates and high costs of doing business. People and economic activity tend to flow to places with fewer disincentives.

Bulgaria has recently instituted a flat 10% tax rate for both individuals and businesses. The results are pretty dramatic. (From Stephen Moore writing in OpinionJournal.com)

Ms. Kostidinova... tells me: "The situation was getting desperate in Bulgaria. We were losing our population and our best workers. They were leaving for Western Europe to find jobs and the No.1 form of foreign capital came from remittances." All that began to change when the corporate tax was cut to 10% in 2007 and the personal income tax to 10% in January of this year. "We told the politicians that it was symbolically important for Bulgaria to have the lowest flat tax. We were surrounded by flat tax countries, we wanted to be the nation most friendly to capital and business."

Result: A country that ten years ago had a 12% unemployment rate now has a 6% jobless rate. Instead of people leaving Bulgaria to find jobs, "now it is the reverse. Western Europeans now come to Bulgaria for jobs. We're gaining population now," she says.

Closer to home, the California State Automobile association is moving its call center operations to Arizona and Oklahoma.

The California State Automobile Association has decided to close its call centers in California, including one in the East Bay, and shift hundreds of jobs to CSAA call centers in other states...

The departure of the call centers is tied to what over the last decade has become an economic bogeyman for a number of businesses with major operations in California: the state's chilly business climate.

"It costs more to do business in California than in other states," said Cynthia Harris, a spokeswoman for CSAA. "Moving our call center operations to states outside of California gives us an opportunity to reduce our operating costs."

As an aside, I wasn't aware that there was a beach between Arizona and California.

The jobs, about 900 in all, will be sent offshore to Arizona and Oklahoma where wages are cheaper.

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