I ran across blog
post on the proposed sales tax increase in Arizona that
referenced an economic analysis done by Dr. Alberta H. Charney from the Eller
Management at UofA. Since I like to read what other economists write, especially
about Arizona, I thought I'd have a look.
I've read both the article and the referenced economic
impact study and there
are problems in both.
Specifically, both the article and the study make
claims that are at odds with recent data.
First, from a macroeconomic model standpoint, it assumes that both government
spending and taxes have a multiplier effect on the economy. That is, an increase
(or decrease) results in an increase (or decrease) in other transactions that
add to (or subtract from) the overall economic effect. From the study:
The cumulative effect of these purchases is referred to as the multiplier
effect and the additional purchases and economic activity created as a result
of the initial increased demand is referred to as the economic impact. The
reverse of all these effects occurs if there is a decrease in the demand for
the output of an industry.
Given the numbers
of jobs they cite, their model apparently assumes that the government spending
multiplier is greater than the tax multiplier. Their model shows that taxing
away $918M costs 7,383 private sector jobs while reducing government expenditures
by $867.6M costs 14,092 mostly public sector jobs. That means their model assumes
that public sector spending is about twice as effective as private sector spending
at creating (or saving) jobs.
While that's what their
it's not what economists have found when they
the multiplier. What
they found was that the government spending multiplier
was about 0.7 while the tax multiplier was between 1.3 and 3.0. In short a
dollar of government spending results in a net of 70 cents of economic activity
while that same dollar received as a tax cut results in $1.30 to $3 in net
economic activity. (The flip side of a tax cut would be a tax increase that
on net decreases economic activity by $1.30 to $3.)
Even adding in the "lost" federal funds won't make up for the private sector
loss if we use measured multipliers rather than their model assumptions.
The study has some reasons that government spending will result in more jobs
than letting people spend their own money.
First, the government is a service provider and, generally, services employ
more persons per $1 million of expenditures than do non-services providers...
Since 80% or more of the economy is services, this won't make that much difference.
Retail jobs are service jobs as are jobs in wholesale and distribution.
Second, from the taxation side, a portion of the sales tax is paid by out-of-state
visitors, so only slightly under 90 percent of the tax is paid by Arizona residents.
So we will get to outsource about 10% of the tax. That raises the cost of
visiting Arizona relative to other places which will decrease the number of
visitors. While we'll get the benefit of taxing those that still come, we'll
lose all of the economic activity of those that will now stay away due to the
For most sales, only the retail margin (the difference between
final sale price and the wholesale cost of the item) is retained in the state.
Retail margins can be as low as 27 percent of the total sales price for purchases
made at general merchandise stores.
Basically this is saying that only a portion of the tax will be paid out of
the retail margin. The rest will be passed back to the out of state wholesaler
or distributor. I don't know how you make this work. I don't know any wholesaler
or distributor that will sell me stuff at a lower price simply because the
state of Arizona has a higher sales tax rate. As a retailer, that means all
of the tax will come out of either my margin or a higher price charged to Arizona
Overall I find the model's analysis and Dr. Charney's arguments unconvincing.
The multipliers their model uses are out of sync
with our experience. The government isn't that much more service job intensive
than the private sector, and I don't see a mechanism for outsourcing
the taxes to other states.
Best I can tell, just based on the multipliers, this tax increase will cost
the private sector at least twice as many jobs as it will save in the public
Labels: macroeconomics, microeconomics