In the midst of tax reform discussions, the MacIver Institute makes an interesting contribution:

The idea that the government can help stimulate economic growth and create new jobs sounds like a productive idea on the surface. Using taxpayer funds to invest in companies that create jobs is a good thing, right?

Not so much, according to the data compiled by the John K. MacIver Institute for Public Policy. Specific tax credits, subsidies, grants and other incentives only help the few. They may even harm economic development – the exact opposite of what the incentives strive for. …

Matt Mitchell, a Senior Fellow at the Mercatus Center at George Mason University, looked to see if government incentives were all they cracked up to be. He discovered that states with more incentives per capita actually have slower real economic growth.

“If local subsidies worked as advertised, we’d expect to see greater economic growth in those states that give away more subsidies. But simple analysis of [Louise] Story’s data suggests that, if anything, there is a negative relationship between per capita subsidies and economic growth,” Mitchell wrote for Mercatus Center.

“I also ran a series of econometric tests, sometimes controlling for other factors (regional effects, the initial size of state economies, and economic freedom) and sometimes not. In every test I ran, per capita subsidies were negatively associated with state economic growth and often the relationship was statistically significant (I should note that the Mercatus measure of economic freedom was always positively and statistically significantly related to growth).”

Many studies have shown the economic value of having a lower tax burden. Businesses and workers pay less to the government, so they have more to spend and invest in the economy. That, however, is the argument for lower taxes in general.

Tax credits, instead, create an unfair playing field. Only businesses that qualify for the tax credit are rewarded, which may give them an advantage over other firms in the market.

Scott Drenkard, an economist with the Tax Foundation, testified late last year in front of the Indiana Commission on State Tax and Financing Policy about tax policy.

“Even though credits lower the tax burden of a particular tax filer, in most cases we see them as poor tax policy,” Drenkard told the commission. “Some businesses might get the benefit of a preference, but other businesses that aren’t engaging in whatever activity is deemed “favorable” are stuck paying the full sticker rate of the tax.”

Typically these credits favor large firms with political connections. …

Boeing plans to begin production on their new 777X plane in 2017, and more than a dozen states rushed to offer incentives to the plane manufacturer, according to the Journal Sentinel. Wisconsin is one of the states that planned to make an offer.

As stated above, Washington already approved $9 billion in tax credits. But, Boeing still considered leaving the state until the labor union also approved a new contract that Boeing agreed to.

Experts argue that offering these massive incentives are actually an admission of failure. A state with a great business climate should be able to attract business without the need for extra incentives. If tax credits or other incentives are needed, the state is admitting it needs to work on making the climate better for all businesses.

A commonly used phrase among economists is, “the best economic development program is to not need one.”

A PEW study argues that such incentives could also drive other firms out of the market because of higher costs. …

The key to a productive economy is for producers and consumers to find an equilibrium where supply and demand meet each other at a certain price and quantity. When businesses sell a product or service in a fair market that is typically what happens. …

Government incentives, however, change the environment between producers and consumers. Instead of providing a product or service that consumers demand, businesses will provide whatever they are incentivized to provide. In short, a company will expend resources to gain a government incentive, rather than produce what the consumer actually wants.

This is known as “rent seeking.” Rent seeking is socially wasteful and in the end will hurt consumers with higher prices and less competition. …

While it may seem like a good idea to provide incentives to businesses in a state, the data shows that it is anything but. The government picks winners and losers, creates an unstable economy, and businesses will eventually make whatever gets them the best incentive from the government.

It is simple. Low (or non-existent) taxes that are more equitable across the board and fewer “winners and losers” incentives will lead to greater prosperity within a state. After all, the best economic development program is to not need one.

Leaving aside for the moment the fact that business climate, as readers know, is based on additional issues besides taxes, improving the business tax climate (in which Wisconsin ranks an abysmal 43rd according to the Tax Foundation) requires a few things.

The corporate income tax, which applies to subchapter-C corporations, needs to be eliminated, as does the personal property tax. The only property taxes businesses should pay should be for building-related services (police, fire, EMS, etc.), not for the buildings’ contents. The good news is that neither of those taxes contributes much to state finances, so eliminating them would have a relatively small impact.

The tax that needs reducing is the personal income tax, which is 10th highest in the U.S. Owners of sole proprietorships, partnerships and subchapter-S corporations don’t pay corporate income tax; they pay personal income tax on their companies’ profits. This year, income over $14,540 for a married couple filing jointly is taxed at 5.84 percent. That is a higher rate than Illinois’ income tax rate for any amount of income, even after Illinois’ 67-percent income tax increase.

In the case of the two previous paragraphs, the incorrect response is to reduce taxes by increasing other taxes. The income tax and the sales tax were created and, in the latter case, increased twice to provide property tax relief. Guess what the most unpopular tax still is? The property tax. Raising taxes to reduce another tax only increases taxes.