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1426 posts

Re: Caliboredom 101

The issue with raising taxes during a downturn is that, in classic economic theory, the marginal tax rate is inversely proportional to the long term growth potential. Therefore, if businesses are already experiencing weak or even negative growth due to the downturn, burdening them with higher taxes is going to make it that much harder for them to become profitable again. However, this classic economic theory does leave some things out.

When I previously suggested that California needed to improve its fiscal revenue policy that was only part of the story. What they really need is more bang for their fiscal buck. Investing in infrastructure can clearly attract business...the idea that businesses will always run from higher tax rates is simply not true. My job is working with investments in emerging markets, many of whom are considered third world countries, and one of the biggest difficulties they face in attracting businesses is their lack of infrastructure (alongside a secure legal framework). Some industries only want the cheapest labor, sure, but many are willing to pay a bit more in taxes if that means that their risk level (and therefore cost of capital) goes down. California was and still is, to some degree, a veritable garden of "knowledge capital", a place where businesses and the communities that were built around them could thrive. But they've let their infrastructure go to shit and now they have a hard time selling their wares over those of your average third world country.

Sorry, that last paragraph is kind of all over the place, but what it comes down to is that California can raise taxes in the short term if it has a real plan to effectively reinvest that money to build infrastructure, to improve education and to get an NFL team back into LA. Er, maybe scratch that bit about education. *rim shot* No, but as Cybele suggests and as I here tend to agree, the sad reality is that California wouldn't spend their money on the future. They would spend it on the quick political fix and in the end they would just dig a bigger hole than the one their already in.

So that's both the theoretical background (presented as a jumbled mess for your reading pleasure) and the harsh practical reality of California's fiscal situation. Feel free to apply it to many other portions of the United States as you see fit.

Jun 22, 2009, 23:49



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