How Many More Punches?

Doug French

When the economy slows and businesses fall on hard times, what do businesses do to survive? Raise the price of their goods or services and assume that remaining customers will pay more so the business can keep its doors open?

Not hardly.

Even the most successful businesses have ups and downs. To stay in business when times are tough, they cut back on expenses, delay plans for expansion and discontinue unprofitable ventures.

Even when times are good, successful businesses constantly look to cut costs and be more efficient. As Henry Hazlitt wrote in Economics in One Lesson, “Contrary to a popular impression, profits are achieved not by raising prices, but by introducing economies and efficiencies that cut costs of production. Therefore the largest profits go to the firms that have achieved the lowest costs of production. These expand at the expense of the inefficient firms with higher costs. It is thus that the consumer and the public are served.”

Governor Kenny Guinn and his fellow travelers, believing that “Nevada faces a serious budget problem,” contend that state government should raise its price (taxes) for the “services” state government provides. They don’t want to seriously cut expenses, like successful businesses do.

The difference between business and government is obvious. Customers pay for goods and services from private business voluntarily. Thus, businesses can’t arbitrarily raise prices and expect customers to remain customers. But government—being by definition a monopoly of force in a given geographic region—can raise its tax rate, and those living within its boundaries must hand over the demanded loot or face jail time. 

Profits are what tell entrepreneurs that a business is doing its job: providing good service or producing good products. When profits are down (or there are losses), it means that customers are spending their money somewhere else, or not at all, and that the business needs to improve its service or products and become more efficient to attract customers and keep its doors open.

Government does not receive these profit signals. Thus, government doesn’t know what to produce or, what services to provide or, how much to provide. What services government does provide, education for instance, it does inefficiently and poorly, to judge by its students’ test scores. Thus, governments, local, state and federal, always have budget problems. Then they look to the defenseless taxpayer to solve those problems.

For some small Nevada businesses, the proposed quarter-percent revenues tax will keep them from buying a new computer or other equipment that would make them more efficient and better serve the customer. For bigger firms, the tax paid could be an employee or two added to the payroll to expand the business. For a company like CitiBank, which has 2,300 employees working in its Las Vegas credit card servicing center, the $12-to-$14-million hit from Carson City means moving the center and those jobs to South Dakota or some other more business-hospitable state.  

Just how many punches are Nevada businesses expected to roll with? The tourism business is down, doctors can’t afford to pay for insurance, and homebuilders have construction-defect lawyers lurking around every corner. Even strippers have seven busybodies at the Clark County commission on their case, lowering their productivity. And now the ubiquitous grubby hand of Carson City reaches for more. For what—to shovel more money at the teacher union and bloated school administrations? There has never been a study yet that concluded that more school funding produces better-educated students. If education is wrecking the budget, then state government should get out of that business.

As Murray Rothbard wrote in Power and Market, “An income tax cannot be shifted to anyone else. The taxpayer bears the burden. He earns profits from entrepreneurial activity, interest from time preference, and other income from marginal productivity, and none can be increased to cover the tax. Income taxation reduces every taxpayer’s money income and real income, and hence his standard of living. His income from working is more expensive, and leisure cheaper, so that he will tend to work less. Everyone’s standard of living in the form of exchangeable goods will decline.”

No matter how high-minded the governor’s intent, what all Nevada citizens will get from the increase in taxes sought by Kenny Guinn and the Task Force on Tax Policy is a lower standard of living.

Doug French, executive vice president at a Southern Nevada bank, is a policy fellow of the Nevada Policy Research Institute.