What is Seen and Not Seen

Doug French

The is only one difference between a bad economist and a good one,” wrote the great French economist Frederic Bastiat, “The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

Governor Kenny Guinn and the supporters of his $1.1 billion tax increase — like the bad economist — can only see what’s visible. They are not accounting for, or maybe are not interested in, the effects of the tax that will emerge later on.

Guinn and his supporters continue to preach that a quarter of one percent tax on gross sales will not meaningfully affect businesses in Nevada. Cheering on these pro-taxers is the usual pack of political pro-tax pundits who write for the Vegas daily newspapers. Undoubtedly, none of these scribblers have read the work of Mr. Bastiat. Indeed, it’s an open question whether they’ve ever had an opinion that didn’t originate in Carson City or on South Las Vegas Boulevard.

The lynch pin to Guinn’s tax plan is the Gross Receipts Tax (GRT). Under the plan, Nevada businesses would pay a quarter-percent tax on annual sales over $450,000. The plan’s proponents continually contend that the tax won’t be a burden on business.

But taxation (and the government spending based on it) destroys capital. As economist Lew Rockwell writes, “It removes resources from where they are productive — within the market economy — and places them in the hands of bureaucrats, who assign these resources to uses that have nothing to do with consumer or producer demand.”

In the case of Nevada’s banks, the destruction of capital that would be wrought by the proposed GRT would have disastrous effects on the state’s economy — effects that may not be visible now, but ultimately would be very real. Let’s consider a sampling of ten Southern Nevada community banks, ranging in asset size from just under $50 million to just over $870 million. This will allow us to see the effects of the proposed tax on the banks and their customers.

Based upon 2002 income numbers, the ten banks would have paid just under $310,000 more in taxes if the GRT were in place. One of the banks, despite losing over $1.3 million, would see its taxes increase $1,400. The largest and most profitable bank would pay an extra $87,400.

A bank can only make loans based upon the amount of capital it has. The banks in this sample leveraged capital from a low of 4.57 times to a high of 10.3 times. Nine to 10 times is the norm. Thus, if these ten banks are forced to send those $310,000 to Carson City, they could not leverage that capital and so approximately $3 million in loans will not be made. Because banks make a 4 to 5 percent margin on loans, that’s another $120,000 to $150,000 the banks won’t earn and that won’t become capital — which, in turn, could be leveraged 10 times into more loans and more profits and more capital, and more jobs, etc.

Of course, the big gaming companies and big real estate developers will to be able to borrow. This three million less in available loan dollars won’t hurt them. It’s the startup and fledgling businesses that will lose access to capital. Maybe it’s a doctor who wants to set up a new practice, or a startup day care facility, or a new restaurant. None of them will be able to open because the capital won’t be available. And when those businesses can’t open, jobs are not created.

These ten banks’ numbers make it clear how the GRT’s effects would be felt most profoundly by new, startup, low- or no-profit banks. And that is consistent with the effects of Washington state’s GRT tax. According to the Washington State Department of Revenue Tax Reference Manual 2002: “Negative features of the [GRT] tax are significant. Most importantly, it imposes a heavy burden on new and small businesses that may not have reached their maximum level of operating efficiency, or have yet to fully develop their markets, and as a result are unprofitable. Thus, the tax does not encourage economic development. As a result, established profitable firms are favored at the expense of new, start-up businesses.”

Nevada’s legislators, like the good economist, must look beyond the visible effects of the GRT. They must foresee the devastation to Nevada small business and the jobs that will never be created if the tax is implemented.

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