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The Earnings Tax Is Still Bad, for All the Reasons We’ve Already Said

Posted by on March 29, 2010

[This post was originally written for my employer’s blog, Show-Me Daily.]

The Kansas City Star‘s website has a piece today by two Saint Louis University professors arguing against the repeal of the earnings taxes in St. Louis and Kansas City. The bulk of their commentary is intended to be a criticism of this 2006 study by Show-Me Institute executive vice president and University of Missouri–Columbia economics professor Joseph Haslag, but the SLU professors, Lisa Gladson and Jack Strauss, have crafted an argument that doesn’t really address Haslag’s findings. In fact, they seem to have missed the point entirely.

In the Show-Me Institute study, “How an Earnings Tax Harms Cities Like Saint Louis and Kansas City,” Haslag shares his findings that there is a measurable negative impact for cities with an earnings tax. The opening of the paper itself provides an ideal summary: “About one in four large cities in the United States has an earnings tax. I attempt to quantify the relationship between the earnings tax rate and the growth rate of cities relative to their metropolitan statistical areas (MSA). I find that cities with an earnings tax tend to have a significantly lower ratio of city income to MSA income than those without them.”

Haslag goes on to argue that the earnings tax distorts the growth of the MSA, encouraging people to locate in outlying areas rather than in the city center — discouraging investment in the city and reducing per-capita income.

The counter offered by Gladson and Strauss is responding to a different point — one not made in the Show-Me Institute study. They claim that Haslag’s study “offers a simple negative correlation between cities with earnings taxes and real per capita income growth.” This is emphatically not the point being made in the study. Growth implies a comparison over time, whereas the Show-Me Institute policy study to which they refer used side-by-side comparisons of population proportions and where they happened to be located within the MSA. Haslag does not make any arguments about the level of growth, but rather about where the people are located. It may be that the MSAs grow faster or slower because of the presence or absence of an earnings tax, but Haslag’s study drew no connection between growth and the presence of an earnings tax. Haslag may or may not be surprised to learn that Gladson and Strauss “found no relationship between earnings taxes and a city’s income growth, and no evidence that earnings taxes are a reason for a city’s slow growth,” because this is not what he looked at in his study.

Haslag found, with careful, externally reviewed analysis, that the presence of an earnings tax negatively impacts the income of the cities that implement them when residents can easily shift to a nearby area without such a tax. Perhaps after a more careful reading of the piece, Gladson and Strauss will find some salient point on which they can disagree with this study, but for now their offering is an argument without an opponent.

4 Responses to The Earnings Tax Is Still Bad, for All the Reasons We’ve Already Said

  1. Gerard

    Right. I guess you’re missing that Gladson and Strauss are saying that the SMI study “missed the point entirely.”

  2. Josh Smith

    It seems to me that Gladson and Strauss are making one central argument, namely that the earnings tax is a bad idea. If you agree, that’s ok. The point of my post is to illuminate for everyone that the argument made by the SLU professors is not an appropriate response to Haslag’s paper.

    Haslag constructed a model and found a correlation, and then explained his findings with what academic economists might consider common-sense economic logic. Gladson and Strauss attempted to replicate what they thought was his model and didn’t get what they thought his results were. The fact that they refuted something Haslag did not contend was the point of my post.

    If you disagree with Haslag’s findings, I encourage you to comment further with links to academic papers with contrary findings, or flaws in the economic logic of his conclusions. If you have a particular reason for siding with Gladson and Strauss, feel free to share that as well.

  3. David Johnston

    I, for one, disagree with Haslag’s methods and THEREFORE his conclusions. Running a study mirroring his methods then is not of interest.

  4. Josh Smith

    Professor Haslag’s methods are those of the academic economist. His paper was reviewed prior to publishing by other academics, and the method of response employed by the SLU professors was an attempt to criticize his model on it’s own merits, rather than undermining his methodology.
    You are free, of course, to disagree with any part of his paper, from his methods to his conclusions. My point was that the critique by Gladson and Strauss was not an effective one.

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