Thursday, October 04, 2007

More on the new Michigan Services Tax

It's a well established fact that when you tax something, you get less of it. It's one of the main reasons why people say we should raise gas taxes, or raise the cigarette tax. Raising the tax will supposedly reduce demand and help people stop smoking or driving too much. For some reason, however, people (politicians in particular) seem to forget or ignore this little fact of life. Granted, the amount of reduction is based on the price elasticity of demand, but in general you will see a reduction in the amount of something purchased if you raise its price. Adding a services tax will raise the price of most services and therefore less of it will be purchased

Pro tax editorials and commentary seem to be focusing on services purchased by individuals and they remark that the cost to an average household may only go up a couple hundred dollars. What they ignore is the cost the new services tax imposes on businesses which purchase services. For example, many companies have started outsourcing janitorial services. This allows the business to focus on its core competency, which probably isn't in providing janitorial services, and it allows janitorial service companies to form and benefit from economics of scale. The net effect is that businesses save money on services, and the services company is able to provide employment. Now, when the services tax kicks in, some companies may find ways to cut back on the janitorial services they use. When they do, janitorial service companies will have to cut back on their employment. Who suffers the most, the worker for the janitorial company.

You may argue that the company purchasing the service can just pass their extra costs on to their customers. Quite possible. However, it puts this business at a competitive disadvantage over companies in other states which aren't subject to these additional costs. One of the arguments put forth by our politicians to support this tax is that it will strengthen Michigan and make it more attractive. However, by increasing business costs, they are making Michigan companies less competitive. In addition, companies which may be thinking about relocating to Michigan will have to take these increased costs into account in deciding whether to come here or not. Companies already here have reasons to consider moving elsewhere. Anyway you look at it, the new tax will be harmful to the Michigan economy.

More details here