“There are three kinds of lies: lies, damned lies, and statistics” attributed to Benjamin Disraeli by Mark Twain
Having made the transition myself, I know well that moving from academia to advocacy often requires some compromise with the standard of the academy.
Academic rectitude requires one to point out the possible weaknesses in one’s views, to qualify statements about which one is uncertain and to be cautious before drawing start conclusion. There is little room for uncertainty, for qualification, and for caution in advocacy.
But becoming an advocate shouldn’t mean that one gives up standards of intellectual honesty entirely. An advocate, especially one who trades on his standing as an academic, shouldn’t put forward conclusions when he has no good reason to do so.
That, however, is what Robert Inman did in his op-ed piece in the Inquirer opposing the BPT proposal put forward by Bill Green and Maria Quinones-Sanchez.
Inman says, correctly, that his research lead to the conclusion that an increase in the gross receipts portion of the BPT will lead to a decline in business activity that would cost 75,000 jobs in five years. And he says, correctly, that his research cannot tell us the impact on jobs of a decrease in the net profit portion of the BPT that offsets the rise the gross receipts tax. Simply because the net profits tax has not varied, Inman has not been able to construct an econometric model that can answer this question.
But then Inman concludes that the loss of jobs due to an increase in the gross receipts tax is “probable” but job gains due to a decrease in the net profits tax is “uncertain.”
That conclusion is not warranted. With all due respect to Professor Inman, the boundaries of Inman’s research are not the boundaries of human reason.
Why reducing the Gross Receipt Tax Creates Jobs In Philadelphia
Does Professor Inman offer one single reason to think that variations in the gross receipts tax is likely to have a greater impact on economic activity than variations in the net profits tax? No.
And does Professor Inman mention let alone respond to the reasons that proponents of the tax believe that it will create more jobs than it costs? No.
First, as Mark Zandi has argued in another Inquirer op-ed, because the gross receipts tax is a broader tax that distributes the pain of taxation more widely, it is easier for business to bear.
And second, the tax swap will reduce taxes on businesses that are located in the city while increasing taxes on businesses that sell goods and services here but are not located here. That will certainly increase jobs.
Take, for example, insurance or business service firms. Right now, a company that is located in Bala Cynwyd but sells insurance or business services in Philadelphia pays much lower taxes than a company that sells insurance or business services in Philadelphia and is located here. Since it is something of an inconvenience to sell insurance or business services at a distance, the tax swap will give insurance companies a reason to open offices in the city.
The elasticity of demand for goods and services provided by “big losers” under the tax swap
I pick those examples because Inman says that they are two of the “big losers” in the tax swap. However the reason that they are losers is precisely that companies in those two fields are so often located outside the city. Indeed, they are located outside the city far more than it would sense for them to be, if the net profits tax were not such a deterrent to locating inside the city. And there is a further reason that the tax swap will not cost jobs in these areas. While increasing taxes on any business will increase the prices it charges its customers, demand for insurance and business services is likely to be fairly inelastic. A slight increase in the price of insurance and business services due to an increase in the gross receipts tax is hardly likely to depress demand or economic activity a great deal.
We know that demand for another “big loser” in the tax swap, professional sports, is also not inelastic. The market for scalped tickets to the Eagles and Phillies shows us that. And the empty seats at Sixer games shows us that quality of the team is likely to have a far greater impact on demand than a small change in ticket prices.
Much the same is true of two other “big loser” health clinics and social service providers. In the both cases, demand is inelastic because third parties—health insurance or government—pay most of the cost.
Demand for another “big loser,” warehouses is likely to be inelastic because the costs of warehousing products is probably a small portion of the total cost of those products. An increase in the cost, say, of warehousing a dryer before delivering it to a customer in the city is a small part of the cost of the dryer. On the other hand, a reduction in the net profits tax will allow warehousers to locate in the city rather in the suburbs thereby saving money on transportation.
There are only two “big losers” where there is any reason to be concerned that an increase in the gross receipts tax will lead to much decline in business activity and jobs: hotels and construction. When it comes to hotels, it’s hard to believe that Marriot and Hilton will close down their taxes go up. And these are also two areas where any impact on jobs can mitigated by other policy changes. Green and Quinones-Sanchez are already considering an amendment to the bill that protects construction jobs. And, a slight reduction in the room tax can certainly offset the impact of an increase in the gross receipts tax on hotel prices in the unlikely event that it does turn out to affect the demand for hotel rooms.
The Tax Swap and Fairness
When it comes to the second question Inman raises, fairness, he entirely drops the ball. Inman may be right that the gross receipts tax is a sales tax for business in a competitive market. But, first, not all markets competitive. And, second, a sales tax is certainly fairer than a tax that applies more heavily to business located in the city than those located outside of it. Because large companies located outside the city can arrange their books to show little profit on their operations in the city, the net profits tax not is not is fundamentally unfair to businesses that are located here. (Reducing that unfairness to locally owned hotels and construction firms might, in fact, address the first concern as well, by reducing prices in those two sectors of the economy).
Much more can be said about all these issues. And I may be wrong in some of the analyses I’ve presented here. But at the very least, I’ve show that economic analysis can tell us more about the tax swap than the conclusions one can draw from the kind of broad econometric analyses that Inman does—let alone what he has not done with regard to the gross receipts tax.
Any academic true to his vocation would admit that. By making broad assertions based on the most limited presentation of what we know about how economies work, Inman has failed as an academic. And that gives us good reason not to take him seriously as an advocate.