Business taxes vs. human capital investments as economic development programs

I recently received a question from an advocate for early childhood education and other education programs. This question arises from this advocate’s interactions with state government legislative staff. These staff persons are judging these educational investments by their effects on encouraging business growth and economic development.  The staff persons are comparing these educational investments with possible cuts in business taxes. The question this advocate asked was as follows:

“Do we have the evidence to say that early childhood education and school performance is more important to state economic development than the business tax?”

In some sense, my entire book, Investing in Kids, is a lengthy response to this question. But it deserves a more useful shorter response as well.

Like most good policy wonks, I believe that the devil is in the details. So one truthful but unhelpful response is that the answer depends on precisely what educational investments and business tax changes are being compared.

A more helpful response is that high-quality educational investments have much larger effects per dollar than the most common proposals for across-the-board business tax cuts.  High-quality educational investments include high-quality universal pre-k programs, the Nurse Family Partnership, and high-quality child care and preschool such as Educare programs.

More specifically, high-quality early childhood programs provide economic development benefits for a state’s economy of $2 to $3 per dollar invested. These economic development benefits are the increase in present value of state residents’ earnings per capita. These finding are based on rigorous studies of how early childhood programs affect job skills, and how job skills affect the attractiveness of a state to business.

In contrast, across-the-board reductions in business taxes yield state economic development benefits of about 50 cents per dollar invested. These findings are based on an extensive scholarly literature on how state and local business taxes affect business growth. Across-the-board business tax cuts are relatively inefficient because these cuts  go to many locally-oriented businesses that do not bring new dollars into the local economy,  and the business tax cuts are provided  regardless of whether the business invests.

Therefore, high-quality early childhood programs have been shown to be from four to six times as effective per dollar as across-the-board business tax cuts.  The evidence for this assertion comes from extensive research on early childhood programs, business taxes, and the workings of regional economies.

However, this answer is incomplete. I’ll elaborate on this answer in a later post.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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1 Response to Business taxes vs. human capital investments as economic development programs

  1. Pingback: More devilish details about educational investments versus business tax cuts | investinginkids

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