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Will States Compete for Prosperity or Charity?

January 27, 2013

How do we help failing states?  Efficient states are growing.  Heavily regulated states are shrinking as young people leave to find better jobs and a better life.   That out-migration is beyond the control of these failed and fading political institutions.  Will they learn, or will the courts have to clean up the un-payable obligations these hollow states leave behind?  Lenders can’t rely on taxpayers who leave.  It is better to restructure these failed states now rather than ignore their problems while they make more un-payable political promises.  I want you to appreciate the scope of the problem by comparing two numbers.

Compare the amount of money a company gets to keep with the amount of money the government gets to takes in taxes and fees.  I think the relative size of those two numbers explain why there are now so few children in Chicago and New York.  Let’s compare the relative size of those numbers and see what they explain.  First, let’s look at what companies get to keep.

Profits- I’ve seen companies make an annual after tax profit of 50% of sales.  (1) In contrast, grocery stores make only a few percent profit.  Five to 10 percent is standard for large industrial firms.  Look at an industrial park and remember that all that effort earns ten cents on the dollar each year.  Some years it looses money.

Taxes- A company earns money, then pays corporate taxes (plural) on the profits.  Shareholders then pay taxes (plural) on the dividends and capital gains.  Individuals then pay taxes (again plural) when they finally buy something with the money they earned.   Include fees, and governments spend 41 percent of every dollar earned.



That means governments take much more than companies get to keep.  Government takes five times more in taxes than people and companies earn in profits.  Companies disappear when profits disappear.  That simple fact explains why companies and individuals leave high tax states.  They have to.  They really don’t have a choice.  Companies move to survive, and working people move with them.  Very few working people move to a state because they think it would be a great place to be unemployed.

It wasn’t always true that people would leave their homes for a better life.  People used to stay where they were born.  Times change, and now it isn’t unusual to cross the country several times in your career.  Many political institutions are living in the past and still assume people and businesses are captive.  They are wrong as this is a picture of Detroit shows.

Dead Detroit


So how do we help these failing states and cities?  It is a government problem and one our representatives desperately want to ignore.  State and federal legislators have every reason to hide the solution.  The ultimate solution is for lenders to stop lending when they know they won’t be repaid.  For many cities, with hundreds of thousands of abandoned homes and businesses, there is simply no one left to pay the bills.

Edit- Chicago reports bond downgrade

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(1) Those were high tech companies, and that profit level didn’t last long.  The companies had layoffs within a few years.

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3 Comments leave one →
  1. January 27, 2013 12:22 pm

    Reblogged this on catherinephung.



  1. Another One Bites the Dust- San Bernardino Edition | SlowFacts

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