I’ve heard from many Missouri legislators that they believe in tax credits, and support them, because they are an investment in Missouri. But is it? And if it is, is it the correct one?
An investment is the purchase of an asset to attain an increase in value over a period of time. When the state issues a tax credit, it is not adding any assets to its portfolio.
Zero.
Instead, it is giving a private entity tax dollars, which it has taken from other private entities. It transfers wealth from a larger group of citizens to a much smaller group.
The businesses receiving the tax credits are assets, and I agree, but not the state’s. They are assets belonging to the shareholders.
Several businesses receiving tax credits don’t even have a presence in Missouri or pay taxes in the state. They must only fulfill the requirements of the tax credit law.
But what if tax credits fit the definition of an investment?
Can the legislature be trusted to invest those funds in a manner that the state would expect an increase in value?
Probably not.
Picking and choosing a good investment is not easy. Most firms, with professionals researching companies all day, routinely underperform the S&P 500. Once in a while, one may get lucky and outperform the market in a single year, but it rarely occurs more than once.
In reality, the vast majority of individuals and entities are FAR better off investing in the whole market instead of picking winners and losers, individual stocks, to become wealthy.
John Bogle revolutionized investing by creating a low-cost fund that invests in the entire market. He realized there was little reason to attempt to pick winners and losers and that humans are horrible at predicting the future.
When I state the legislature isn’t capable of picking suitable “investments,” it isn’t a knock on the legislature. It’s just acknowledging reality.
If professionals, who spend all their time researching, cannot beat the market – why would we expect the legislature?
We wouldn’t.
Instead, the legislature should “bet” the entire market. That would be the “investment” most likely to increase in value, to pay dividends.
How would they do this?
By reducing taxes and regulations for EVERYONE.
If we create an environment that allows anyone with an innovative idea and some business savvy to succeed, we increase our chance of growth and prosperity. We are less likely to choose a poor “investment” and lose our state, our taxpayers, money.
Photo by Markus Winkler on Unsplash
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