Friday, October 10, 2008

Governments And Prices

I've been blogging for five years about the relationship between taxes and the relative attractiveness of cities. Also, about how government officials don't get said relationship. I had the issues put clearly before me once again, but in a discussion about water policy, in a post title "BassAckWards":
Although I welcome this bit of news (higher prices!), both JN and I noticed the perverse order of things:

1. People use less water.
2. Prices rise.

As I have mentioned before, this order of events is terribly annoying to people. The reason it occurs so often in water is because most water utilities are run on a break-even basis, i.e.: if they sell less water, they have to raise prices to generate the same revenue.

Mainly, government officials never seem to understand the relationship between price and revenue. If the price goes up, consumption goes down. That's great for water consumption and for consumption of other natural resources, if conservation is your goal. It's disastrous in this example, because the city is trying to generate more revenue in response to lower usage. Their result is going to be even lower usage, hence, even lower revenues. (Still good for conservation, though.) If they wanted greater usage, they should lower the price. Well, government officials aren't to be confused with the sort of people who have a clue about economics.

Which brings me back to taxes. Cities that drive away businesses and people of means with their higher taxes tend to look at their falling tax revenues and conclude that to make up the shortfalls, they need to raise taxes. 

Well, duh! That's what drives people away! The revenues aren't going to rise. The population is going to fall. Just look at Cleveland, Detroit, and a host of other cities that have chased their tails, and their wealth away, by failing to understand the relationship between price and use.

As the man so named his post, most government officials are BassAckWards.


Ed Angleton said...

Regarding the desire to raise taxes to suppliment tax revenue shortfalls, I think Churchill said it best, "No government ever taxed its way to prosperity."

Mike Kole said...

Churchill had another one, something on the order of, 'trying to tax into prosperity is like getting into a bucket and trying to lift it'.

The choice for governments is simple: attract with lower tax rates; repel with higher tax rates. Which will it be?