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Posted by: Michael Mandel on June 03
In my house we have a rule—anything that goes wrong gets blamed on my teenage son.
In the same way, China gets blamed for all the problems with the U.S. economy.
But here’s something surprising that China, indirectly, may really be responsible for—tight state and local budgets. The problem is that state and local tax revenues have fallen as a share of GDP, compared to the 1990s. The decline is roughly 0.2 percentage points of GDP, or about $25 billion in missing revenues.
The shortfall comes almost totally from sales taxes, not property taxes or income taxes.
What’s happening is that prices of goods such as clothing—which are almost always taxed—have risen much less than the prices of services, many of which are exempt from sales tax. Lower prices, lower sales tax revenues.
And why are the prices of all sort of goods so cheap? Why, it’s the low-cost Chinese imports.
So when your local school board has to cut after-school activities because of a lack of money—remember, it’s just the global law of unintended consequences at work.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.