The late great political economist Jude Wanniski long ago observed that whatever our individual politics, we’re all supply siders in the microeconomic sense. As individuals, we respond to incentives.
On an individual level taxes are a price placed on our work such that we to varying degrees migrate to the locales where we’ll be charged the least for it. Regulations are a costly tax on our work that rob us of time and resources that in a normal world we could devote to pleasing our customers on the way to higher profits. As individuals we produce in order to consume; our work effort what we exchange for that which we don’t have. Put more simply, as individuals we’re all free traders. And because money is how we measure the value of the goods we exchange, we innately desire stable money values so that we’re not stiffed in return for what we produce; currency devaluation the explicit way that governments rob us of the fruits of our labor.
The fair response to all of the above has long been that basic economics perhaps doesn’t apply to the film industry. With its leading lights and not-so-bright lights almost monolithically in favor of higher taxes on the rich and successful, it’s been fair to point out that the brilliant artistic minds who populate the film industry aren’t ‘supply side’ in their microeconomics. Hollywood has proven Wanniski wrong? Not so fast.
Ben Affleck, the very talented actor and director, told the Los Angeles Times last week that the Laffer Curve which has long animated supply-side thinking is the economic Polaris of the film industry too. As he explained to the Times, “You just follow the money. What happens is that you’re faced with a situation of shooting something where you want to shoot, versus shooting somewhere you’d less rather shoot – and you get an extra three weeks of filming. It comes down to the fact that you have X amount of money to make your movie in a business where the margins are really thin.”
Affleck’s comment has long been the refrain of businessmen in other industries in search of tax relief. Margins are razor thin in a hypercompetitive world, and because they are, taxes make it very expensive for businesses to attain finance. Entrepreneurs and businesses need investment to pursue their vision, and the prevailing tax rate can surely impact whether or not a business is funded. The same is apparently true of film if Affleck is to be believed.
Conservatives and libertarians have forever argued that high rates of taxation lead to a great deal of economic waste too. Thanks to high levels of taxation, industries are created that don’t produce anything of value other than facilitating how the overtaxed evade the aggressively greedy hand of government through the tax code. As the Times put it about film industry tax facilitator Ric Reitz, “Reitz is one of Hollywood’s new financiers. Just about every major movie filmed on location gets a tax incentive, and Reitz is part of an expanding web of brokers, tax attorneys, financial planner and consultants who help filmmakers exploit [my emphasis] the patchwork of state programs to attract film and TV production.”
An unwieldy tax code has made the work of Reitz and others necessary, but imagine if we lived in the flat tax or consumption tax world long clamored for on the right, including by Steve Forbes. If so, energetic people like Reitz would migrate to the productive parts of the economy, as opposed to economy-sapping facilitator work made necessary by the unquenchable thirst of politicians to spend money not their own.
Those in search of tax cuts have most of all argued that high rates of taxation are anti-job creation. To this, Hollywood’s leading figures have long scoffed. Wrongly guilty (the movie industry is intensely competitive) about their earnings, top actors and directors have over the years been very public about how they’re not taxed enough. Not so fast once again.
Indeed, when it comes to the creation of their art they feel they’re overtaxed, thus the migration of filmmakers and actors to the locales most willing to lower the price of making movies. As one would expect, the movement of Hollywood’s artistically inclined to the best tax deals has had job implications – in Hollywood. Thanks to the proper desire of film directors and producers to maximize profits through a constant search for tax breaks, California, where the film industry largely resides, has suffered in a relative sense. As the Times explained, “the number of top-grossing films shot in California has plummeted 60% in the last 15 years.”
Conservatives and libertarians most known for their support of tax cuts have for quite some time said that high rates of taxation hurt the lowest earners the most. For saying this they’ve been the recipients of all manner of scorn. Oh well, it seems they were right all along; evidence supporting their claim coming from the film industry itself. The Times laid it out rather well, observing that “Hollywood’s trade workers – the electricians, carpenters, caterers and others working behind the scenes – have long complained that they’ve lost their livelihood as states vie for film business with ever-richer incentives.”
It turns out tax rates do matter, and it says here the film industry owes Arthur Laffer an apology. Not only do tax rates impact where and when we produce, but they can also dictate where jobs are created thanks to tax rates having a powerful impact on where money is invested.
The great Austrian economist Joseph Schumpeter stated the obvious many moons ago that there are no entrepreneurs without capital, and because there aren’t, capital must be treated well. It turns out the film industry is no different in that capital similarly flows to where it’s treated best. For a film industry that’s long dismissed the Laffer Curve, its modern existence is easily the best example of how right Laffer was all along.
