Kristoffer Tripplaar/Sipa USA via AP Images
Tax policy could play a crucial role in addressing urban-rural economic inequality.
The yawning economic gap between rural areas and the rest of the United States shows up in higher permanent nonemployment rates, higher minimum-wage employment, opioid abuse, incarceration, and premature death. This gap in lifetime earnings between rural and metro America is as significant as the difference between high school and college graduates. It contributed to the political division of the country revealed in the 2016 and 2020 presidential elections.
Addressing this problem would mean finding good jobs for Americans living in poor rural areas. Policymakers have suggested a wide variety of solutions to this issue, from broadband to green infrastructure to strengthening the social safety net. They haven’t, however, considered how tax policy might play a crucial role.
Specifically, we might grant corporations a zero tax rate to the extent that they hire people in the poor rural areas of the U.S. This would revise an existing, largely failed policy known as “enterprise zones,” or “opportunity zones,” which grants tax breaks to companies that locate in poor, largely urban neighborhoods. But this tax benefit has been too easy for corporations to game. Paradoxically, it promotes gentrification of booming large metro areas, and it seldom produces net new jobs for the target population.
We propose to target benefits to rural areas that have been losing population and to require that the employees that qualify the company for the tax incentive would have to be residents of the target zone. This limitation excludes many worthy communities, most notably low-income urban areas. However, there are better policy proposals directed at cities that can be structured differently and are less prone to causing gentrification.
The tax rate on profits apportioned to the target zone should be significantly lower than the tax rates on other profits.
From a development perspective, it does not matter if the corporation moves highly trained people into the target zone from other, richer locations rather than hiring locally. The whole idea is to create an incentive for people to move to the poorer places. Once people move to a place with jobs and salaries, they demand housing; once they have housing, they demand good schools, good infrastructure, and the other amenities they had where they came from.
The tax rate on profits apportioned to the target zone should be significantly lower than the tax rates on other profits. Currently, the tax rate on domestic profits is 21 percent and on foreign profits zero if actual jobs are moved overseas. Because of this, we recommend a corporate tax rate of zero on profits from the target zone. Here is a more detailed technical explanation of how this would work.
Some may object to giving corporations even more tax breaks. But existing tax incentives that do not achieve their supposed goals, such as the tax favoritism for empowerment zones, could be scrapped in favor of this one. Though tax incentives, such as the R&D tax credit, or the Earned Income Tax Credit, may not be the best possible policies for achieving their goals, in the practical world of real politics they have the advantage of bipartisan appeal.
The outcome of the 2016 presidential election came as a shock to many Americans in heavily Democratic areas, who could not imagine that their fellow citizens would vote for somebody like Donald Trump. It revealed an immense gap between the well-educated beneficiaries of globalization, who tended to congregate on the rich coasts even if they were born elsewhere, and the poorly educated non-beneficiaries.
The inequality that is ripping the country apart is not just based in class. It is also spatial. If we are serious about maintaining the ethos of e pluribus unum and sustaining the ideal of a united country, we need to find a way to close this gap, or at least reduce its size. Using tax policy as a lever is one attainable step toward doing so.
