Wednesday, May 28, 2008

Tax Lessons From Real Life

Politicians (especially Democrats) believe that increasing Taxes will increase revenue. And the logic they apply appears on the surface to make a lot of sense. Democrats expect the size of the pie to stay the same (or grow larger). Therefore if the current Federal Corporate Tax Rate of 35% is increased to 45%, the Democrats reason, Tax Revenue will increase by 10%.

The fallacy of this argument is that the pie does not stay the same size. In fact it becomes smaller because that extra 10% was what Corporate Michigan used to expand and grow. It provides the Corporate Dollars to invest in new technology, grow and thereby create new jobs. Tax Increases inhibit growth, investment in technology and cause job loss.

We elect a lot of Lawyers, but few Economists. If our elected officials came from the business schools with MBA's rather than JD's, we might see a better understanding of this Inverse Tax effect. We can hope, and we can now point to an example, the State of Michigan.

Granholm's Tax Warning, from the on-line edition of "The Wall Street Journal" highlights the effect of an Increase Taxes Attitude. The state is lead by a Democrat (Jennifer Granholm) and Democrat Lead Legislature which combined to Increase Taxes on Michigan Activities.
Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year. This is a major embarrassment for Governor Jennifer Granholm, the second-term Democrat who shut down the state government last year until the Legislature approved Michigan's biggest tax hike in a generation. Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be "invested" in social spending and new businesses and lead to a Michigan renaissance.
Michigan is in an Ecomomic Hole and should realize that the first rule of Holes. When in a hole, stop digging! This Hole is underlined by what happened after the Tax Increase was put into effect.
Six months later one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales.
Currently Michigan's Unemployment Rate is 6.9%. This compares to Illinois' rate of 5.4% and Ohio's 5.6% according to this article. Further reading of this article will reveal the depth of Michigan's Economic Hole.
The tax hikes have done nothing but accelerate the departures of families and businesses. Michigan ranks fourth of the 50 states in declining home values, and these days about two families leave for every family that moves in. Making matters worse is that property taxes are continuing to rise by the rate of overall inflation, while home values fall. Michigan natives grumble that the only reason more people aren't blazing a path out of the state is they can't sell their homes. Research by former Comerica economist David Littmann finds that about the only industry still growing in Michigan is government. Ms. Granholm's $44.8 billion budget this year further fattened agency payrolls.
From this example we can learn that there is a balance between the Tax Rate and Prosperity. Obviously the Governments (Local, State and Federal) need to raise money through some form of Taxation, but if the Tax Burden becomes too great, the Pie and therefore Tax Revenue decline. In real terms we all become poorer when business and individuals are not allowed sufficient income above expenses to grow, invest and provide good paying jobs.

President Bush is not an Attorney. He holds an MBA. Maybe this is the reason his tax cuts have lead to our Economic Growth and Expansion (despite Michigan's Record) during the last 8 years. Not everything went well, but if the Democrats are allowed to execute their Stated plan of Increasing Taxes, Michigan's Situation awaits the entire Country.

The Bush Tax Cuts expire after 2010. The Democrats have pledged not to continue them and to add additional taxes to boot. The Pie is in DANGER.

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