Economics 101: How to increase jobs and economic growth. Not by raising taxes.

There's a big debate in the states over how to increase economic activity and jobs.  Several state governors want to either eliminate or seriously cut their income tax rates to attract businesses and talented workers.  Others, like Minnesota, are heading in the opposite direction.  Governor Dayton wants to put in "a new, fourth tax rate of 9.85 percent on income above $150,000 for single filers and $250,000 for joint filers. Currently, the top state income tax rate is 7.85 percent."

Polling of Minnesotans suggest they oppose the sales tax increase because it will directly affect them while they support higher taxes on the wealthy.  Because, I presume, it means somebody else will be paying higher taxes.

According to the poll released Wednesday evening, 65 percent of Minnesotans support Dayton’s plan to hike income taxes by 2 points on the wealthiest 2 percent of Minnesotans. Only 30 percent polled opposed the move. The plan, which was part of the governor’s January budget proposal, would raise more than $1 billion for the state’s coffers while lawmakers are looking to wipe out a $1.1 billion budget deficit.

The same can’t be said for the governor’s plan to lower the state’s sales tax rate from 6.875 percent to 5.5 percent while adding it to many business-to-business services and clothing purchases of $100 or more. Only 30 percent of those polled support the move to expand the sales tax to clothing and things like haircuts and auto repairs, while 55 percent of those polled were opposed. When it comes to adding the sales tax to business services such as legal and accounting work, 59 percent of those polled were opposed, 34 percent supported the move, and 8 percent said they weren’t sure.

I suspect Minnesotans might feel differently about taxing the wealthy if they knew it meant fewer jobs and slower economic growth.

I've always felt raising taxes on anybody means the middle and lower classes will get hit.  There isn't enough wealth even among the wealthy to pay for the heightened appetite for more government so invariably taxes will rise on lower income groups.  That's the case with Dayton's sales tax increase proposal.  But also, businesses will simply pass along tax increases to consumers in the form of higher prices.  And finally, the wealthy can move to lower tax jurisdictions and there are enough tax shelters available that smart CPAs and lawyers will find them so they still can avoid the full effect of tax increase proposals.

One can't legislate away the laws of economics.

Horner's misleading, big government budget revisited.

Tom Horner is a big government candidate for governor. He just doesn't like the DFL's big government budget. Either way, it's big government and that's the fundamental problem.

With the state state facing a projected $5.8 billion deficit, Horner wants to actually increase spending, using the euphemism "new investments", by $360 million.

He wants to increase taxes $2.15 billion over the next two years, primarily through sales tax increases.

His budget cuts are only $1.35 billion which are misrepresented as $2.45 billion. The extra $1.1 billion are redesign savings which is another way of saying we'll get rid of the inefficiencies of government and save boat loads of money. He would set up 10 "redesign teams" to change the way government does business. Those sorts of efficiency savings never materialize.

And then there is the $1.8 billion in delayed payments to schools. That's merely kicking the can down the street. Not dealing with overspending.

In his favor, Horner doesn't want to raise taxes on businesses and those business owners who create jobs. That means the tax increases are targeted at the poor and middle class through sales tax increases.

Ultimately, as government grows bigger and bigger, the poor and middle classes ultimately get hit the hardest. Either through seeing their taxes increase or lack of jobs because the government crowds out the private sector.

Either the liberal approach to big government or the Horner approach to big government, there's an attitude of we know what's best for society and we'll use government to socially engineer towards that goal. That's why we need to keep spending a lot of money and keep taxes high.

Minnesota state government faces growing budget deficit -- opportunity to change the way it does business or kick the can down the street.

The Minnesota state government is facing a growing budget deficit even in the current biennium which is only a quarter over. It ends June 30, 2011.

State officials are now projecting another $1.2 billion deficit which have to be dealt with in the next year and half. However, there's an even bigger storm cloud on the horiz0n. A $5.2 billion deficit is being forecast for 2012-13, the following biennium.

The answer? Pawlenty will no doubt resolve it through spending cuts while House Speaker Anderson-Kelliher, who's now running for governor, wants cuts and tax increases. According to the Star Tribune,

Speaker of the House Margaret Anderson Kelliher said the state must take a more holistic approach to restoring the state's financial health. She favors blending spending cuts and with revenue increases, but also wants to ensure the state is doing all it can to spur job growth.

"It's important to have balance in the way we solve these deficits," she said before the release of the forecast.

Like other Democrats, she criticized the governor's refusal to raise taxes, instead relying on deep cuts and one-time accounting maneuvers.

"Quick fixes and band aids are not doing it," she said.

Perhaps House Finance Committee Chairman Lyndon Carlson, DFL-Crystal, captured the outlook best: "All expectations are that this will be a very difficult biennium."

Pawlenty will no doubt accept no tax increases especially as he considers a run for president, and I'm sure Democrats realize that although. They'll push for tax increases to send a message to their constituencies that it's not "our fault we're having to cut more than we want".

I think we've simply postponed making the necessary structural reductions in the size of government. Pawlenty's probably done as much as he could to address the size of government, given his narrow veto proof minority in the House. He's kept tax increases at bay but he hasn't been able to force deeper structural changes in the way government does business. The result is deficits keep coming back and the way and what government does hasn't changed. The result is another enormous deficit looming on the horizon, a year and a half away.

Frankly, I see the deficits as an opportunity to change how the government does business. Voucherize government programs and empower local governments to take more responsibility. Unfortunately, nobody who receives government monies wants any of that. As a result, the problem keeps getting kicked down the street.

The 2010 elections will be enormously significant. If Democrats keep control of both the state House and Senate and gain control of the governorship we will start seeing enormous tax increases in 2011. In the multiple billions of dollars. That would no doubt further harm any economic recovery which is critical for the return of jobs. It will be interesting to see whether Minnesotans will have similar concerns and vote accordingly when they go to the polls in 2010.

We've so far avoided a depression, but for how long given Obama's policies?

There's article in the Washington Post by columnist and economist Robert Samuelson entitled, "Why there was no depression." I would add the word "yet", because I don't think we're out of the woods yet. I say that because the problems and sources of problems underlying the 1930s Great Depression are still distinct possibilities today with policy proposals trumpeted by President Obama.

The Depression in the 1930s is attributed largely to bad government policies. Raising up tariffs dramatically during the early 1930s which choked off trade and reduced economic activity. Raising taxes dramatically on businesses, which create jobs, and private individuals. Bad monetary policy -- keeping interest rates artificially low which distorted investment and business decisions. And so forth.

Now fast forward to 2009. There are efforts to restrict trade on some goods and services with other countries, e.g. tariff barriers.

And the Fed has continued to print money and have kept interest rates artificially low.

President Obama has exploded the government's debt load and to close the gap he'll invariably choose taxes increases over spending decreases. He'll allow many of the Bush tax cuts to expire in the next year or two. He's proposing "cap and trade" policies which will slow economic activity and drive up the cost of goods and services for families. Estimates suggest cost increases would be the equivalent of anywhere from a $800 to $1700 tax increase per family. And he's proposing a massive increase in health care spending. By as much as $100 billion a year.

Arthur Laffer in a Wall Street Journal article, "Taxes, Depression and Our Current Problems" argues that bad fiscal policy played an important role in continuing and deepening the depression.

The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

The longer I look at things, the more convinced I am that government got us into this mess and government will likely keep us in this mess longer than necessary.

The last thing to do to revive a state's economy is tax the wealthy. Drives them out of state or they simply stop creating jobs.

The last thing which should be done during the current deep recession is the first thing many progressives/liberals want to do -- raise taxes on the wealthy. Why do they want to raise taxes? Because government programs are sacrosanct. Thus there's a push for revenue enhancements" or tax increases. And the easiest tax target is the wealthy, because there are so few of them.

Yet if one wants the economy to get rolling again the last people to tax are the wealthy. Why? Because small business owners are generally among the wealthy individuals and they are the ones who create jobs.

Where states have really gone after the wealthy it's been a major problem. In an article entitled: "millionaire" tax is causing millionaires to migrate out of the state. In an article entitled, "It's not Just Millionaires Fleeing Maryland Taxes":

Anyone taking Economics 101 could have predicted that those best able to avoid Maryland’s new 6.25 percent marginal tax rate on income over $1 million would. They are the ones best able to choose where to live and to pay accountants and lawyers to lower their tax burden.

Market losses no doubt contributed to one-third fewer people filing taxes in that income bracket in Maryland by April 15, as supporters of the legislation say. So did those filing extensions. But they and the Republicans yelling “I told you so” miss a bigger issue: Everyone is leaving Maryland, not just the rich.

The only bordering locale where more people moved to Maryland than away is the District of Columbia. My guess is that the inflow will slow since the Census results do not account for migration patterns since the slate of new taxes went into effect in 2008 that make Maryland more tax-heavy than Washington. Those new taxes mean Marylanders shoulder the fourth highest tax burden in the nation, according to the Tax Foundation.

Of President Obama wants to raise federal taxes on the wealthy and there's no state people can then flee to. However, some might well leave the country but another effect it is will diminish the willingness of people to invest and expand the economy. One can't violate Economics 101 and get away with it.

The tax man cometh for ... the middle class. So says Krugman.

President Obama is proposing tax increases on the wealthy -- income, reduction of charitable deductions and capital gains -- to pay for his massive spending increases both stimulus bill and general budget proposals for health, and environment.

I've said his increases and those of other liberals who want to see the expansion of government programs and activities, are never limited to the wealthy but invariably include the middle class and the poor. Why? Because the wealthy don't have enough money to pay for everything.

My thought was confirmed by liberal economist Paul Krugman of the New York Times. He loves President Obama's proposed budget but does point out it's contingent on the economy recovering -- it includes rosy economic forecasts. And as an aside he says we can expect tax increases on the middle class.

And even if fundamental health care reform brings costs under control, I at
least find it hard to see how the federal government can meet its long-term
obligations without some tax increases on the middle class. Whatever
politicians may say now, there’s probably a value-added tax in our future.

As President Obama moves us further down the road towards European-style socialism the question isn't if but how much will taxes go up on all Americans.

The effects of the Obama's proposed tax policies on jobs and the economy

Here's an interesting article showing the impact of the Obama economic/tax plan on an actual business if implemented into law. His proposals for mandating health insurance by private employers, increasing the highest tax bracket, increasing the minimum wage, changing union voting rules will all impact private employers in a big way. One effect with reduced economic growth and fewer jobs.

Here's an excerpt:

Specifically, here's what the owner of the larger firm said regarding six of Obama's key proposals for the small-business sector: The average wage at his company, figuring the 52 paychecks of his office staff, installers and service workers, is $31,200, $15 an hour.

First, "Barack Obama and Joe Biden will require that employers provide seven paid sick days per year," states the Obama campaign's Web site. "I give three paid sick days," explained the business owner. His extra cost for this one new regulation would be $24,960 (4 extra days, 52 employees, at an average of $120 per day). "That's one of the women in the office," he said. "I can make up that cost by letting one of the office people go."

Second, Obama states that employers will be required to pay 100 percent of the cost of health insurance premiums for 100 percent of their employees or face a tax penalty. "I pay 75 percent of their coverage," explained the owner. "The family policy is about $11,000. For single guys, it's about $5,000." At an average annual cost of $7,000 per policy, his additional cost for 52 employees to cover the 25 percent of the premiums that he currently doesn't pay is $91,000. "That's the price of three installers," he said. "Just to stay even with where I am, I'd have to fire three more people or raise some prices and fire two."

The result is more unemployment or more inflation, or both.

Third, with the estate tax, Obama is calling for a top tax rate of 45 percent on estates valued above $3.5 million, producing an estimated "death tax" of $675,000 on an estate of $5 million. "You're kidding," he said. "They took half my income on the way up and now they want another half when I die?" He estimated that his business is already valued at more than $3 million, in addition to the value of his home and investments. "Why," he asked, "would I want to grow to 100 employees? What'll stop them from changing it to 75 percent?"

The cost in jobs that will never be created in the U.S. economy because of this single disincentive to growth? Incalculable.

Fourth, Obama's economic plan calls for a hike in the minimum wage to $9.50 an hour within three years. The business owner's reaction? "That's bad for two reasons. I don't have anyone at minimum, but raise the bottom by $3 and a guy making $15 wants $18. Plus it's bad for productivity when people think their pay raises are coming from government instead of from their own individual effort."

Fifth, saying he'll "play offense for organized labor," Obama is proposing that workers should be denied the right to a private ballot at work in deciding whether to unionize. "That'll never be," said the plumbing entrepreneur. "I'm in business because I'm independent, not to take orders from a grievance chairman. I'd shut down."

Sixth, the increase in taxes on this small business owner from Obama's proposed hike in the income tax rate from 36% to 39.8% on incomes above $200,000 and the proposed increase in Social Security taxes comes to $32,000 per year. "That's another employee," he said, referring to the termination of another installer in order to just stay even.

And the jobless plumbers? They can be re-socialized to work for ACORN.

At a time when our economy is already reeling, the accumulation of these initiatives will no doubt prolong and/or deepen a recession or worse.

With a Obama Administration, we will no doubt get change but change isn't always for the better.

Constitutional amendment increasing sales tax for environment, water and arts will face tough time in November

The Minnesota House and Senate today passed a constitutional amendment increasing funding for the outdoors, the arts and the environment via a 3/8 of 1% increase in the sales tax. It will go on the November ballot for the voter's to decide.

The proposal while intended to increase funding in these areas may mean reduced general budget for these areas because future legislators will say, we can cut back some general budget arts funding because the arts are getting an extra $54.5 million a year from this constitutional amendment. It won't hurt if we redirect some of those funds to other programs. The same for other areas. The ultimate consequence is merely a tax increase through the constitutional amendment process.

Others have questioned whether it's appropriate to making funding decisions through the constitutional amendment process. It allows legislators to avoid making the tough decision of raising taxes.

I think the most problematic element is arts funding via the government. I think there's a legitimate role for the government to play in protecting the environment but should government bureaucrats be deciding what art receives taxpayer dollars.

I think this amendment may well have a difficult time passing in November. First, in time of economic slowdown, people are less willing to vote themselves a tax increase. And second, under Minnesota's constitutional amendment process, a majority of all votes cast in the general election must be in favor of the amendment not just those cast on the amendment. Often many people don't vote on constitutional amendments; they leave it blank. Those non-votes are treated as no votes. Meaning? For an amendment to pass will require approximately 55% support. That won't be easy for a significant tax increase and the broad reach of the amendment.

What to expect from 2008 Minnesota Legislative Session? Haggling and Posturing

What should we be expecting from the 2008 Minnesota legislative session? A lot of haggling and posturing and not a lot of substance. Why? Because there isn't much money to go around. The state is projecting a $373 million budget deficit by the summer of 2009. That's about 1% of the state's general fund budget. It shouldn't be too hard to scale back a bit especially for a 1% reduction over a year and a half time period. Especially in light of the $1.95 billion deficit the state faced in November of 2001. Even with that huge deficit there were no tax increases.

DFLers in the legislature will demand tax increases to cover not only the deficit but provide for other spending projects. Ultimately, Governor Pawlenty holds all the cards, along with the Republican minority in the state House who will be needed to uphold any vetoes of tax increases. If they hold firm there will be no tax increases and therefore no big health care and education initiatives.

The lack of money will act as a bottleneck on all the health care, education and other social spending programs proposed for individual legislators. If there's no money then they won't have a lot to do.

DFL'ers want to close a "corporate tax loophole" for foreign corporations which would bring in about $244 million. Pawlenty said he's supports doing that if the new revenues are used for tax cuts which means there is no net increase in state taxes.

As a result, the 2008 legislative session will see a lot of haggling and posturing but not a lot else. That's not a bad thing if your chief concern is the possibility of state shrinking the family budget by raising taxes.