Tuesday, June 28, 2011

More About How to Tax the Rich

A couple months ago, I posted a blog about how we hold the power to tax the rich. The basic premise being if we all stopped buying products and services from large corporations, those companies would quickly go out of business. Imagine what would happen to Walmart's profit margin if for one month we all bought food from a farmer's market, used washcloths after our bathroom visits and just washed laundry more often, skipped the coffee and soda, and found alternatives to all of the products we might normally get at Walmart or Target. Now if we continued that, that farmers and local grocery stores would have to expand and hire more workers. Your local coffee shop (and not the large chains) might open a second location. After a few months, the economy would be shifting dramatically. We would all have to put up with having less for awhile since it would be a bit more of a drain on our wallets, but the rich would no longer be rich. Note: Just remember that most of us with retirement funds are likely invested in these large corporations through our mutual funds within our 401(k) accounts and similar vehicles. If they fail or go bankrupt, it could be a hit to your retirement funds. The economy and the rich are more connected to us than you think!

This subject came back into my mind because of the debate in Minnesota over raising taxes on the top 2% of income earners. The justification from the liberal side is that the top 5% of income earners in MN pay less than the rest of Minnesota pays. See how easy it is to twist this stat? It is true in a sense, but the base truth is the top 5% of income earners in MN pay 43% of the income taxes collected. So yes, the other 95% pay 57% of all taxes, but does that really translate to that 5% not paying a fair share? The simple analogy is if 20 people have a $100 bar tab, and 1 person pays $43, the remaining 19 people pay $3 each. Not bad considering you each had a $5 drink. Also, in MN, the bottom 30% pay no net income tax. So in the bar analogy, 1 person pays $43, 13 people pay about $4.39, and 6 people pay nothing. So you can see that only one person in that group of 20 paid more than what they got in return, everyone else paid less than the cost of their drink.

You will see the question in the comments of this article is "where are the jobs?" Liberals often question the idea of trickle-down economics (the more formal economic term is supply-side economics). I'll start by going back to the idea of the Laffer Curve. The premise of the Laffer Curve is that there is a point in taxation that starts to stifle economic growth and actually brings in lower tax revenue than a lower rate would. It is very common sense at a basic level. If the government taxes at 0%, it collects no money. If it taxes at 100%, it collects no money because no one will work for free. At 99%, the government still gets very little because no one wants to work for only 1% of their total pay. The idea is that there is a "sweet spot" where the government maximizes revenue and yet few business decisions are based on tax policy. I had a discussion on twitter with University of Minnesota professor Bill Gleason about this a few days back, and he sent me an article "debunking" the Laffer Curve. The best part is the article says it debunks it but than admits in the body of the article the Laffer Curve does work (under certain circumstances). If you read the full Laffer Theory, Art Laffer says the maximum is not easy to find, and changes over time as well as changes with circumstances. It is more important to understand the Laffer Curve so that we are more judicious in our decision to change tax policy.

One other interesting piece of information that come across Twitter this morning was a piece from thinkprogress.org. The piece was a chart showing states that had spending decreases lost jobs, while states that spent more money had a small gain in jobs (on average). But to put a skeptical eye on any statistic is important so I thought I should point out something interesting.
  • Two states that caught my eye right away are Texas and South Dakota. They had some of the highest gains in employment (with their spending increases). These states also have no income tax.
  • North Dakota would be considered an outlier, but  interesting that we loosened some drilling regulation there and they can't even build enough houses for all the people going out there to work the oil drills.
  • Montana increased spending almost 50%, and got a less than 1% gain in employment. North Carolina had a 30% cut in spending, and only lost about 2% in employment.
  • You might also notice the cluster of states at or near zero increase/decrease in spending - more states are above the line of employment gain than are below it.
  • These numbers are inflation adjusted, so you could adjust the 0% line of spending to the right a bit. If you were to look at this in real dollar spending, the picture of how government spending affects jobs becomes even less clear.
The truth is tax and spending policy be the government isn't all science. It is a bit of an art. The effects of a change in regulation, in taxation, or in government spending  all take time to show adjustments in the economy. This is why I am a strong advocate of a major overhaul of the tax code. We need to simplify it, and we need a long-term commitment to it. When "the rich" and businesses don't know what their tax rate will be a year or 2 down the road, it is difficult for them to make decisions of investment including hiring people (see above, "where are the jobs?"). We are still debating a tax rate hike in Minnesota, possibly on income this year while we are already 6 months into the year. The tax rates signed into law by President Bush were extended by President Obama for only 2 years. We need long-term certainty in taxation. We may even need to raise taxes to get out of the debt mess we are in. I am simply saying is let's be honest and really evaluate how much money the government needs and should have, and let's set the rates there and keep them there for a long time.

President Obama as a candidate agreed government spending was too high. From the third presidential debate:
  • "...what I've done throughout this campaign is to propose a net spending cut."
  • "Every dollar that I've proposed, I've proposed an additional cut so that it matches."
  • "We need to eliminate a whole host of programs that don't work. And I want to go through the federal budget line by line, page by page, programs that don't work, we should cut."
  • "And we are now looking at a deficit of well over half a trillion dollars...we've got to take this in a new direction, that's what I propose as president." (Note: this year's deficit is about $1.5 trillion)
Finally, while you ponder where taxes should be set, I leave you with another (Note: Penn doesn't always use the best language, so NSFW, but worth it for the message) Penn Point video. I think Penn Jillette is awesome, because he uses logic, is willing to admit ignorance or errors when needed, and he always stands up for freedom. In this video about his friend Christopher Hitchens, he says (with my paraphrasing), "My utopia is where people can disagree, they understand the other's side, they're not crazy, they're not lying, and we learn from it." The video that caught my attention is one where he uses an analogy to make a point at the end that it is not realistic to think anyone, including government leaders, can be so smart that they know everything. Instead, if we can admit we don't always know, we can see why government that is too big is not good. Note: Penn likes to swear. However, his point is very valid.

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