Thursday, July 7, 2011

Taxes Do Change Behavior and A Few Other Things

I heard an interesting tidbit on a podcast today and I thought I should look a bit further into this tidbit to see if there is some truth to it. It turns out Governor Dayton has spent years avoiding taxes in Minnesota by setting up trusts in South Dakota and setting up limited partnerships in the Cayman Islands. Now as Joe Soucheray rightly points out, this wasn't necessarily solely a decision made by Governor Dayton since he is not the only family member affected by the money. It does show a couple of broader points. First, when you have guaranteed money coming, a person has a tendency to be willing to part with it. If taxes go up a little, a person in this situation might not care because more money keeps coming all the time. So for Governor Dayton, even if the money he makes that is taxed in Minnesota goes down, would he really care when he has a nice stream of tax-free income from South Dakota? Second, the very fact that the family set up these trusts and partnerships with the intent of avoiding taxes shows that taxes are an important factor for the wealthy in deciding where to invest their money.

Another interesting issue is the state employees laid off during the state shutdown. I don't want to be misunderstood, so I want to be clear that I am sure this is a hardship for some since it is a reduction in income. However, let's put a few things in perspective. State employees that are laid off are collecting unemployment benefits, meaning they do still have some income. State employees are also having their health benefits are still being paid. Employees are continuing to accrue vacation time at the normal rate during the shutdown. And while all of that is happening, those employees deemed essential have had to report to work and have had their vacation time cancelled. Anyone laid off for any amount of time faces a certain amount of stress, but it is always important to understand your situation and know it could be worse.

One last little tidbit about the shutdown. I really hate the little political lies that get blown up and used for media fodder. The GOP says the budget is being increased by about 6% over the last budget biennium. The democrats say their spending deal is about flat or slightly below the previous biennium. So who is right? Actually, both parties are right in this case because the truth is in the language used. The GOP uses the word "budget," which in the previous biennium was about $32 billion dollars. However, after the budget was passed, the federal government provided some additional one-time stimulus money which we spent. That means the state spent roughly $35 billion in the last biennium. So, the GOP budget proposal is about a 6% increase over the last budget passed, but would represent a decrease in spending over the last biennium. The democratic proposal would actually increase the budget about 11%, but would keep spending about flat. I hope everyone can see that. A simple analogy would be if you set your budget for the whole year to be $20,000, but in the middle of the year your grandma gives you a gift of $2,000 that you blow on a TV and a PS3. Next year you budget $22,000. You have an increase in your budget of 10%, but your spending would be flat.

Does anyone else feel like they are watching reality TV when watching news on the shutdown?

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