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Saturday, September 13, 2008

Boring Economic Stuff

Phil Gramm, former Senator from Texas and Mike Solon, the founder of Capital Logistics have a good primer about economics in today's Wall Street Journal. DO NOT READ IT if you are a fan of Barack Obama, it contains facts about taxes, and who's actually going to get hit the hardest by raising them on the top 1% of income earners.

Gramm and Solon take a look at 6 states, the three biggest economic winners in the last decade and the three biggest losers. Arizona, Texas, Florida are the winners. Illinois, Michigan, and Ohio are the biggest losers. Unlike the NBC TV show, being the biggest loser economically is bad.

What they find is even though the populations of the biggest winners are expanding at double the national rate, the real income of their residents went up by over 21%, double the national average. The losers? The real income in those states only went up by 58% of the national average.

Unsurpisingly, they show that (DUH!) if you punish business through taxes and regulations, they leave your state for more friendly states. This seems like a no-brainer, but some folks don't get it, Gov. Granholm. Fully one third (3.7 million) of the new jobs in the US over the last 10 years have been created in the three "winner states" listed above. The losers? They've lost over a quarter of a million jobs between them.

Those who think more government programs can cure those 'loser' states should probably ask "why, if they already spend 20-25% more per person than the 'winners', and are still losing jobs"?

Why shouldn't Obama supporters read this? Well, Gramm and Solon point out something that lots of us have known for a long time. That top 1% that Barack wants to jack taxes up on; 75% of the filers in that group are actually small businesses filing as individuals to avoid the higher US corporate tax rate and regulations.

Since three quarters of our new jobs are created by such businesses, jacking up taxes on them will just stifle job creation. That group isn't some untapped treasure chest, it's the economic engine of our country.

If such tax increases hit, two things will happen, as business will have to react in one of the two following ways, because unlike economic assumptions, people actually react to tax changes.

The first, some of the folks filing as individuals, who'll see their tax rates go above the corporate rate will incorporate, and then pay themselves a salary that gives them a tax benefit. At the same time, since the corporation will be able to shield some income from taxation an individual can't, the business will also lower it's taxes. Net income to the treasury will go down, and no one will be able to figure out why.

Secondly, for the small business owners that incorporating doesn't make sense for, they still have to feed their families. That means they have to cut business costs. Either some sort of benefit cut for employees, or someone getting fired to make up that income difference.

What about that 25% that aren't small business owners? Like they always have, they'll find a way to shield enough income to nulify the tax code changes. All you have to do is look at the historic IRS tables to see that the higher the tax rate is on the upper 1%, the less they pay into the treasury.

There are armies of accountants and tax lawyers out there licking their chops at the idea of a 20% increase in the upper tax rate. They know that is a big enough increase to justify paying them to find away around it.

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3Comments:

Blogger ayoungamerican said...

I don't think these guys have this one right. Given the conflict of interest, I am also not sure we can trust Mr. Gramm to have an unbiased analysis of the economic situation of Michigan. Check out my reply, if you like,

http://ayoungamerican.blogspot.com/

3:24 PM  
Blogger Crazy Politico said...

I checked it out. While the tax rate itself isn't "crippling" start looking at the other regulatory costs of doing business in your state.

Check labor costs in Michigan vs. Texas.

If all were equal, it would be a no brainer for the Toyota and Hyundai folks to be building their plants in your state, or just buying the empty ones, which is cheaper than building.

So, if they aren't going to a state with hundreds of thousands of available workers who specialize in what they want to do, why?

6:22 PM  
Blogger ayoungamerican said...

I've reiterated some of my comments on my own blog, which you are welcomed to read (I'm just trying to drive my point home).

Yes, I won't deny right-to-work laws have some effect (I bet it "advertises" well to potential auto makers, says "hey, look at political commitments we are willing to make"). I do believe, though, that a more important influence that drove foreign auto makers to stay away from Michigan was that they would have to compete for employees and that would drive up wages (after all, it was only a few years ago that our unemployment rates was decently low and our workers were still employed!). Of course, that's not the case anymore, so maybe a foreign plant will pop up soon.

But that's not quite my point. (I'm just trying to explain why Michigan is doing badly, not why Texas is doing great). The poor performance of Michigan is is due to poor domestic auto industry management. I mean, they clearly made some bad decisions in this country. As a result, they are laying off employees all over the US, it's just that most of them are in Michigan because much of their manufacturing is in Michigan. Since people are buying foreign cars, foreign plants stay open; the domestic ones close. Anyway, Michigan just never got any foreign plants (well, we have one) because when Hyundai and Toyota were looking (10-20 years ago?) Michigan was chuck-full of domestics.

11:51 PM  

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