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A heretical Rx for Minnesota’s economy

Because we have a deficit forecast for our state budget, and because the Minnesota Constitution doesn’t permit deficits, the governor and the Legislature have two choices in this session: cut spending or raise taxes.  If the goal is helping the Minnesota economy, I’d like to suggest that the best solution is to raise taxes.

Such a prescription sounds heretical, doesn’t it? We’ve spent a long time here and elsewhere in the United States being told that taxes are the enemy of economic growth.  The theory — based, really, on ideology, not economics — would have us believe that money sent to the government is inherently unproductive.  Government, it is said, can’t do anything well, so the smaller it is the better off the economy is because all the government does with taxes is suck them in and waste money, which could be used productively to invest in production.

Not true.  Not even close to true.

Getting money into the right hands
In difficult times, government is actually quite adept at doing what needs to be done, i.e. at getting money into the hands of people who don’t have very much so they’ll spend it and help the economy along. There are a number of ways to get this economic churning going. One is through what is called a transfer payment — a payment of money from a government to an individual for which no service is required. Unemployment compensation is a classic transfer payment. 

Government payments to service providers can also help the economy. Everyone knows that the money given to contractors to build roads and bridges helps the economy. What most people don’t think about is that the money given to the teachers in job-training programs, the money paid to staff for after-school programs, and the money paid to workers in nursing homes also helps the economy. It’s precisely these kinds of programs that will be cut if the governor and Legislature agree that Minnesota’s deficit should be paid by spending reductions only.  From an economic standpoint, cutting these programs is exactly the wrong thing to do. It exacerbates the recession, making it worse, not better.

Where should the money for balancing the budget and initiating a few temporary transfer-payment programs come from? Higher income-tax payers in the form of an income-tax surtax. 

Won’t taxing those who are better off hurt the economy?  No, according to Nobel Prize economist Joseph Steiglitz and many others. The money that’s sacrificed to taxes won’t be used to increase the consumption of those paying it — very-high-income folks already theoretically consume as much as they want to. 

But won’t taxing higher-income people curb job-creating investment? No again. There’s considerable evidence that most American savings weren’t going into job-creating investments before the recession; they certainly won’t do that now. The vast majority of investment these days is in financial investments, like derivatives, not job-creating investments. 

There’s another very good reason to raise taxes on Minnesota’s more affluent citizens: It could bring us back to the fair goal Minnesota used to strive for, and got quite close to achieving in the 1980s and early ’90s: having all income groups pay about the same percentage in overall taxes. Today the top 1 percent of Minnesota earners pays 20 percent less, on a percentage basis, than the rest of us. 

High tax equals high growth rate

The bottom line:  We should tax high-income taxpayers and use the money to help stimulate the economy. Will we do it? Probably not, but maybe. There’s always hope.  More and more people are becoming aware of this reality:  When Minnesota really was a high- tax state, we had the best economic growth rates in the nation, and now that we’re 28th in state and local taxes and fees as a percent of personal income, our economic performance compared to the other states is deteriorating rapidly. One example of many:  We used to consistently have unemployment rates 25 percent to 33 percent lower than the national average. In March of 2007,  for the first time in three decades, Minnesota’s rate was as high as the national rate, and it still is. 

The states with the highest taxes have the best economic performance. State taxation really isn’t a waste; it’s one efficient and fast-acting way to grow the economy, especially in recession. 

Wy Spano directs the Master of Advocacy and Political Leadership Program at the University of Minnesota Duluth.

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Comments (3)

  1. Submitted by myles spicer on 02/21/2008 - 01:12 pm.

    A good article that points out two historically proven “truisims”. First the failure of “trickle down” economics vs. “a rising tide helps all”; and the lack of correlation of taxes as an indicator of a strong economy for states. Indeed, a more viable thoery is the LOW tax states (i.e Mississippi etc) have lesser economies.
    As an aside, a new book (The Shock Doctrine by Naomi Klein) provides a very cogent analysis of laissez faire capitalism and it ramifications on society, as opposed to a public/private cooperative effort.

  2. Anonymous Submitted by Anonymous on 02/21/2008 - 02:24 pm.

    Hard to imagine that Wy wrote this with a straight face. One thing we know about raising taxes—the higher they go, the harder people work to avoid paying them. That, I think, is what Aesop referred to as killing the goose that laid the golden egg.

    Transfer payments don’t give money from the government to “an individual’, they give money taken from those who earned it to those those who didn’t. Governments don’t give money without first taking it away from someone else.

    There is no better way to thoroughly screw up an economy than to remove the incentives for earning and thoughtful consumption by government raising taxes and giving money away.

    By Wy’s logic, if higher taxes are better, why not take all our earnings? That, of course is an absurd question (I think/hope Wy would agree), but it raises the real question: at what point are taxes too high for Wy, or for the good of Minnesota?

  3. Submitted by Frank Jaskulke on 02/21/2008 - 03:04 pm.


    I certainly hope my comments don’t affect my grades (I’m sure they won’t) but I must respectfully disagree – to a point.

    The argument that higher taxes result in more economic growth is a fallacy (post hoc ergo propter hoc) – simply because high taxes and high growth occur at the same time does not mean they are related – positively or negatively.

    What is more likely that we are experiencing the results of decreased investment in critical infrastructure in the state – education, transportation, etcetera combined with globilization.

    Minnesota used to be well above average in terms of education. Our workforce was far and away one of the most educated and skilled in the world. That is not the case anymore. It’s not so much that are people have become less educated, but that many other places around the world have become more educated. Competition is more intense then in past years.

    Would raising taxes on high income earners to increase transfer payments have much of an effect? Seems unlikely, Minnesota’s GDP stands at about 200 billion dollars. With a state budget of about 16 billion a year (33 a biennium)state spending would have to be increased very significantly to impact the economy in a material fashion. Many analysts do not feel that the federal stimulus package is large enough to restart growth.

    The most important consideration though is missed – why are we in a recession? It’s physics, what goes up, must come down (if it goes up too high). Cheap money lead to a housing boom not based on fundamentals. That growth we saw for a number of years was ‘fake.’ Now we have to pay the piper.

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