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Piling taxes on ‘the wealthy’ punishes job creators — just what Minnesota shouldn’t do in a recession

To date, legislators who eventually must resolve the looming $6 billion budget deficit have been trial-ballooning spending cuts and tax increases while looking over their shoulders with fingers crossed, hoping that the federal stimulus package would help bail them out.

The bill President Barack Obama signed last week promises about $2 billion dollars in general fund dollars for Minnesota in “one-time” money. That will certainly help with the 2009-2010 budget cycle, but one-time money doesn’t address the sustainability, or lack of sustainability, of current and projected levels of state spending.

Certainly state government can work smarter and improve efficiency, but given current spending levels, it is also imperative that Minnesotans rethink how and what services government is meant to provide. Reform is not simply one option.

Nor is it an option, as some on the left are suggesting, to maintain state spending at its current levels, using the bailout money to help plug the budget hole and increase income taxes on the top wage earners to fund the rest. That doesn’t solve the systemic gap between revenue and spending, and it’s bad policy in a time of recession.

Bottom half of filers pay about 5 percent of income taxes
Under Minnesota’s progressive income tax, the bottom half of filers, those households making under $45,000 per year, pay about 5 percent of all state income taxes. Overall, they pay less than 2 percent of their household income to the state for income taxes.

The top 10 percent, households earning over $130,000, pay an average rate three times higher. It’s about 6 percent individually and 55 percent of all state income taxes collected. These households are generally two-income professionals with children. They are middle-aged families making house payments, saving for college tuition and for retirement while meeting day-to-day expenses.

A progressive system? Absolutely. So why are some folks proposing to raise the top tax rate again?

The progressive argument is that high wage earners “can most afford” to “pay for a better Minnesota.” The fact is they can’t. Not now. The reason the state has a deficit is because given our progressive income tax structure, in times of recession when higher earners see investment earnings tumble or lose their jobs, state revenue is hit disproportionally hard.

Top 5 percent includes many businesses
The top 5 percent of households have incomes over $180,000 and pay 43 percent of all state income taxes. This group includes many small- and medium-size businesses whose owners run their businesses as S-Corporations. This means that business income is passed directly through to them on their personal tax return.

According to the Minnesota Chamber, 92 percent of all businesses flow their business income through a personal tax return where it appears as personal income. In fact, from that “income,” the owner must take his personal income and find money to plow back into the business to make it grow.

Today, when many employers are simply trying to keep the doors open and the staff employed, increasing already high taxes is not a tax on the wealthy so much as a tax on a struggling small-business owner, which puts his working-family employees’ jobs at risk. In a recession, tax increases equate to layoffs. The employer’s tax burden has to come from somewhere.

Taxes on the “wealthy,” like so many progressive policies, actually work against their stated objectives. If the tax burden gets too high, the “wealthy” simply pick up and leave for warmer climates. Homes are cheap in Florida, and a dollar stretches a lot further when there are no state income taxes. When they move, they take the jobs they provide and the taxes they pay along with them. And, ironically, to woo new high-earners with job mobility to the state, companies must offer higher wages to offset higher income taxes, in effect increasing, not decreasing the wage gap that seems so “unfair.” Mobility is much easier for citizens and businesses in the 21st century.

I would hope that before any legislators consider a class-warfare offensive, they remember who it is that pays for their state programs. Punishing hard work and ingenuity does not bode well for the long-term health of our economy.

Punishing job creators so that we can expand non-sustainable government programs makes no economic sense. Even President Obama has stated that raising taxes is not an appropriate action to take in a recession. I urge his Minnesota disciples to take him at his word.

Pat Anderson is the president of the Minnesota Free Market Institute and a former Minnesota state auditor.

Comments (13)

  1. Anonymous Submitted by Anonymous on 02/24/2009 - 07:55 am.

    The right wing, trickle down, conservative fiscal policies espoused in this article have been debunked by the failures of the last 30 years. It is not low taxes that spur the economy, but better wages and consumer spending. American entrepreneurs will find a way to create jobs to fill demand, but if there is no demand you could cut taxes to zero and they would not build more factories or create more jobs for no reason. Supply side economics has almost crippled this country, just like it did in 1929, yet people like this columnist still want to stick to a failed ideology. This article is completely irresponsible. The right wing have been waging class genocide for 30 years, so of course they don’t want to start a class warfare. They like it being one sided in their favor.

  2. Submitted by Hiram Foster on 02/24/2009 - 09:41 am.

    Taxing the poor, punishes people who actually work. Given a choice, it’s better to tax those who don’t work as opposed to those who do.

  3. Submitted by Paul Udstrand on 02/24/2009 - 10:14 am.

    Someone needs to explain some basic arithmetic to Mr. Anderson. We collect taxes as a percentage of income for a reason. Yes, twenty percent of a million is more dollars than twenty percent of $50,000, but that doesn’t mean a millionaire is getting soaked.

    As far as economic stimulus is concerned, there is absolutely no data, nor does Anderson even attempt to present any, that taxing the wealthy is bad for an economy. In fact on the contrary our nation saw one of it’s biggest periods of economic growth at a time when tax rates were as high at 70% – 90% for the wealthy.

  4. Submitted by Carol Braddock on 02/24/2009 - 11:37 am.

    As an S Corporation officer, I find the logic error filled, for you always have the option of going C Corp, where the tax rates for being profitable are better.

    This is what “freedom” is about, the ability to leave. I don’t mind if they leave. They probably have nothing I’d want anyway. I don’t want them then “becoming too big to fail”, which then has me giving them money for bad judgment.

    And…an owner doesn’t have to “pass” income to him/herself first. They can ‘grow’ by using a sound business plan which accounts for all of those variables.

    You eventually have to pay for things. That time has finally come. The tax rates have to rise. You are free to leave. But please don’t complain, this has been coming for almost 30 years now. The Piper is here. Pay him.

  5. Submitted by Thomas Swift on 02/24/2009 - 11:46 am.

    NOT A COMMENT…NOT FOR PUBLICATION….

    Is there some reason my comment has not been posted?

    I have lost several comments without explaination in the past couple of weeks. I do not see where any of them violate MinnPost terms of use.

    What gives?

    tjswift@yahoo.com

  6. Submitted by myles spicer on 02/24/2009 - 11:54 am.

    Following up on Paul Udstrand’s comments about growith in our country during relatively “high” tax years; similarily, our state had its most robust growth when we were considered a relatively “high” tax state. Business and growth in Minnesota flourished.

    Conversely, under Pawlenty’s “no tax” pledge, growth and development have diminished.

    The bottom line, is, there is practically no correlation between taxes and business development. So many other factors trump taxes: strong educated,labor force…transportation…quality of life amentities…and access to information among them.

    As a long time (Minnesota) business owner, taxes were virtually irrelvant to me; if I made good profits, I would pay my taxes without complaint, and hope they would be put to use to make Minnesota a better place to live. Moving to ,say, South Dakota was a non-option for me — I love my state.

    If taxes were the driving force for business development, Mississippi would likely be a mecca.
    Not so!

  7. Submitted by Brian Simon on 02/24/2009 - 12:51 pm.

    If all these so-called ‘job creators’ are tired of paying such a high percentage of collected taxes, perhaps they should increase the wages of their employees, so their employees can pick up more of the tax burden.

  8. Submitted by Paul Harvey on 02/24/2009 - 01:05 pm.

    Ms. (I believe it is “Ms.”) Anderson’s use of statistics is misleading. First, even if income were taxed at a flat rate, the top 10% of income earners would still bear more than 10% of the income taxes because they receive more than 10% of the income. Therefore, her pointing out the disproportionate share of income taxes these people pay does not prove the system is progressive.

    Second, Ms. Anderson ignores the fact that people pay several types of taxes, not just income taxes. She also ignores the distribution of income, which is fundamental to any discussion of tax fairness. Consider, for example, that the top 10% of income earners in Minnesota bear 38.2% of the total state and local tax burden, but receive 41.5% of the income. (Readers can get more information about relative shares of taxes and income from the State’s tax incidence study on the internet.)

  9. Submitted by Thomas Swift on 02/24/2009 - 01:20 pm.

    Paul Udstrand offered: “In fact on the contrary our nation saw one of it’s biggest periods of economic growth at a time when tax rates were as high at 70% – 90% for the wealthy.”

    Yes, Paul. During WWII and through the cold war tax rates were high….of course you’re referring to *marginal* tax rates. Surely you do not believe that any company in the history of the United States ever turned over 90% of its profits to the government?

    In addition, you don’t think that the influence of WWII, Korea and the cold war had anything to do with the economic boom of the 50’s and 60’s, do you? Nah.

    I’m happy the miles and Gloria have had such success. Hearing stories of achievement from my neighbors is a real pleasure to me.

    Perhaps they might pass along some of that combined wisdom to 3M Corp., which hasn’t spent $1.00 in expansion or modernization in Minnesota for the past 10 years.

    Evidently they haven’t received the memo that would have convinced them that building a $1.75 billion dollar chemical plant in Alabama, or that building a virtually copy of their Minnesota engineering campus in Austin, TX was a bad business decision.

    The same information could be shared with Whirlpool, Fisher Nut, Ford or any of the dozens of other businesses that have moved to the South.

    The author has presented reliable facts, as well as the source of those facts, responding with visceral avarice and hyperbole that borders on hysterical does nothing to advance a rational counter argument. All too often (always, really) calls from the left for higher taxes on the wealthiest citizens rely on nothing but that visceral avarice and hyperbole.

    Take a moment…breathe; think.

    As Pat pointed out, the top earners in this state are already paying most of the taxes collected. Putting all of our eggs into that tiny basket leaves us vulnerable to wild fluctuations as the taxable incomes of these people rise and fall with the market. To suggest that it is either a good idea for them to leave, or that under no circumstances will they leave makes absolutely no sense at all.

    Middle income earners, such as myself, are not in a position to pay higher taxes today, and most likely will not be at anytime in the next five years. I, like many of my friends and neighbors, have accepted rather significant salary cut to help my employer through these tough times. We have adjusted our lives to accommodate these circumstances, casting about for someone to blame is a waste of time, but we certainly do not want to have ourselves put in the position of having to rely on government assistance merely in order to maintain government expenditures.

    As Pat also pointed out, there is a huge segment of the population that is exempt from paying taxes at all. In fact, for many, tax time is bonus time. There may be a reasonable argument for this redistribution in times of economic boom (I haven’t heard one yet, but I’m open), but when we are faced with a projected 3.4% decline in GDP, at the very least perhaps it might be time to forgo the regular re-distribution that occurs through “earned income credits”. Redirecting these subsidies won’t answer completely, but it would certainly help.

    If it makes sense to “spread the wealth” why should we not spread the sacrifice?

  10. Submitted by Keith Pickering on 02/24/2009 - 01:22 pm.

    More GOP talking points devoid of real data. If what you say is true, it should be easy to prove using numbers. North Dakota repealed their flat tax in 2002, preferring to go with a progressive income tax. Since then, ND’s per-capita Gross State Product has climbed from 35th in the nation to 24th. Hmmmmmm.

  11. Submitted by Alicia DeMatteo on 02/24/2009 - 02:00 pm.

    Now I’m no economist, but let me make sure I understand this flow of money correctly here:

    1. Reduce income taxes on the upper 5 or 10% of MN taxpayers.
    2. Those individuals will feel SO lucky to have their taxes reduced, they will forgo salary increases and/or bonuses for a while, which leads them to …
    3. Using that extra money to keep or hire more employees, preventing massive buyout situations and layoffs.

    Uh huh, I think I’m with you here.

  12. Anonymous Submitted by Anonymous on 02/24/2009 - 02:23 pm.

    It always annoys me when the neocons trot out the tired old “tax cuts as the cure for everything” mantra, when it’s been disproved so long and so often. But, in fairness, here is a chance to defend your reasoning. If you were a CEO of a small business doing, let’s say a million dollars in sales annually, how big of a tax break would it take before you hired one more person? $10,000? $20,000? More? Could the state actually give you and every other comparable business that much money without going bankrupt?

  13. Submitted by Bill Coleman on 02/25/2009 - 10:48 pm.

    I am a small business owner, an S corp. Every dollar that I invest in my business is exempt from income tax. It is only my salary and company profits that end up in my pocket that are taxed. So, a high tax actually motivates me to invest in my business, with equipment, training, marketing, whatever. A low tax rate might encourage me to take the profits out and go on vacation.

    Mr. Swift cites a 3M decision from the 1980’s that has more to do with Texas’ massive investment in the University of Texas to make it a research juggernaut. We have great companies here in MN that have invested and made millions. Medtronic, Boston Scientific, Thomson Reuters, Ecolab.

    Investment in MN has definitely slowed here in MN in this decade. Some people would say that declining public investment in education and roads is the reason. Whatever the cause, we better get moving.

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