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Nobel laureates and Minnesota taxes

Trust me, we’ll get to Minnesota taxes in a moment.

Amazingly, three alumni of Far Rockaway High School in Queens won Nobel Prizes over the course of 11 years: Richard Feynman in physics in 1965; Burton Richter, also in physics, in 1976; and Baruch Samuel Blumberg, in medicine, once again in 1976. There may be another nonselective public high school someplace that has produced as many Nobel laureates, but maybe not. 

But that was all then. Two years ago, after more recent decades of lousy academic results and dangerous hallways, education officials in New York City “reorganized” FRHS into something called the “Far Rockaway Educational Campus,” a collection of four smaller, and, presumably, manageable programs.

In between, interestingly enough, Bernie Madoff also graduated Far Rockaway (as I did, for that matter). There may be a pattern here, but for our purposes, let’s just say that institutional fortunes have a tendency to bounce around, whatever the reason. 

Here’s another intriguing example of how things — in this instance, businesses — can change rather quickly.

The 11 ‘Good to Great’ companies
One of the best-selling business books since its 2001 release has been “Good to Great,” by Jim Collins. Using hard data, he identified 11 firms that had dramatically outperformed both their competitors as well as the market as a whole for about 15 years.  How dramatically?  Cumulative stock returns for the 11 companies were 6.9 times better than those of the general market. 

What were some of the companies?  Three of the better known ones were Wells Fargo, Walgreens and Kimberly-Clark.  But the two enterprises which, almost surely, have garnered the most attention over the last year have been (drum roll and taps, please) Circuit City and Fannie Mae; the former of which sought Chapter 11 bankruptcy protection last November, and the latter of which remains alive only through the compelled generosity of American taxpayers.    

Taking the 11 companies as a whole, economist Steve Levitt last summer wrote that they actually performed less well than the S&P 500 in the eight years after the book’s release. 

Then there’s an old but still important George McGovern op-ed.  Writing in the Wall Street Journal in 1992, the South Dakota Democrat talked about how he had bought an inn in Connecticut four years earlier, but which had gone bankrupt in the interim.  “In retrospect,” he acknowledged, “I wish I had known more about the hazards and difficulties of such a business, especially during a recession of the kind that hit New England just as I was acquiring the inn’s 43-year leasehold.” 

Even more candidly and impressively, he wrote, “I also wish that during the years I was in public office, I had had firsthand experience about the difficulties business people face every day.  That knowledge would have made me a better U.S. senator and more understanding presidential contender.”

The connection between the stories
What’s the main thread in these disparate stories?  It’s the brilliantly acute insight that running an organization — be it commercial or otherwise — is hard.  Remaining afloat is hard.  Making payroll can be extra hard.

Let’s say you own a new business.  Every dollar you have may be tied up in it.  Sure you fantasize about getting rich, but for the time being at least, just about everything in your life is consumed by your dream.  Your employees also rely on your success for their own families to stay fed and sheltered.  Sleepless nights aside, you take satisfaction in contributing to your community in the most tangible ways you can: providing products, services and jobs.  Not incidentally, you also generate a reasonably steady stream of tax revenues.       

But then you fire up your computer one morning and read that DFLers in the Minnesota Legislature — on the off-chance your business has a decent year despite the worst economic downturn in three-quarters of century — expect you to pay one of the highest income tax rates in the country: 9 percent if their House bill prevails; 9.25 percent if their Senate bill does.

I’m not unmindful of how difficult it is to balance a biennial budget that’s almost $5 billion out of whack.  But I’m more mindful and admiring all the time of what it takes to run a successful business and how dependent we are on the men and women who do so here — as opposed to the overwhelming majority of other states with lower tax burdens. (Note: The personal income taxes of many business owners are based on their companies’ revenues.)

So two impertinently pertinent questions:

Do these proposals sound as if they were designed by people who truly know what it takes to conceive, create, and run a business? 

Even more to the point, do these plans sound like promising ways of encouraging entrepreneurial people to set up shop in Minnesota and then stick around? 

Mitch Pearlstein is the founder and president of Center of the American Experiment.

Comments (9)

  1. Submitted by Dan Hoxworth on 04/30/2009 - 01:08 pm.

    So George McGovern was a poor businessman and not knowledgeable about the challenges of running a business, what does that have to do with tax policy??

    Organizations evolve and go through ups and down often dependent on their leadership or decisions. Again, what does this have to do with higher income tax rates in Minnesota??

    Many businesses and professions are cyclical. Farmers go boom to bust. Retailers are very dependent on economic conditions and the discretionary income of their potential customers.

    A strong case can be made to have our income taxes allow for averaging income over three years to clear up cyclical ups and downs in individual, business and economic fortunes. I would agree with this principle.

    A progressive tax structure that says that those who benefit the most economically from our state’s and nation’s legal, constitutional and economic framework is very valid. Perlstein’s argument fails to refute this.

    Indeed, the vast majority of those targeted for the new higher income tax rate in the House (I disagree with the Senate’s provision) do not have the volatility in income that Pearlstein is exposing. They have large investment income and often are in positions with major corporations where their stockholders take the risk financially not them personally (except perhaps for their bonuses.)

  2. Submitted by Thomas Swift on 04/30/2009 - 01:09 pm.

    Very timely questions, indeed Mitch.

    The other night I was listening to Mark Heaney’s AirAmerica talk show. He was engaging in a genuine meltdown over the idea that the Democrat tax fest might harm the state’s economy by driving away business investment. Heaney’s response was that business people that don’t like the Minnesota Democrat party’s plan to tax them, and the businesses they manage, more than any other state in the union should not let the door hit them on the way out.

    Evidently Heaney is privy to the existence of a plethora of new businesses just chomping at the bit to relocate to Minnesota.

    I don’t know if it’s fair to say Heaney speaks for the entire Democrat machine, but judging from what I read on left wing web sites, he certainly is articulating the sentiments of many of the cogs and wheels that have put tax happy liberals in power.

    Now we hear that a leftist group plans to converge on the state capital to express their heartfelt support for higher taxes…..on everyone but themselves.

    These examples, for me, illustrate the disconnect leftists have with the hard work involved in running a business explains not only their eagerness to “pile it on” the work side (higher business taxes, more regulatory intrusion, reporting and the paperwork that brings) but their obsession with crushing the rewards of having the audacity to succeed (tax the rich).

    From all appearances, the dedicated leftist believes that the piles of cash that didn’t just float down from the sky into the laps of the filthy rich must be delivered on the whip scarred backs of their hapless employees.

    They evidently see it as their duty, therefore, to lift the yoke of employment from the abused masses by taxing the employer out of his business.

  3. Submitted by Michael Friedman on 04/30/2009 - 04:37 pm.

    It is an extreme sleight of hand, commonly used by paid writers for millionaires, such as Mr. Pearlstein, to equate wealth with entrepreneurial hard work. In this instance, a more egregious error is to whitewash the majority of personal income taxes as a tax on entrepreneurs — the myth of the singly owned, out of nothing but hard work, basis of wealth is alive and well. Most of the extreme wealth subject to the highest tax rates will be accrued through inheritance — which millionaires fight like hell to keep from getting taxed, not believing in each generation having equal opportunity to work their way to the top — or management within corporations, for which a record of personal success bears no relationship to talent or to the well being of society as a whole, as has been well demonstrated during this economic crisis and others before it.

    The rates in question actually represent a return to Minnesota’s tax policies of a decade ago. Given that such rates coincided with a better state economy, and higher tax rates in earlier decades nationally coincided with a better national economy, the sounding of the alarm must be seen for what it is: paid propaganda, invoking all sorts of appealing myths, for the benefit of millionaires who would rather see denial of health care to impoverished thousands (hopefully none will have their flu treated too late) then contribute to the well being of society in a fair manner that does not affect their standard of living in the slightest.

  4. Submitted by Karen Sandness on 04/30/2009 - 11:40 pm.

    Um, Mr. Pearlstein, if you’re so knowledgeable about business, then you should know that corporations are taxed on *profits,* not on income, but roughly on income minus expenses.

    Deductible expenses include employee wages, salaries and benefits (including the owner’s salary); various sorts of allowances that executives get, travel (even first class airfare, if the company’s budget allows it), inventories, lease payments, supplies, depreciation of equipment and buildings (Some equipment can even be expensed), and any other cost of making money. Money that is plowed back into the company for things like R&D is not taxed, either.

    As a sole proprietor, I don’t even pay the corporate tax rate. I figure my income minus expenses (and I get to deduct a lot more things than an individual does), and then the profit is considered my *personal* income.

    My well-being depends not on tax rates but on whether anyone wants to pay for my services. If no one wants my services, then all the tax breaks in the world won’t help.

    Besides, if my business expenses exceed my business income, then I pay no taxes. The same is true of a corporation. A corporation that is struggling will pay little or no state income tax. If may pay nothing even if it *isn’t* struggling, since clever lawyers and accountants can work miracles in that respect.

    OK, OK, the shareholders may receive fewer dividends if taxes on corporate profits rise. Big deal. Whoever said that playing the stock market was supposed to yield guaranteed returns?

    Republicans depend on the ignorance of the general public. An awful lot of people think that businesses are taxed like individuals. If they knew the truth, they wouldn’t be fooled into thinking that taxes were depriving them of potential jobs.

  5. Submitted by James Hamilton on 05/01/2009 - 08:08 am.

    Yes, there are employers which can choose where to locate based, in part, on the tax rates that its owner(s) may pay. But how large an effect does that single factor have, I wonder.

    I’ve been self-employed in one fashion or another off and on throughout my life. In each case, I provided services of one sort or another. That required that I live in an area in which there might be a market for my services.

    I’ve been engaged in my current line of work for close to 25 years. My competitors operate in exactly the same business environment that I do.

    I also choose to live in an area near my extended family. That, too, means Minnesota.

    Certainly, there are businesses far more portable than mine. If I built widgets, I could build them anywhere I could find a competent work force, reliable access to parts and supplies and a cost-effective means of distribution, among other things. But would I actually move to, say, South Dakota, to operate that business? Possibly. But not necessarily.

    So, when someone tells me that the tax rates here in Minnesota are too high, that they drive businesses to adjoining states, or that they encourage new businesses to establish themselves elsewhere, I have to ask: to what extent?

  6. Submitted by Paul Udstrand on 05/01/2009 - 09:30 am.

    I can only assume that Mr. Pearlstein is writing to us from Somalia where he’s living the no-tax no-government dream.

  7. Submitted by William Pappas on 05/03/2009 - 10:40 pm.

    Good point Mr. Hamilton. The corporate and personal income tax environment is way down the list of potential reasons on where to locate a business. That’s just another myth perpetuated by conservatives. The plain truth is that the middle class is in real trouble and if only regressive taxes are viable the redistribution of wealth to the rich will continue to accelerate. A progressive tax is what keeps the middle class afloat.
    Another myth is that a higher income tax or corporate tax rate will discourage investment. Quite the contrary. It serves to direct reinvestment that works to sustain business rather than encourage obscene profits and short term planning. In addition the effective corporate tax rate is the result of many factors that keep that rate much lower.
    Watching our State and National economy begin to resemble that of a third world nation apparently pleases some. As we witness a humongous wealth transfer from ordinary taxpayers to financial institutions that has gutted almost everyone’s retirement account its time for the middle class to get a break. Those that have been on this low tax, high income joy ride now need to pay up.

  8. Submitted by david granneman on 05/03/2009 - 11:12 pm.

    hello all
    is it a coincidence that all the high tax states such as michigan, new york, and california have the highest unemployment, bankruptcies, and forclosures. is it a coincidnece that companies and people are leaving these states in droves. is is a coincidence that low tax states have business moving to these states and thier unemployment is low. is is a coincidnece that the high tax states have state budgets with hugh deficets. why do you think northwest airlines and 3m have moved offices out of minnesota. when companies are looking for places to build factories and create jobs they do not pick high tax states. i suspect most people who post in favor of higher tax work in some form for the government. i need to remind you that the money to run government is conficated from private enterprise. when you tax private enterprise out of existance you will no longer have money for your government job. most americans are working to the middle of may just to pay their taxes.

  9. Submitted by Karen Sandness on 05/14/2009 - 12:11 am.

    I don’t work for the government; I’m self-employed, and I would NOT want to move to any of the low-tax states, for the simple reason that they offer a lousy quality of life.

    You get what you pay for.

    Oh, and I don’t know anything about 3M, but NW Airlines is leaving the Twin Cities not because of taxes but because it was bought by Delta Airlines, and I can’t imagine Delta dismantling its own headquarters to move them here.

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