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Tax your way to prosperity?



The Illinois legislature, with the support of the state's Democratic governor, rammed through major tax increases on Illinois residents and businesses on January 11, 2011. This took place just hours before newly elected representatives were to take office, with control then shifting to the Republican Party.

The intent? To help address a nearly $14 billion budget deficit. The state's income tax rate will rise from 3 percent to 5 percent, a hike of 67 percent. In addition, the nearly 50 percent boost in the corporate tax rate will now make Illinois one of the most expensive places in the world to conduct business (The Wall Street Journal).

Shouts of joy soon followed...from such places as Indiana, Iowa, Missouri and Wisconsin. Economic development people from each of these states will now target Illinois businesses, enticing them to shift their operations to their state where the business climate is friendlier, where taxes are less painful, and where state budgets are largely under control.

You cannot tax your way to balanced budgets. You cannot tax your way to economic prosperity.

Out West
It's no secret that California

has routinely boosted taxes on high income individuals and on the business sector to deal with excessive spending and massive budget deficits. The same "move your business here" agenda has been followed successfully in many Western states.

You cannot tax your way to balanced budgets. You cannot tax your way to economic prosperity.

A variety of states passed income tax surcharges on their high income residents in recent years. These increases-referred to as the "millionaire tax"-in most cases led to fewer tax dollars collected than anticipated. In one example, Maryland had 30 percent fewer "millionaires" file than the year before, with an actual 22 percent drop in high income tax payments(www.walletpop.com).

What happened? People typically make rational decisions about money. High income earners in many cases have the ability to establish "residency" in lower tax states. Many did just that.
States across the nation will collectively deal with shortfalls in tax revenue in 2011. The problems are most acute in California, Illinois and New York.

More well-managed states in recent years have addressed revenue shortfalls with spending reductions, avoiding the major tax increase "solution." Such states have also made minor changes to address public employee pension funding shortfalls down the road. It is largely these states that will be successful in attracting-and retaining-high quality employers in coming years.

Stocks Up in '11?

It's already in the cards. The Dow Jones Industrial Average is highly likely to rise in 2011. The reason? Either the Green Bay Packers or the Pittsburgh Steelers will win the Super Bowl.

One of the more unusual-and accurate-predictors of stock market performance involves professional football. On those occasions where a team from the "original" National Football League (one existing before the merger with the American Football League) wins the game, the market goes higher during that year (The Wall Street Journal).

This indicator has been accurate following 35 of the 44 Super Bowls, a glossy 79.5 percent rate of accuracy. This year the winner doesn't matter, as both teams are "originals" from the National Football League.

A finance professor at Washington & Lee University in Virginia took it a step further. He indicated that only nine times in the 44-year history of the Super Bowl have two original NFL teams met each other. And all nine times, the market, as measured by the S&P 500, was up that year.

Works for me

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Jeff Thredgold
The Tea Leaf is a weekly economic and financial update by Jeff Thredgold, economist for Vectra Bank Colorado. He has been writing an economic update every week for the past 31 years and is the only economist in the world to have received the designation of CSP, or Certified Speaking Professional. Republished with permission from the Tea Leaf by Jeff Thredgold, whose site address is www.thredgold.com/html/leaf.html.

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