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Posted: January 27, 2011

Tax your way to prosperity?

I think not

Jeff Thredgold

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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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.
Enjoy this article? Sign up to get ColoradoBiz Exclusives. The opinions expressed in this article are solely that of the author and do not represent ColoradoBiz magazine. Comments on articles will be removed if they include personal attacks.

Readers Respond

I agree with Rob... In addition, until the tax system is overhauled, just do what the rich (and financial savvy) in our society do; manage your financial affairs in such a way to take full advantage of the loop holes and tax benefits that allow you to minimize your taxes, then use your extra money to pay special interests that lobby Washington so you can get MORE loop holes and tax benefits. And, PLEASE don't feel guilty about how unfair it might be that the percentage of taxes you pay are far less then someone making a much more modest income! By Annie on 2011 01 28
Maybe you can't tax your way to prosperity, but businesses routinely invest their way to it. And they typically use somebody else's money to do it. When businesses stop investing they become less successful and gradually fade away. Government is the way we collectively as a society invest in our future - through education, infrastructure, etc. Taxpayers are the investors, and they deserve a return on their investment. The argument should be about how to best invest taxes for future returns, not how to stop collecting taxes. Unfortunately , arguments like the one in this article create a sentiment that taxes are inherently bad for business, when the discussion should be about how capital raised through the tax system should be invested wisely to create a society where business thrives. Not hearing much of that lately.... By Rob on 2011 01 27
"You cannot tax your way to balanced budgets. You cannot tax your way to economic prosperity." Bravo! I think your previous commenters missed where you pointed out that higher taxes in one state is a huge incentive to move business elsewhere. --- I also agree that the stock market will rise. However, I believe the football thing is irrelevant. The stock market is denominated in Federal Reserve Notes (colloquially known as 'dollars'). There are now several times as many of these FRNs circulating around the marketplace as there used to. As the beneficiaries of first use of these new FRNs start moving them downmarket (by purchasing goods and services), the value of each individual FRN will plummet. Basic economics tells us that, as larger amounts of scrip chase after a fixed measure of wealth, the value of that scrip falls. Each company in the stock market represents some real wealth. It has hard assets. It will take an ever-increasing number of FRNs to represent this wealth, as the true value of each FRN falls. Ergo, the markets seem to rise -- but in paper valuation only -- if the true underlying wealth remains the same. By Nunya Bidnez on 2011 01 27
Surprised Cobiz printed this - Cobiz's endorsement of Obama before the election clearly highlights the differences people actually engaged in business and those who simply write about it. By Jay LaVigne on 2011 01 27
1. Saying an outgoing legislature did something at the last minute doesn't make it less legitimate - how far before an election or change of legislative session do you think our elected officials should sit on their hands? A week? A month? A year? 2. Can you provide citation on exactly who's 'shouting for joy' - do you have any direct quotes? 3. "You cannot tax your way to balanced budgets." I don't know if maybe you don't know the way that state and federal budgets work, but 'taxes' are how the government takes in the revenue it needs to cover its expenses. In other words, it creates a 'balance' between what it takes in and what it spends. Not taxing to prosperity is at least something you could make an argument for, although you didn't. 4. Thank you so much for highlighting the fact that rich Americans will do anything to avoid paying their taxes - REGARDLESS OF WHO SETS THE RATES. They've been dodging taxes for decades and decades and, as you point out, will continue to do so the more government has to try to make up for tax evasion. Oh, and everybody knows that 2/3 of American businesses don't pay any taxes anyway, but that little fact doesn't help you push your agenda, so you left it out. 5. So you think that a state that treats its people like garbage is going to attract businesses, heh? Sure - the ones that want to employ garbage I guess. 6. OK, so you're going from baseless conjecture to outright superstition - anything at all to avoid saying that anything positive has happened on this president's watch, huh? You should see if FOX news is looking for any editorial propagandists pretending to be journalists. By Andrew on 2011 01 27

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