Taxation: September 2007 Archives

The Corporation for Enterprise Development (CFED) recently released a new report called "Assets and Opportunity Scorecard" for each of the fifty states. In this report, Maine scored an A. Given that that the report is suppose to measure "financial security" this sounds like a good development for Maine's business climate. However, the CFED report has nothing to do with boosting Maine’s business climate. With a little research into the report, it becomes apparent that CFED is a liberal think-tank pushing a pro-governmnet, pro-dependency agenda. Consider these nuggets pulled from their index.

The index touts that having a state minimum wage higher than the federal minimum wage is a good thing for business. Ask any business owner if this is good for business.

The index supports the expansion of the earned income tax credit. First, the EITC is bad tax policy—welfare should not be hidden in the tax code. Second, the EITC discourages as much as encourages work among low-income taxpayers.

The index favors Medicaid/SCHIP expansion. Again, increasing dependency on government is their goal. Our recent report on Medicaid/SCHIP expansion details why this is bad public policy.

Finally, another sign of CFED's liberal ideology, see their index on “state tax incidence studies.� These type of studies are designed to stoke the flames of class-warfare. And cited as the data source was Michael Maserov who is with the well-known liberal think-tank The Center for Budget Policy Priorities.

I could go on, but I think you get the point . . .

A recent study by Dr. Roger E. Brinner and Dr. Joyne Brinner, The Parthenon Group and Global Insight, Inc., sheds new light on the economic effects of various taxes. This study should be required reading for the Taxation Committee as they continue to pursue new tax reform options. In a nutshell, the study finds that sales, profit and excise taxes are the most economically destructive taxes while income taxes are only slightly so. After running an economic simulation through the Global Insight model of the U.S. economy, they state:

“The results are striking. The higher inflation created by equal-sized retail tax changes, plus the absence of a federal taxes by ‘deducters,� more than doubles the economic pain created by higher income taxes. In the second year, at the peak impact, the income tax increases cut national employment by 345,000 while same-sized sales or excise tax increases would cut jobs by an estimated 901,000. Any such combination of retail tax increases would boost inflation by a full percentage point, setting off a painful vicious cycle of weaker confidence, lower spending, and fewer jobs.�

More specifically, “. . . a 1% point increase in the sales tax rate can cut about 2.6% from state output growth over a decade. A comparable increase in the income tax rates would reduce such growth by only 0.2%. The much larger impacts of taxes on business activity as opposed to taxes on personal income certainly match theoretical expectations. As noted earlier, corporations choose their locations with a keen eye on comparative costs, and taxes are a substantial, easy-to-measure cost.�

Note the reference to the fact that sales taxes are (mostly) not deductible for federal income tax purposes while income taxes are deductible. I used this fact to show that last year’s tax reform plan would have actually caused Mainers federal tax liability to increase—see here for details.

I recently came across this report published by the U.S. Small Business Administration. The report finds that:

"Marginal tax rates have significant effects on entrepreneurial entry and exit, suggesting that the formation and closure of small enterprises are in part determined by the handling of income from these activities in the tax code. The findings show that the level of entrepreneurial entry, exit, and duration react differently to changes in marginal rates on wage-and-salary and entrepreneurial income. Specifically, lower marginal tax rates on entrepreneurial income encourage more entrepreneurial entry and lower rates of exist, and lengthen the duration of spells of activity. Similarly, higher marginal rates on wage-and-salary income also increase entrepreneurial activity as more workers switch from wage-and-salary work to starting their own business. Importantly, however, the magnitude of the entry, exit, and duration effect is larger for marginal tax rates on entrepreneurial income than on wage-and-salary income."

This finding is especially important for Maine since our economy depends more on small businesses for growth--or in Maine's case, the lack of growth.