Friday, January 02, 2009

Yankees Thinking Outside the Box

Every newspaper in the state should be challenging every elected official to cite four ways to reduce spending.

It is no longer possible, or even advisable, to think about these matters inside the usual spending box. Connecticut has for so long thought exclusively in terms of increasing revenue that the state has lost the virtue of prudence in spending. What is needed is a method that will force legislators to curb a habit that threatens to bury the state in debt.

A way to reverse the state’s decline has been offered by the Yankee Institute, the best libertarian-conservative think tank in Connecticut.

Two economists for the YI, J. Scott Moody and Wendy P. Warcholik, have suggested the adoption of a “Taxpayer’s Bill of Rights.”

The bill the two have in mind will set statutory limits on spending, “which would grow no faster than the increase in inflation and population. Since spending drives taxes, the speed limit is meant to ensure that growth in government does not exceed taxpayers’ ability to pay.”

A Taxpayer Bill of Rights, if enacted in FY 2010, would make it possible to eliminate the income tax by fiscal year 2032. The two economists anticipate that “dynamic increases in the economy due to the income tax elimination” may make it possible to axe the income tax even sooner.

It is a well know fact that whatever you tax tends to disappear. This is true of all taxable products and activities. The corollary is also true: When taxes are reduced, the economic activity taxed tends to increase. Even progressives recognize the principle when they propose punishing taxes for human activities they deem, for good or bad reasons, inadvisable. A use tax on gas, for instance, is supposed to encourage conservation and reduce emission harmful to the environment. When we wish to encourage an activity, we reduce the tax on it.

A conscientious effort to eliminate the income tax will create a dynamic in the economy that will increase business activity and therefore, over a period of time, increase state revenue. The increase then can “be used to reduce the income tax burden by systematically reducing the top marginal tax rate which is currently at 5 percent. This is a simple way to ensure that taxpayers see immediate benefits and that the positive economic impact of a lower tax burden is maximized. The lower top marginal tax rate will boost the incentive to work, to invest in new equipment, or to start a new business.”

Business activity, we know, flows from high tax states to low tax states. In competition with other states like South Carolina -- whose enterprising governor, Mark Sanford, is attempting to eliminate property taxes by increasing use taxes – Connecticut is at a disadvantage. Unless the imbalance is redressed, our state will continue to lose business to low tax states. Stanford is eating Connecticut’s lunch because he is constantly thinking of increasing business activity though tax reductions. A larger business universe contributes more in revenue to the state than a diminishing business sector.

There are two ways to increase state revenue: You can increase taxes, in which case the product or activity taxed will diminish; or you can increase the number of tax producers by decreasing taxes, thus causing the product or activity taxed to accelerate and increase. This second method has been demonized by its opponents as counter intuitive, and indeed it is counter intuitive – for everyone who has not participated in a reduction sale in which a lowering of price increases sales volume. A tax is a price hike, but products and activities taxed are all subject to the law of diminishing returns. The higher the price, the less is sold. And if you do not sell your products or activities, you go out of business.

Or you can move to South Carolina, the eat-your-lunch state.

That is what has been happening to Connecticut. It has been shoving its businesses away from its shriveled breasts, and the more it suckles the less nourishing is its milk. The principle involved here is one that is acknowledged by every consumer of a product who searches for the product he wishes to buy at the lowest cost. It has nothing to do with political philosophy or ideology, and everything to do with common sense.

The principle involved here is one that is acknowledged by ever consumer of a product who searches for the product he wishes to buy at the lowest cost. It has noting to do with political philosophy or ideology, and everything to do with common sense.

The figures provided by the two Yankee Institute economist are bone chilling:

“The most recent estimate by the Office of the State Treasurer puts the total bill at $54.2 billion, which is nearly four times the taxes the state collected in FY 2008 and includes: debt outstanding ($14.4 billion), unfunded state employees and teachers pensions ($14.8 billion), unfunded state employees and teacher’ post-retirement health and life insurance ($23.9 billion), and the GAAP deficit ($1.1 billion).”

We cannot go in this way and survive in a competitive economy.

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