Tax Rates Matter

As the governor's race heats up, it is refreshing to see an occasional area of agreement between the candidates; especially when the agreement makes good economic sense.

Both major gubernatorial candidates, Rick Snyder and Virg Bernero, have alluded (more than once) that they will not raise taxes and in fact will make business tax cuts.

Unfortunately, the conventional wisdom among many news agencies seems to presume that these tax cuts will make for a larger budget shortfall, already estimated at between $1 billion and $2 billion for the next fiscal year. A recent story concludes, "The [Senate] fiscal agency also says Michigan will face a $1 billion shortfall in the budget year that starts next October 1. The nonpartisan Citizens Research Council puts the deficit even higher, at $1.5 billion. The hole would grow if the candidates cut taxes."

But despite repeated assertions in the media that tax cuts equal higher deficits, this statement is a matter of opinion; not an economic fact.

In 1964, the federal government cut the marginal federal tax rates; the next year, the federal government brought in more revenue. In 1981 and 1983, the Congress cut marginal tax rates; by the end of the 1980s, total tax revenue was nearly twice what it was at the beginning of the decade. In 2001 and 2003, the federal government cut marginal federal tax rates; federal revenue decreased slightly and then climbed to the highest level in history.

Conversely, in 2008, the state of Maryland could not balance its budget and passed a "millionaire's tax" on its richest residents, raising the rate to 6.25 percent. About one-third of the millionaires promptly disappeared from Maryland's tax rolls, many of them simply leaving. The Wall Street Journal noted, "On those missing returns, the government collects 6.25 percent of nothing." Pennsylvania and Virginia's lower tax rates were more welcoming.

How can this be? It is known among economists as the "Laffer Curve" and explains how cutting taxes can bring in more government funds. In short, incentivizing people and businesses to produce more creates more prosperity and growth and ultimately generates more economic activity.

No matter who the next governor and state legislators are, they would be wise to take note. But in the meantime, news agencies should not pass off misleading assumptions for fact.

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