Wednesday, December 24, 2008

Tax and Rend

As we would expect, the Drum Major Institute welcomes the governor's apparent shift on raising the personal income tax: "Is Governor Paterson finally coming around? On Saturday, the New York Times reported that Paterson might consider raising taxes on New Yorkers who benefited most from the state's economic growth. But the Governor's economic logic is still askew. He insists a broad-based tax increase on the wealthy is a last resort, because " it automatically kicks in less job creation and leads to people leaving the state.”

Not so, says the DMI's Amy Taub: "I've already noted that Nobel-Prize winning economist Joseph Stiglitz concludes that public spending cuts will harm job creation and economic growth more than raising taxes on the wealthy. Now the Fiscal Policy Institute has released a letter from more than 100 other economists who agree."

So who's right about this? In our view, it is important to point out that many of the economists who sign on to this world view are those who instinctively support a greater role for government; and who are suspicious of anything that's redolent of laissez faire philosophy. As the FPI letter states: "The reasoning is straightforward: in a recession, you want to raise (or not decrease) the level of total spending—by households, businesses and government—in the economy. That keeps people employed and buying things, and makes it more likely that
businesses will want to invest to serve that consumer demand. Budget cuts reduce the level of total spending. Raising taxes on high income households also will reduce spending, but by much less than the amount of the tax increase since those with plenty of income typically spend only a fraction of their income."

Of course, the more you tax high incomes-and where does small business stand in all of this (remember Joe the Plumber?)-the more you add to an already high tax burden; and the result is encouraging the job creators to find a more hospitable place to do business-unless Ms. Taub believes that the government is a real wealth creator.

We're unsure about her perspective on this issue, but the economists cited lay their ideology out in plain sight: "Raising taxes and maintaining public expenditures and investments also helps New York and America in meeting its long run needs. America today faces two major problems— inadequate investments, especially in infrastructure, and growing inequality. The poor are
particularly dependent on government expenditures, and cutbacks would hurt them the

The harsh reality, however, is that with the Wall Street meltdown, the state is hemorrhaging jobs-something that the FPI economists only hint at ("New York State faces enormous challenges in closing a projected $12.5 billion gap in the 2009-2010 state budget. Wall Street is the epicenter of the global financial crisis and there likely will be no quick rebound from what could prove to be a severe recession.") So, how do we grow back the economy while we are laying a further tax burden on New Yorkers that are already over taxed?

The economists cited don't really care-concerned as they appear to be about the needy who would be "hurt the most" by cutbacks. The fact is, that there's nothing in the FPI letter that contradicts the governor's statement on the potential dampening of job growth; the signatories are more concerned with short term harm to the poor and a supposed income inequality than they are about the over all health of New York's economy.

This issue is addressed squarely by the Business Council's Kenneth Adams in yesterday's NY Post: "LET'S admit it: New York is grappling with a fiscal crisis largely of its own making. The national recession and Wall Street meltdown magnify the problem, but New York has a $15 billion budget deficit not because we don't collect enough taxes, but because we spend too much. To avoid being in this terrible situation again, we have to leverage this current crisis to achieve long-term reforms in government spending and fiscal policy."

That's certainly our view-and, given the state's existing tax levels, the argument Adams makes is compelling: "State and local spending in New York is now the second highest in the nation - 47 percent above the national average. A spending cap would help bring this excess under control.
It's clear where much of this overspending is centered - and that it doesn't actually buy us better government services. For example, we have the highest per-pupil education spending in this country - nearly $19,000 per student, 63 percent above the national average. Yet we're 33rd in the nation in eighth-grade math scores and not much better on other pupil-performance measures. And New York's per-capita Medicaid spending is more than double the national average, according to Kaiser State Health Facts. Yet, despite this off-the-charts spending, our key health-care indicators are worse than the national averages."

None of this is even acknowledged by the tax and spenders over at the DMI. As Adams points out: "On the other side of the ledger, our personal-income and real-estate taxes are the highest in the country. Business taxes are the second highest. The result is the worst tax climate in America, and an economy that was already tanking before the downturn."

What kind of "award winning economists" fail to address this crucial equation? Or perhaps, the awards in question are similar to those Pulitzers that the NY Times receives for its stellar work-products, as it were, of the fact that all in question swim in the same ideological swamp.

We listen to the DMI at our peril-particularly with the loss of the Wall Street engine: "In recent years, Wall Street pumped out 20 percent of state revenues - masking the fundamental problems in our fiscal policy. Now that narcotic is gone - and the "halo effect" of New York City's prosperity hiding the decline of the rest of the state is over. The ATM just spit back the debit card and told us we're $15 billion overdrawn. New York's leaders must make significant cuts in government programs and services. The state should relieve local governments and school districts of antiquated regulations and mandates so they can cut their costs. Simply shifting the burden from state taxes to local property tax does no good."

The "spread the wealth" crowd is trying to dose out a toxic brew; and the result will only make things worse; just as FDR's initial forays along the same lines did in the 1930s-making the original downturn even worse. The fact that raising taxes on the "wealthy" is popular-or that it never just stops at the so-called rich, will make this approach hard to resist. But Adams, underscoring that a policy's popularity doesn't make it prudent, gets the last word on this: "Families across New York are making prudent choices to live within their means. Our state and local governments must now do the same."