Michigan government out of control?

The amount of money being collected by the State of Michigan is falling. Governor Jennifer Granholm and legislators on both sides of the aisle are struggling to balance blown budgets and find ways to maintain essential state services. The economy is at the bottom of a down cycle with positive signs on the horizon, but it is going to take years, not months before jobs and wages return to healthy levels.

There are few areas in the debate where everyone agrees. Costs must be cut, but arguments rage about which programs can be sacrificed. The governor believes the amount of tax revenue collected must be increased, and today her latest plan to create new taxes was revealed.

The Detroit Free Press reported today:

"Granholm plan:

Raise $685 million in new revenue, including:

• 6% sales tax on tickets to concerts, pro and college sporting events ($87 million).
• 25-cent per pack increase in cigarette tax ($54 million).
• 6% sales tax on vending machine sales ($29 million).
• 6% tax on service contracts ($28 million).
• 1-cent tax per bottle of water sold in Michigan ($18 million).

The plan would eliminate numerous tax exemptions and deductions for businesses. It would reduce the earned income tax credit and freeze the personal exemption on income taxes."

Let's talk about the economics of taxation. Economics in practice is one of the most complex sciences, Mapping the human genome is simple in comparison with attempting to isolate and track all of the interacting and conflicting influences, causes, and effects that add up to the cost of a loaf of bread in Michigan.

However, certain principles can be stated simply.

1. Tax revenue collected always reduces production
2. We accept the negative effects of taxation in exchange for public benefits
3. 100% taxation would result in 0% production, therefore $0.00 tax revenue

Let's look at that third principle. It is important. Stated another way, you simply can not increase taxes indefinitely, because you reach a point of diminishing returns where the next tax increase you make actually results in a decrease in the revenue you collect.

The thing that is painfully obvious to those of us who continue to live in Michigan is that the Michigan tax levels have already reached the point of being destructive. Our best and most talented people are flooding away from Michigan in order to find better jobs and lower cost of living. Each one we lose reduces income tax revenue, and reduces the quality of products and service produced by Michigan businesses.

Taxation can not be targetted in the way the governor is attempting. There is a total amount of money in the economy and it doesn't matter where you attempt to extract it, the result is still a tax increase and therefore a reduction of production, which reduces the amount of tax revenue that can be collected.

At best, Mrs Granholm's current proposal to "Raise $685 million in new revenue" is actually a zero-sum game which would result in $0.00 new revenue, while driving more talented people away and pushing already marginalized businesses closer to bankruptcy.

At worst, such tax increases stress the already overtaxed system to the point where total tax revenue collected is reduced.

In this economy, at this time, the painful and difficult (but necessary) solution is to reduce taxes in order to increase tax revenue. This is not voodoo economics. There is nothing wrong in the logic, although it is counter-intuitive to those simplistic thinkers like Governor Granholm who fail to understand the more complex causes and effects at work. To reduce the effects of tax increases to pocket calculator math is to completely ignore the inevitable secondary effects. One can not claim that X dollars will be collected by placing a 6% tax on service contracts by simply multiplying the current value of service contracts by 6%. To do so ignores the fact that the money will be collected at the expense of the contractors, most of whom are already stretched to their limits. Those who can stay in business will pay less in income taxes. Those who can't absorb the cut will be forced to leave the state. The end result on tax revenue collected is negative, and the Michigan economy is weakened further, pushing recovery farther away.

I'll say it again: If our goal is to increase the tax revenue we collect in Michigan over the next few years, the only way to make that happen is to reduce our tax rates and eliminate the most severe taxes on Michigan business. That is the only way to create new jobs and to attract back some of our best and brightest who have fled the state for greener pastures.