Just raise taxes already!
To recap last week, we highlighted the Georgia budget process and the state of Georgia’s budget for fiscal year 2011. It is well publicized that the Georgia budget is over $1.6 billion short and the Georgia General Assembly is constitutionally bound to balance the state’s budget. This means the state of Georgia cannot operate at a deficit. We also noted last week that over 85% of the state’s revenues are from income, sales, excise and corporate taxes.
To cover the budget shortfall, legislators are contemplating more spending cuts and tax cuts.
Why not just raise taxes to get more money?
Because of a concept called tax shifting. According to Investopedia.com, tax shifting occures when the “economic reaction to a tax causes prices and output in the economy to change, thereby shifting part of the burden to others.” For example, let’s say the government places an increased tax on lemonade produced by your business. This tax causes the price of the lemonade to increase because, as a business, it is not profitable to absorb cost increases. Any increase in the costs will be passed to your customers. Well, the government assumes that your customers will continue to purchase your lemondade although it costs more. That assumption is incorrect. As a result of the tax increase, the demand for your lemonade decreases. This decrease in demand causes you to layoff workers because they are no longer needed to produce the lemondade. As the one of the largest companies in the state, you layoff 1000 workers.
The taxes that were paid by those 1000 workers has now drastically decreased because their incomes have decreased. Their individual income tax payments may have totaled $4 million prior to the layoffs. That would be $4 million available to the state as revenue. Now, after the layoffs, these workers individual income tax payments total $1 million because their incomes have decreased. This $3 million is no longer available to Georgia to spend.
Fewer jobs for a state means a lower income tax base available to be taxed. In other words, less income for businesses and workers means less revenue available for the state’s budget.
As The Heritage Organization highlights, “As tax rates rise taxpayers gradually become discouraged and businesses discover that it is not profitable to employ as many people. These factors combine to reduce earnings and, therefore, lead to a reduction in taxable income…”
Where does Georgia stand?
As you have heard, Georgia’s unemployment rate is a record 10.3%. We have over 482,000 fellow Georgians looking for jobs. This not only means that Georgia’s revenue base is lowered, but, more importantly, that individuals and families are suffering. When we lower the corporate tax rates, Georgia becomes more hospitable for business and that means more jobs for Georgia.
As I close ponder this quote by William Boetcker: “You cannot bring about prosperity by discouraging thrift…You cannot lift the wage-earner by pulling down the wage-payer…You cannot keep out of trouble by spending more than your income…You cannot establish security on borrowed money. You cannot build character and courage by taking away men’s initiative and independence. You cannot help men permanently by doing for them what they could and should do for themselves.”
For further reading:
The Reagan Tax Cuts: Lessons for Tax Reform
Do Tax Cuts Stimulate The Economy?
How to Cut Taxes and Balance State Budgets