My newly adopted home state needs money.    Bad.    So, like many other states, it is raising taxes on a variety of behaviors that it views as bad and seeks to discourage.    Those include drinking, smoking and, apparently, working.

Here’ the story from a few days ago:

TRENTON — The state Assembly passed legislation today that raise taxes on cigarettes, hard alcohol and wine, along with boosting the tax rate for personal incomes over $400,000. The package of bills, designed to support the $29 billion state budget up for a vote later today, also eliminates the property tax deduction on income tax forms for households earning more than $250,000.

Let me get this straight.   New Jersey actually has the chutzpah to raises taxes on high-earners in the same bill that boosts taxes on so-called ’sin’ behaviors that they seek to deter?    The message by association is clear:  working hard and being successful is a behavior New Jersey considers bad and wants to punish.

The increases are going to be painful, even for the wealthy.     Taxes on income over $500,000 are going from an already-high 8.37% to a the whopping double-digit of 10.25%.   If you make more than a million a year you will be paying 10.76% on any income with seven digits.

They’re also hitting the ‘rich’ in the property tax area.   From the new bill:

For the 2009 tax year, A4102 limits the property tax deduction for high-income taxpayers. Although normally allowed for property taxes paid up to $10,000, the deduction is limited to a maximum of $5,000 for a taxpayer who has gross income over $150,000, but not over $250,000, provided the taxpayer is not a qualifying senior, or blind or disabled. For such a taxpayer with gross income exceeding $250,000, no deduction is allowed.

And don’t be fooled, this isn’t just a tax hike on the rich.    It also attacks the middle class through the elimination of a property tax rebate check for many homeowners.   From the article:

The budget would reduce the size of the property tax rebate program, limiting it to households earning less than $75,000. Exceptions are in place for senior citizens and disabled residents.  Households earning up to $150,000 qualified for rebate checks last year and the ceiling was $250,000 the year before.

Like many high-cost states, $75,000 per household ($47,500 per worker) is already hard enough to live on with the prices one must pay for everything in the Garden State.

Of course, these hikes come at a time when the federal government seeks to raise taxes on the wealthy and is touting how most Americans won’t get hit.   In a speech on Februrary 24th the President said:

Now, let me be clear–let me be absolutely clear, because I know you’ll end up hearing some of the same claims that rolling back these tax breaks means a massive tax increase on the American people: If your family earns less than $250,000 a year–a quarter million dollars a year–you will not see your taxes increased a single dime. I repeat: Not one single dime.  Not a dime. In fact, the recovery plan provides a tax cut–that’s right, a tax cut–for 95 percent of working families. And by the way, these checks are on the way.

I guess the President didn’t consult New Jersey before giving the speech.    I venture to guess that most taxpayers don’t care whether the hit is coming from their town, state or big brother.   A tax hike is a tax hike, regardless of whose hand is in your pocket.   And with the reduction of the property tax deduction allowance and rebate, New Jersey is clearly raising taxes on people making less than $250,000 per year.    So much for the big ‘middle class tax cut.’

The message New Jersey (and many other states) is sending is clear - working hard and making money is considered a bad behavior and must be discouraged.   Just like smoking, drinking and gambling.   If taxes are going up on all of those at the same time, what else are we to believe?

I can hear the moving trucks headed to Pennsylvania already…

The “middle class tax cut” talked up for 95% of Americans should now begin appearing in paychecks.

Given the level of publicity this is receiving, I am trying to follow the story and make sure the impact is actually happening and people are seeing more money.   One viewer told me she noticed $9 extra in her check this week.

So if any of you notice less Federal withholding taken from your checks (net more money) let me know.   You can write in the comments section.

Not looking to know salaries, etc … just want to make sure these tax cuts are happening and how much extra people are receiving.

Good luck and happy tax day!

Lots of talk about taxes these days.   Wondering where your Federal tax dollars go?   Here is a nice chart from the Center on Budget and Policy Priorities

And here’s the same chart, for state spending

While the President touts his $7 per week tax cut for “95% of Americans,” it looks like many states are ready and willing to take any savings right out of the taxpayer’s’ pocket.

Numerous states are considering raising taxes to fill budget gaps, and it’s not just on the rich.   According to the article, 10 states are now looking at some form of tax hike.

From today’s Wall Street Journal: “Delaware Gov. Jack Markell wants to raise the marginal income-tax rate by one percentage point, to 6.95%, on those earning more than $60,000 a year, effective in 2010. His budget plan also includes increases in corporate taxes as well as spending cuts to close a projected $750 million shortfall in a $3 billion budget, said spokesman Joe Rogalsky.”

States are facing huge budget gaps as they overspent during the boom years and now look for revenue where they can get it.   And it appears that just taxing the rich won’t be enough.

From the WSJ’s story:  “States have lowered revenue forecasts repeatedly in recent months, yet the estimates still seem to exceed the grim reality. Last week, Pennsylvania officials said total March tax collections were $334.6 million, or 7.9%, short of expectations, due to sharp drops in income and sales taxes and a steep decline in corporate income taxes. For the fiscal year that began July 1, 2008, collections to date are running $1.6 billion less than forecast.”

As the Journal story notes, states budgets are tight.   So tight that it is likely not just the “rich” who have the taxman dip into their pocket.

10 states now.   More to come for sure.

Excellent article in today’s Financial Times by Clive Crook.

The premise is that even the coming tax increase on the wealthy will not raise enough revenue to fill the holes in the budget from the proposed spending programs.

As Crook writes:

In short, whether it intends to or not, Congress is leaning towards making the long-term deficit even bigger. It is preparing to underwrite a large and permanent expansion of the government’s spending obligations while failing to provide for a corresponding expansion of the tax base. A crucial question is therefore whether, and for how long, Mr Obama will continue to be bound by his pledge to raise income taxes “by not one cent” for almost all Americans.

One other interesting point Crook makes is that according to the OECD, the U.S. actually has one of the highest progressive tax rates in the world.

Check out the article here.

Following up on my entry yesterday about taxes…

There is an interesting graphic in today’s NY Post on how everyone in New York is gonna get socked in taxes.   Costs are going up for everyone, not just the wealthy.

As the graphic indicates, even just a 1% increase in taxes will cost the family an extra $4,000 per year.  Combine that with the 4.6% jump on the federal side coming in two years and the numbers start to get even larger.

The current tax rate on income is 33% between $200,000-$357,000 and a top rate of 35% on anything over $357,000.   Obama wants to raise the 33% back to 36% and the top end back to 39.6%.

Looking at the family example below and using those tax increases show some big numbers:

Taxable Income: $450,000

Current federal (not including state) income tax payment: $125,000

Additional payments Federal post tax increase: $7,600

Total federal income tax payment: $132,600

Yes, the numbers are rough because every household has a different situation with deductions, etc.   But you get the point.   That, my friends, is a lot of money.   And consider it doesn’t even include state taxes, New York city taxes, social security, medicare or other payments.    What’s worse is that the family itself will see little benefits from the federal tax increase as more and more of the money will go to merely paying down interest on the national debt.

It’s even worse than this.   The stories the Post didn’t add are the impact of other increases, such as the mortgage interest deduction reduction, possible cap-and-trade led increase in the price of everyday goods, higher “sin” taxes (I saw a sign advertising a “special deal” on Marlboros in NYC for “only” $10.05 a pack the other day) and higher property taxes for those in the ‘burbs.

Though few overall will care about this increase (save for the couple % who pay this much in taxes), the city overall should care as the bottom will continue to drop out of the real estate market as these families look to pack up and leave the city.

Perhaps instead of debating the benefits of raising taxes on the wealthy to pay down deficits we should be asking why we have such big bills to pay in the first place.

I appreciate all the thoughtful comments on my column on higher taxes and the economy.  There seems to be some misunderstanding of my primary point, however.

My point was not to suggest that higher taxes equate to higher unemployment (though they may in specific consumer discretionary related segments of the economy such as boats and RVs that require much free cash flow to purchase), but rather to suggest that higher taxes will not necessary mean lower unemployment.

The primary criticisms of my posting seem to revolve around the idea that I am suggesting unemployment will rise if taxes do, and to question my use of data points.   Rather, I was trying to use data to suggest that history, both in the U.S. and Europe, suggest that higher taxes may not solve the jobs crisis many in our nation now face.  I chose the data points (1970 - 1983) because it was one of the rare eras without major buildup (U.S. involvement peaked in 1968 though the war continued), which tends to skew data points.

As our sharp readers have pointed out, tax rates have been coming down at the top end since the end of World War II.    And while it may not be completely analogous to today’s discussion because the top end was still very high by today’s standards, I think this clip of JFK’s press conference announcing a sweeping tax reduction is a good indication of at least a general belief that lower corporate and personal income taxes can help stimulate growth in times of an economic slowdown.

Yes, Kennedy only cut the upper end from a staggering 91% to a still-high 77%, nearly double the high end today.   But he clearly felt that even cutting taxes on a small number of people at the very top would make a difference in the economy.   Those at the very top tax rate of 1963 had to make $400,000 per year in 1963 dollars, which equates to a GDP-adjusted income of $2,700,000 in 2007.   Sadly, Kennedy never got to see the benefits of his bold move.

Still, Ish’s (real name?) point about wasting resources on attempts to skirt higher taxes is well taken.    I was reading this paper from a Yale law review member yesterday and part of his conclusion is:

The reduction of marginal tax rates in the Reagan years was driven by a new policy consensus that still persists today. That consensus is that high marginal tax rates on the rich come with an unaffordably high price for the U.S. economy in the form of reduced incentives for the rich to work and to save, and increased incentives to engage in socially wasteful tax planning. And yet 1957, when Rand wrote Atlas Shrugged and the top income tax rate was 91%, falls in the middle of the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost.

(The full document can be found here and the conclusion begins on page 23 of the PDF file)

So while I am still not convinced higher taxes will reduce unemployment (which was my point, not the inverse) as Yale’s Reuven S. Avi-Yonah says:

Thus, the question of whether high marginal tax rates come with an unaffordably high cost to the U.S. economy remains unsettled.  Does Atlas Shrug?, a recent collection of papers written mostly by public finance economists and superbly edited by Joel Slemrod, represents the most recent attempt to answer this question. Unfortunately, no clear-cut answer is forthcoming in the book, and the debate is sure to rage on.

Tomorrow on the program we will compare historical employment rates with marginal tax levels and debate it with our Senior Economist Mark Lieberman.   No doubt the debate will continue long after that as well.

While campaigning, President Obama made the now-famous comment to the now-infamous plumber that he wants to “spread the wealth around” by raising taxes.   He certainly isn’t alone these days in wanting to stick it to the wealthy.   Protesters at the G20 meeting, in the streets of New York City and on bus tours of AIG executives’ homes are all calling for higher taxes and their populist rage is being heard.   New York state has agreed to a massive tax increase on those making more than $300,000 per year.   Other states are discussing similar moves.   The federal government’s tax increase on those making $250,000 per year will begin in 2011.    That hike is also likely to be accompanied by a reduction in the amount of interest allowed as a deduction on home mortgages.   It is  a tax triplet whose cumulative impact is that a doctor in New York making $500,000 per year is facing a tax hike of more than $2,000 per month.   That increase will then be scattered through government spending, a “middle class tax cut” that provides a two-income family with a meager $13 more per week, along with the filling of a variety of state budget gaps, particularly in government employee pension plans.

The weak economy, bank bailouts, AIG bonuses and a collapsed housing market has created a wave of anger at the top end of the economic spectrum.   Out of work laborers hold signs saying “tax the rich,” seemingly under the belief that higher taxes are a panacea to America’s, or at least their, economic problems.   Those groups are going to get what they are asking for, as taxes are set to rise on a number of different fronts.   And while the higher tax proponents will net a small political victory, history says they will likely encounter few big changes in their own scenarios.

Higher marginal tax rates may provide families with a few extra dollars of temporary relief, but are unlikely to provide better job prospects long term.   Higher tax nations do not traditionally have lower unemployment rates than the United States, and periods of higher taxes in America haven’t helped the under or unemployed find new work.    In fact, generally the opposite is true.   As an example, higher tax European and Scandinavian countries have traditionally also posted much higher unemployment rates than the United States.  The percentage of individuals actually looking for work (and are thus counted in those figures) is even lower in these countries.   Only a few years ago Italy found itself out of the top 100 list of national employment rates.   Many European nations actual unemployment rates are even worse than the numbers indicate, as there are millions in those nations who live entirely off state sponsored welfare their entire lives and are thus not measured in official data.  France, a country considered a model of socialist economic thinking more than most, is going in the opposite direction of America and cutting income tax rates.   In 2007 the new government led by Nicolas Sarkozy eliminated income taxes on any “overtime” work done beyond the traditional 35-hour work week as part of an overall plan to increase French competitiveness and productivity.

There also appears to be little positive correlation between high taxes on the wealthy and job creation in America.   The top tax rate in the 1970s was a staggering 70% yet unemployment averaged around 7-8% for most of the decade, topping out above 10% for the first few months of 1983.   Only when the impact of the Reagan tax cuts of the early 80s began to be felt did joblessness fall.  Franklin Roosevelt raised the highest end tax rate to 94%, and while the unemployment rate did fall in the later half of the 1930s it was still more than 17% in 1939.

The favored argument of those in favor of higher taxes is that the Obama top-end is simply placing the tax rate back to where it was under Bill Clinton in the go-go 1990s.    Supporters of that era tend to forget two important things.  First, the 90s decade was highlighted by the boom in personal computing and the growth of an entirely new industry in the Internet and software.   Second, we found out the hard way that much of the “go” in the “go-go” 90s was based on a bubble economy in tech stocks.    The problem now is that we are recovering from a much bigger economic problem - the housing bubble created by the Fed’s interest rate cuts after the tech bubble burst and the terrorist attacks on 9/11.   We also lack a nascent technology such as the Internet to help build a new economy and good jobs to drag us out of the slump as we did in the early 1990s.

New York is raising taxes on the very top earners by a staggering 31%.   The second highest group of earners will face a smaller but still punishing tax increase of 14.5%.   Assuming many of those earners do not move to lower tax states and their incomes stay the same (big assumptions in this economy), those tax hikes will together add $4 billion dollars to the Empire State’s coffers.   It sounds like a lot until you consider that New York’s budget deficit is a whopping 400% more than that amount at $16 billion and growing.   Ironically, much of that huge budget gap is due to falling income tax receipts as many of the “rich” Wall Street crowd lose their jobs or make less money.   Until those high paying and high tax generating jobs return, the burden will grow on the fewer high earners left.   That is, until they too finally break down, leave the state or do as many high income earners do and underreport their incomes to get around higher taxes.

Sadly, it is likely those screaming loudest about higher taxes on the rich who will get hurt the most when they get them.   Travel is already down 30-plus percent to Las Vegas this year and the city has one of the fastest growing unemployment rates in the country.   Retail workers across America are losing their jobs as stores close and companies go under.   Towncar drivers in New York report business is down even more.   The stories are endless, but the spending of those with money is not anymore.   In the end, that doctor in New York will probably take one fewer vacation per year, drive his car for a year or two longer before buying a new one and perhaps even trade down into a smaller home.   Lost in the frenzy though, few will care.   Except for the bellhop at the hotel, the car salesman or the worker at the furniture store.

Bizarrely though, the higher tax crowd seems to have little interest in discussing real job creation or long term improvements in the economy.   The shouting seems to be more punitive.  Many “working party” type organizations have long pressed for tax hikes on those making more than $250,000 per year, saying that the wealthy should “share the sacrifice.”  Notice the  tone of the language.   Instead of “how can we make things better” we instead hear “we should all suffer together.”   The implication seems to be that it is more desirable to bring the top down than to try to bring the bottom up.

“You know, the yelling and screaming about the rich - we want rich from around this country to move here. We love the rich people.”

- New York City Mayor Mike Bloomberg speaking Friday

Bloomberg has it right by refusing to play into the populist uprising against families making more than $250,000 per year.   As Mayor of a city that relies heavily on the financial sector and the wealthy (1 in every 5 income tax dollars New York City takes in comes from finance), billionaire Bloomberg understands the devastating monetary impact an exodus of these families would have on his city.    As his own state of New York likely turns a deaf ear, other states should follow his example and look to lure in the high earners with incentives.

It should be a buyers market for states looking to change their long-term prospects.    The smart ones will recognize this and

Little can be done to stop the tax increases federally.    The Obama administration is determined use the Clinton-era economic story to raise taxes on the wealthy, capitalizing on the national memory of the mid-1990’s as “good times” and a balanced national budget (failing to remind America that much of those “good times” came from the tech stock bubble, taxes paid on phantom stock gains and, of course, no major terrorist attack and subsequent wars).   The story is also being sold that these are not new tax hikes, but merely a return to taxes on the wealthy back to pre-Bush levels, and that these cuts benefited the rich more than any other income level.    Of course they did.   The same percentage of a larger number is a greater absolute figure than that of a smaller one.   Sadly, this concept is easily manipulated for political gain.    If all income levels receive a 3% tax cut, it would be easy - and true - for a politician to scream about how a wealth family “benefited 10 times more than a middle class one” (3% saving on $40,000 is $1,200, while a 3% saving on $500,000 is $15,000 … more than ten times the “benefit” on a dollar basis, even as the actual percentage reduction is equal).

Unfortunately, the message of how the wealthy “unfairly” benefit distorts the facts on how much society and the lower wage earners also gain.  As the non-partisan Congressional Budget Office data below indicates, lowering tax rates on the wealthy increased the total tax burden on higher earners and lowered it on lower income earners.

Bloomberg’s comments yesterday show he understands that going after the high-earners will not only impact vital tax and sales revenues, but likely end up hurting the poor by placing more of a tax burden back on them as the wealthy retreat from spending to save up for the incoming tax hits.

A bigger question may be: how much wealth is going to be left to tax?     The map below shows the highest per capita income concentrations in America as of 2005:

Let’s analyze a few areas above…

Detroit: Still a few packs of old money families roving around Grosse Pointe, but fewer by the week and we know what’s happened to the American auto industry.

New York Metro: Wealth is primarily built from finance, and as Bloomberg added yesterday, “we can tax the rich, except that, if you haven’t looked at the stock market lately, they aren’t making any money.”  Bonuses are down 44% and more than half of all finance jobs have been lost.   It is going to be a very, very difficult few years for New York City.

California’s Silicon Valley: Generally sees its wealth created by stock options and the ultimate payoff when and if the underlying companies make it big or are purchased by a larger competitor.   Not only are fewer new companies being created, but the potential buyers of those companies are seeing their own stock and capital base shrink.

Dallas: Oil revenues are sinking as the price of crude collapses.

Miami/Palm Beach: Triple hit from the real estate collapse, decline in emerging markets (where many of its migratory Latin American residents get their wealth) and scams like Madoff.

Only the Washington, D.C. area seems immune as the government expands.

As the more traditional industries of wealth dry up, smart states should take advantage of the current scenario to boost their long-term prospects by encouraging out-of-work or disgruntled entrepreneurs, inventors and professionals to come to their states and create new ideas and companies.   They can do this by offering incentives such as tax breaks on properties and income taxes.  Utah, which has a fixed state income tax rate of 5%, has two of the three fastest job growth cities in America according to the Milken Institute.

Mike Bloomberg is a very smart fellow (fair disclosure: I worked at his eponymous firm Bloomberg LP for 12 years and knew Mike before he went on to run the city of New York) and a self-made guy.   He’s rich now, but he became rich by starting his company from scratch after being fired by investment bank Salomon Brothers (read the book “Bloomberg by Bloomberg” if you get a chance).  In some ways he embodies the exact type of scenario he is trying - against nearly all political odds - to sell: give smart, talented people the incentive and motivation to create something and you often won’t be disappointed.  The more incentives you remove, the less you are likely to get.

Consider a scenario in the Presidents own backyard.    Virginia has many of the richest counties in America and is one of only 19 states with a median income above $50,000.   Its close neighbor, West Virginia, has the 2nd lowest median income in the United States behind Mississippi.  Even still, Virginia has a lower state income tax rate.   West Virginia would be smart to make itself “almost heaven” for hard workers and high earners by slashing state income tax rates or eliminating it altogether.   What it would lose in short-term income tax revenue would be balanced out by the spending of the influx of former Virginians on everything from homes, to furniture to food.   One can already hear the Mayflower moving trucks rolling up the 20 miles from Route 15 from Leesburg, Virginia to Harpers Ferry.

We often hear about ‘big government’ and how it’s getting bigger.   I wanted to check the data to see if it’s hyperbole or reality.   Its not hyperbole.   According to official government data (ironic) it turns out that government - Federal, state, local and military - has the single highest payroll of any “industry.” The table below is from the Bureau of Economic Analysis’ official income data for 2008 (as of the 3rd quarter) and lists the major industry groups by total payroll.   Across all industries, the total wage disbursements were $6.5 trillion dollars.

Below is the BEA payroll breakdown.  The numbers are in millions and annualized, so you can see that government is the only “business” to pay out more than $1 trillion dollars in wages in 2008.

• Farm wage and salary disbursements $20,802
• Forestry, fishing, related activities, and other $19,415
• Mining $66,841
• Utilities $47,483
• Construction $368,519
• Manufacturing $744,233
• Wholesale trade $378,038
• Retail trade $423,009
• Transportation and warehousing $198,907
• Information $220,021
• Finance and insurance $517,190
• Real estate and rental and leasing $97,229
• Professional and technical services $622,908
• Management of companies and enterprises $181,255
• Administrative and waste services $265,270
• Educational services $109,385
• Health care and social assistance $680,833
• Arts, entertainment, and recreation $67,310
• Accommodation and food services $211,175
• Other services, except public administration $201,977
• Government and government enterprises $1,122,604

Two things surprise me in these numbers:

• Government payrolls are more than twice as large as the much-maligned financial industry, and
• Manufacturing is still the second largest industry in terms of payroll.

Not surprisingly, Washington D.C. and Maryland enjoyed some of the biggest income gains last year as evidenced by the BEA’s map below: