The editor’s opinion from Marketplace, Northeast Wisconsin’s business magazine. (Obligatory disclaimer: Most hyperlinks go to outside sites, and we’re not responsible for their content. And like fresh watermelon, peaches, pineapple, grapefruit, tomatoes and sweet corn, hyperlinks can go bad after a while.)

July 24, 2008

Taxes, businesses, taxes, government and taxes

Time was when political campaigns wouldn’t start in earnest until Labor Day, when the attention of the electorate was assumed to have diverted from vacation to more serious subjects.

Campaigns started earlier in Wisconsin because we have a primary election shortly after Labor Day. But thanks to the 24/7 news cycle and the Internet, any campaign can start as soon as the filing deadline.

Jo Egelhoff, former Appleton alderman who is running for the 57th Assembly District seat being vacated by Rep. Steve Wieckert (R–Appleton), talked in The Post~Crescent about what the state needs to do to attract more jobs, essentially: “1) reducing our horrific budget deficit and 2) creating a positive tax climate for employers and employees alike.”

Egelhoff pointed out, correctly, that the fact that Wisconsin has slipped out of the top 10 taxed states list is not because of any focus on governmental economy in Madison, but because some states raised their taxes beyond Wisconsin’s, and others have collected more tax revenues because of oil price increases. Egelhoff favors creating a small business tax credit program “to encourage risk-taking and growth” for companies in their first two years of operation.

Reading the online responses to Egelhoff’s commentary proves that there is a great deal of misunderstanding about how business and taxes work among the electorate. Cutting “wasteful spending” is assumed to mean “spending towards helping people, and not corporations.” At least one person does grasp what we all know, that “consumers should understand that taxes to corporations are simply added to their product price and we reimburse them at the cash register.” (The complete answer, of course, is that every dollar a business is taxed is a dollar that won’t go to the business’ owners or to the business’ employees or back into the business.)

There was a longer assertion about how Egelhoff “utterly fails to see the connection between education and taxes. Folks, if we want to have a first-rate educational system, we have to pay for it. … We don't want to cut their funding because they produce the educated workforce that Ms. Egelhoff touts in her article. In fact, we need to increase their funding just to keep up with inflation. If we make low taxes an important part of our program to attract business, we will join a race to the bottom. We will cut and cut and cut our public services until we become just another Third World country, and we will still fail because, on that basis, we cannot compete with China, Brazil or Thailand.”

“Race to the bottom” is a favorite phrase of those who believe we don’t spend enough money on government now, and, by extension, that we are insufficiently taxed. My first suggestion is that those people who really believe we should be taxed higher should in fact send more money to the government.

But what exactly is enough in taxes and spending? Wisconsin is in the top fourth of states in education spending and, at $6,157 per student, we spend 5 percent more per student than the next-highest-spending state in the Midwest, Minnesota, and 8½ percent more than the national average. In this past school year, per-pupil spending increased 4.2 percent, and total school costs increased 3 percent, according to the Wisconsin Taxpayers Alliance. This is, incidentally, despite the fact that enrollment has dropped in Wisconsin for the past four consecutive school years. (Perhaps the fact that teacher and administrator employee benefits are 52.5 percent more than the national average has something to do with it.)

Moreover (and, as a reminder, none of this necessarily represents or reflects Egelhoff’s positions) is our educational system really first-rate? When teachers are paid according to years of experience and educational level instead of quality, the answer is clearly no. When the only way to get rid of a teacher is either for that teacher to commit gross misconduct, or for the school district to engage in job-cut maneuvering or wait out that teacher’s retirement, none of those are signs of a first-rate educational system. When the only way to reward a teacher for superior performance is to raise the pay of all teachers of similar experience and educational level — that is, when individual teachers are not able to negotiate their own salaries — that is not a sign of a first-rate educational system either.

(For those who think the previous paragraph is an exercise in teacher-bashing, it is not, but consider: Reality says that 75 to 80 percent of school district budgets are for personnel costs. Reality also says that schools are the largest part of your property tax bill. Do the math.)

The assertion a few paragraphs ago refers to the importance of our “educated workforce.” The importance of an educated population, not just workforce, is self-evident. However, note the survey of state business climates I wrote about earlier this month, which (A) places Wisconsin at 37th overall, (B) ranks Wisconsin 47th in “workforce” (defined as the numbers of available workers and their average education level, unionization level, and the job placement success rates of state worker training programs), and (C) ranks education as fourth most important for businesses, with “cost of doing business” number one.

Profitable businesses (1) provide their customers with useful products and services, (2) pay employees and (3) pay their owners. Many businesses also make contributions out of their profits, at the discretion of management, to their communities that go beyond those three points. That is how “private enterprise” contributes to the “public welfare.” (And besides that, every corporate employee who earns a salary, including that high-paid management, pays taxes anyway. Corporate income taxation is really triple taxation — employees pay taxes on their income, shareholders pay taxes on their dividends and their capital gains, and the corporation pays income taxes — except that the corporate tax is hidden in the prices of products and services.)

If corporate taxes were reduced to zero, there would be no need for Egelhoff’s proposed small business tax credit, or any other business-oriented tax credits, and no lobbying legislators for tax breaks. There would also be no need for the accountants larger businesses use to avoid taxes. (Appropriately, I might add; a corporation's fiduciary responsibility to its shareholders is to maximize profits, and taxes eat profits.) Corporate revenues and profits would then go to the proper places, which, once again, are (1) the business, (2) employee pay, and (3) shareholders.

Based on how too many people in Wisconsin vote, there is one place schools seem to be particularly deficient — economic education.

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