Right on it

How Not to Balance a Budget.

I found this article, on the Wall Street Journal Newspaper this past Saturday, and I couldn’t agree more.

Anyone who thinks the path to “fiscal discipline” is through higher taxes ought to look at the current budget spectacles in New York and California. The two liberal states have among the highest tax burdens in the country, yet both now find themselves with huge budget deficits and are debating still higher taxes to close the gap.

California has the highest state income tax rate in the country (10.3%), while New York State also has high income tax rate (6.85%), with combined state and city rate rising to 10.5%, in New York City. Their overall government spending totals also happen to stop the national charts. And what do you know California is $15billion in the red this year while New York is trying to close a $6.84 billion2009 budget hole, which budget expert E.J. McMahon of the Manhattan Institute expects to grow to $26 billion over three years.

California hasn’t even passed a budget yet, many weeks into the fiscal year. The Democrats in Sacramento have proposed a series of new taxes on business and individuals with incomes above $1million. Their plan would raise the top income tax rate to 12%, which would be the highest in the nation. They would also repeal a tax law allowing business to carry forward losses against future profits.

In August, Governor Arnold Schwarzenegger abandoned his promise not to raise taxes and proposed a hike in the sales tax- by one percentage point for three years, which would bring the rate in many cities to as high as 9%. California taxpayers are fortunate that state law requires a tow-thirds majority to pass a budget, which gives Republicans in the legislature leverage to block these tax hikes. They realize that these budget showdowns are the only chance they have to force even modest spending restraint.

A similar mess is playing out in Albany, where Assembly Democrats and Republicans have passed a budget with two added tax rates. Millionaires would face a one-percent-age-point rate income tax hike (to 11.5% in New York City), while anyone making more than $5 million would get hit with another 0.85%-point hike (to 12.35% in NYC). A new business tax of 4% would also apply to hedge fund managers.

The politicians who want all these new taxes are the same ones who scratch their heads and wonder why so many hedge funds are already based in Connecticut, or why Manhattan is losing its status as financial capital of the world. So far the only voice of reason has been Democratic Governor David Patterson, who has attacked the tax increase and wants spending cuts first.

Mr. Patterson knows what he’s talking about, as New York State spending has climbed by 45% in the last five years according to the Manhattan Institute. As for California, its spending soared to $145 billion in 2008 from $104 billion in 2004. Every time the politicians raise taxes, they merely lift their spending by as much or more, and then plead poverty and demand another tax hike during the next economic slowdown.

The “progressives” who dominate politics in these states target the rich on grounds that they have the ability to pay. They also have the ability to leave. From 1997-2006, New York State lost 409,000 people (not counting foreign immigrants). For every two people who move into the state, three flee. Maybe the problem for New York is merely bad weather, not high taxes.

Except that sunny California is experience a similar exodus. Over the past decade 1.32 million more native-born American left the Golden State than moved in –despite beaches, mountains and 70 degree weather. Mostly the people who have fled are the successful, the talented and the rich.

If taxes don’t matter, then maybe someone can explain the divergent economic paths of California and New York and America’s two other most populous states, Florida and Texas. The latter two states have no personal income tax, personal income has been growing about 50% faster in Florida and Texas than in California and New York. (See chart). This year Texas became the No.1 state for Fortune 500 corporate headquarters. About a dozen of those 58 corporations once called New York or California home, and taxes are one reason they departed.

We realize that none of this will matter to the Sacramento and Albany politicians, whose only priority is taking ever more money from the private economy to feed their patronage interests. But perhaps it will server as a lesson to other states that haven’t yet embarked on this tax-and-spend road to red ink and slower growth.”

What worries me the most is the status of Americans Corporations , people have to understand that cutting benefits to corporations, will affect middle class like us, the less revenues Corporations make, less jobs we will have out there for middle class workers, also, when it comes, to personal taxes states like NY and California, it doesn’t stimulates you make more a money as individual specially over time, because, it will go all away in taxes.. That’s the core of the “Reganconimics”, which cut “Corporate taxes” to 25% attracting corporations to invest in United States and create new jobs, this monetary policy was very well follow, by Bill Clinton too, which help in great measure the technology “boom” in the 90s thanks to this approach. A good example of this, is how, London is becoming the new capital finance of the world as consequence of business that are moving out of Manhattan. (I will talk about this in another post.).

Without a doubt a smaller role government, less regulations and more fiscal discipline are the key for the economy to get out the shadows, especially under slowdowns as we living today. The administration of George H. Bush, George W. Bush did not understand it , and it seems neither Nancy Pelosi, Hillary Clinton, Barak Obama and John McCain economics plan are any different from it.

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