The Gathering Storm: A Collapsing Tax Code

New York City is in crisis. The collapse of the Wall Street financial system and the class warfare ignited by the Obama administration has left tens of thousands of productive, taxpaying, New York citizens out of work. According to Mayor Bloomberg, who is raising the financial hue and cry, approximately 40,000 people paid 50% of the revenue used to operate Gotham. And now the chickens are coming home to roost. Many of the so-called rich taxpaying citizens have lost their jobs, and numerous financial concerns have closed. Revenue to the city has been drastically cut, and it is in danger of going bankrupt. Massive layoffs in city services are looming. Who is going to pay? According to President Obama and Governor Paterson…the “rich” will pay. Oh really?

In reality, this story is being played out all over the country in states that have adopted the tax the wealthy model for entitlement services. The most obvious ones are New York, New Jersey, California, and Michigan. The weight of the bureaucracy has collapsed on itself, and the tax well is dry. Sooner or later, the public is going to realize that in order for these entities to survive, the “rich” will be considered anyone who has a job. Sure, President Obama has assured America that there will be tax cuts for the middle class…at the Federal level. That may or may not happen. But it is at the state and city level that the middle and the lower classes will be feeling the stress. A friend of mine here in Ohio figured out that he and his wife pay around 45% of their income for Federal, state, and city income tax (Youngstown and Canfield), as well as property and sales taxes. Really makes you want to work.

Sooner or later the public is going to wake up to the smoke and mirrors game being played by all of the levels of government. A system that is based on 50% of the population paying for benefits accruing to the other 50% of the population who pay nothing will eventually collapse under its own weight. While auto worker are being laid off, more than a few PERS systems have an 80/20 retirement plan. You work for 20 years, and retire with 80% of your income. What a sweet deal that is. No wonder many of our governmental entities are on the verge of bankruptcy.

All you have to do is add to figure out that strapped states and municipalities will end up taxing everyone to make up for budget shortfalls. It may be income tax, but will probably take the form of sales taxes, property taxes, and sin taxes…all of which are regressive, and affect everyone. Cigarettes now cost $5.00 per pack. That is after the latest Federal tax on cigarettes to fund its healgh care program fro children in families that make $60,000.00/year. Oregon is considering raising taxes on beer 1800%, and that's no typo.

Nothing in life is free. Someone has to pay for whatever the government program somewhere, sometime. Here are the lessons the Federal government and the big liberal states like New York and California are going to have to learn again.

1) You can’t force someone to work. When you have taxed the rich to the point where their jobs are no longer there, your revenue is going to go down, not up. And unless you have your government employee unions under control, you are going to go broke. New York City has that problem: it is running out of rich to tax…so the burden will have to be shifted down.

2) You can’t force a company to stay in a high tax state. While Michigan and Ohio have floundered as the auto industry disintegrated, low tax/right-to-work states have seen their auto industry blossom. Yes, the entire industry is suffering, but Honda and Toyota are not on the verge of filing bankruptcy. And while Michigan is on the verge of going third world, Tennessee and Alabama are holding their own and will thrive when the economy turns around.

3) You can make fun of Rush Limbaugh all you want, but his move to a no income tax state such as Texas is absolutely emblematic of the troubles the liberal model states are facing. I see it here in Ohio, where many of my clients have retired to Florida to escape the income and estate tax problems.

People laughed at Ronald Reagan’s trickle-down economics. Media types still laugh. It won’t be so funny when what trickles down is poverty. That will plant the seeds for social unrest. If you haven’t been watching these past few weeks, check out the riots in France…another of the gathering storm clouds. (To be continued).