There’s a storm brewing on Beacon Hill coming from the far left. The problem is that 21 Democratic legislators are pushing for an increase in income taxes, raising the state’s income tax rate to 5.95 percent. You can read more about it here –
In a state already ranked the eighth worst in terms of job loss nationally since 2001, we should be cutting taxes in order to stimulate the economy.
The lawmakers want to also include some tax exemptions for elderly middle-class citizens, just to add a healthy dose of political pandering to the mix. They project that the tax increase will generate roughly $1.37 billion in revenue, but it also calls into question, once more, how much they know about real-world economics.
This group of lawmakers claims that they will be able to, for the most part, add some more exemptions to “hold down increases for middle-class families”. That being said, there’s no doubt that the Democratic machine will manage to do it in a way the skews the numbers, making it look like the exemptions are working while the real average family is left out in the cold. Assuming, then, that most families pay more taxes, they will have less money to spend and to save. That’s not even taking into account the sizable amount of investment spending that they’ll be taking out of the economy by raising taxes on the wealthy.
An increase in taxes will increase aggregate demand, but this demand-side approach to economics fails to take allocative efficiency into account. Yes, the government will be spending money. Yes, this will increase aggregate demand, which, in the short run, will stimulate the economy. However, the approach that these legislators want to take is to pour money into already bloated government agencies, instead of allowing private citizens the right to spend their own money. This is a problem because the government doesn’t always know better, especially with regards to spending.
Tax-and-spend does raise aggregate demand. However, we also need to take into account the investment spending that is lost when the government taxes money out of the hands of private citizens. This money could have gone into the banks, or into investment, where it would grow new businesses in the Commonwealth. Instead, it goes into government services. Businesses are streaming out of Massachusetts. Just in the office building where I work, 38 Studios (Curt Schilling’s video game company) has left, and Monster (the job search engine) is heading out. Both are leaving the state, taking jobs with them. At some point, people start to leave and head for states with lower income taxes and more jobs. We’re already seeing the effect of this with the loss of a Congressional Representative. At some point, the government needs to see that enough is enough.