Can Economic Prosperity Come Solely from Higher (or Lower) Taxes?

Bring up Maine’s economic challenges and you will be met – inevitably – with two suggestions: cut taxes and raise taxes. But neither approach is a comprehensive economic strategy and both have political and social consequences.

 

First, let’s look at calls to cut taxes.  It is certainly true that having some of the highest taxes in the country puts Maine at a competitive disadvantage when it comes to attracting business investors and workers who might move here. But it is also true that many, if not most, Mainers support high taxes and/or the things they pay for: local government, public safety, schools, state government, parks, the U-Maine system, and more.

 

In addition, tax cuts are always claimed to only benefit “the rich.” As it happens, 30% of Mainers pay no state income tax. And 40% only pay a total of 1% of Maine’s total revenue from income taxes.  These are the lowest incomes in the state, so since taxes have been essentially eliminated for them, tax cuts will only benefit the top 60% of income earners.  When we consider that taxes provide jobs and incomes for teachers, law enforcement personnel, state workers, road builders, and more, we see that cutting taxes comes with trade-offs that have to be considered and supported by at least a majority of Mainers.

 

Now, let’s look at calls to increase taxes as a way of lifting up Maine’s economy and quality of life for its residents. Often, these calls come in the form of proposals to expand government paid benefits—Medicaid expansion, universal health care, free college.  Large segments of the population want these benefits but can’t afford them, so some say it is only “fair” that those with higher incomes pay.

 

The problems with that approach are that it creates perverse incentives, distorts the economy, and doesn’t address the real issues.

 

Not that many years ago people could pay for all these things with their regular income and took pride in doing so.  Working people could live independently and didn’t have to look to the government for things they wanted or needed.

 

What’s changed is the well-documented collapse of the American middle class, combined with dramatic increases in the cost of health care and education.  People can no longer afford these essential and transformative services and that’s not acceptable.  Since they can’t get it in the economic system, they demand that it be delivered by the political system—and that means wealth transfer from the haves to the have lesses.

 

The better answer is to fix the economic system and bring back middle-class jobs while getting the cost of health care and education under control.  Big, difficult things to do, but the right answer for everyone’s benefit in the long run.

 

So, does Maine need to change its tax policy? Perhaps. But it needs to be a part of a comprehensive strategy that considers how to grow the tax base (both business and individual workers), the social programs and public services Mainers want most and how to deliver these services and programs as cost-effectively as possible.