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Missed Fortune – The Economic Realities of Raising & Lowering Taxes

Posted on | September 25, 2011

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When Government Needs Your Money

Any time government suffers for revenue, it has the option of raising taxes to provide increased funding for government programs. Or a state can lower taxes and decrease regulation in order to increase revenues through economic growth.

With so many eyes focused on the efforts of state and national government to turn the economic tide towards recovery, the states of Illinois and Wisconsin provide a powerful contrast. One state has demonstrated exactly what to do, the other has shown what not to do. Their results make for a great lesson in economics.

In Illinois, lawmakers raised taxes in January of this year and saw unemployment increase dramatically.

This is described in detail by Business Insider magazine:

“[I]n addition to the worst bond rating in the country, the state lost the most jobs of any state last month. The Illinois Policy Institute reported the grim news that “Illinois lost more jobs during the month of July than any other state in the nation, according to the most recent Bureau of Labor Statistics report.

After losing 7,200 jobs in June, Illinois lost an additional 24,900 non-farm payroll jobs in July. The report also said Illinois’s unemployment rate climbed to 9.5 percent. This marks the third consecutive month of increases in the unemployment rate.”

There is a clear correlation between January tax increase and the subsequent drop in employment numbers. It’s a perfect illustration of the futility of trying to conceal the results of runaway spending by imposing punitive taxes on producers rather than simply cutting the spending.

Ask yourself, if you were a business owner in Illinois, would higher taxes motivate you to grow your business?

By contrast, during this same time frame, the state of Wisconsin saw jobs increase dramatically with 39,000 new private sector jobs were created with 14,100 jobs in manufacturing. Wisconsin’s non-farm growth is now two times the national average. One other happy note: the state also managed to turn a $3.6 billion deficit into a surplus in that same time thanks to the increased revenues.

So what did Wisconsin do differently?

Governor Scott Walker asked employers why they weren’t hiring people. Business leaders told him they were feeling uncertainty about whether taxes were about to go up or not. So Wisconsin chose to lower taxes and to deregulate in order to provide the certainty and confidence that job creators were seeking.

The results speak for themselves.

Raising taxes to cover a budget deficit and shortfall stifles the very economic activity that is needed to generate increased revenues. Lowering taxes has the exact opposite effect.

Keeping Your Eyes Peeled for Tax Hikes

Right now the president is talking about eliminating $467 billion in tax breaks for wealthier Americans and corporations as part of his proposed jobs bill. That jobs bill comes with a price tag of nearly half a trillion dollars in additional governmental spending.

If this seems all too familiar, please re-read the part about how Illinois sought to handle its revenue shortfall and the results it got.

Great pressure is being brought to bear on U.S. lawmakers to pass the jobs bill or risk being portrayed as ineffectual do-nothings regarding the economy.

The tax provisions of this proposed jobs bill include a limit on itemized deductions and certain exemptions on individuals who earn over $200,000 or families that earn over $250,000. President Obama claims that these tax provisions would raise over $400 billion over a ten year period.

Make no mistake, these proposed tax hikes will hit the very people who create jobs by employing other people.

Another proposed element of the jobs bill would treat carried interest earned by investment fund managers as ordinary income rather than taxing it at capital gains rates which would raise another $18 billion.

The key message you should be taking away from all this is that taxes will be going up and our dollars will be worth less. The biggest dangers we face in the next decade will include higher taxes, inflation and continued market uncertainty.

You must understand how this triple whammy may affect your retirement money and how Missed Fortune strategies can give you the certainty and confidence you’ll need for the days ahead.

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