Guy 1:  I hear Sec. of the Treasury Tim Geithner is make efforts to close the tax gap [the difference between taxes legally owed and the taxes paid]).

Guy 2:  So he’s going to pay his own taxes?

A Tax Court judge made a presentation at the MBA yesterday. In it, she stated some simple, but not-well understood facts about the tax gap. There seem to be two major reasons for it: the cash economy (people not reporting a transaction to the government) and FICA witholding issues on closely held entities.

Despite what may be reported by the press and stated by politicians, there is no significant tax gap in corporate compliance (you may think corporations should pay more, but they largely do not cheat–which is not surprising when you consider how much they pay in compliance costs).

The tax gap is, in large part, a cash-based economy issue.  It does not include those people who are receiving a W-2 (you don’t have much room to cheat if you receive a W-2 because that information goes right to the government and they match it).  This is important to remember when the current administration treats the tax gap like free money and rails against the lack of progressivity in our tax code–closing the tax gap will make taxes more fair, but it will probably also make taxes overall less progressive.

Joe the Plumber event tomorrow:  Bootleggers @ 5:30.  See you there.

Obama sold his stimulus as a way to inject cash into a faltering economy.  While conservatives were very worried about the amount of wasteful and unncessary spending, I don’t think that the package, as originally sold, presented many threats to our freedom.  After all, this money was supposed to be being spent on roads and bridges and “infastructure”–those things, that most people agree the government should provide (I’m assuming that such expenditures are popular because Obama uses that word in every other sentence).  It’s difficult to say that our fundamental liberties and the balance of individual rights versus collective action through government control are upset because the government repaves a road (or in the case of MPS, builds an empty school). 

But there is no doubt that some of that stimulus included long-term government programs that will allow the government to organize a larger portion of American life that previously it did not organize.  We are just now starting to understand exactly what sort of inroads the new-look federal government will make beyond a simple one-time stimulus.

In the budget Obama released recently, we also found out that taxes are going up and are going to be more complicated.  In a complicated provision, Obama is planning to phase-out the charitable deduction for high-income taxpayers.  There are many tax policy reasons to oppose what exactly Obama is doing, but I won’t discuss those here. 

But is what is far more troublesome, and this gets to the all-important balance of individual choice versus government control of our lives and our society, is that  the combination of these provisions seem to put a substantial portion of services that were once provided by private charities under direct governmental control.  It doesn’t do it directly (no non-profit organization will be nationalized), but the combination of extra federal government spending and the inevitable decrease in non-profit donations will produce  a similar result nonetheless.

There are a number of problems with the charitable deduction.  But one of its best traits is that it allows donors to have a choice and it produces plurality in civil society.  It’s arguable if when you make a charitable donation and then deduct the amount, you’ve really given some of the government’s money (after all, difficult to distinguish why you should have a deduction for charity when you don’t get a deduction for other things that you like to do).

But the incentive the government provides for you to give money supports the great democratic virtue of plurality.  The taxpayer makes a gift where he chooses, as long as it is a broadly defined social good, and the government kicks in a little extra.  Taxpayers choose what specific cause to support.  We don’t all have to decide to support the same charity–we don’t all have to agree or have an legal obligation to support someone else’s charity (like we do when the government decides to fund something–we vote and then we are bound by the majority).  There is a plurality of organizations and solutions out there competing for our dollars and our volunteer time–and even an organization supported by a small minority can still exist. 

It allows a taxpayer the freedom to direct his charity wherever he chooses.  But all of us get the benefit of a donation that went to an organization that lessens the burden of government.  There are other trade-offs, but there are some significant advantages to this method.

Alexis de Tocqueville adored the caucaphony generated by a thousand American voices, each with their own ideas and their own plans on how to improve and to solve and to make this country a better place.  De Tocqueville found it to be a distinctly American virtue.  He thought this plurality was vital to the fabric of America and to the survival of its democracy.

Politics is generally about making collective decisions that we all have to abide by.   But a democracy can also become a tyranny when the decisions, even when made by a perfect majoritarian process, encompass too much control of our lives and how civil society is organized.

It’s good to have benevolent organizations that are not under the control of the government that help organize our collective actions as well because they provide voluntary opportunities for service and a plurality of views on how to obtain a solution.  Too much government intervention, de Tocqueville argued, crushes individualism and the even the voluntary communal aspect of a society.

A federal budget provision will not end the non-profit sector.  A federal budget (no matter how much is spent) cannot change the virtues (and probably not the excesses, either) of the American people.  Most of the donations will still come in.  The charitable deduction needs reforming (even though this is not the answer). And may be if there wasn’t trillions of government dollars looking for a place to stick, this would not be unsettling.  But I fear this sort of provision tramples on an important, if overlooked, principle to collect a few dollars.

h/t www.taxprof.blog.com

Scott does a great job explaining why he has hesitated to “line up at the federal trough” in a WSJ Opinion piece.

In addition, he explains how Gov. Doyle has failed to make tough budgetary decisions and has instead raided the state’s transportation fund.

Keep up the great work Scott!

Yesterday, Ellen Bravo, the coordinator of the Multi-State Working Families Consortium in Milwaukee, asserted in the JS that the Milwaukee sick leave mandate “makes economic sense” and that we should “ensure that paid sick days work for all us.”  She suggests that opponents of this government mandate contradict themselves by arguing that guaranteed paid sick days will hurt local businesses.  Humorously, she also dismisses their empirical evidence as merely “abracadabra arithmetic and hocus-pocus economics” — a lesser blogger might point how aptly that description would fit Congress and the Obama administration’s attempts to spend us into oblivion; I shall rise above that temptation however. 

In dismissing the costs that taxpayers, businesses, and customers will incur as a result of this directive, Ms. Bravo states the following: 

Many employers easily could come into compliance simply by allowing time they already offer to conform to the terms of the ordinance – that means not requiring a week’s notice that someone’s kid will wake up screaming with an earache. Most businesses already track when employees are not at work. No one can use the paid sick time until he or she has been on the job for 90 days. Many workers will save sick days for when they need them. Any new costs will be offset by savings on health care, productivity and job loss.

So, not only will the costs be minimal because employers are already positioned to easily and cheaply offer and monitor sick time (which obviously begs the question why the government must mandate it then), any additional costs will be serendipitously offset by savings elsewhere; though the reader is left to wonder just how and why those savings will materialize.  

In What is Seen and What is Not Seen, Frederic Bastiat ventured,

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Surely, the goal of this measure may be lauded by many of us.  But goals and motives cannot and must not be enough to simply ignore the results of our efforts.  Clearly, there would be employees that would benefit from this measure (“the seen”).  These folks are readily visible and thus very compelling.  However, there are also those that will be hurt by this measure (“the unseen”).  By their very nature, they are not easily discernable because the costs they incur are widely dispersed.  Is anyone comfortable telling someone that faces the dilemmas posed by Ms. Bravo, that the benefits they will receive are more than outweighed by the costs that many nameless and faceless individuals will absorb? 

And yet, if we are to heed Bastiat’s warning, we should not accept the “small present good” without recognizing the “great evil to come.”  What will that evil look like?  Well, rather than resorting to the fuzzy numbers of mathematicians and economists that Ms. Bravo finds lacking, I’ll cast my gaze across the Atlantic and offer a future glimpse of what Milwaukee might look like.   

Recently, the Eurpean Court of Justice ruled that employees on long-term sick leave are entitled to take all holiday they have accrued when they return to work.  As noted in this BBC article, 

“If employees never return to work – which is usually the case on long-term sickness cases – they accrue that holiday which is then paid out as a lump sum on termination of employment,” said Fraser Younson, head of the employment group at lawyers Berwin Leighton Paisner.

…

“Such liabilities may encourage employers to think twice before providing long-term sick arrangements for their staff in the future,” Mr Younson said.

 Earlier this year, the WSJ reported on the effects of sick-leave-on-demand in Belgium. 

Ultimately, does it mean that this is where we’re headed?  I’d like to think not.  I still believe that this city, state, and country are places of opportunity rather than entitlement.  That we are free to choose, as Milton and Rose Friedman contended, to engage in voluntary exchanges in which both parties benefit.   

That is the only way to ensure that the government, economy, and sick days work for all of us.

A recent WSJ article outlines some truly astonishing numbers.

First, keep in mind those making $200,000 or more annually, or roughly the top 2% wage-earners, accounted for 62% of all federal individual income receipts in 2006.  The top 1% accounted for 39.9% of all income tax revenues.

As Jason discussed a few days ago, I thought the wealthy folks in the U.S. don’t pay their fair share?

But with respect to where this country is heading, what is even more amazing:

A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That’s less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable “dime” of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.

So there you go.  All we have to do is tax everyone who makes $75,000 a year at a marginal income tax rate of 100%, and we could pay for 2010 federal spending.  Why not?

In his budget, the Governor proposed a 1% income tax on single people with an income of more than $225,000, and for married couples who have a joint income of over $300,000.

This was lauded as a way for the wealthy to pay “their fair share” and to pay back for the benefits that they have received from the state.

I don’t know what a “fair share” of your income should go to the government.  I will say this; the majority of people in this state who make $225,000 a year earn it–the hard way.  I think that’s a truth that is somewhat lost on people who come easily to the conclusion that high-income taxpayers aren’t “paying their fair share.” 

Jobs are not equal.  Some require very, very long hours and require you to be available at all times and to work on the weekends. They require large investments of time and energy and money without guarantee of return.  Sometimes they are very boring but yet require a very high aptitude (I read the U.S. tax code for a living; it’s lucky for me I like to read the tax code).  Other jobs require you to sell services; for many people, that is a daunting task. 

There are jobs that no one will choose to do unless there are substantial financial rewards–I can assure you that their employers are not paying them for fun.  To tax these “so-callef wealthy” people far more than very similar people, who have the same God-given capacities and who receive the same government services but who choose to work less, on the basis of “fairness”, seems awfully odd to me.  It just plain ignores the sacrifices that some taxpayers have made and the effort they have spent pursuing their careers and their dreams (I’m not saying that everyone should work more; I’m saying that our tax code should not punish those who do based on some arbitrary view of “fairness” that leaves out a key factor–namely the effort and time required to generate the income).

On the economic front, this is just terrible policy.  First, in a service economy, where the most important resource is people, people get to make choices about investment every day.  To say that the expected after-tax return on that investment will not be taken into account by those people making the decisions of whether to invest is to ignore reality and common sense.

No, no one is going to make life-changing decisions based on a tax rate change.  But the most valuable human capital investment is often made at the end of a long day of work when a person can stay at work and read or write an extra article or take time to mentor a subordinate or think up a new business plan.  To the extent the government increases taxes on marginal income, people will choose increasingly to go home instead of staying the extra 30 minutes.  Again, and why should the tax code reward those people who go home?  That’s a powerful idea of fairness that is entirely left out of the discussion of ”fair.”

And then there is the reality of business investment.  The personal income tax increase is not just hurting the wealthiest among us–it will have a detrimental effect on the Wisconsin economy and business growth, which we all rely on for our jobs and welfare. 

Many, many businesses in Wisconsin are organized as “pass-through entities.”  That means that the entity does not pay corporate income tax, but the business income is “passed-through” to the individual owners returns and taxed at their rates.  This is generally the case for closely held businesses and small businesses (the engines of the economy).  The individual owners end up with tax due from the business profit, but with no readily available cash (in a dividend or distribution).   Many businesses try to reinvest as much of the profit available in the business and dislike paying dividends.  To fix the problem of having shareholders with taxes payable and no cash to pay them, these businesses oftentimes have a policy or agreement that the business will distribute at least enough cash for the shareholders to pay their taxes.   Thus, when the budget increases taxes on high income individuals, it will require these businesses to make distributions to shareholders to pay taxes; these distributions would have been reinvested in these closely-held businesses.  Without business investment, the economy can’t grow. 

h/t to John Torinus, who mentioned this in the JS last Sunday.

There is quite a lot to discuss about the Governor’s proposed state budget (enough to keep several tax attorneys busy for many years [I hope]).  Christian Schneider has started calculating the numbers at http://www.wpri.org/blog/?p=504 

Governor Doyle has been busy.  In an interview with the Wisconsin State Journal, has previewed a plan to lift revenue caps for school districts.  See http://www.madison.com/wsj/mad/top/439591

Frankly, it is a very frustrating read (and we don’t know all of the details, so I’ll work off the articles). 

First, as I think Doyle implicitly acknowledges, but won’t quite come out and say, it will result in higher property taxes.  It is clear school districts have had lower amounts of yearly increases in the amount of school spending and in teacher benefits because of the revenue limits and the QEO. 

And what will taxpayers receive for these higher taxes?  Doyle says there needs to be a “pathway” for each district to get rid of the the revenue limits.   From the article:

To avoid the revenue caps, Doyle’s plan would require districts to:

• Join together for the purposes of negotiating union contracts

• Make employees use the state health plan unless the school district already has a plan that is cheaper

• Require schools to agree to a list of practices that would improve student performance

• Provide compensation for teachers that better reflects the needs of individual schools such as those in rural districts that struggle to attract teachers for some subjects

I don’t know enough about union negotiation rules to fully comment on the first two.  Perhaps if school boards bind themselves together for teacher contract purposes, they can avoid the teachers’ union from using arbitration to obtain higher pay and benefits.  I’m not certain why that would be the case–I don’t think it follows that a group of school boards would strike a better bargain than single school boards.  I fully accept the fact that some districts will want to pay their teachers’ more.  Once a few contracts are signed at a higher level, a union in another school district can point to the contract in arbitration as “market.”  WEAC, as they are fully allowed to do, will coordinate with the unions in various districts to make sure that “market” is as high as possible.  Binding school districts together may moderate the increase in pay and benefits by decreasing the number of outliers, but I would want to see how the Governor proposes to group these school districts (the QEO may be imperfect, but I doubt any system of arbitration can match it for keeping overall salary and benefit costs in check). 

On the second point, perhaps the school boards will need to pay teachers more so that their unions will accept changes to their healthcare (as the union president further along in the article brings up).  If so, then the unions would be asked to trade healthcare they don’t want and more money.  My understanding is that they were always allowed that tradeoff under the QEO.  If they never took it, then it seems odd to pay teachers more money overall to accept a healthcare plan they don’t want under the guise of saving taxpayer money.  If the savings from changing health insurance providers is that great, I would think that by giving the teachers’ union more leverage (eliminating the QEO), it would result in the teachers’ union and not the district capturing the savings (since the teachers probably already gave up extra pay to have the coverage that they wanted).

The third point is also odd.  I would have thought that schools would have already been doing what was best for their students.  Doyle’s plan makes it seem like there is some silver bullet out there that, if with just a few more hundred dollars a year (over the $8,500-$12,000 per student that we’re already spending), there will be some massive gains in educational achievement.  More on this later.

The fourth point is probably worth debating.  There are a number of poor, rural, low-spending districts across the state that do not spend up to the revenue limit (or they could always pass a referendum to spend more) but who choose not to do so, even though they are offered nearly the same grandiose bargain from the state that the Milwaukee Public Schools are offered–for every educational dollar spent, the state will pay for 75%-80% of the additional cost.  To hinge a policy that will result in suburban school districts to massively increase their spending on the lack of spending by poor districts who will not take advantage of their increased ability to spend is nonsensical, especially when a good portion of the problem is the differential in pay between suburban and rural districts, not just the total amount of salary.  To the extent the problem is differential in pay (suburban districts pay teachers more and thus claim the best teachers), then this plan will probably actually make the problem worse, because suburban districts have a higher appetite for spending.  If this was really the underlying problem, there are far more targeted and cheaper ways to solve it. 

The simple result of this plan is that teachers will be paid more than they are currently.  Wages and benefits make up 75%-80% of each school district’s budget; if the revenue limit and the QEO are simultaneously eliminated, it is pretty easy to see where the majority of the spending increase will go–to teachers who are already teaching (less whatever savings can be obtained by changing health insurance to the state, as outlined above).  Will paying people more make them better at their jobs?  Doyle’s response seems to be, well, if the state can make them do their jobs better, then yes.

I have my doubts.  Yes, we should expect more from our students, but Libby Burmaster and Tony Evers clearly don’t do so when it matters (beyond your basic campaign slock, that is:  http://www.jsonline.com/news/education/40010682.html).  I have great doubts about whether the proposals under this bill can really make the state educational bureaucracy into a machine for innovation and academic achievement. 

The crux of this plan is in the middle of the article, so you might have missed it:

Doyle said his proposals on best practices for schools would draw on the work of UW-Madison professor Allan Odden, co-director of the Consortium for Policy Research in Education.

Odden said Doyle’s plan would be a good compromise because it would allow school districts more money but also ensure that it was better spent. Odden said recommendations of his group included setting sharply higher expectations for student achievement, giving small-group tutoring to struggling students and more testing of students by teachers beforehand to develop their curriculum.

Good compromise for who, exactly?  Certainly not the taxpayers who are footing the bill.  Wisconsin school spending is more than healthy when compared to other states.  So is Wisconsin’s tax burden.  Taxpayers are rewarded under this plan presumably because the schools are going to produce better students (because we started expecting “higher standards” and paid the teachers more).

Odden’s work is mostly predicated on the notion that more money spent will equal more academic achievement.  That would come as a big surprise to most of the economists and researcher who study the issue; they know that most studies do not find any general link between spending and achievement.  When anyone, including the Governor, argues that by spending a few more dollars, academic achievement will increase, their plan deserves the strictest of scrutiny.  Empirically, that is just not the case.  It is not a “good compromise” for anyone except those who just want more money for schools.

I suppose the response will be that the programs that Odden is talking about will work (there may even be good evidence of some of these things working–such as regular testing of students).   There may be some data that shows that particular programs will work.  However, there is nothing stopping the implementation of those programs right now with the massive amounts of money that we already spend (an average of $9,600 per pupil), except maybe union rules.  But giving teachers’ unions more leverage in negotiations by eliminating the QEO and going back to arbitration is not a good way to make sure that those rules are changed.  There are other proven solutions that will produce increased academic achievement without spending anything close to the cost of this plan (which, conveniently, is clouded by so many contingencies, will never be clearly estimated).  There are good solutions out there such as allowing administrators more flexibility in choosing and retaining teachers and pay-for-performance.  Moreover, if the idea is to increase academic achievement with these particular programs, why wouldn’t the state just fund the programs that it finds can produce additional academic achievement (such as lowering class sizes), instead of allowing local districts to increase taxes for all sorts of programs/spending that may not be on Odden’s list of ways to spend money to increase academic achievement? 

Without a doubt, Wisconsin should raise expectations for its students.  The connections between the rationales offered for this plan and its operative provisions (as we know them) are loose, to say the least.  The question of when Wisconsin’s students reach those expectations is not a fiscal question, it is a question of whether our leaders will make the tough, accountable reforms that we need to make to our schools.

This report by the American Legislative Exchange Council on the relative economic competitiveness of all 50 states is a few years old but nonetheless very informative given the measures that many states, such as ours, may impose to address their fiscal situations.  If you don’t have time to read the full report, I’d recommend at least comparing Wisconsin with similar sized states that are more or less competitive.  It is also worth noting the striking (albeit not surprising) disparity in rankings between the two most populous states in the union, California and Texas.  Of course, it is not surprising given their respective governors’ approaches on handling state budget deficits and “free money” from the federal government.  Governor Schwarzenegger is all too happy to take the “stimuli” while Gov. Perry and a few other GOP governors are being a little more discerning.

Locally, Scott Walker has caused quite a stir with his suggestion of a sales tax holiday.  Criticism notwithstanding, it is a refreshing alternative to the standard approach our big spenders in state government are renown for.  Just yesterday, JSOnline reported how the state may spend the $12.5 million in fees collected thus far to assist in complying with the federal Real ID law.  Ignoring the merits of the law or whether it will change in the future, the following section from the article is a perfect example of the “tax first, figure out how to spend it later” mentality that has resulted in massive spending increases that the federal and many state governments have experienced this decade.

The state will continue to improve its licensing system, but it’s too soon to tell how the state should use the $10 increase in license fees it began charging last year, Doyle said.

“Depending on what the federal government does, we may want to use part of that fee to finish our modernization, but I think we really don’t know where the federal government is going to go on Real ID,” he said.

The Legislature’s Joint Finance Committee plans to begin amending Doyle’s budget in April. Democrats run the committee and Legislature.

Decision debated

State Sen. Mark Miller (D-Monona), the committee’s co-chairman, said Doyle made the right call because of the federal law’s uncertain future and the state’s tight fiscal situation.

“We need every nickel we can find,” he said.

No doubt.  How about looking under the couch cushions instead?

Blair Holt’s Firearm Licensing and Record of Sale Act of 2009

http://www.govtrack.us/congress/bill.xpd?bill=h111-45&tab=summary

1/6/2009–Introduced.
Blair Holt’s Firearm Licensing and Record of Sale Act of 2009 – Amends the Brady Handgun Violence Prevention Act to prohibit a person from possessing a firearm unless that person has been issued a firearm license under this Act or a state system certified under this Act and such license has not been invalidated or revoked. Prescribes license application, issuance, and renewal requirements.
Prohibits transferring or receiving a qualifying firearm unless the recipient presents a valid firearms license, the license is verified, and the dealer records a tracking authorization number. Prescribes firearms transfer reporting and record keeping requirements. Directs the Attorney General to establish and maintain a federal record of sale system.
Prohibits: (1) transferring a firearm to any person other than a licensee, unless the transfer is processed through a licensed dealer in accordance with national instant criminal background check system requirements, with exceptions; (2) a licensed manufacturer or dealer from failing to comply with reporting and record keeping requirements of this Act; (3) failing to report the loss or theft of the firearm to the Attorney General within 72 hours; (4) failing to report to the Attorney General an address change within 60 days; or (5) keeping a loaded firearm, or an unloaded firearm and ammunition for the firearm, knowingly or recklessly disregarding the risk that a child is capable of gaining access, if a child uses the firearm and causes death or serious bodily injury.
Prescribes criminal penalties for violations of firearms provisions covered by this Act.
Directs the Attorney General to: (1) establish and maintain a firearm injury information clearinghouse; (2) conduct continuing studies and investigations of firearm-related deaths and injuries; and (3) collect and maintain current production and sales figures of each licensed manufacturer.
Authorizes the Attorney General to certify state firearm licensing or record of sale systems.

Many thanks to the friend who passed this along.

The Legislative Fiscal Bureau’s summary of the just-passed budget repair bill is here:  http://www.legis.state.wi.us/lfb/Misc/2009_02_16WI%20Leg.pdf

The legislation passed both houses of the Wisconsin legislature without a single Republican vote.

Among other things, the Democrats finally got their wish and passed “combined reporting.”  Currently, subject to some exceptions, each corporate entity must individually “do business” in Wisconsin to be subject to state corporate income tax (although see Wis. Stat. Sec. 71.25(5)(a)(9)).  Combined reporting requires corporations to pay state corporate income tax on all income received by all businesses that are “unitary” with the corporation, regardless if any of the particular corporations themselves do not do business in Wisconsin.

It’s always politically expedient to raise taxes on corporations, and combined reporting is even better in this regard–it doesn’t even raise the rate, which too often is confused with not “raising taxes.”  The LFB has scored it as an 11% increase in corporate taxes and the $200-some million revenue “enhancement” is a pretty big chunk of change and makes up most of the budget repair bill.

Combined reporting is defensible as tax policy because, in some cases, it allows the state to more accurately account for the profit a corporation derives from Wisconsin.  The lack of combined reporting sometimes allows corporations to ”shift’ the location of profits from Wisconsin to other states (where they are taxed a lower rate).  For a business that has a number of subsidiaries that have frequent transactions with each other, or are all in the same line of business, it is difficult to measure where the income actually originated from.  Instead, combined reporting offers the state a short cut:  add all income together of all related corporations and then apportion according to a formula of sales, property, and payroll (Wisconsin only apportions based on sales).

But to the extent that separate subsidiaries represent different businesses that do not interact (or do not share profit), combined reporting will decrease the accuracy of the parent’s Wisconsin income and decrease the fairness of applying the corporate income tax.  When a parent corporation has a separate corporate and accounting subsidiary that segregates income produced within the corporation, this makes taxes more unfair.  One unit may be in Wisconsin, but with combined reporting, the other businesses will be taxable on Wisconsin receipts, even if the other subsidiaries are not doing business in Wisconin.  This is an unfair application of Wisconsin tax, because those other businesses do not derive profits from Wisconsin and their competitors do not have to pay Wisconsin corporate income tax). 

If combined reporting would have been part of a tax revenue neutral package, perhaps it would have had more merit at this time of recession.  A good idea for a stimulus bill would have been some sort of bonus depreciation–which targets new capital investments by businesses by making the return on new investments tax free.  New capital investment will get the state out of the recession (which the governor seemed to understand–he funded some angel investment credits, but the amount of those credits is paltry in comparison to combined reporting).  Instead, the legislature decided to raise taxes during a recession, which decreases the expected return on investment, thus in turning decreasing the amount of investment (again, the very investment needed to begin economic recovery).

Combined reporting has other important economic implications.  A combined reporting regime creates a heavy disincentive for corporations to establish their first operations in Wisconsin.  The Wisconsin state corporate income tax is entirely based upon where the sales of the corporation are located.  An out-of-state corporation may make Wisconsin sales without actually having operations in the state (and thus not ‘doing business’ in the state and not subject to the corporate income tax).  If that out-of-state corporation began operating in Wisconsin–buying land, hiring employees, investing in Wisconsin’s future– it would face a hefty corporate income tax bill based on the percentage of its sales (not on its employees or property, which may initially be small) in Wisconsin.  That is not a very welcoming strategy if you are trying to build the economy. 

Moreover, there is considerable data to show that much of the corporate income tax is not being born by capital.  All taxes decrease the amount of economic well-being of one or more people.  A corporation, a non-person, cannot bear the economic incidence of a tax.  Most people assume,  far too quickly and without much in the way of analysis, that a corporate tax is passed on to the shareholders of a corporation (in a static world in which no one responded to taxes, that would be the case, but in reality, people and corporations react to taxes).  Instead, corporations and their shareholders make adjustments based on taxes.  All things being equal, if doing business in Wisconsin means less profit, than there will be less business in Wisconsin.  There is super high capital mobility among the states–capital and investment will flow very quickly to those  those states and municipalities that do not attempt to tax it.  Or investment will be available in high-tax jurisdictions such as Wisconsin, but the return needed to obtain investment must be higher to attract it.

In Wisconsin’s case, since the corporate tax is determined by amount of corporate profits and what percentage of the corporation’s sales are located in Wisconsin, it seems fairly likely that a sizable portion of the Wisconsin state corporate income tax is being shifted on to Wisconsin consumers.   This includes the additional $200 million increase in tax paid due to the legislature’s passage of combined reporting.  Perhaps we should should bear this in mind when we hear talk that the proposed budget didn’t raise the sales tax.