In the last few postings, I've commented on Illinois' decision to increase taxes modestly in order to address a substantial budgetary gap of $8 to $15 billion. I've noted that many states face similar problems, and that increasing taxes along with wise allocation of tax dollars and stringent attempts to cut waste (but not to target public employees or needed programs for the vulnerable) should be considered by most states during this difficult fiscal time.
But the New York Times today has a story that says that many states have concluded that they have to take draconian cuts and can't raise taxes no matter what because of their fear that raising taxes will stifle growth. See Monica Davey, Budget Worries Push Governors to Same Mind-Set, NY Times, Jan. 17, 2011. She says the "prescription" is to"slash spending. Avoid tax increases. Tear up regulations that might drive away business and jobs. Shrink government, even if that means tackling the thorny issues of public employees and their pensions."
This is a prescription for disaster. Why? Because historically, we have better growth at higher tax rates, not lower rates. See Mike Kimel's blog "presimetrics" for various good posts on this topic, looking at a range of data from a range of sources, e.g., Kimel, Presimetrics, Tax Rates that Maximize Growth, Dec. 25, 2010. States that follow the cut-services,-fire-workers,-defund-pensions,-and-don't-raise-taxes prescription are sticking to the worn out script provided by the "freshwater economic" thinking of the Chicago School--dogmatic, unrealistic, tied to a notion of property and wealth that favors the propertied and the wealthy at the expense of ordinary folk.
Note the contradiction between what these "free market" economists who want us to crack down on unions and public employees say and what they profess to support. They profess to support full property rights and the right of individuals to have a say in their destiny. But public employees who signed on for a particular compensation package--pay below what their skills and competencies would garner in the private market, but buttressed by decent pension and health benefits--are now expected by these stuck-in-the-mud thinkers to give up what they already worked to earn, and in addition accept pay freezes and/or furloughs and/or large layoffs. All in the name of avoiding higher taxes for those who have continued to garner most of the benefits of productivity gains through the last few decades.
That makes sense if you honestly think that giving more wealth and power to the plutocrats who already control so much of our wealth and power is a good idea. Otherwise it does not. What states should be doing is raising taxes through a more progressive tax system--not flat taxes on income, but progressively higher taxes on income and increased corporate and capital gains tax rates (where there is a preference as in the federal system).
The rhetoric of the "no new taxes" governors is generally off base. Rick Scott, new Republican governor of Florida, said that "taxation, regulation and litigation" are the "axis of unemployment". Yet the facts don't support that. Better regulation prevents businesses from abusing workers and stepping on worker rights and more taxation actually supports growth. (Again, look at Mike Kimel's work on this issue.) Scott Walker, the Republican governor of Wisconsin, says that there will be no tax increase and that he will "right-size" government. Does that mean cutting funding for public universities? Public universities were an important piece of our advancements after WWII, and the significant decrease in public funding for them has resulted in higher tuitions (making them less accessible to the middle and lower middle classes and poor) and less funding for basic research (if it doesn't come from the federal government, it likely isn't there). Then there's the public infrastructure that is rotting in this country--from bridges to state roads, from lack of rail systems to inadequately inspected rail systems. If any state is going to move forward in the next few decades, it will need to invest in cutting edge energy and transportation infrastructure, not cut back to bare bones. And that means it will have to raise taxes to pay for some of these important public services.
Even Jerry Broan indicates that public pensions need to be reviewed to be sure that they are "fair to the workers and fair to the taxpayers." If you've already contracted to pay a particular pension, how is it fair to the workers to reneg on the bargain you made just because you saw fit to spare higher income taxpayers an increased tax burden to pay for it at the time and deferred it to another day. Now that another day has dawned, it is suddenly "fair" to reneg on that contractual agreement in order to spare the wealthy their fair share of the tax burden? That seems to be the political sentiment expressed by the tea party, the Republican party in general, and even lots of Democrats these days. But it doesn't sit well with hopes for broad-based growth that builds a sustainable democracy, or even with claims to honor "traditional" values like responsible payment of obligations. The Republicans scoff at homeowners who default on their mortgages for being irresponsible, then urge states to do exactly the same thing in dealing with their public employees. this stems more from the wealthy-friendly animosity to unions than from any traditional value of accountability, responsibility, or fairness in contractual relations.
This isn't "shared sacrifice" but it certainly is a "painful choice." It is a choice that will reverberate through the next decade, as the wealthy continue to benefit from a casino economy with even less regulation than before, while the brunt of the sacrifice is borne by the poor and middle class (the real one--not including those well-off in the bottom of the top quintile of the income distribution).