Walker, GOP Place their Bet on Incentives

In a week that brought a couple of jarring business stories, the demise of the Wisconsin Cheeseman and Wehrmann's Travel Shop at Hilldale, Gov. Walker and the GOP-controlled Legislature are placing a heavy bet on the value of incentives.

Tax incentives, that is. The Governor has signed into law a business tax credit of $2,000 for new hires in companies with annual sales of more than $5 million, and a credit of $4,000 for new hires in companies with annual sales under the $5 million threshold.

Obviously, the high cost of hiring is a justification for this approach, but I have to confess my initial reaction was that these credits might be too generous.

Contrary to popular belief, the goal of tax credits or tax rate cuts is not to starve the government of revenue, but to create healthier revenue streams by igniting the economy and growing the pie. More wealth creation brings more tax revenue, more so than increasing individual tax rates.

But by cutting tax rates too much, you can run the risk of reaching a point of diminishing returns, and that's my worry about the size of these tax credits. I could very well be wrong, and happily so, if the Legislative Fiscal Bureau's numbers hold up. On the one hand, the bureau says the business tax credit proposal would result in actual tax savings per job of between $92 and $316, and save businesses an estimated $33.5 million a year in taxes. That's more money for job creation and capital investment and other pro-growth activity.

On the other hand, the bureau says it would cost the state the same amount in lost revenue, and Democrats argue that this is too expensive, given that the state anticipates a structural shortfall in excess of $3 billion. But they forget that a humming economy creates more taxpaying entities — more businesses forming that pay taxes, and more people being hired who pay taxes. In other words, getting the economy into job-creating mode creates more taxpayers, and that does not take into account increasing individual wealth, which also increases the tax base and typically occurs during an economic expansion.

Tax revenue to the government is the product of two factors — tax rates would be one, and income and/or wealth assets would be the second. You have to think of it as an equation because that's exactly what it is. One factor, tax rates, can be reduced and yet tax revenue can still increase if the wealth factor grows. In fact, increasing wealth is a much better revenue generator than increasing tax rates, but it's hard to argue that with folks who are wedded to a soak-the-rich, class warfare approach.

Actually, the best way to derive more tax revenue from the rich is to encourage them to become richer rather than punish their success. The same is true of businesses. I just hope the GOP hasn't gone too far in trying to demonstrate that. I will happily concede to being overwrought with worry if this leads to more robust hiring and tax collections.

Social Insecurity

The news that Social Security will post nearly $600 billion in deficits over the next decade is the latest economic tsunami to hit us, and more proof that we have to deal with our looming debt crisis right now. The shortfall, $45 billion this year alone, simply means that Social Security will collect a lot less in payroll taxes than it pays out in retirement, disability, and survivor's benefits.

Blame it on a struggling economy with fewer people paying into the system due to high unemployment, or blame it on the fact that millions of baby boomers are on the cusp of retiring, but this should be a wake up call!

It should also shine more light on Congressman Paul Ryan's Roadmap to the future, which calls for some common sense Social Security adjustments. There would be no changes in benefits for people age 55 and older, but people my age (55 and younger) would see a gradual increase in the retirement age and modest reduction benefit growth for higher-income earners. In other words, means testing is involved. There is no reason that Bill Gates and Warren Buffet, who can no doubt afford to pay for their own health insurance in old age, should be feeding more from the government trough.

While middle class people like me would receive less in traditional benefits than the government is now unrealistically promising, at least we would avoid more draconian cuts. We'd also have the option of staying in the existing Social Security structure, or opting for voluntary individual accounts funded with a portion of our payroll taxes.

In addition, the Roadmap allows for benefit increases for lower-income workers, ensuring some level of safety net for the people who need it most.

Social Security's Chief Actuary has given the Roadmap a fiscal benediction, noting that it makes this program "sustainably solvent." Those who want to demagogue the plan should explain why they are willing to do nothing and invite more austere measures in the future as the program gets weaker and weaker.

Ask yourself one simple question: Who cares more about Social Security? A rare leader like Ryan, who has the guts to offer a serious plan to fix something regarded as the "third rail" of politics, or politicians who treat it as nothing but a political football? As someone who is counting on Social Security being there for me in about 15 years, I cast my lot with Ryan.

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