Connecting the Dots on 'Connections'

I was invited to be a guest on Connections, a weekday talk show on WXXI, Rochester's NPR affiliate.  The show is available as a podcast, a link to which is included in this post. This essay was published in the Rochester Beacon.  Click HERE to read the original piece. 

The TV character MacGyver once said, “Desperation tends to make one sort of flexible.” I think of it whenever WXXI radio host Evan Dawson reaches out to me to come on his show, “Connections.” I am reliably conservative, and he likes to present a balanced perspective. But I am a minor figure in Rochester with little expertise in anything. Why else would he reach out to me unless he’s desperate?

John Calia

“Connections” is like an oasis in the desert if you crave intelligent discussion rather than screaming insults. Dawson doesn’t facilitate debate so much as moderate a discussion. He leans to the left politically but is fair-minded. He relies on data to inform opinion; so, I knew I had to be well-armed when he asked me to discuss New York taxes. The state budget had just been approved with some new taxes on the wealthy but without others that were the favorites of so-called progressives. 

I was a guest along with Jeremy Cooney, former chief of staff to Mayor Lovely Warren and recent Democratic candidate for state Senate, and Michael Kink, executive director of the Strong Economy for All Coalition. I predict Cooney will be a successful politician simply because he is so engaging in a face-to-face encounter and pragmatic in his approach to policy matters. Kink, on the other hand, is a liberal firebrand.

The rapid-fire Q&A that characterizes discussion shows doesn’t play to my strengths. Following the show, my thoughts about the experience fell into one of three categories: 1) what I said that felt right, 2) what I could have said better and 3) what I didn’t get a chance to say. 

I arose early on the day of the scheduled broadcast and skipped my trip to the gym so I could do some research. I wanted to broaden the context of the conversation. My supposition is the issue isn’t taxing the wealthy but rather a bloated state budget that undermines the economic success of our state.

Data point number one: Florida has 1.75 million more people than New York but its state budget is only $88 billion (as opposed to New York’s $175.5 billion). I then quoted Paul Wetenhall from his recent article in the Rochester Beacon. A former Xerox executive who moved to Rochester in 1975, Wetenhall is now an economic development professional in Charlotte, N.C. Generally, he described how North Carolina government works with business toward productive ends. More specifically, he laid out the structural challenges that New York must address. For example, the cost to educate a pupil in the Rochester area is about $17,000 while Charlotte manages to do the same with only $11,000. Charlotte must be doing something right. Over the last 40 years, its population has more than doubled while Rochester’s has only increased 10 percent.

The mention of Charlotte got the discussion off-script for a while. Kink waxed poetic about North Carolina’s embrace of philosophies and policies that emulated those of New York when it was indeed the Empire State. If I didn’t know better, I would have thought he is a Rockefeller Republican. Alas, he is not. At least four times, he characterized wealth as “immoral” and “obscene.” Neither our host nor my fellow panel member challenged this assertion. It was left to me to point out that doing so characterizes “the engine of our prosperity” as evil. Earning money and having wealth is not, in and of itself, evil. It is power that corrupts. Our state government aggregates power by taking money out of the economy and creating criteria by which we might get it back. That’s “immoral” and “obscene.”

I wish I had I asserted that not only is the process immoral but the practitioners to whom we trust this task are often convicted of corruption. There should be a dedicated wing in state prison for former New York legislators. 

I didn’t get a chance to say that the new state budget includes a plethora of new taxes aside from those levied on the rich. For example, a new tax on online sales will cost consumers $390 million this fiscal year. Meanwhile, the governor doles out unproductive economic development funds by the millions. An example is the Pinnacle North development in Canandaigua. The taxpayers contributed millions to an environmental cleanup of the site, a liability that would normally have been borne by the investors. The governor (who was campaigning for reelection at the time) told us this is the kind of project he would “invest in all day long” because it would provide about 100 low-paying service jobs. But, where did the funds million go? Answer: into the pockets of the investors. A more recent example is the state’s $4 million “investment” in Hickey Freeman.

In my closing remarks (too late to explore), I was able to point out that the U.S. already has the most progressive tax code among the nations of the seven largest developed countries. I didn’t get a chance to provide the data substantiating that claim, detailed in a 2018 Wall Street Journal op-ed. The article noted income data reported by the U.S. Census Bureau doesn’t include the impact of non-cash transfers. Consider: 

• Medicare and Medicaid pay $760 billion to the bottom 40 percent.
• 93 other programs transfer $520 billion to low-income households (CHIP, TANF, SNAP).
• States transfer another $310 billion

The bottom 20 percent of U.S. earners receive 84 percent of their income from taxpayer-funded transfers. The next 20 percent receives 57 percent of their income the same way. Overall, 28 percent of household income in the U.S. is received from the government, a percentage larger than any other country in the OECD except France. The top 10 percent of U.S. taxpayers earn 33 percent of total household income and pay 45 percent of taxes, a ratio of 1.35 times their income. In Germany, the ratio is 1.07. In France, it’s 1.1. The U.S. collects only 35 percent of taxes from non-income sources, the smallest share of OECD countries. All those countries have a value added tax (VAT), which acts like a national sales tax. To close the $1 trillion annual federal deficit, Americans would have to pay an 8 percent VAT. 

Off air, Dawson and I casually discussed the attraction of moving to a low-tax state like Florida. 

“The difference in my tax burden would send us on a European vacation each year,” I told him. 

“Yeah,” he joked. “But if you move to Florida, you’d have to buy a boat.”

So, what would you want to spend your retirement income on? Paying taxes or owning a boat?

The Hunger Games: not everyone is a winner

An edited version of this post appeared in the December 18th edition of the Rochester Business Journal

My wife and I have moved around the country quite a bit, following one professional opportunity or another – nine states at last count.  When it came time to settle into semi-retirement, we decided to return to Rochester for one simple reason:  it’s a great community. 

When you live in many regions of the country, you notice differences – those things that most people don’t think about because they’re ingrained in the local culture.  They’re taken for granted. 

So, what sets New York apart from other places we’ve lived? 

A broad swath of the population expects the government to affect positive social and economic outcomes. 

Last week’s award of $500 Million in economic development funds is a perfect example.  It was greeted with enthusiasm by one and all.  The common refrain from all those interviewed by WXXI’s Morning Edition was “everyone is a winner!”

Everyone, that is, except the New York taxpayer.

New York and other northeast states have been losing jobs and population for decades; and, it’s not just because Florida, Texas and Arizona have better weather.  It’s because of high taxes and overbearing regulation. 

The Empire Center reports, “Between 2010 and 2014, all regions of New York have lost population due to domestic migration – the movement of residents to other states”.  Meanwhile, the independent Tax Foundation ranks New York 49th on its State Business Tax Climate Index and further points out that, in the first decade of this century, New York lost more than 1.9 million taxpayers representing some $119 Billion in adjusted gross income.  That’s investable and taxable income.

“So what?” you might say.  We’re getting something back for our tax dollars.  The plan developed by the Finger Lakes Regional Economic Development Council (FLREDC) “leverages” tax dollars to great effect.  Businesses will be enabled to grow by virtue of the governance of a local steering committee that guides the investment of funds and reports on its activities and results to the state government.  Private capital will be attracted to the region, jobs will be created and the region will be revitalized. 

Here’s an alternative view. Government consistently misallocates capital.  When the FLREDC’s plan mentions “leverage”, they’re talking about contributing taxpayer dollars to the projects of private developers and enterprises pretending to free market status. The coalition of business leaders, non-profits and government agencies that will determine how the funds will be invested each have their own agendas.  There is a real cost to this kind of oversight. Capital doesn’t necessarily go where it will get the best return. 

It’s hard to blame business leaders for playing the hand they’ve been dealt.  But, is that how we want things to work?

At some level, the governor recognizes these problems.  He has created tax-free zones at college campuses to attract new businesses.  And, the recent restructuring of regulations affecting craft brewers was an uncharacteristic response to the needs of small business owners.  

So, why hasn’t that awareness translated into broad-based tax and regulatory reform?  Why does he – and, by extension, we – prefer high taxes and state control of the investment of capital? 

Your guess is as good as mine.  

When I have challenged business people on this matter, I get one of two responses.

“At least we got our share,” is a common refrain. Hence the competition’s nickname:  The Hunger Games.  We win and someone else loses. 

A more thoughtful response is the assertion that we should be happy to have government collaborating rather than regulating.  It’s a move in the right direction.  But, is it really? 

New York’s problems in retaining jobs are structural.  The right direction would be to restructure – to reduce taxes and reform our regulatory regime.  A one-time grant of a large sum of money does nothing to advance the process. 

What if this project does not yield the expected results?  We would be back where we started.  The high cost of doing business in New York will continue to drive away businesses and population.

Wouldn’t it make more sense to emulate the policies of states that are taking our jobs?

Robert Reich, the corporate income tax and the middle class

Robert Reich

I enjoy the writings of Robert Reich despite his liberal leanings.  He is intelligent and articulate and, most importantly, not dogmatic.  On his Facebook page last week he voiced his support for President Obama’s one time tax on the overseas profits of American corporations to rebuild America’s infrastructure.  In a 2 minute video he laid out his case that American corporations enjoy the protections of American trade policies without the penalty of being taxed. 

I immediately thought this was at odds with his prescription for corporate taxes in his 2009 book, Supercapitalism and the Transformation of Business, Democracyand Everyday Life.  But is it?

Then he argued that corporations should not be treated as people and that such treatment distorts their effect on government policy.  This is from page 218…

“The result of this anthropomorphic [treatment of corporations] is to give companies duties and rights that properly belong to people instead. This blurs the boundary between capitalism and democracy, and leads to a host of bad public policies. Consider, for example, the corporate income tax. The public has the false impression that corporations pay it, and therefore they should be entitled to participate in the democratic process under the old adage “no taxation without representation.” But only people pay taxes. In reality, the corporate income tax is paid—indirectly—by the company’s consumers, shareholders, and employees. Studies have attempted to determine exactly how the tax is allocated among these three groups, but the distribution remains unclear. What is clear is the corporate income tax is inefficient and inequitable.

“It’s inefficient because interest payments made by corporations on their debt are deductible from their corporate income tax while dividend payments are not. This creates an incentive for companies to over rely on debt financing relative to shareholder equity, and to retain earnings rather than distribute them as dividends. The result, in recent years, has been for many corporations to accumulate large amounts of money that the company then uses to purchase other companies or to buy back its shares of stock. Capital markets would be more efficient if these accumulated profits were redistributed to shareholders as dividends. “Decisions by millions of shareholders about how and when to reinvest these funds are likely to be, as a whole, wiser than decisions made by a relatively small number of corporate executives. Abolishing the corporate income tax would thus help capital markets work better.

“The corporate income tax is inequitable in that retained earnings representing the portion held by lower-income investors are taxed at a corporate rate that’s often higher than the rate they pay on their other income, while earnings representing the holdings of higher income shareholders are taxed at a corporate rate often lower than they pay on the rest of their income. As we have seen, under Supercapitalism, investors have far more power than they did decades ago. Their decisions about where to put their money to maximize their returns are similar to any other decisions they make about how to increase their earnings. Logically, there is no reason why their ‘corporate’ earnings should be taxed differently than their other earnings. Abolishing the corporate income tax and treating all corporate income as the personal income of shareholders would rectify this anomaly.”

To be fair, the two comments are taken out of context and provide Dr. Reich’s answer to two different questions.  In his book, he is advocating a policy that would favor the middle class by lowering the tax burden of owning corporate stock and mutual funds, cause corporations to be smarter about how they invest their capital, reduce corporate lobbying in Congress and create jobs in America rather than overseas.  His Facebook comments are made in the narrower context of the budget proposal submitted by the President to Congress earlier this month. 

His argument that American corporations enjoy the benefits of US trade policies is somewhat suspect, however.  Those policies are more favorable to our trading partners than to American corporations. 

Enacted in 1994, the World Trade Organization (WTO) has enabled emerging economies to participate in free trade with the industrialized world and has helped to alleviate poverty in those countries.  The rapid expansion of the global economy is among its myriad benefits.

However, the WTO puts every nation and every corporation on an equal footing and precludes the US from taking direct action to pressure trading partners to eliminate barriers to US exports and other unfair practices. Under this regime, American corporations do well to invest overseas.

If we want to help the middle class, lets address the underlying causes of their distress.  Overhaul of tax and trade policies is a good place to start.

WHO WILL LEAD?