Unions, wages, and taxes.

I have been doing a little reading and listened a bit to talk-radio so I can try to get a better handle on what is happening in Wisconsin (and in fact in a few other states as well) in regards to the proposed union changes. First a little fact-check.

Per Governor Walker’s website:

Governor Walker’s budget repair bill strikes a fair balance—asking public employees to make a modest 5.8% pension contribution, which is about the national average, and 12.6% health insurance contribution, which is about half the national average.

If you read the rest of the release, he makes comparisons to the private sector to help justify the change and to try to show how much better government employee pensions are when compared to the private sector. It should also be pointed out that the unions are not being banned. They are still would be allowed to bargain for wages and would still be offered union protections including tenure.

One of the counter-arguments is the first bills pushed through by Gov. Walker caused the deficit in Wisconsin. That is true for this year, as tax revenues are projected to be lower in Wisconsin because of some business tax credits Gov. Walker pushed to pass. However, for 2012 the cost of the tax credits is expected to be about $50 million. The deficit is projected to be $6 billion.

Here’s a summary of how I feel: This might not be the best way to do something about this, but something has to be done.

I am sure some of my friends remember what happened to some people on the Iron Range when LTV Steel went bankrupt. People who were retired under their pension plan had it taken over by the PBGC and their income was cut by more than half. Many other companies have gone bankrupt and many people have lost their pension benefits and have been left to start over. State and local governments are no exception. 30 or more years ago, these pension plans were set up with unrealistic return expectations. We also had no idea people would continue to live longer thanks to dramatic advances in medicine. It is not unusual for someone to spend more time collecting a pension then they did working. That is simply no longer affordable. If we continue down this path, those that are already retired will find their benefits gone or severely cut. I don’t want to leave my parents or my friends parents without because we can’t keep those promises to them.

In Minnesota, Governor Dayton wants to increase the top tax rate in order to help shore up these pensions. I ask how high should taxes be? As people continue to retire and live longer, do we raise rates again and again to pay for the pensions? At some point do you think people will start to move to Texas or Florida where there is no income tax? If raising taxes is the solution to all of our problems, then what we should do is just have our whole check sent to the government, and they can spend what they need and just send back to us what they feel we deserve.

Here’s the thing about taxes – raising the rates changes behavior much more than it changes revenue. Take a look at this chart. It should be noted that from 1946-1963, the top federal tax rate was over 90%. In 1964, the top rate was dropped to 77% and stayed 70% or over until 1981 when it dropped to 50%. By 1988, the top tax rate was 28%. What you will notice is that when taxes are cut, tax revenues actually tend to go up (as a percentage of GDP). In any case, since 1945 tax revenues as a percentage of GDP have gone from 14.4% to 20.6%, no matter what the tax rate. People in the higher tax brackets simply change their investments, their work habits, or find other ways to avoid taxes. Also, people who are “rich” are not always income rich, but asset rich. They build a successful business and their riches are in the business, not necessarily in income. Bottom line, you don’t get more tax revenues by raising taxes. You only end up punishing the upper-middle class.

What we need to do is start drawing a line where the pensions need to be cut off. Perhaps those 35 and younger should be placed into a define contribution plan where the employee would contribute to a 401(k), 403(b), etc. and would be matched to a point by the government. This would give those people 30 years to build a nice nest egg (assuming a 65 retirement) and still have a nice, long retirement. We could even “jump start” the plan by doing a lump sum deposit based on years of service. This would then give the governments more cost certainty and lower the burden for tax payers. This would also save and protect the pensions of those retired or those older people that have made their plans around these pensions.

Certainly this is a broad overview of the topic. I am not a fan of the politics being played by the union and the Republicans in Wisconsin, but the one good thing about it is the conversation is starting. We have to start these reforms so we don’t leave older Americans without their pensions, their healthcare, and their social security. Those of us that are younger need to plan on our own, so we don’t leave our parents and grandparents without – or leave ourselves with nothing. Higher taxes are not the answer. Politics are not the answer. Honest conversation and reform – that is how we fix this.