Wednesday, December 11, 2013
The most difficult challenge to any effort at political change is the imbalance in power between the potential "losers" and "winners."
Those who would lose from a particular change are well established and powerful and thus able to mobilize their forces to oppose change.
Those who would benefit, on the other hand, are the nascent, the hopeful with the gleam in their eyes. By definition, they are not well established; they have few resources to mobilize; their argument is an appeal to what might be.
Generally, such hopeful appeals to the future hold little weight compared to the shouts of those who benefit from the status quo, who cry, "We can't afford to risk what we have now!"
Nowhere is this struggle between hope for a better future and fear of losing a precarious present more evident than in the voices rising to oppose significant tax reform. L.D. 1496, An Act To Modernize and Simplify the Tax Code, among many other changes, calls for simplifying Maine's income tax and lowering its rate.
The purpose of this reform is to provide "incentives for persons to locate their homes and businesses in Maine thereby increasing jobs and laying the foundation for a more prosperous economic future."
What could be more clearly hopeful and future-oriented? Let's create incentives to help bring what we all know we need -- more business, more jobs, more people.
But how can such wistful hopefulness stand up to the harsh, allegedly pragmatic, white-knuckled fear of those opposing change? By pointing out what we are missing.
The individual income tax, both federal and state, applies not just to households -- the consumers who, we are constantly reminded, account for 70 percent of "the economy."
Income taxes also apply to businesses organized as partnerships and S corporations. And these entities are increasing in importance as engines in the economy, but less so in Maine than in the United States as a whole.
Between 2006 and 2012, the number of individual income-tax returns in Maine increased by 2.1 percent, compared to a 9.2 percent increase for the nation. This clearly reflects Maine's slower rate of population growth. The number of individuals in Maine is growing more slowly than in the U.S.
But look at the pattern with other types of filers. The number of traditional C corporation filers fell by 8 percent in the U.S. and by nearly 16 percent in Maine. But the combination of partnership and S corporation filings rose by more than 24 percent in the U.S. and by nearly 15 percent in Maine.
In short, a growing proportion of business entities are choosing the organizational form for which the individual income tax is the relevant business income tax. And, while it is positive, that rate of increase is substantially less in Maine than in the nation.
And here's where "incentives for persons to locate their homes and businesses in Maine" comes in.
Between 2006 and 2012, the number of partnership and S corporation filers in Maine increased by 4,508. Over the same period, the number of employed individuals in Maine dropped by 14,632.
If each of our additional partnerships and S corporations employed only one person, they made our job loss 31 percent less than it otherwise would have been.
Thinking hopefully, if Maine's number of partnerships and S corporations had increased at the national rate, we would have another 2,948 business entities in the state.
If each of these potential Maine business had, again thinking optimistically, hired two employees, the number of unemployed Maine people in December 2012 would have been 44,945 instead of the 50,840 it actually was.
Yes, these numbers are merely the hypothetical results of a thought experiment.
But how else do we escape from a present that is increasingly painful for many of us than by imagining a better future?
Charles Lawton is chief economist for Planning Decisions Inc. He can be reached at: