The economy of the State of Nebraska is a shining star on many fronts. According to the state’s Department of Economic Development website, in 2011 Nebraska ranked 1st in the country in the lowest combined debt and pension liabilities, was the 3rd best state for job seekers, 9th in growth and innovation, 5th in pro-business legal climate, 5th most pro-business climate and 2nd best run state, along with achieving top ten placement in many other categories that address quality of life, leadership and growth in emerging industries and workforce training.
And yet, in true Nebraska form, state officials continue to look to their laurels to improve the lives of their hardworking citizens. Just as 19th century settlers transformed this barren land from near desert conditions to become the breadbasket to the world, the Cornhusker State is considering ways to transform their position in the battle to attract well-paying jobs and highly qualified employees.
Key to its 21st century transformative vision is the Nebraska tax reform debate, which is slipping into high gear. A joint report released earlier this month by the Tax Foundation and The Platte Institute for Economic Research, Building on Success: A Guide to Fair, Simple, Pro-Growth Tax Reform for Nebraska, proposes several well thought-out options for how to improve opportunities and secure the state’s competitive advantage.
Options include increasing the personal exemption from $6,100 of $7,500 per person for low income earners, reducing the top rate for individual income tax from 6.84% to 5.5% to bring it in line with neighboring states, and flattening the corporate income tax rate to 5.5% across all business types while reducing tax incentives to mirror the lowered rate. Certain triggers would cut corporate rates to 4% and then 3% when the state reaches revenue goals. Other options include capping property taxes, which are currently among the highest in the country and three options for broadening the sales tax base.
While the scenarios laid-out in the report’s Action Plan seem fair and reasonable, flawed thinking is found in the details of the individual income tax option. While simplifying the tax code by reducing the number of tax brackets from four to two, this plan retains a progressive PGR +0.19% imposition of taxes on those earning above $35,000.
A better approach is to flatten out the rate for all workers with the exception of low-income earners. Distortions that occur with progressive tax rates are detrimental to growth. Flattening the tax code offers several real advantages for taxpayers and a state’s economic stability, such as transparency, simplicity, cost savings in tax preparation, and removing the temptation to game the system.
Progressive taxation is seen by some as the easier approach, politically. But in reality, progressive tax codes hinder future reform measures because lower income brackets have no incentive to vote down the rate applied to top earners.
In my own home state of Missouri, our flat rate of 6% is applied beginning at $17,200 ($9,000 income plus the standard deduction and personal exemption), so all taxpayers have the shared incentive to lower rates across the board.
If Nebraska’s leaders are committed to their vision of real, sustained growth, they will consider modifying the proposed personal income tax option by removing progressivity in favor of a system that encourages success rather than punishing it.
“In an efficient market, at any point in time, the actual price of a security will be a good estimate of its intrinsic value.” - Eugene Fama
On October 14, Eugene Fama was one of three U.S. economists recognized by theRoyal Swedish Academy of Sciences and awarded the 2013 Nobel Memorial Prize in Economic Sciences for work in the area of “trendspotting in asset markets.” Fittingly, Fama is recognized worldwide as the leader of the empiricism that proved the fundamental truth that markets work, at least in the financial markets.
This idea was first conceived by Adam Smith and published in the groundbreaking 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, which outlines topics that were critical to the new dawn of the Industrial Age, such as productivity, labor and free markets. Next , the 20th century benefited from the wisdom and insight of Friedrich Hayek, who took Smith’s ideas a step further with his work on economic fluctuations, money theory and the influential concept that prices are a reflection of all of the available information.
But, it was Fama’s empirical studies that led to his development of the efficient-market hypothesis (EMH), which illustrates, unequivocally, that the price of an asset is an accurate reflection of all available information. Fama now is known as the father of efficient markets and his vast body of work is influencing public policy around the world.
Fama’s seminal work in the area of efficient markets was published during the time when I was one of his budding graduate school students at the University of Chicago. The Efficient Capital Markets: A Review of Theory and Empirical Work, which appeared in the Journal of Finance in 1970, introduced the EMH concept that led to the creation of the index fund, now the world’s most popular form of investment. This same theory informs not only private and institutional investment decisions throughout the world, but also is used to determine economic policy and financial regulations.
Tuesday’s Wall Street Journal Op-ed, Nobels and National Greatness, declared that “A culture of individualism and an ingrained respect for against-the-grain thinking,” is essential to America’s position as home to the greatest number of Nobel Prize winners.
Clearly, Eugene Fama is a true American icon. The influence of his research and against-the-grain thinking is far-reaching. For investment purposes, the implication of the EMH is that the best strategy is to avoid the temptation to stock pick. Accept the market returns that exist, they are high and they are for the taking. The implication for policymakers is similar. Government should not be in the business of picking winners and losers and using taxpayer dollars to back their bets. If markets work, then markets work. It is just that simple. If seasoned investors can’t outguess markets, then government officials should not try to do so either.
I am sitting atop a limestone bluff overlooking the Osage River at my home in Folk, Missouri, and it seems as if the only way to get Congress to reform this country’s tax code is to ask for an intervention by the Great and Powerful Oz. But, here in the nation’s heartland, results from an experiment in state income tax policy just might provide other states with a roadmap to real growth.
You may recall from a past Forbes column by me that laid out the landmark legislation signed into law one year ago by the forward thinking Kansas Governor Sam Brownback. Brownback’s tax plan flattened and simplified the tax code, cut personal income tax rates for most earners from 6.45% to 4.9%, and got rid of small business income taxes.
Gov. Brownback’s singular goal was to grow the economy of his state. At the time Kansas had the second highest tax burden in the region, a cash balance of less than $1,000, a projected deficit of $500 million and an unemployment rate of 6.9%. In addition, 73% of the counties in Kansas had witnessed a decline in population.
Instead of continuing to watch billions of dollars in Net Adjusted Gross Income leave Kansas to other states, such as Florida, Texas and Tennessee (all no-income tax states), the legislature and governor identified and seized the opportunity to increase its competitive advantage with neighboring states. It was a bold politicalmove to say the least, but an idea that ultimately struck a chord with politicians, employers and workers across the state.
Just one year later, a close look at the data backs up the economic projections of Brownback’s visionary leadership. Lower income tax rates have in fact stimulated the economy by reducing the price both of work and conducting business in the state, not to mention that lower rates have predictably proven effective when it comes to luring out-of-state businesses to Kansas’ friendlier business environment.
A progress report issued recently by the state’s former budget director, Steve Anderson, one published in the Kansas City Star, shows many indicators of improvement. According to Anderson, the state’s cash balance has risen to $585 million today and they are projecting a surplus in 2014 of nearly $510 million. In addition, the unemployment rate fell from near 7% to 5.8%, as 45,000 jobs were created and the state’s population grew by 27,000. All this while the state reduced the tax burden on workers to the second lowest in the region, and handed just under $250 million back to workers.
And just how have these changes improved Kansas’ position in competing against its neighboring, higher income tax states? According to Anderson, “The Kansas portion of the Kansas City Metro area gained 9,500 jobs from May 2012 to May 2013 while the Missouri side registered no change in total nonfarm employment over the year. Employment on the Kansas side of the metro area reached 454,800 and surpassed the all‐time high of 452,800 recorded in June 2008.”
Back in Missouri, members of the legislature, along with business leaders from around the state, have taken the time this last year to understand the issues surrounding competitive tax policy and the related opportunities for long-term economic growth. In fact, a new coalition called Grow Missouri, composed of business advocacy groups, grassroots organizations, agriculture associations and others is demonstrating the diversity of support for tax reform there.
The Show-Me-State now has real data, made available from our neighbor to the west, which can be used as a reference this coming legislative session. It’s now up to Missourians to create the best tax policy for our own state’s economic growth.
School districts around the country are experiencing a mass exodus of teachers and principals. As reported in this NPR story, this year, nearly 20 percent of Milwaukee’s public schools have hired new principals.
In my own home state of Missouri, St. Louis Public School District lost 50 teachers, many of whom resigned after the first day of class. And the situation appears to be getting worse each year. According to St. Louis Post-Dispatch Education Reporter, Elisa Crouch, the number of those fleeing this troubled system is about 30 percent higher than in previous years.
This phenomenon is taking place across the country with school leaders and classroom teachers departing for better work environments. Just as in the business world, when organizational leaders, and the policies they create, fail to provide a successful work environment, employees depart for greener pastures.
In fact, some of these educators are looking toward teaching in charter schools, higher performing/better paying public schools within the district or neighboring districts, private schools and in some cases, jumping ship entirely to teach in other countries.
And just what are our schools doing to recruit top-notch teachers to replace the exodus?
“There are a lot of people coming to the district who can’t cut it,” said Mary Armstrong, president of St. Louis American Federation of Teachers Local 420 in a recent interview. “People aren’t breaking down the door to come to St. Louis Public Schools to work.”
One has to ask: Isn’t there a better way to run a district? Isn’t it time that school leaders be given the opportunity to create an environment that allows them to recruit teachers who are best suited for their student population?
In a recent survey of Missouri school superintendents, conducted by the Missouri-based free-market think tank, the Show-Me-Institute, more than 90 percent of superintendents surveyed favor teacher tenure reform. More than 70 percent say that it is very difficult and costly to get rid of bad teachers. In fact, Randi Weingarten, the head of the American Federation for Teachers, has publicly stated that the time has come for tenure reform.
According to a report in Education Week, in the 2011 legislative session, 18 states passed legislation that changed teacher tenure, and in many cases the language of the new laws varies significantly. From Alabama to Wyoming, some states are realizing that teacher quality is the most important factor in student performance.
In Missouri, most superintendents agree that they would be in favor of reforms that protect high performing teachers from personal vendettas by elected school board members but they also want reforms that will help them fire underperforming teachers.
The tide is turning on the issue of K-12 tenure reform and it may just be the most critical factor in our schools’ ability to hold onto great teachers.
“A genuine leader is not a searcher for consensus but a molder of consensus.” – Martin Luther King, Jr.
The need for genuine leaders in our world could not be more critical. While advances in science, information technology and medicine benefit mankind and improve our daily lives, government policies affecting job creation and education seem uninspired, caught in a quagmire of status quo thinking while bowing to special interests.
The winner of this week’s most lamentable example of the leadership vacuum is highlighted in Kelly Phillips Erb’s Forbes.com piece, Out Of Ideas And In Debt, Spain Sets Sights On Taxing The Sun. The seemingly random tax policies of Spain’s “leadership” have resulted in an economic position that looks more like a Jackson Pollock painting than a strategic plan for leading Spain out of its crippling state of decline.
Contrast Spain’s convoluted policies with the kind of clear and visionary thinking that is emerging from entrepreneurial leaders in Silicon Valley, one of the most innovative and productive regions in the world. On Monday, Carl Guardino, president and CEO of the Silicon Valley Leadership Group,blogged that U.S. tax policy is, “a confusing mess of preferences, exemptions and deductions that both individuals and corporations dread toiling over each year.” Guardino goes on to argue in favor of lower rates and eliminating all tax credits, except for those that are proven to “promote economic growth.”
Shoot across the U.S. and you will fly over a number of state leaders who are pushing for less convoluted tax policies. Governors in Oklahoma, Kansas and Ohio are leaders in rethinking tax policy to more innovative approaches that encourage job creation and put more money into the hands of workers.
In the last few weeks, North Carolina’s legislative and gubernatorial leadership successfully passedsome of the most impressive reforms in the country. The Carolina Journal reports that these broad-based reforms will firmly plant the Tar Heel State in 17th position on the Tax Foundation’s State Business Tax Climate Index, a big improvement from its current 44th place ranking.
In my own state of Missouri, we are approaching a veto session where legislators will vote on overriding Governor Jay Nixon’s veto of House Bill 253. Passed with bipartisan support, the leadership mettle of our legislature will once again be tested. This practical approach to tax policy sets the stage for job growth by reducing the tax burden on employers, while allowing workers to keep more of their hard-earned wages.
Missouri House Bill 253 gradually reduces the personal income tax by .5 percent and the corporate income tax by 3 percent over a 10-year period. It also provides for a 50 percent deduction for small businesses, which will be phased-in over five years. By increasing the deduction for individuals with incomes less than $20,000 a year, the bill provides relief to those living below the poverty line. This sensible approach to economic stimulus also offers built-in safeguards that ensure reductions will only be triggered if annual state revenues increase by $100 million.
The best leaders provide the vision, direction and determination that is essential to break through the death spiral of bad policies that benefit the few. Missouri lawmakers have an opportunity to prove their belief in economic growth and job creation. The vote to override Governor Nixon’s veto of HB 253 creates an opportunity for establishing an authentic legacy of leadership on tax reform for our state. For those who do not agree, I hear that the moon is wide open for imposing new taxes.
By Rex Sinquefield , May 16, 2013
This week, the Rockefeller Foundation celebrates its 100th birthday. Notably, the organization has named innovation as the key component for its philanthropy in the next century.
The finalists for this new round of funding clearly articulate the interests of Rockefeller and a growing number of contemporary large scale donors. The Foundation’s “Next Century Innovator Awards” focus on projects that transform society and reimagine new approaches to the treatment of cancer, sanitation, education, social-service program funding, and marketplace literacy, just to name a few.
One of the more interesting programs, and one of this year’s three awardees, is Innovate Salone of Sierra Leone. Anyone who believes that poor children cannot learn need not look any further than this incredible program for proof that they are wrong.
Through Innovate Salone, young people are given the opportunity and the support they need to develop workable solutions to problems that they have identified in their own communities. Winning ideas are financially supported, and prototypes are improved during a summer camp at which students benefit from the input given by peers and mentors. A network of support works with the youth to advance the project while building a culture of innovation in local communities.
Clearly, in Sierra Leone, there is an opportunity to challenge established attitudes that limit self-realization and community development.
The Rockefeller Foundation joins a growing group of new donors who are sharpening their philanthropic focus. The potential societal impact of these new giving programs is vastly greater than that made by simply writing a large check every year.
Universities also have taken a giant step toward reimagining the future of higher education, as demonstrated by the remarkable success of Harvard’s MOOC program. The opportunity for expanding student access to some of our country’s best educational institutions will mean real advantages for students who otherwise would not have such opportunities.
Ten years ago, my good friend Garry Kasparov created the Kasparov Chess Foundation, which promotes the study of chess in schools all around the world. Headquartered in New York, the Foundation developed a comprehensive K-12 chess curriculum that, according to the website, ”encourages creativity, instills self-discipline and offers hope and a feeling of accomplishment to millions of children.”
Reimagining the future of education here in Missouri is something on which my wife Jeanne and I spend a considerate amount of effort and resources. We have integrated our commitment to improving high quality educational access and student outcomes with our two personal passions (music and composition for Jeanne, chess for me.) In St. Louis, through the Chess Club and Scholastic Center of Saint Louis, which sponsor chess programs in hundreds of classrooms and community centers throughout the region, we have seen firsthand how behavior and performance improve once students enroll in our chess program.
Across the street, the World Chess Hall of Fame is developing interesting programs that establish new paradigms for what defines an arts organization and the impact it can have on a community. Exhibitions explore chess’ connection to such diverse fields as hip-hop, fashion, nature, science, and contemporary art.
Jeanne’s commitment to finding and growing young composers is changing the trajectory of hundreds of Missouri students’ lives. For the last seven years, the Missouri New Music Initiative has provided young composers with the training and opportunities to compose, to have their music performed, and to have their music to be recorded.
Philanthropy can directly impact the long-term future of our youth, schools, healthcare initiatives, and the arts. Social impact giving programs now are found in communities from Bogota to Botswana, and the key driver for most of the successful programs is innovation. As physicist William Pollard once said, “Learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.”
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By Rex Sinquefield, May 3rd, 2013
For nearly a year, this column has provided evidence that taxes matter and that income tax policy, in particular, directly impacts business decisions, employment, and ultimately the economy and the stability of workers’ lives. This week, for those who fervently refute this position, developments in France and the U.S. offer sound and practical proof in support of my ongoing thesis.
It all began in October last year, soon after France’s president Francois Hollande’s all-out assault on the French workers’ and business owners’ ability to acquire working wealth. His new administration’s revenue-generating approach of raising taxes on income, property, inheritance, and capital gains resulted in outrage from a large cadre of young (25-34 years old) entrepreneurs, dubbed Les Pigeons (French slang for one who is being duped), and prompted an organized social media campaign protesting business-stifling taxes.
By Rex Sinquefield, April 5, 2013
Those of you who have been following me know that about half of my columns deal with California’slackluster leadership and its resulting failed, irresponsible tax-and-spend policies. And, while I would prefer to shift my focus to other states and issues, this week’s Golden State-related headlines are — quite simply — impossible to avoid.
The leadership vacuum that exists in our country’s most populous state seems to have trickled down to local municipalities. Sadly, it is hard-working taxpayers and small business people who will pay the price for municipal ineptitude.
Tuesday, a U.S. Bankruptcy Court judge ruled that Stockton, California, may move forward with its Chapter 9 bankruptcy, which the city filed last summer.
by Rex Sinquefield, March 22, 2013
In 2011, New York Governor Andrew Cuomo promised a major overhaul in the state’s tax code. Along with that promise he set out to empanel a tax reform commission “to address long term changes to the tax system and create economic growth.”
Instead, Governor Cuomo seems more committed to tweaking New York’s antiquated and punitive tax structure and turning a blind eye to the devastating impact those policies are having on The Empire State. Unfortunately for the taxpayers of New York, the research shows that things do not look good, even if the millionaire’s tax would expire.