Kill the Frankenstein Michigan Business Tax

Gary Wolfram
Issue CCLXIV - November 13, 2010
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For the first time since 1998 the Republican Party has won control of both houses of the Michigan Legislature and the governor's office. While gridlock in government can often be a good thing, since at least entrepreneurs can know that the rules of the game are not likely to change over the near term, if one must undo bad legislation it will take a united legislative and executive branch.

Unfortunately for Michigan, there is a lot of undoing to do. Terrible creations have done great damage.

Like townsfolk discovering the horrors of Dr. Frankenstein's lab, those who voted Republican on Tuesday hope that Michigan will be able to undo a monstrous taxation and regulatory structure that has run amok, leaving an unemployment rate that has been at or near the top of the nation for years.

An important issue to deal with is Michigan's scary business tax, the MBT. There is no theoretical basis behind the tax. It is a freakish combination of a gross receipts tax and profits tax. If you pick up any public finance text, you will find an explanation of why a gross receipts tax is one of the most economically inefficient taxes. The portion that is a profits tax results in sole proprietorships, S-corporations, partnerships, and limited liability corporations being taxed under the MBT. Then - since the profits of such companies are passed through to individuals - these same profits are taxed under the state's personal income tax!

This is one reason that at the federal level entities such as S corporations are not taxed on their profits, since the profits will be assigned as income to the individual stockholders who will then be taxed under the income tax.

The MBT, along with its 23 percent surtax, is a burden particularly for non-industrial, medium-sized firms that are the job base of the economy. Like the doctor's brainless, green monster, the MBT emerged from the lab because of a lack of leadership in the governor's office and a legislature that was pushed about by various special interest groups. This resulted in a patchwork of credits and deductions tagged onto a Frankenstein tax code. The heavy tax burden gave power to the state's economic development bureaucracy, such as the Michigan Economic Development Commission, since it could grant credits to reduce or eliminate a firm's tax. Rather than what the late Nobel laureate Friedrich Hayek called the "rule of law," we have what he called the "rule of man."

The new legislature and governor will have the power to repeal the monstrous MBT and establish a tax that is simpler, less burdensome, less scary, and more certain than the tax that was produced by the last state government. It should also follow the advice of the Mackinac Center and get rid of the various economic development programs and provide a low tax rate that is the same for all producers.

This will avoid the failures of the last administration that were the result of a belief that a central planner can know what is best for the economy — granting credits and subsidies to those industries that curry the most government favor.

There are other particular policy ghouls that the new Republican majority should address. Among these are reducing burdensome regulations that are not economically efficient, establishing property rights in our urban centers, such as Detroit and Flint, and creating freedom schools such as John Engler suggested a decade ago and that are being formed in California today, where parents may vote to turn a failing regular public school into a charter school.

But the most important thing the new majority can do is follow the advice that Professor Hayek provided for us fifty years ago and clarify the principles by which we as a free society will govern ourselves. The Republican legislature should make it clear that it believes that individual liberty and responsibility along with a market economy are the basis for our social order. In Hayek's words: "It has been a long time since that ideal of freedom which inspired modern western civilization, and whose partial realization made possible the achievement of that civilization, was effectively restated."

Once the principles are made clear, then individual policies can be examined in light of them. This will create the certainty of the rules of the game that has been lacking at both the state and federal level. It will provide a guide star for the governor and the legislature as it creates a Michigan that once more becomes a state that attracts new residents and retains its children.

This post was originally published in The Michigan View on November 7, 2010. 

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This TRA feature has been edited in accordance with TRA's Statement of Policy.

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Learn about Mr. Stolyarov's novel, Eden against the Colossus, here.

Read Mr. Stolyarov's comprehensive treatise, A Rational Cosmology, explicating such terms as the universe, matter, space, time, sound, light, life, consciousness, and volition, here.

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