Fletcher: The economic law of physics

As you probably already know , I have an interest in the absurd and I believe writing about governmental economic policy probably stems from that fascination. I’ve been thinking about the topic for this column for several hours trying to write it in an interesting way. Then I got sidetracked by needing a windshield chip repaired.

The gentleman at Alpena Glass with whom I was dealing said he had recently returned from seeing his son in Kansas and that reminded me of Garden City, Kan. Cheri and I visited there once after a pal of ours gave us a travel guide of interesting stops in that state. Of course, the home of the world’s largest hair ball got my attention and the Garden City Museum became a necessary stop.

That hair ball was as big as a soccer ball and twice as smelly.

Government has its own economic hair balls when officials forget about the laws of physics, specifically “for every action there is an equal and opposite reaction.” Too often government’s view of the economic world is one of zero elasticity.

United Water Utilities Manager Mike Glowinski talked about that to Municipal Council recently when he told officials that when there is a water rate increase, immediately after consumers will use less water. This is price elasticity. Dollars per units go up, while units used decrease. The same is true in reverse. This is the effect of price on supply and demand.

A good example of not taking price elasticity into consideration is the recent tax increase on high bracket taxpayers. The immediate effect will be seen this summer when the White House will crow about increased tax collections from April. What happened at the end of the year was many corporations paid a higher than normal dividend at year end of 2012 to avoid the 33 percent tax rate increase on dividends. The savings rate is so low (look at the interest offered on your checking or savings account) that it pales in comparison to the tax on dividends.

The early payment in 2012 was good for collections but bodes ill for 2013 and beyond. Dividends don’t have to be paid and some private companies just won’t pay them any more. Hence, there will be no tax collection on unpaid dividends. The key reporting period to see the full effect will be April next year when the final 2013 taxes are paid..

You and I will look to offset higher taxes in other ways as well. Most folks don’t differentiate much between state and federal taxes. If you see a Florida license plate in Michigan, it probably means the person owning that vehicle is a “snow bird” with residence in Florida. The advantage of living in and being a citizen of Florida rather than Michigan is that Florida has no state income nor inheritance taxes.

People become shoppers of low cost venues for retirement when they reach a certain age. One way to offset higher federal taxes is to dump state income taxes. This helps explain Florida’s appeal to many.

One high profile Silicon Valley guy recently went to Singapore. He said his decision wasn’t tax related but the effect of the move is that this executive’s taxes were slashed dramatically.

My point is there are options to dodge a tax increase and many people are exercising their options. Last year’s tax increase on the rich probably won’t net as much tax revenue as advertised. When planning for anything, don’t assume the status quo because we live in a dynamic economy.

By the way, Garden City, Kan., also has the world’s largest swimming pool.