Reference no: EM132208604

Minicase: Michigan Tax Reform or Class Warfare?

Please see below and read the “Michigan Tax Reform or Class Warfare” Mini-case. What are the major points of the case? Include at least two points.

Michigan reduced its taxes on businesses by eliminating tax breaks for the poor and retirees, dispute public opposition. Some argued that this was a tax reform, aimed at stimulating the economy of a financially strapped state, but others saw it as class warfare that deepened inequities in the state tax system.

The changes in Michigan were not fully revenue neutral: The reductions in business taxes and the continuation of the credits already granted resulted in over a billion dollars in losses each year, while the increase income taxes did not cover all the losses. A portion of the Michigan Business Tax revenues that the reforms repealed had been earmarked for education fund losses were not replaced.

The court made the tax reform more regressive. The court ruled taxing pensions legal, but declared the phase-out of tax breaks for the wealthy illegal. The phase-out of the tax break to the wealthy had been necessary to get enough votes to pass the legislation, but the feature was removed after the fact.

Michigan changed its tax structure for the purpose of stimulating business in a state hard hit by the recession. However, the specific changes led to charges of class warfare as the government cut funding for public education (K-12 cut by 6% higher education by 15%), increased taxes on the elderly and on the poor, reduced welfare payments, cut taxes for businesses, and maintained tax breaks for the wealthy.

Not all changes to a tax system should be thought of as reforms. just cutting taxes is not necessarily a reform and may, in fact, increase fiscal stress as well as encourage excessive borrowing or odd adaptations to balance the budget. Reducing the burden of taxes may be a reform if a government realistically is concerned that its level or type of tax puts it at a competitive disadvantage with respect to neighbors or rivals. Raising or lowing the burden on one class or another may be a reform if the burden was excessive to start with or if there were major disincentives in the tax structure to engage in socially desired behavior. Just claiming the existence of a disincentive should not be sufficient to warrant the term "reform." For example, some have claimed that relatively higher taxes on the well-to-do discourage them from working or encourage them to leave the state or country. The evidence for either of those claims is weak. The idea that lower taxes on income and higher taxes on sales stimulates business has not been demonstrated convincingly either, but such shifts may be considered reforms if high reliance on income taxes has resulted in high volatility of revenue, deepening the impact of recessions. The mini-case suggest that what claimed as tax reform sometimes just means passing tax burden from class to another when the party in power can protect its own constituents from taxation.