Income tax

Michigan Romney was brainwashed – by income tax

During the summer, I played golf at a course near Nashville. The club paired me with a gentleman in his thirties. We both exchanged questions about what we were doing. His response: “I’m an auto worker.

Of course he was. There are legions of them in Tennessee. I heard about the expertise in using sophisticated equipment to pack the next generation Nissan. Or was it Volkswagen or even GM? It does not matter. All of these companies pay real money to their Tennessee employees. In turn, these people manipulate state-of-the-art capital goods to create products that generate profits and customer satisfaction.

Swing a cat in Tennessee, hit an auto worker.

Swinging a cat in Michigan in the 1950s, hitting an auto worker. The places are five hundred miles apart.

In 1967, Michigan instituted its income tax. The rate is now 4.25%. Municipalities can add a payroll tax. Detroit’s is 2.4%. Residents of large squares therefore pay around 7%. Prior to 1967, there were no such taxes in the state. Just like Tennessee today, no income tax.

What has happened to Michigan’s share of the national economy since 1967 is staggering. In Taxes Have Consequences: A History of Income Tax in the United Statesnew book I wrote with Arthur Laffer and Jeanne Sinquefield, the reader will wink at the painting which represents him. Since that year, Michigan has lost nearly 40 percent of its share of national population and nearly 50 percent of its share of national income.

In 1967, Michigan had about 6.3% of the nation’s population. Now he has 3.9 percent. He had about 6.7 percent of the nation’s income. Now he has 3.5 percent. The place sank like a stone.

In 1967, Michigan Governor George Romney acceded to an income tax, so according to official reasoning, corporate taxes could be reduced. This happened for a while until corporate taxes went up again.

It is a myth that manufacturing in the United States declined in the 1970s, 1980s or 1990s. The permanent slump in manufacturing came with the presidency of Barack Obama. (See this graph.) Manufacturing performed well during the first forty years of Michigan’s income tax. It worked well leaving Michigan and going to other places, like Tennessee with no income tax.

From a business accounting perspective, income tax was serious business. If workers in Detroit before 1967 earned a certain amount, then the company had to pay them 7% more to stay whole. In fact, more than 7%, because the federal tax structure is progressive. In addition, employee benefits are usually based on nominal wages. The company would have about 10% higher wage obligations due to a new income tax like Michigan’s in 1967. Ten percent could easily be all or more of a profit margin.

Financiers will note to accountants that capital obtainable with a 10% margin will not be obtainable with a 2% margin. Therefore, for the company to get the money it needs, it has to leave Michigan for better climes.

What if a company holds on, commits to making things work in the new income tax state? Michael Jensen’s classic research from the 1980s showed what is happening. Jensen ranked the Fortune 500 over this decade by return on reinvested earnings. GM and Ford were dead last, numbers 500 and 499 (Big Mo Philip Morris was first). The two big automakers in Detroit said we were going to reinvest in this place, now with income tax, and they got run over. There was nothing to be gained – the cost structure transferred potential benefits to the government.

Trying to work with state income tax means ignoring market advice, burning capital and avoiding the inevitable moves. Over time, the movements happened. Income has left Michigan even more than population (see Illinois today), so the place is half itself to what it was to the country when Romney acted in 1967.

Social transformations were another huge side of the story. The African Americans came out. The Great Migration refers to the great movements of black people from the South to the North starting with the Great European War of 1914. Henry Ford rang the bell and a good part came to Michigan.

Then there was The other great migrationas in the standard book on the prehistory of matter by Bernadette Pruitt. Blacks moved out of Michigan starting in the 1970s and flew to places often in the Old South where they had come from, especially Texas. There they lived large in the zero-income-tax state. If August Wilson had lived up to our times, his stories of the last decades would not have taken place in the places of the Great Migration but of the Other.

Michigan Governor Romney was wooden for the 1968 presidential ticket. He was infuriated by a remark that the authorities or someone had “brainwashed” him about the prospects for American success in Vietnam. The brainwashing had been active the previous year, when he had high hopes for his state by signing the income tax law.