Mackinac Center Current Comment :: 29 July 2008

<>< Josh Rule : : 2008 MCPP Intern

Today’s Current Comment was written by Jack McHugh.  He writes about the tax climate in Michigan and how increasing the tax burden for an already stumbling economy is a poor idea.  Fundamentally, McHugh reminds readers that economics is the study of people and their decision-making.  So, when the legislators in Michigan’s congress choose to enact higher taxes, businesses who were planning to move into Michigan decide not to come after all.  Families who were barely scraping by before the tax hike simply cannot make it anymore, so they move away.  People are not static objects, but thinking, feeling subjects.  Changing the rules of the game, by increasing taxes for example, changes the very way people play the game itself.  The same old game becomes an entirely new and different game.  But, new may not necessarily mean better.

Another way to communicate this truth is to realize that institutions are important.  Why?  Well, they are important because they can enforce rules and rules are important.  Why?  Well, rules are important because they create incentives, and incentives are important.  Why?  Well, incentives guide people’s behavior, and understanding how people act is the goal of economics.

For the most part, though, the problem is not in the institution itself.  Government, by most people’s account, is a valid institution with a legitimate place in society.  There are problems, though, with the rules.  The current rule set that governs Michigan residents, its current laws, are creating the wrong incentives.  They are, for instance, encouraging people to stay away from Michigan business and even to leave if they are already here.  Economic growth cannot happen this way, no matter how many tax credits are granted to filmmakers or other specialty enterprises.  Instead, these poor rules must be repealed, and different rules must be established to govern the game of Michigan’s economic health.  Remember though, that we might not need as many rules as we have currently.  We need just enough to create the right incentives, and no more.  In fact, creating extra incentives will only serve to make the game less fun for everyone involved.

Michigan needs serious revision to the rules governing the game, and until that happens, situations such as the one outlined by Jack McHugh in his Current Comment will only become more and more depressing.  The solution is simple, even if it may be hard to exercise the restraint to implement.  It is worth it though, for the millions of grateful people who will make Michigan prosper for decades to come.


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