Brown’s Tax Canoe Headed For Water Fall

MARCH 23, 2012

By WAYNE LUSVARDI

California Gov. Jerry Brown likens himself to a canoeist who paddles a little to the Left then a little to the Right.  Lately, he has been paddling Left with labor unions to propose a new $9 billion tax increase that supposedly will plug an estimated $7 billion state budget deficit. Brown merged his tax proposal with one by the California Federation of Teachers.

But his proposal will get sucked over a giant waterfall to its doom if he ignores the consequences of the federal government’s extremely low interest rate policy on voters. There can be no real economic recovery without raising interest rates to savers and investors. And without an economic recovery, all tax increase proposals are doomed at the ballot box.

A mild increase in jobs will not be sufficient to pass a $9 billion tax hike. Voters won’t feel there is an economic recovery until interest rates rise at least two points over the current inflation rate of about 3 percent. That is, the rates must be at least 5 percent.

Presently, interest rates are below 1 percent for 82 percent of Treasury Bills.

Piddle Paddling at Tax Increases

Brown also still is working to keep off the November ballot a rival tax increase by Molly Munger, daughter of Pasadena billionaire Charles Munger. The “Munger Tax” initiative would increase taxes on everyone with an income of $14,632 per year or higher. It would apply to about 90 percent of all California households. Munger’s tax would mainly fund public schools and the remainder would go to childcare programs.

Both of these tax proposals are headed for a big fall at the ballot box because of the federal government’s deliberate policy of holding down interest rates.  Abnormally low interest rates for savers and investors are squelching an economic recovery.  This is likely to lead voters to vote “No” on any tax increases at the ballot box in November 2012.