Surprise! The rich act in their own self-interest when taxed
Troubled state governments often look to raise taxes on the rich in their attempt to shore up their depleted coffers.
It’s a no-brainer, right? After all, the rich can afford it, and the rest of us can’t. Plus, it appeals to the current Obama-stoked rage at all those nasty greedy (fill in the perjorative adjective of your choice) financiers who caused all the trouble in the first place, talking the rest of us poor (or poorish, or relatively poor in comparison to the filthy rich) folk into maxing out on credit cards and buying mansions we couldn’t afford.
Oh, but it turns out that the rich actually have brains, and they tend to use them to preserve their own assets. Fancy that; how avaricious of them:
Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states…
E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.
How can this be? Arthur Laffer and Stephen Moore, the authors of the article, and a book entitled Rich States, Poor States write:
We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.
I suppose that if all states started adopting the strategy of raising taxes on the rich, the disparities would eventually be erased and people would become less mobile. But unless and until the Obama administration tries to abolish the states’ rights to set their own taxes (or starts attempting to shame those states that don’t ask their rich to “sacrifice” enough), I think we’re safe from that sort of forced equality. And even if all the states (or the federal government, for that matter) were to raise tax rates on the rich, I think we’d see the rich becoming less productive and/or lying on their tax returns, and/or searching ever more assiduously to find effective tax shelters.
Beware the law of unintended consequences.
[NOTE: Laffer is indeed the Laffer, of the famous Laffer curve. He also made a public bet with doomsayer Peter Schiff that the housing bubble wouldn’t burst when it did. Laffer lost, and Schiff had the last laugh.]
Billionaire founder of Paychex, Thomas Gollisano has recently announced he’s leaving NY. I wonder how many laughs Gov. Patterson will try to get out of that one?
Quip borrowed from Limbaugh show, he advises Gollisano to sell the Buffalo Sabres because of the hassle he (Limbaugh) has experienced as an out of state resident.
The states that tax the rich heavily tend to have generous welfare benefits for the poor. Thus, while they run off the rich they maintain their poor population which requires ever more taxation of the well off. It’s a downhill spiral.
Off topic
http://www.americanissuesproject.org/blogs/columns/archive/2009/05/15/epa-overreach-with-navajo-nation.aspx
So many darn topics! People are blissfully ignorant about how bad large government can be….
and from this you can see why things become totalitarian… they keep seeing their plans foiled by acts of uncooperative freedom… and so clamp down to get their things to work…
in case you havent noticed… you need a passport now to go out of the US… even to our neighbors… the first step in closing the borders to keep the productive cattle from fleeing.
do note that if you dont have a passport, entry is now easier than if you do and forget it.
Tax revenue since WWII has consistently has been 19% of GDP plus or minus 1%. During that time we have had marginal rates on the top earners of as high as 90% and as low as 28%. This is the best evidence that people adapt their actions to whatever tax regime is adopted. The larger point illustrated by these statistics is that the goal of government should be to grow the economy if it wants larger tax revenues. Obama’s policies unfortunately seem to discourage growth by burdening those factors that have historically produced the greatest standard of living in the history of mankind.
Black market, anyone?
I seem to recall that one-fourth of the USSR’s food was grown on 1% of its land: the tiny plots the later Communist regimes allowed the peasants to farm as their own.
These bozos never learn. Of course, their aim is to accrue power for themselves and their cronies, not to grow the economy.
Mark Levin says that , and i’m paraphrasing from memory, ” liberals are like locusts. They move into an area, demand more social programs, raise the taxes, then move out of the area because the taxes are too high. Then they start setting up more social programs in the new area they moved into…..”
“I suppose that if all states started adopting the strategy of raising taxes on the rich, the disparities would eventually be erased and people would become less mobile.”
Then they would simply move overseas, would they not?
What if all states raise taxes? I’ll use myself as an example: I’m eligible for citizenship in three other countries… and I’m only counting anything in the EU as one (but actually, in two separate EU countries btw)… that’s just today with no effort and off the top of my head (re: if I applied I’d probably get any of them)…
jon baker: I’ve never understood that human trait.
I happen to live in a fairly unusuall area – a bit rural and a bit metropolitan (Knoxville Tennessee – see the picture on Instapundits website). There are a huge amount of people from up north drive through here and love it enough to move here. Many of these people really and truly understand what they fled from and why this is such a good area to live.
Then there are Yankee’s – those that do not get it. They want thier social programs, they want their “safety laws”, basically they want Yankeeland in the mountains minus the small handful of restrictions they didn’t like that applied to them (but all those that applied to others MUST be implemented by the local idiot rednecks who do not know any better). For now the local populace is, well, not nice to these people and they tend to leave in a huff.
And, of course, that is the other part of the phenomena of what you describe too – they move there many times due to the freedoms but they do not *really* want freedom. They want only these handful that effect them and everyone else to be tightly controlled. But then each group is usually large enough to pass the laws that pertain to the others (each group also being small enough to not oppose those they do not want to see) so you get the taxes, the programs, and the restrictive govt they fled from before and never realizing that in each and every case *they* are the ones bringing it about.
Ahh, I like living with the rednecks/hilbillys as we tend to be insular enough that those actions are hard to bring about yet friendly enough that if you don’t bother us we will not bother you and we can all happily co-exist (plus it seems that attitude tends to creep into most people that stay here making the ones that stay eventually become rednecks/hillbillys). Heck we even accept hyper liberals as long as they don’t bother us (though those are few and far in between).
Not the black market, the free market.
I just never cease to be amazed at the stupidity of the people in this country. Hell, during the Eighties even a Leftist like me finally “got it” about the Laffer Curve. But these kids these days… so damn stupid it defies description.
I’m afraid it’s going to take a re-run of the Seventies for the lesson to be re-learned.
Parasitism never created any jobs or fostered prosperity.
Who is John Galt?
“I’m afraid it’s going to take a re-run of the Seventies for the lesson to be re-learned.”
Apparently every succeeding generation has to put their hand on the stove to find out, ooh, that burns. Reading about it just isn’t good enough. (Of course, there’s little evidence that most younger people are well-read in terms of political and social history. Their standard seems to be “if it sounds good, it must be good” despite any historical evidence to the contrary.) One of these days, though, (and maybe this one) the result won’t be only a burned hand, but rather accidentally setting the whole house on fire.
So the rich act in their own self-interest, just like the rest of us? I’m shocked, I tell you, shocked!
The problem with confiscatory taxes on the wealthy (other than it being nothing more than envy as government policy) is that the wealthy got that way for a reason and can generally outsmart the bureaucrats who work in most tax agencies, as well as the politicians who actually enact the tax laws. Moving out of the city, county, or state, using tax shelters, setting up companies in tax havens, all serve to legally lower the tax burden. Money may not buy happiness, but it does give you options, and most of the rich opt to pay as little tax as they can.
The states with low tax rates have an incentive to retain low tax rates; they then gain the rich, and the companies and industry chased out of the high tax states.
A state like CA has an inherent advantage over a state like, say, NV, and NV needs to have lower taxes/fewer laws to compete.
The idea that the rich make it possible for the poor to exist at a significantly enhanced comfort level than they would enjoy if left on their own, is lost on the Obama brain trust. Granted, the poor often work very hard and should be well compensated for that work, but they often do not produce the ideas, drive, and work structure that make that work possible.
We are not the same and never will be.
Unintended consequences: rent control; living wage laws; and damn near every other economic floor or ceiling put into place.
With so many choices, I guess information travels slowly in the information age.
Good post, Neo-Neocon.
Neo-Neocon,
I guess the question I’d ask you is whether you really care to evaluate the truthiness of the WSJ editorial’s data, or whether you’re just looking for any old ammo to support the position you already hold.
If it’s the former, then it’s worth my time to mention that the WSJ is really playing fast and loose with the numbers. When they say that the no-income-tax states ‘had 32% faster personal income growth” than the high-tax states, they’re juicing the numbers in several bad ways. First, they’re equally weighting all the states in each group, so that Wyoming is as important as Texas (even though, population-wise, you could fit 45 Wyomings in Texas). Second, they’re using total income instead of per-capita income as their measure of growth– but that conflates two different variables, population and income.
If you use per capita income, and weight the states according to population, “32% faster” becomes “3% faster.” Specifically, you have ten-year growth rates of 55% and 52% for no-tax and high-tax states, respectively. That’s a 3% difference over ten years, which on an annual basis rounds to about zero.
To go even further, if you think that GSP (Gross State Product, the overall size of the economy) is the right measure of economic well-being, and look at the same states, the result actually reverses itself– the high-tax states grow faster over this period.
Finally, their choice of “high tax states is totally cooked. Maryland is included in the “high tax states” category because they hiked their state and local tax rates in the fall of 2007. The hikes didn’t even take effect until 1/1/2008, which of course is AFTER the period they’re making claims about. Without these hikes, the top rate in MD was a lot lower– low enough that they can’t be considered a “high tax” state by this measure, unless you want to assert that in the ten years between 1997 and 2007 Maryland’s economic growth was depressed by forward-thinking Marylanders who knew that ten years later the income tax would be increased, and immediately moved to Florida in anticipation of that. Anyone want to assert that with a straight face?
To be clear, the fact that I’m saying these data can easily (and justifiably) be interpreted to show the opposite conclusion of what the WSJ is trumpeting should NOT be understood as a claim that “high tax states have healthier economies.” I wouldn’t argue that, because you simply can’t prove it. The economic analysis is simply too shabby to demonstrate a relationship either way.
As I mentioned, saying all this is only worth my time if you really want to know whether the WSJ’s claims can be trusted. If you’re going to argue that you don’t need an economic analysis to tell you what’s obvious, then say so. But you shouldn’t lean on the WSJ report as evidence for your claims– it just doesn’t withstand scrutiny.
If any readers are interested in seeing a spreadsheet with the underlying data that the WSJ is discussing (with the alternative results I’m discussing here), just email me at wilbur.gardner@gmail.com and I will happily send it to you.
You have some flaws in your thinking Wilbur with regards to the state weighting versus per capita.
Mathematically people might jump to agree with you but the jist of the story has to do with states not the amount of people in each state.
For instance, if growth in CA is 1% and growth in Nevada is 8%, if you discount the Nevada growth because it is smaller then you MISS the point of the story.
California economic growth has been extremely anemic because of it’s policies (a number of them). You can quibble about why it’s considered a “high tax state” as you do Maryland – but I have relatives there and in New Jersey. It does you no service to quibble like that and claim that it was really a low tax state when it truly hasn’t been for awhile. Yes rates changed but they shouldn’t have because rates were already too high.
As an ex-liberal, and then an ex-libertarian who thought government should be cut to the tune of 80%, who has evolved to a CENTRIST – you need to know that state spending has grown tremendously over the last few decades (yet reporters only talk about cuts in the state newspapers like the Sacramento Bee)
Fiscal sanity needs to be returned to the nation. What CA is going through and what the USA is going through right now is nerve racking debt accumulation that is generational THEFT.
Are you going to be an accomplice?
“Tax the rich, feed the poor till there are no rich no more? ”
Timely lyrics from an old song “I’d love to change the world”