Monday, May 18, 2009

Tax The Rich, Lose The Rich

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.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

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.

~Art Laffer and Stephen Moore in today's WSJ

Bottom Line: If you tax something, you get less of it. Is that so hard to understand?

10 Comments:

At 5/18/2009 10:24 AM, Blogger Marko said...

Tax poverty!

 
At 5/18/2009 10:30 AM, Blogger vakeraj said...

Unfortunately, such mobility is not possible at the national level.

 
At 5/18/2009 12:03 PM, Blogger 1 said...

"Tax poverty!"

Excellent idea!

Maryland plan to tax millionaires backfires

 
At 5/18/2009 12:14 PM, Blogger 1 said...

Rochester billionaire Tom Golisano changes address to Florida to avoid New York taxes

 
At 5/18/2009 12:47 PM, Blogger 1 said...

Well if Illinois Gov. Pat Quinn gets his way look for monetary flight from that state...

From the WSJ: As if Illinois voters didn't have enough to be angry about, this week their new Governor announced plans to raise state income taxes by 50%. Pat Quinn, the man who replaced Rod Blagojevich, is proposing to raise the personal income tax rate to 4.5% from 3% and the business tax to 7.2% from 4.8%.

 
At 5/18/2009 2:19 PM, Blogger Marko said...

vakeraj said...
"Unfortunately, such mobility is not possible at the national level."

Unfortunately it is all too common. Isn't this what happened to the U.S. garment and textiles industries? Taxes (broadly understood) went up, so they moved to other countries. Happens in business all the time. Every time you hear about "outsourcing", you are basically seeing tax flight in action!

 
At 5/18/2009 4:06 PM, Blogger randian said...

I love Texas, but its new business tax (the Margin Tax, a gross receipts tax), rather bizarrely instituted at a time when the state was running a budget surplus, is becoming a serious obstacle to attracting business.

 
At 5/18/2009 7:27 PM, Blogger sethstorm said...

Every time you hear about "outsourcing", you are basically seeing tax flight in action!
Or it is a case of insufficient regulation to dissuade it. Also acceptable as an answer is a loophole that allows it in spite of regulation.

 
At 5/19/2009 12:14 PM, Blogger Size said...

Sethstorm,

A regulation may prevent job creation in another country by a U.S. based company, but it won't keep the job here.

Likely, it will either cause the company to downsize or close down entirely (resulting in even more job losses) or move to another country or extract rents which will result in a lost job somewhere else in the economy.

In any case, this country won't be keeping the job and you'll be paying heavily for the regulation in other ways as well.

 
At 5/19/2009 12:49 PM, Blogger 1 said...

"Or it is a case of insufficient regulation to dissuade it. Also acceptable as an answer is a loophole that allows it in spite of regulation."...

LOL! Unbelievable...

Consider the present regulation and the pending regulation...

From IBD's opinion section: One of President Obama's campaign pledges was to "create or save" more than three million jobs in his first two years in office — not all that ambitious considering the economy has created 1.5 million jobs annually since 1980.

Well, so far this year, 1.9 million jobs have been swallowed by the recession. So he's already nearly five million jobs in the hole.

Now, Christina Romer, chairwoman of the White House Council of Economic Advisors, says don't expect any new jobs this year — and that unemployment could reach 9.5%, up from the current 8.9%, even though she expects the economy to grow 3.5% in the fourth quarter.

We understand that jobs are a lagging, not leading, indicator of economic strength. And this time will be no different.

 

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