Soak the Rich, Lose the Rich Americans know how to use the moving van to escape high taxes. By ARTHUR LAFFER and STEPHEN MOORE With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich. Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1% or 2% or 5% of their citizens. New Illinois Gov. Patrick Quinn wants a 50% increase in the income tax rate on the wealthy because this is the "fair" way to close his state's gaping deficit. Mr. Quinn and other tax-raising governors have been emboldened by recent studies by left-wing groups like the Center for Budget and Policy Priorities that suggest that "tax increases, particularly tax increases on higher-income families, may be the best available option." A recent letter to New York Gov. David Paterson signed by 100 economists advises the Empire State to "raise tax rates for high income families right away." 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. And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities. 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. Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses. Martin Feldstein, Harvard economist and former president of the National Bureau of Economic Research, co-authored a famous study in 1998 called "Can State Taxes Redistribute Income?" This should be required reading for today's state legislators. It concludes: "Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust. . . . A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees." More recently, Barry W. Poulson of the University of Colorado last year examined many factors that explain why some states grew richer than others from 1964 to 2004 and found "a significant negative impact of higher marginal tax rates on state economic growth." In other words, soaking the rich doesn't work. To the contrary, middle-class workers end up taking the hit. Finally, there is the issue of whether high-income people move away from states that have high income-tax rates. Examining IRS tax return data by state, 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. This result was all the more remarkable given that these were years when the stock market boomed and Wall Street gains were in the trillions of dollars. Examining data from a 2008 Princeton study on the New Jersey tax hike on the wealthy, we found that there were 4,000 missing half-millionaires in New Jersey after that tax took effect. New Jersey now has one of the largest budget deficits in the nation. 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. Those who disapprove of tax competition complain that lower state taxes only create a zero-sum competition where states "race to the bottom" and cut services to the poor as taxes fall to zero. They say that tax cutting inevitably means lower quality schools and police protection as lower tax rates mean starvation of public services. They're wrong, and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores. Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation -- much worse than those in New Hampshire. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves. One last point: States aren't simply competing with each other. As Texas Gov. Rick Perry recently told us, "Our state is competing with Germany, France, Japan and China for business. We'd better have a pro-growth tax system or those American jobs will be out-sourced." Gov. Perry and Texas have the jobs and prosperity model exactly right. Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year. The Texas economic model makes a whole lot more sense than the New Jersey model, and we hope the politicians in California, Delaware, Illinois, Minnesota and New York realize this before it's too late.
Similar for America as a whole. Soak the rich and businesses... they'll take their income and business elsewhere, if possible... or not locate here to begin with. Promote tax and business "friendly" policies, capital and jobs will be attracted. Bottom Line... Obama's "redistribute the wealth" policies are as stupid as they could possibly be.. if you want to promote growth and jobs. (If his objective is to promote ever greater government size and control plus dependency of the populace on government for as much as possible, then what he's doing will be effective.)
I was lucky enough to get a position in the Baltimore area with the same salary as the one I had in Jersey. I cannot WAIT to leave the "Garden" state. NJ can rot in budget hell for all I care after all the taxes I had to pay. My property taxes have decreased by about half, and my income tax is considerably less. Auto insurance, less. Home insurance, less. Hell, we even locked in at 4.375% fixed 30 years, so my mortgage payment is also about half (considering the cheaper home values). I did the math on my new budget (income/expense) and am STUNNED at the amount of money I will have left over from just this simple move.
Couldn't agree more. He wants Americans to pay tribute to the state by producing without incentives to produce. This is not at all different from the Soviets' playbook. I think that he'll be shocked to find that people don't like paying tribute to the state and would rather do absolutely nothing because that actually makes them wealthier than working themselves into the grave and giving up time with their families and doing other things they enjoy to pay most of it to the State. It's not that different from FDR's playbook, so look forward to the economic crisis for years if not decades to come.
The data is convincing with regard to low tax rates attracting wealthy individuals. This is intuitive and not surprising. Another question might be of greater interest however: Can a State can be successful in providing adequate public education and basic services and also have a low tax rate structure. If you look at an example such as New Hampshire, it would seem the answer is yes, definitely. But one could then easily be misled into assuming that low tax rates will produce similar results in all states. Whether or not that is true i would think would depend on what fraction of a state's residents are indigent or low wage earners and thus net consumers of, or non-net contributors to, public monies, and also what other income resources a State has such as gambling revenues, tourist taxes, state owned natural resources, etc. While it might be true that a non-competitive tax rate will always be counter-productive, it might not be true that a low tax structure will necessarily lead to greater prosperity. In other words, states with large fractions of unproductive or low productivity residents and without sufficient alternate revenue sources may be doomed no matter what they do.
How do higher tax rates lead to greater prosperity? Higher tax rates on the productive for the purpose of redistributing to the unproductive does not lead to prosperity of the unproductive. It merely leads to more dependents and fewer people motivated to work. The reason those states have a high concentration of dependent and unproductive residents is because they attracted those kinds of residents with entitlement programs. As the number of people living off entitlements increases, so does their voting power and the pressure on the very people whose wealth they are voting to steal via government. That puts pressure on the wealthy to leave. New York City is the perfect example. There is no end to the entitlements. Oh....and while the city has been clobbered by recent economic events (NYC among the worst), the state budgeted an increase of 30% (!!!!) in entitlement spending including welfare for 2009.
American tax payers are going to get fleeced over the next 1-2 decades. UK and EUR zone won't be pretty neither. The good thing for Europeans is they can simply move away and assume tax liability in low tax jurisdictions such as Switzerland, Caribbean, Monaco or Dubai; no such luck for Americans. The US government made sure it's a lot tougher for Americans to rid themselves of the slavery tax shackles of Uncle Sam -- they probably knew why
I understand your post, but i think you misunderstood mine. My point wasn't that higher rates could or would lead to prosperity. It was just the opposite. To put it another way, what i said was that lower state rates would not necessarily always lead to prosperity because of insurmountable constraints faced by some states.
' I agree that this is not a single-variable problem and tax rates alone do not dictate the level of prosperity. Reducing the number of welfare roles (gradually) would increase prosperity because formally unproductive people would become productive and the number of dependents will be reduced as well. Reducing or eliminating the minimum wage would aid the transition. A person whose labour is worth $2/hr will not be employed if the minimum wage is $7/hr and will never have a chance to learn new skills and move up in a company. But, I don't think any of that will happen. Making people dependent on government makes politicians more powerful.