Shaft the Rich, Shaft Yourself

by Crocker on May 18, 2009, 9:32 pm

in Economics,Politics

My title for this post is a cruder restatement of an op-ed in today’s Wall Street Journal by Art Laffer and Steve Moore. The real title is ‘Soak the Rich, Lose the Rich’ and they outline research that demonstrates common sense that is completely lost on state politicians: that if you persecute the rich with punitive taxation, they’ll just move to a low-tax state. And it’s no coincidence that the states with the highest taxes have the lowest rate of economic growth.

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.

Read it all.

What ‘progressive’ policymakers can’t seem to fathom is that economies are as dynamic as the people who inhabit them. And if taxes are too high, dynamic people will avoid those taxes. Hence, there is an optimal level of taxation – and the counter-intuitive idea that by lowering taxes, governments can actually increase government revenues.

And that is the point of the “Laffer Curve”. It looks like this:

The curve is a simple representation of human behavior: if governments raise taxes beyond a certain point, tax revenues will decline because people will cease working and businesses will move or disappear. In a free society such as ours, people will vote with their feet and move to states where their labor will not be stolen from them.

On the graph above, “T” represents the optimal point of taxation where government will realize the most revenue. If a given tax rate is to the right of “T”, further tax increases will actually generate less revenue as people dynamically respond to the burdens placed upon them. If the tax rate is to the left of “T”, then government can theoretically raise taxes and increase revenue.

One byproduct of the curve is that tax revenues may actually increase when marginal rates are lowered below “T”. Again, in a dynamic economy, people and businesses will increase their economic activity and thereby generate additional jobs, output and, not incidentally, tax revenue.

But back to my crude title: as Laffer proved, if you shaft the taxpayers – particularly the rich – you’ll end up shafting yourself.

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