Monday, May 18, 2009

Arthur Laffer: Tax the Rich and They'll Leave

Good piece in the Wall Street Journal today by Arthur Laffer and Stephen Moore: Soak the Rick, Lose the Rich. It's a simple explanation of why taxing the rich in one state will only make them relocate to another state. And since the rich are also the business owners, when they leave they take their jobs with them. Here are a few excerpts from this article:
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.

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.

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.

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.
To illustrate, on Friday Rochester businessman and Sabres owner Thomas Golisano announced he's leaving the State of New York, to move to Florida. This followed a more than 2% hike in taxes for people making over $500,000. Instead of making 2% in confiscatory taxes from this succesful businessman, David Paterson's state will lose all his paid taxes, together with several hundred jobs, with all their income taxes, payroll taxes, gasoline taxes due to commuting, sales taxes on what Galisano and his employees would buy, and so on.

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