Tax the Rich, Lose the Rich

Arthur Laffer might be one of the smartest men in America, if for no other reason than just stating the obvious fact that taxing heavily the most productive members of our society can lead to a net decrease in tax revenues. In this article posted Monday in the Wall Street Journal, Laffer and Moore point to the fact that as the tax disparity rises between states, the rich will flee high tax states for states that tax less heavily.

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.

What's really interesting is how states with low taxes are still able to mete out the needs of the various social services that they offer because of the fact that people are actually willing to stick around when tax rates are reasonable. And not only can they meet the needs, they can exceed the standards set by other states that are drawing heavily from rich wallets. The best example is New Hampshire:

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.

One example of the rich fleeing for a tax haven is billionaire Buffalo Sabres owner Tom Golisano. He estimates that by moving his residence from New York to Florida, where there is no state income tax, he will be able to say $14,000 a day, which turns out to be more than $5 million a year. Crazy, right? Maybe it's crazier that it took him so long to change residences.

Salt put together a great post recently about how California is the window into the future should our country continue to lurch leftward in its politics. Yesterday, voters handed down a referendum by voting down all ballot initiatives to raise taxes, forcing legislators to reign in their spending and reconfigure the budget. Early in his stint as governor, Arnold was touted as fiscally conservative and was voted in during a special election because the previous governor had lost all control over budgetary issues. I wonder how much of the real problem lies with the governor versus how much of the blame falls on the hyper-liberal legislators that dot the state and overly powerful special interests groups that back them. Was Arnold simply to weak and inept at garnering the support he needed to stay true to his fiscally conservative roots? The last two governors have failed so I guess we'll see in the next election if the next governor will have more success combating the state legislature.

Here are a couple of other relevant points from the WSJ article:

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.

Maybe it's time we all move to Florida.