Free Markets, Free People

Tax The Rich? Watch The Inevitable Happen

Many states have decided the financial relief they need to make up for their profligate spending sprees of the recent past and their present budget short-falls is to be found in raising the taxes of their “rich” citizens.

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.

But there’s a problem with the plan. As the WSJ points out, these citizens and their money are mobile and while they may prefer to live in the states listed above, they simply don’t have too. And with the plan to significantly increase taxation for them, now there’s a good reason not too:

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.

Notice that the exodus from the high-tax states to low-tax states with more opportunity has been significant since 1998. But now with the plan to increase taxes again on the “richer”, high-tax states are providing even more of a financial incentive for those in higher income brackets to leave them and move to low or no-income tax states. While such a relocation might have had marginally positive financial results for those leaving in the past, high-tax states are about to make relocation for financial reasons a no-brainer. And states like California and New York can hardly afford to run off the class of tax payer that presently pays the largest percentage of state taxes.  But, with alternatives available, that’s precisely what they’re getting ready to do.

And when that happens, who ends up making up for the state’s shortfall?

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.

Heh … what a surprise.

~McQ

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27 Responses to Tax The Rich? Watch The Inevitable Happen

  • I can explain this problem quite easily: All of those states that suck the lifeblood out of people are liberal states. Even where liberal Republicans survive (like Connecticut), they are run state-wide by liberals.

    With that in mind, it is clear that liberals do not understand economic theory that has anything to do with capitalism. For some reason, the liberal mind reflexively moves to a socialist mindset. Tax the sh!t out of people, and you make more money for the gubmint. There is no thinking about the possibility that those same people may take they money and go elsewhere.

    It reminds me of what happened when the Democrats were last in power in the early 1990s. They decided to levy a huge tax against yachts and large boats. After all, they argued, who else buys yachts and large boats but rich people? Let’s tax them so we can have lots more money for our social programs!

    So, what happened? Rich people decided that they would do without yachts and large boats. And they stopped buying. Wait – who did that impact? The thousands of workers who made those yachts and large boats. What happened to them? THEY LOST THEIR JOBS, that’s what.

    Have you heard of this story? Of course not, because the leftwing media in the US won’t bother to talk about such a thing happening (unless they can argue that it must be Bush’s fault), and because that would put the lie to the entire leftwing economic plan that The Clown™ and His Clownettes™ are currently foisting on all of us. Spend more, tax more, and things will work out. Except that is not how it goes in real life. But when you elect a man to the presidency who has not one whit of business experience, who argues that if you raise the capital gains tax more money will come into the government’s coffers (despite being told that the reality is that lowering that tax brings in more money, and raising it brings in less), and who has the chutzpah to pass on trillions in deficit spending yet tells everyone that we have to be careful about deficits (sort of having a drunk tell you about the evils of John Barleycorn), what can you expect? The media has no problem with lying for The Clown™. How long people will continue to believe his pile of horsecrappola is anyone’s guess.

  • They will have to create something new to stem this tide ..  the “dead resident”.

    If they used to be a resident, they will have to pay taxes.

  • And when there are no longer any “lower tax” states for the rich to move to? They’ll just move to one of the many tax-friendly countries that would be happy to have them.

    You’d think they’d have learned some lessons from when the major cities basically taxed manufacturing out of their areas.

    Idiots.

  • Bill Whittle ( http://www.ejectejecteject.com/ ) in his 6 April 2009 essay “A Message to the Rich”  advises the rich to:

    “LEAVE!  LEAVE NOW!”

  • I’m wondering how long it will be before these states decide to try and levy a massive “moving tax” for anyone who tries to leave.  Then again, their tax policies seem to be based on the idea that people will not react to changes, which is why they’re probably shocked to find that when you massively increase the taxes on cigarettes, people will purchase fewer cigarettes.

    • “State taxes are usually rather slight, so I suspect very, very few people would uproot themselves over that — especially given the cost of a move, and dealing with the current housing market!”

      This entirely depends on the states in question and the tax bracket of the person. I can assure you that the difference between states like MN, IA, WI, and IL and  TN, TX, or SD is significant for high earners.  And company owners DO move their entire operations. It happens all the time.  My wife and I are planning such a move in the next 18 months and the primary reason is taxation.  We’ve asked ourselves, how much more freedom does a lack of state income tax buy us?   Quite a bit is the answer.

      • my comment is supposed to be under Erb’s comment.  Formatting could be a bit better on the Reply link…

  • One would be hard pressed to try to claim that Republican states do better economically than Democratic states — indeed, people who make absurdly sweeping statements like ‘liberals don’t understand economics’ clearly are seeing the world with ‘two legs bad four legs good’ ideological blinders.   Also, a lot of the economic growth we saw in recent years was artificial and being eaten up by the current recession — it was built on the mistaken choice in the 80s (under Reagan) to start running every increasing current account deficits and mistaking short term investment gain for being just like savings (the wealth illusion).  

    Finally, people are mobile, but wealthy people often own companies, work in particular industries or for companies that are not so easily shrugged off.  Families, school districts, lake cabins, friends, activities, and culture are often far more important than the marginal difference one might pay in Minnesota compared to South Dakota, for example.    State taxes are usually rather slight, so I suspect very, very few people would uproot themselves over that — especially given the cost of a move, and dealing with the current housing market!

    (Oh, the argument that people will buy fewer cigarettes was a reason given for raising taxes — I doubt that shocked anyone!)

    • Here’s what you do, educated idiot – look up the headquarters for Chicago Bridge & Iron.

    • Wow, another demonstration of your cluelessness….check the emigration from California to the more working class friendly states of the South(east/west).

      Texas grew to be #2 in population in the last census, it’s isn’t because we’re importing Mexicans right and left and having beau coup kids.  I can tell you, all kinds of damnyankees are moving down here busily screwing up the place to ‘make it more like home’.

      • “Wow, another demonstration of your cluelessness….check the emigration from California to the more working class friendly states of the South(east/west).”

        See: Bank of America and their recent move from Kalifornia to South Carolina, or Toyota (?) from KA to TN, or all the auto companies that didn’t move to high tax/cost states in the first place.

        Geez, Erb has got to be the poster child for Publick Skooles!

    • “it was built on the mistaken choice in the 80s (under Reagan) to start running every increasing current account deficits and mistaking short term investment gain for being just like savings (the wealth illusion).”

      I could not stop laughing from this one. Let me repeat this utter hilarity so that everyone can realize what was said:

      “to start running every increasing current account deficits”

      So, Erb, what do you call a President who said that a $300 billion dollar deficit (under Bush) was intolerable, but comes in, spends until his a$$ breaks, and racks up a $1.8 trillion deficit in ONE YEAR? How about $10 trillion over ten years…if times are good? (Never mind that his “good times” are not based on any current reality, which is why his Gang of Doofuses keep revising the deficit upward.) Notice that $1.8 trillion is more in one year than your hated George W. Bush spent in deficits in all of his eight years in office.

      You need to start writing comedy, Erb. You are one funny guy. Pathetic, but funny.

    • One would be even harder pressed to find where anyone except you has stated that Republican states do better economically than Democratic states.
      But hey, thanks for the chuckle. Keep ‘em coming.

    • Most recent Forbes Magazine has two articles one on the five cities in America that have suffered the greatest downsizing.  They are:
      1. Youngstown OH
      2. Flint MI
      3. Cleveland OH
      4. Detroit MI
      5. Dayton OH

      The other article has the 5 cities that have gained the most during the economic slump.  They are:
      1. Raleigh NC
      2. Austin TX
      3. Charlotte NC
      4. Pheonix AZ
      5. Dallas TX

      So Erb, you see a trend there?  In more than one way.

  • Isn’t this how the Framers set things up in the Consitution?  States are free to set their priorities and may levy taxes accordingly.  People are free to move from state to state, and experiement that is America continues.

    This is nothing new…

    I think it is more impoirtant to understand why liberal states do not learn from the experience of dynamic, job-creating states like Texas and Tennesee, that high taxes, suffocating regulation and unfriendly labour rules are not going to attract investment.

    It seems obvious to readers of QandO, what is manifestly not obvious to the voters of these states. Why?

    Are the people that live in these states rubes? Are they being fooled into voting for politicians that sacrifice long term economic health for short term political survival?

    To answer this question, I think you have to ask what are voters getting in exchange for their high taxes? I am reminded of a recent OECD poll that showed Scandanavian countries have the happiest people. It was clear from the poll that the happiest people came from what we would call socialist countries.

    Now, there could be lots of problems with this poll, confirmation bias for example. But again, I ask the question:

    Why is something so obvious to us, but not to others, even in the face of overwhelming evidence?

    • JasperPantsWhy is something so obvious to us, but not to others, even in the face of overwhelming evidence?

      It’s a question of priorities.  Q&O is a libertarian blog, so most of the readers share the idea that people should be left alone to live their own lives as they see fit and are repulsed by the opposite idea that the government ought to “take care of them”.

      I suggest that the Scandanavians who are allegedly so happy take the opposite view: so long as their basic rights aren’t trampled too badly, they want a powerful “nanny state” to take care of them.

      A commenter with the nom de plume of flak wrote a few weeks ago that he wanted to live in some sort of regimented society, in which the duties and requirements of each citizen (slave?) were clearly laid out.  I was reminded of Orwell’s phrase “Freedom is slavery” and realized that, for some people, the right to live one’s life as he sees fit is horrifying: they don’t want and can’t handle that level of responsibility.  To people like that, the need to spend every day working and planning and worrying about the future is really a form of slavery: they are “free” when the government takes care of everything for them.

      I understand that kind of person… and I pity them.

      Some of the animals talked of the duty of loyalty to Mr. Jones, whom they referred to as “Master,” or made elementary remarks such as “Mr. Jones feeds us. If he were gone, we should starve to death.”

      George Orwell
      Animal Farm

      • Ok, I agree. But why do I have to pay for it?

        If I vote for a candidate that believes in limited government but the guy who wins expands it and taxes me to pay for it, why should my taxes go up?

        Could I make the argument that I should have some rights preserved because I was in the minority? The argument I would make is that I have a minority view (limited government) and if the majority wins, should my rights be respected and preserved because they are minority rights? If this sounds absurd, then why do we carve our special rights for minorities in cases of race, but not ideology?

  • … 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.

    Given TAO’s stated goal of shutting off tax havens (which appears to jibe with the goals of the EU, come to think of it), I wonder how long these renegade states will be allowed to continue their reckless tax policies?  Maybe this can be TAO’s next Big Idea: making state taxes “fair”.  After all, why should the bumpkins in Tennessee or the cowboys in Texas or the weirdo libertarians in New Hampshire not have to pay their fair share of state income taxes?  MiniTru could have a field day with this, running lots of stories about people in those low tax states who don’t get the social services they need, or how those states siphon disproportionate amounts of federal tax dollars to make up for their low state taxes.

    Sigh…

  • Can the talk of taxing people who leave a state.  New York already tried, based on the theory that your pension/401k was earned in New York.  The Supreme Court struck it down.

    This would be the same court that refused to allow New York to establish a residency requirement for claiming welfare benefits. 

    What we are experiencing is what any logical person would expect.  Jobs and high income earners leave, those content to live of the largesse of others move in.  I’ve encouraged my kids to leave, and I will go as soon as I retire or am laid off, whichever comes first.

    Pennsylvania is not all that different from NY, and they manage to make do with a significantly lower state tax burden.   NY must control its spending, and doesn’t even make an attempt to do so.  The public employee unions have the balance of power, and the answer is always more spending.  Not with my money. 

  • The states without income tax, Florida for example, are hurting bad right now and are considering an income tax as well as other ways to increase revenue. There’s no stopping the gov’t parasites. Except on an individual basis and even then you are risking heavily. Leviathan is drunken and stumbling and the best anyone can do is try to stay out of its way as it succumbs to the gravitational pull.

  • I LOVE New York. But how much should it cost to call New York home? Decades of out-of-control budgets, spending hikes and relentless borrowing have made New York simply too expensive.
    Politicians like to talk about incentives — for businesses to relocate, for example, or to get folks to buy local. After reviewing the new budget, I have identified the most compelling incentive of all: a major tax break immedi atelyall New Yorkers. To be eligible, you need do only one thing: move out of New York state. available to
    Last week I spent 90 minutes doing a couple of simple things — registering to vote, changing my driver’s license, filling out a domicile certificate and signing a homestead certificate — in Florida. Combined with spending 184 days a year outside New York, these simple procedures will save me over $5 million in New York taxes annually.


  • There is an interesting clip from FOX, covered by Newsy, about “taxing and regulating” marijuana to increase revenue for the state – most Californians would probably support this measure.
    http://www.newsy.com/videos/critical_california

  • Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”
    One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.