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Making Excuses for the Rich

One of my pet peeves is local governments who give huge tax breaks to corporations to entice them to locate a factory or office locally. The excuse is always given that it creates jobs, but that is often a cruel joke. First of all, it doesn’t create any jobs, it just moves them from one place to another. Even worse, giving tax breaks to Wal-mart may create Wal-mart jobs, but it destroys other jobs from the small businesses who close because somehow they can’t compete with a huge multinational corporation that is also getting massive tax breaks. In the end, the local government kills their own revenue sources and the local community suffers.

So I am distressed that the same flawed logic is being applied not just to big corporations, but to rich people themselves. For example, New Jersey governor Chris Christie recently vetoed a state tax on the wealthy, saying:

You’re not going to fix this tax situation by continuing to load more and more taxes onto people who have both the ability to leave the state and the inclination to leave the state if they feel as if they are being treated unfairly.

And governors in New York and Maryland also have killed extra taxes on the wealthy, citing similar concerns that if you tax rich people, they will move to somewhere else where the taxes are lower.

Bullshit!

Two new studies show that there is little or no evidence that rich people leave high-tax states. One study tracked 18 years of migration in New England states and found that (not surprisingly) tax levels factored very little if at all into rich people’s choice of where to live. According to the study:

There are many reasons households do not flee from a state when taxes are increased, including the fact that they value the public services financed by taxes, the cost of relocating to a different state (both financially and psychologically) is quite high, and the potential gains from moving are often small. The main reasons for moving to a different state are employment, family-related matters, and education. Taxes account for little of the migration from New England.

The second study was actually done in Christie’s state of New Jersey. In 1994, New Jersey increased taxes on income over $500,000 by 2.6% (which gave them one of the highest tax rates on the wealthy in the country). The study compared people who made just under $500,000 (and so were not affected by the new tax) with people who made more and so were affected by the tax. The result? Both groups moved away from New Jersey at the same rates, so there was no evidence that higher taxes caused anyone to move.

So where did this dumb idea come from? Why are we using a false excuse to cut taxes on the rich?

Well, one explanation is based on Arthur Laffer, the economist who came up with the infamous Laffer curve that was used to try to prove that if you raise taxes, then people work less, which in turn will lower tax revenue. Conversely, the theory went, if you lower taxes (as we have done, repeatedly) people will work more, and — as Reagan claimed — tax revenue will actually go up. Well, unsurprisingly it never quite worked out that way. Laffer also claimed that he left California and moved to Tennessee because they had no income tax, so maybe that anecdotal evidence is where this dumb idea came from.

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5 Comments

  1. ebdoug wrote:

    Correction on New York: First of all Golisono moved out. He actually earned his money starting the company “PayChex” a very effective company. He still have property in New York so pays property taxes,
    Second New York is doing its best to raise property taxes on the rich. It repealed the temporary raise in Income tax, but is raising the property taxes on anyone with an Income over 500K. A back door tax raise. New York has a rebate on property taxes if you are a home owner. If you are poor and don’t own property, you pay more in taxes as there is no break for renters. Now they are trying to take away the break for the rich.
    We have one of the highest property tax RATES than any other state. As I have explained over and over, we have very low property values (here in the rural part of New York)so we don’t pay high property taxes. Counting on the ignorant to not understand, politicians campaign that we have the high property taxes. WRONG.

    Saturday, April 30, 2011 at 5:05 am | Permalink
  2. Quidam wrote:

    This silly argument presupposes that rich people will choose to live in cheap places. They seem to have the idea of Scrooge McDuck as a desirable person to attract.

    The whole point about being rich is that you can afford expensive things and live in expensive places.

    A rich person will live where they want to live irrespective of how much it costs. It’s poor people that might consider moving to save 10%.

    I think a good argument could be made that charging high taxes and using the money to improve roads and amenities would attract the wealthy.

    Saturday, April 30, 2011 at 7:06 am | Permalink
  3. TENTHIRTYTWO wrote:

    The problem with the Laffer curve is that, like a lot of other economic arguments, it is based entirely in theory.

    http://www.politicalbooks.us/wp-content/uploads/2009/07/laffer-curve1.jpg

    Besides 100% taxation rate and 0% taxation rate, you’ll notice that no other numbers appear on the chart. This is because for all other rates besides 0 and 100%, the Laffer curve is useless. People simply shift the equilibrium point to suit their argument. Think taxes are too high? Shift the equilibrium point behind the current tax rate. Not collecting enough revenue from taxes? Shift it ahead of the current tax rate.

    Point being, the curve is not necessarily a parabola which peaks at 50%, and there is absolutely no way to know what shape the curve is.

    I find it truly astonishing that I’ve heard so much about an utterly useless concept from people who claim to be very intelligent, realistic people. Seriously, how can anyone say “communism only works in theory” and then trot this out to bolster their position?

    Saturday, April 30, 2011 at 8:25 am | Permalink
  4. Dan wrote:

    According to one of my Econ Text books the Laffer Curve only had the desired effect once, when Kennedy lowered the rate to 70%. If you want to talk about “curves” how about the Lorenz curve?
    Not only does Iowa pay large corporations for setting up shop here, last year the county I live in drastically reduced the property tax burden of our largest employer, all they had to do was threaten to move to Mexico. It was their second large break.

    Saturday, April 30, 2011 at 9:38 am | Permalink
  5. Don wrote:

    I could have sworn it was the Laugher Curve. My mistake. ;>D

    As to taxes and businesses bailing out of Iowa – it is one of few states undergoing continued job growth and realistic to high farm commodity prices thanks to the wonderful world of ethanol. Why, I enjoyed my time in Iowa so much last year I’m going back for more this year. Gonna watch the Kernals play baseball in Cedar Rapids, even.

    Saturday, April 30, 2011 at 10:22 am | Permalink

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