SOAK THE RICH, LOSE THE RICH

May 18, 2009

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, say Arthur Laffer, president of Laffer Associates, and Stephen Moore, senior economics writer for the Wall Street Journal.

For example:

  • Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1 percent or 2 percent or 5 percent of their citizens.
  • New Illinois Gov. Patrick Quinn wants a 50 percent increase in the income tax rate on the wealthy because this is the "fair" way to close his state's gaping deficit.

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, say Laffer and Moore.

And the evidence discovered in Laffer and Moore's new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before.  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, Laffer and Moore found:

  • 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.
  • Over these same years the no-income tax states created 89 percent more jobs and had 32 percent 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, say Laffer and Moore.  Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Source: Arthur Laffer and Stephen Moore, "Soak the Rich, Lose the Rich; Americans know how to use the moving van to escape high taxes," Wall Street Journal, May 18, 2009.

For text:

http://online.wsj.com/article/SB124260067214828295.html

 

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