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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, May 18, 2009

WSJ: Soak the Rich, Lose the Rich

Op-ed in today's Wall Street Journal:  Soak the Rich, Lose the Rich:  Americans Know How to Use the Moving Van to Escape High Taxes, by Arthur Laffer & Stephen Moore:

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.

Mr. Quinn and other tax-raising governors have been emboldened by recent studies by left-wing groups like the Center for Budget and Policy Priorities that suggest that "tax increases, particularly tax increases on higher-income families, may be the best available option." A recent letter to New York Gov. David Paterson signed by 100 economists advises the Empire State to "raise tax rates for high income families right away."

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.

Laffer Cover And the evidence that we discovered in our 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, 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.

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Gotta love the WSJ's Science Fiction page.

Last I heard, its pretty expensive to invest in education and infrastructure. Which probably explains why low tax states have second rate university systems. Is it any wonder that world's finest minds flock to New England and California? More often than not, tomorrow's future scientists, doctors and entrepreneurs stay close to home (home being any locale with a community of intellectuals). There's a reason why the Bay Area will continue to be the home of technology entrepreneurs and why North Dakota will be the home of predatory lenders.

Posted by: eiuos | May 18, 2009 2:41:05 PM

Uh, low tax states have second rate university systems? Ever heard of the University of Texas, or the University of Washington? Hardly second rate... and the vast majority of those great New England colleges are private. California has some outstanding public universities, but they don't come close to explaining away the out of control deficits there.

Posted by: Diego | May 19, 2009 3:01:48 PM

So tax the land value. It won't leave. And in fact, places that tax land value are likely to become people magnets.

And those which tax land value heavily will tend to become job magnets, too.

We wouldn't want that, would we? Life might start getting easier for working people, and harder for the rent-collecting class, in which California abounds.

Don't worry. Our great universities would never permit such wise heresies to be taught. Would they?

Pssst. Hint. Google "Henry George"

Posted by: LVTfan | May 21, 2009 1:58:16 PM