'Soaking The Rich' Doesn't Increase Tax Revenues

Today's WSJ has an interesting piece by economist Artur Laffer ( inventor of the Laffer Curve) and Stephan Moore, the senior economics writer for the Wall Street Journal. It's premise? Increasing taxes on 'the rich' actually decreases revenues...because the rich leave and go to other low tax jurisdictions, taking their businesses and the properity they create with them:

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.{...}

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.

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.

Most of these states have additional reasons for the properous and productive to flee aside from just outrageous taxes. Regulations, red tape and permits - with, of course high govenrment fees- for starting a business also contribute to people voting with their feet.So do high property taxes and a generally dclining quality of life.

In California, the State legislature has been almost completely dysfunctional as huge chunks of the state budget are simply squandered for special intersts. For instance, huge dollar amounts supposedly being spent for things like education have actually gone to simply enrich the public employee unions on whom the Democrats who control the state depend on at election time. As a consequence California has the unfortunate distinction of being number three in the country in terms of the dollar amount spent per pupil and number forty nine down on the list when it comes to test scores.

What's left when the most properous and mobile people leave states like California and New Jersey is a declining core of middle class, older taxpayers who can't or won't leave for one reason or another to carry the load.

And that's not exactly a recipe for prosperity or fiscal health.