Revenge of the Laffer Curve, Part II

It seems New York politicians are running into a problem with the Laffer Curve. According to an AP report, the state's 100 richest taxpayers have paid $1 billion less than expected following a big tax hike. The story notes that several rich people have left the state, and all three examples are about people who have redomiciled in Florida, which has no state income tax:

Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth. ...Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated. The concern about millionaire flight has prompted some states, including New York, New Jersey and California, to increase the highest tax rates only temporarily. ..."People aren't wedded to a geographic place as they once were. It's a different world," said New York Lt. Gov. Richard Ravitch. He said last year's surcharge on income taxes, set to last three years, won't likely meet expectations. So far this year, half of about $1 billion in expected revenue from New York's 100 richest taxpayers is missing. ...State officials say they don't know how much of the missing revenue is because any wealthy New Yorkers simply left. But at least two high-profile defectors have sounded off on the tax changes: Buffalo Sabres owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and radio talk-show host Rush Limbaugh. Golisano changed his official address to Florida, and Limbaugh, who also has a Florida home, announced earlier this year that he was relinquishing his home in Manhattan. Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes. ...And it's not just the well-known leaving. Nancy Bell is moving her Science First manufacturer of scientific products from the Buffalo site her father founded in 1960 to Florida... "It was the higher tax brackets, the so-called millionaire's tax" that forced the move, she said. "We feel we have to look to the future ... I'm leaving wonderful, wonderful friends. It's not our first choice. It's our 100th." Maryland enacted higher tax rates for wealthier residents in 2008 to boost revenues but income from those taxes is down 6.7 percent so far this year.

For more background information on why higher taxes on the rich do not necessarily raise revenue, see this three-part Laffer Curve video series:

Time to Kill the Death Tax

I like USA Today for the sports section, but today's editorial page has a piece by yours truly arguing (contrary to the statist position of USA Today) that the death tax shold be completely reprealed. While this tax is grossly immoral, my main points were about 1) the damage to economic growth because of reduced saving and investment, and 2) the loss of national competitiveness since other nation's are getting rid of this absurd levy:

The politicians in Washington impose double taxation on interest, dividends and capital gains, but the "death tax" wins the prize for being the most self-destructive part of the internal revenue code. Adding an extra layer of tax when someone dies is an unsavory combination of bad economics and immoral grave robbing. ...Economists warn that the death tax reduces the capital stock. That sounds like jargon, but it means all of us have lower living standards because of less investment, fewer machines, less technology and diminished innovation. Ironically, other nations have figured out that the death tax does a lot of damage in a competitive global economy. Many people will not be surprised to know that a free-market paradise such as Hong Kong has eliminated its death tax, but it is certainly newsworthy that European welfare states such as Austria and Sweden also have repealed this unfair tax. Australia, Russia and New Zealand are among the other nations that have figured out how senseless it is to penalize wealth creation.

But I also noted that we are going to conduct an interesting social-science experiment in 2010. How many investors, entrepreneurs, and business owners are willing to hasten their own death to protect their assets from the IRS grave robbers?

There may be a bit of good news on the horizon. Assuming Congress does not change the law, the death tax disappears in 2010. But since the death tax comes roaring back to life in 2011 (with an even higher tax rate of 55%), this creates a bit of a quandary. I'm sure the successful people affected by the death tax love their children, but how many of them are willing to jump off a bridge before the end of next year to keep the IRS from seizing the lion's share of their wealth?

Weekly Economics Lesson

The White House is trying to claim that health care “reform” does not mean higher taxes. This is a two-pronged issue. First, there is a mandate to purchase health insurance. Second, there is a tax (the White House calls it a fee) on people who fail to purchase a policy.

The White House claims this mandate is akin to state-level requirements for the purchase of health insurance, and that the newly-insured people will be getting some value (a health insurance policy) in exchange for their money. These assertions are defensible, but that does not change the fact that a tax is being imposed.

It might be plausible to argue that the mandate is not a tax if the value of the insurance policy to the individual was equal to the cost. But since these are people who are not buying policies, their behavior reveals that this obviously cannot be true. So this means that they will be worse off under Obama’s plan and that at least some of the cost should be considered a tax.

The Social Security payroll tax allows a good analogy. Labor economists correctly argue that the payroll tax functions, in part, as a “premium” for what can be considered a government-provided annuity. As such, when we try to measure the disincentive effect of the payroll tax, it is appropriate to include the perceived value of future Social Security benefits (for most Americans, especially with average or above-average incomes, the “rate of return” is very low or negative, so a substantial share of the payroll tax is a tax both in the legal sense and economic-distortion sense). The same is true of a mandatory health insurance policy (even if the money does not go through the government’s hands).

On the broader issue of paying money and getting something of value in return, another analogy is helpful. A share of the gasoline excise tax is used for road construction and maintenance. We all benefit from roads, even if we don’t drive (let’s set aside issues such as whether the benefits equal the costs, whether the federal government should be involved, etc). Does that somehow mean the gasoline excise tax is not a tax? Of course not.

Turning now to the excise tax, the Administration’s argument that this is a fee is even less defensible. The Baucus legislation in the Senate Finance Committee explicitly references an excise tax. Equally revealing (and even more ominous), the IRS is charged with collecting the fee. The White House can argue that the tax – in the economic sense – is lower than the fee if something of value is exchanged. But the tax is still there.

Rather than play games, the White House should make an open argument for bigger government. The fact that the Administration prefers to be deceptive says a lot about the underlying merits of their proposal.

America Falls from Top Spot in Global Competitiveness Report.

There are several international rankings that measure competitiveness and economic freedom. The United States generally does well in these rankings, though often that is a reflection of bad policy in other nations rather than a ringing endorsement of America. The best ranking is probably Economic Freedom of the World, published by the Fraser Institute. The best known ranking, by contrast, might be the Global Competitiveness Report, put out by the World Economic Forum. While I am not completely happy with the methodology in this report (it is probably too oriented toward the interests of big business rather than free markets), it is generally a good measure. So it is interesting to see that the United States has dropped from the top spot and now ranks second behind Switzerland. I'll be very curious to see what happens to the U.S. position when the new Economic Freedom of the World is released. America dropped from 2nd in 2000 to 8th in 2006 under the big-government policies of the Bush Administration (rankings are always two years behind because of lags in data availability). Presumably, the U.S. fell even further during the last two years of the Bush Administration - and will continue falling under Obama because he is continuing Bush's policies of big-government interventionism.