50% of working Americans pay no federal income taxes. They pay into Social Security and Medicare, but those are benefit programs. When that many people do not have a stake in the tax system, there is opportunity to manipulate elections by appealing to their interest of taxing “the other guy”. Obama did exactly that when he said he would only tax those people with lots of income, but not you, so vote for me.
The realization that tax revenues cannot hinge on a slim tax base has begun to seep into the public policy debate. States are particularly vulnerable because while high-income residents may not wish to leave their country they will move their family and business between states. California has already lost significant numbers of high earners to Nevada where there is no income tax. The reaction of the California Legislature has been to continually raise tax rates, thus encouraging additional residents to depart. Two years ago in Maryland, they raised taxes on the highest earners and a third of them have relocated since that time.
But even the federal government is not unaffected by high income tax policies. We have seen corporations move to places like Ireland which has much lower corporate tax rates. We may soon see more and more people depart to places like Costa Rica, which has become an American colony with thousands of ex-pats. If we continue raising our upper tax rates, we may experience what has been going on in Great Britain.
As is well known, English Premier League soccer has religious-like fervor there. Recently they have lost out when attempting to acquire some of the biggest name players in the game. Big-name stars are starting to turn down either coming to or staying in England because Gordon Brown’s government raised the top tax rate from 40% to 50%. This applies not only to these very high-earning soccer players, but to every English citizen earning over 150,000 pounds per year. As the performance of the teams in England begins to slump, you will hear an uproar about this tax policy change.
Governments need to realize that attractive tax policies granting new businesses one-time exemptions are not the answer – competitive everyday rates are what is needed. Modern communications and transportation systems make it easy for people to change their tax jurisdiction and maintain their lifestyles. Actually, they may be improving their lifestyle because of the reduced tax rates.
The public policy that exempts millions of Americans from any taxes and focuses on a small group of people has governments heading off a cliff. Maybe high earners should pay more, but when lower earners pay no income taxes at all they have no personal consequences from the decisions of their lawmakers. This creates a breeding ground for demagogues.
More importantly, it makes the government susceptible to the actions of a shrinking amount of taxpayers creating instability for the government. California’s experience where revenues have crashed twice in this decade is a perfect illustration of what not to do. The last thing Washington should do is follow this example and establish new programs based on revenues from a narrow tax base. When President Obama says he cannot implement new policies without new revenues, you know whom he is going to tax. If you think we have a deficit now, wait until the next recession.