Consider the following: Libby, to her chagrin, has inherited a compendium of Soviet agitprop. She meets a fellow, Barack, who is burdened with a first edition of Friedrich A. Hayek's The Road to Serfdom. Well, to Libby and Barack, each book they own is worth absolutely nothing; its worth is solely in whatever they can trade it for to someone else. So they gladly exchange their books. In so doing, they have made both books more valuable to their owners. Wealth has been created, but as with so many things in economics, its creation was not in any way immediately noticeable and evident.
Take that process, multiply it by countless times with all conceivable goods, and overall societal wealth increases. Anything that speeds this process or opens avenues to new and more trades will help grow overall wealth in society even faster. Money is the most obvious example; rather than try to find the perfect bundle of goods to exchange, people began to exchange goods and services for money – the individual receiving money knew it could be used subsequently to exchange for desired goods and services. They would also trade their labor for money.
Because wealth is created faster the more trades take place, it can also be slowed down by throwing up roadblocks and drags on voluntary exchanges. Government regulations raise the cost of doing business, and those costs will be deal-breakers for particular companies; the more burdensome the regulations, the higher the costs of compliance, and the more companies won't be created and trades won't be made. Sales taxes and income taxes (taxes on the trade of labor) also become deal-breakers to prospective trades.
The societal costs in wealth not created is also unmeasurable; however, they can be demonstrated in comparison with the growth in other, like societies without those burdens. Making that demonstration on a state-by-state basis is one of the strengths of Laffer and Moore's report. Why on earth would a state with the natural and cultural amenities of California be losing people (over 1.3 million from 1997 to 2006) in comparison with, say, Nevada (plus a half million in that time)? Because California has the highest "progressive" income tax rate in the nation outside of New York City, and the costs for businesses to comply with California's byzantine menu of regulations is over twice as high as those of other Western states. As Laffer and Moore write, "It takes a lot of public policy folly to persuade people to pack their bags and abandon California's sunshine, 70-degree weather, scenic mountains, and beaches, but lately the politicians in Sacramento have proved themselves up to the task."
Because wealth can be created, it can be destroyed. Trade must be voluntary to benefit both parties and grow wealth; involuntary "trade" (theft or coercion) only benefits the recipient. Recurring involuntary trade gives the repeated victim incentive to reduce his exposure, either by reducing his acquisition of what is taken from him or by getting out of the area. High-crime areas destroy wealth by driving off wealth creators. Just so, governments that use taxes to "redistribute wealth" merely destroy it by driving off the wealth creators.
The difference is, we the people have given government the coercive power to take from us in order to protect our lives, liberties, and property — indeed, in part to fund protection from robbers. When, however, governments do as governments are prone to do, grow themselves beyond their true purposes and become an end unto themselves, then in the eyes of the productive citizens, they begin to resemble the robbers and not the looked-for protection. The closer this resemblance, the faster the exodus of the wealth creators.
That is a process Laffer and Moore call "voting with their feet," and it is something they show occurring from the high-tax, high-regulation Northeast as well as the increasingly statist California. In page after page, they show the devastation to a state's economy that is wrought by the enticing, hopelessly false promises of using confiscatory taxation to protect the poor and disadvantaged. All it does, in the end, is drive off the producers to freer states, leaving behind the poor and disadvantaged and a state budget in deficit, while growth – including growth in state tax revenues – accrue to the freer states.
I hope ALEC will publish successive versions of this report in the years to come. It would greatly underscore the truth of the economic principles Laffer and Moore highlight in "Rich States, Poor States" if they are able to track and demonstrate those effects at work in the states right now.
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