Maybe this means I’m not a nice person (notwithstanding my high score for tenderness in a recent test), but I can’t help but be happy when I read bad news about fiscal policy in high-tax welfare states.
And because I’m a huge fan of tax competition, I get even happier when I find out that bloated governments are in trouble because people are escaping to places where government isn’t quite so greedy.
With that in mind, I smiled when I read what the Washington Examiner just wrote about tax competition and tax migration inside the United States.
States like California…can’t afford to be hospitable to business while also funding massive public employee entitlements. …job-creating businesses flee big-government Blue States for limited-government Red States. In short order, Blue States find themselves in financial straits. …between 2000 and 2010, the big Blue States of New York, California, and Illinois chased off hundreds of thousands of residents taking billions in income with them ($45.6 billion, $29.4 billion, and $20.4 billion respectively). Each of these states have highly progressive, high-marginal rate tax codes. California, for example, has 10 income tax brackets and a top rate of 13.3 percent. New York has eight brackets and an 8.82 percent top rate. Where did all those formerly Blue State income go? To low-tax, Red State jurisdictions, including Florida (no income tax), Texas (no income tax), and Arizona (4.54 percent top rate). Those three alone raked in $67.3 billion, $17.7 billion, and $17.6 billion, respectively.
Indeed, there have been studies looking at how specific states are driving high-income taxpayers to emigrate. And that means big Laffer-Curve effects.
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Which is good news because even politicians are probably capable of learning – sooner or later – that high tax rates won’t raise much revenue if the geese that lay the golden eggs decide to fly away.
And since a picture tells a thousand words, here’s the map of taxable income migration put together by the Tax Foundation using IRS data.
Before closing, I want to highlight one other passage from the Examiner column that touches on a very critical point.
Thanks to the few federalist principles that are still protected in the Constitution, Americans remain free to vote with their feet and escape economically suffocating places like California in order to move to the vastly more hospital economic climates found in Red States like Texas.
Amen. Federalism is a very valuable way of protecting people from statism. We see it when people move from New York. We see it when they escape from California. We see it from a big-picture perspective in the Tax Foundation map.
Federalism enables to producers to escape the looters and moochers.
But federalism has been weakened over the years by the expansion of federal government. If we want to bolster competition among the states – and therefore constrain the greed of the political class, we need to devolve programs from Washington.
This is why welfare reform during the Clinton years was such a good idea. And it’s why block-granting Medicaid is so desirable (above and beyond the fiscal need to implement good entitlement reform).
P.S. It’s rather appropriate that I’m writing about federalism since I’m now in Lausanne, Switzerland, for the 2013 Liberty Conference and Switzerland is probably the world’s best example of genuine federalism.
P.P.S. One small correction to the Examiner’s piece. Illinois is a high-tax state. Illinois is a big-government state. Illinois is a state heading toward fiscal collapse. There are many things wrong with the Land of Lincoln, but it hasn’t compounded those other mistakes with a “progressive” tax that discriminates against those who add more to economic output. Indeed, the fact that Illinois has a flat tax helps to explain why politicians had such a hard time pushing through a tax hike a couple of years ago. They eventually succeeded, but the politicians faced an uphill battle because they couldn’t play the divide-and-conquer game of raising taxes on a limited segments of the population.
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