Arthur Laffer and Stephen Moore have a wonderful op-ed in yesterday’s Wall Street Journal about how states with high income tax rates drive away their wealthy residents. Laffer gained fame while he served on President Reagan’s Economic Policy Advisory Board and used the Laffer Curve to argue for lower taxes. The Laffer Curve claims that moderate tax rates raise the most revenue; extremely high taxes discourage whatever activity is taxed and make avoiding the tax more profitable, while extremely low taxes obviously don’t raise any revenue.
The Laffer Curve explains why a tax can either discourage an activity or raise revenue, but not do both at the same time. I talked about this effect In my last post on the proposed soda tax. When people have more options and low transaction costs, they will switch to whatever activity incurs the lowest cost. Proponents of high income taxes assume that the rich will always live where they live — that they have no option to move. In fact, the rich and those who own their own businesses have more options than the poor and those who work for someone else. As the rich seek to maximize their income, they will exercise their options and relocate to states with low taxes. The poor do not have that luxury.
High income taxes that target a few wealthy families in order to support social welfare programs unintendedly result in lower revenue, which, coupled with the increased spending, leads to massive budget shortfalls. Laffer and Moore point out that the two most populous states with such tax policies, California and New York, face the largest budget deficits in the nation.
But aside from lower revenue and less economic activity, states that lose population also lose representation in the House of Representatives. The results of the 2010 Census will reapportion seats in the House according to the population shifts that have occurred since the last census in 2000. Reapportionment will affect the 2012 House elections, as well as the number of electors that each state has in the Electoral College for the 2012 presidential election. Election Data Services estimates that, according to 2008 data, twelves seats would shift between eighteen states. The states that gain seats have an average top marginal rate, weighted by seats gained, of 3.01%. Three of the seven states gaining seats (Texas, Florida, and Nevada) have no income tax. The states that lose seats have an average top marginal rate, weighted by seats lost, of 5.77%.
Additionally, in states that will gain seats, Republican representatives outnumber Democrat representatives 51-41. In states that will lose seats, Democrat representatives outnumber Republican representatives 99-53. Of the seven states the will gain seats, only three voted for Obama in the 2008 election; nine of the eleven states that will lose seats voted for the Democrat candidate.
So high income tax policies that reduce a states’ population (or slow its growth) have political, as well as economic, consequences for the states that enact them. Voters that lose on tax issues at the ballot box can always vote with their feet. If the Democrat politicians who prefer these high tax policies continue to enact them, they will bankrupt their states and lose their influence in our nation’s capital.
Federalism: New Arguments for an Old Idea
Wednesday, January 27th, 2010Two good pieces have come out recently advocating distributing power away from the federal government in Washington towards the states and the counties: one by Alex Castellanos and the other by Arnold Kling. Castellanos writes to give the GOP a message for the 2010 electoral cycle that can reach the ears of the Millennial generation. He puts the ideas of individual liberty and free markets in terms of networks, such as Facebook. Free markets work, he argues, because their network-like structure allows coordination among individuals more efficiently than a hierarchical, top-down, command structure.
Kling, on the other hand, notes that those hierarchical command structures simply don’t work. A national government must institute a uniform policy, which can never satisfy everyone in a large country like the United States. State governments can create a variety of policies, each tailored to the different preferences of their residents. State and local governments can also respond more quickly to policy challenges because of the reduced chain of command.
Yet, neither of these articles presents any radically new ideas. James Madison outlined the federal nature of the Constitution in Federalist No. 10 and Federalist No. 39. In the Federalist No. 10, Madison argues for a large nation, so as to diminish the influence of any one faction in the body politic. With many competing interests, a government could not pass laws that benefited one group at the expense of another, such as the recent Senate heath care bill where all 49 states would pay for the costs of Nebraska’s heath care.
In Federalist No. 39, Madison explains how the Constitution conforms to republican principles and creates a government that is neither wholly federal nor wholly national. Though the federal government derives some of its powers directly from the people, but it mostly coordinates actions between the states and leaves most of the powers of government to the states:
You can find the complete Federalist Papers here: It’s like an owner’s manual for the Republic.
Tags: alex castellanos, arnold kling, federalism, federalist paper, free market, james madsion, networks
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