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Archive for the ‘Tax Competition’ Category

I don’t like the income tax that’s been imposed by our overlords in Washington. Indeed, I’ve speculated whether October 3 is the worst day of the year because that’s the date when the Revenue Act of 1913 was signed into law.

I don’t like state income taxes, either.

And, as discussed in this interview about Seattle from last week, I’m also not a fan of local income taxes.

From an economic perspective, I think a local income tax would be suicidally foolish for Seattle. Simply stated, this levy will drive some well-heeled people to live and work outside the city’s borders. And when revenues fall short of projections, Seattle politicians likely will compensate by increasing the tax rate and also extending the tax so it is imposed on those with more modest incomes. And that will drive more people out of the city, which will lead to an even higher rate that hits even more people.

Lather, rinse, repeat.

Though I pointed out that this grim outcome may be averted if the courts rule that Seattle doesn’t have the legal authority to impose an income tax.

But I also explained in the discussion that a genuine belief in federalism means that you should support the right of state and local governments to impose bad policy. I criticize states such as California and Illinois when they expand the burden of government. And I criticize local entities such as Hartford, Connecticut, and Fairfax County, Virginia, when they expand the burden of government.

But I don’t think that Washington should seek to prohibit bad policy. If some sub-national governments want to torment their citizens with excessive government, so be it.

There are limits, however, to this bad version of federalism. State and local governments should not be allowed to impose laws outside their borders. That’s why I’m opposed to the so-called Marketplace Fairness Act. And they shouldn’t seek federal handouts to subsidize bad policy, such as John Kasich’s whining for more Medicaid funding.

Moreover, a state or local government can’t trample basic constitutional freedoms, for instance. If Seattle goes overboard with its anti-gun policies, federal courts presumably (hopefully!) would strike down those infringements against the 2nd Amendment. Likewise, the same thing also would (should) happen if the local government tried to hinder free speech. Or discriminate on the basis on race.

By the way, it’s worth pointing out that these are all examples of the Constitution’s anti-majoritarianism (which helps to explain why the attempted smear of James Buchanan was so misguided).

The bottom line is that I generally support the rights of state and local governments to impose bad policy, so long as they respect constitutional freedoms, don’t impose extra-territorial laws, and don’t ask for handouts.

And I closed the above interview by saying it sometimes helps to have bad examples so the rest of the nation knows what to avoid. Greece and France play that role for the industrialized world. Venezuela stands alone as a symbol of failed statism in developing world. Places like Connecticut and New Jersey are poster children for failed state policy. And now Seattle can join Detroit as a case study of what not to do at the local level.

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As a general rule, the International Monetary Fund is a statist organization. Which shouldn’t be too surprising since its key “shareholders” are the world’s major governments.

And when you realize who controls the purse strings, it’s no surprise to learn that the bureaucracy is a persistent advocate of higher tax burdens and bigger government. Especially when the IMF’s politicized and leftist (and tax-free) leadership dictates the organization’s agenda.

Which explains why I’ve referred to that bureaucracy as a “dumpster fire of the global economy” and the “Dr. Kevorkian of global economic policy.”

I always make sure to point out, however, that there are some decent economists who work for the IMF and that they occasionally are allowed to produce good research. I’ve favorably cited the bureaucracy’s work on spending caps, for instance.

But what amuses me is when the IMF tries to promote bad policy and accidentally gives me powerful evidence for good policy. That happened in 2012, for example, when it produced some very persuasive data showing that value-added taxes are money machines to finance a bigger burden of government.

Well, it’s happened again, though this time the bureaucrats inadvertently just issued some research that makes the case for the Laffer Curve and lower corporate tax rates.

Though I can assure you that wasn’t the intention. Indeed, the article was written as part of the IMF’s battle against tax competition. As you can see from these excerpts, the authors clearly seem to favor higher tax burdens on business and want to cartelize the global economy for the benefit of the political class.

…what’s the problem when it comes to governments competing to attract investors through the tax treatment they provide? The trouble is…competing with one another and eroding each other’s revenues…countries end up having to…reduce much-needed public spending… All this has serious implications for developing countries because they are especially reliant on the corporate income tax for revenues. The risk that tax competition will pressure them into tax policies that endanger this key revenue source is therefore particularly worrisome. …international mobility means that activities are much more responsive to taxation from a national perspective… This is especially true of the activities and incomes of multinationals. Multinationals can manipulate transfer prices and use other avoidance devices to shift their profits from high tax countries to low, and they can choose in which country to invest. But they can’t shift their profits, or their real investments, to another planet. When countries compete for corporate tax base and/or real investments they do so at the expense of others—who are doing the same.

Here’s the data that most concerns the bureaucrats, though they presumably meant to point out that corporate tax rates have fallen by 20 percentage points, not by 20 percent.

Headline corporate income tax rates have plummeted since 1980, by an average of almost 20 percent. …it is a telling sign of international tax competition at work, which closer empirical work tends to confirm.

But here’s the accidental admission that immediately caught my eye. The authors admit that lower corporate tax rates have not resulted in lower revenue.

…revenues have remained steady so far in developing countries and increased in advanced economies.

And this wasn’t a typo or sloppy writing. Here are two charts that were included with the article. The first one shows that revenues (the red line) have climbed in the industrialized world as the average corporate tax rate (the blue line) has plummeted.

This may not be as dramatic as what happened when Reagan reduced tax rates on investors, entrepreneurs, and other upper-income taxpayers in the 1980, but it’s still a very dramatic and powerful example of the Laffer Curve in action.

And even in the developing world, we see that revenues (red line) have stayed stable in spite of – or perhaps because of – huge reductions in average corporate tax rates (blue line).

These findings are not very surprising for those of us who have been arguing in favor of lower corporate tax rates.

But it’s astounding that the IMF published this data, especially as part of an article that is trying to promote higher tax burdens.

It’s as if a prosecutor in a major trial says a defendant is guilty and then spends most of the trial producing exculpatory evidence.

I have no idea how this managed to make its way through the editing process at the IMF. Wasn’t there an intern involved in the proofreading process, someone who could have warned, “Umm, guys, you’re actually giving Dan Mitchell some powerful data in favor of lower tax burdens”?

In any event, I look forward to repeatedly writing “even the IMF agrees” when pontificating in the future about the Laffer Curve and the benefits of lower corporate tax rates.

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Whenever I debate my left-wing friends on tax policy, they routinely assert that taxes don’t matter.

It’s unclear, though, whether they really believe their own rhetoric.

After all, if taxes don’t affect economic behavior, then why are folks on the left so terrified of tax havens? Why are they so opposed to tax competition?

And why are they so anxious to defend loopholes such as the deduction for state and local taxes.

Perhaps most revealing, why do leftists sometimes cut taxes when they hold power? A story in the Wall Street Journal notes that there’s been a little-noticed wave of state tax cuts. Specifically reductions and/or eliminations of state death taxes. And many of these supply-side reforms are happening in left-wing states!

In the past three years, nine states have eliminated or lowered their estate taxes, mostly by raising exemptions. And more reductions are coming. Minnesota lawmakers recently raised the state’s estate-tax exemption to $2.1 million retroactive to January, and the exemption will rise to $2.4 million next year. Maryland will raise its $3 million exemption to $4 million next year. New Jersey’s exemption, which used to rank last at $675,000 a person, rose to $2 million a person this year. Next year, New Jersey is scheduled to eliminate its estate tax altogether, joining about a half-dozen others that have ended their estate taxes over the past decade.

This is good news for affected taxpayers, but it’s also good news for the economy.

Death taxes are not only a punitive tax on capital, but they also discourage investors, entrepreneurs, and other high-income people from earning income once they have accumulated a certain level of savings.

But let’s focus on politics rather than economics. Why are governors and state legislators finally doing something sensible? Why are they lowering tax burdens on “rich” taxpayers instead of playing their usual game of class warfare?

I’d like to claim that they’re reading Cato Institute research, or perhaps studies from other market-oriented organizations and scholars.

But it appears that tax competition deserves most of the credit.

This tax-cutting trend has been fueled by competition between the states for affluent and wealthy taxpayers. Such residents owe income taxes every year, but some are willing to move out of state to avoid death duties that come only once. Since the federal estate-and-gift tax exemption jumped to $5 million in 2011, adjusted for inflation, state death duties have stood out.

I don’t fully agree with the above excerpt because there’s plenty of evidence that income taxes cause migration from high-tax states to zero-income-tax states.

But I agree that a state death tax can have a very large impact, particularly once a successful person has retired and has more flexibility.

Courtesy of the Tax Foundation, here are the states that still impose this destructive levy.

Though this map may soon have one less yellow state. As reported by the WSJ, politicians in the Bay State may be waking up.

In Massachusetts, some lawmakers are worried about losing residents to other states because of its estate tax, which brought in $400 million last year. They hope to raise the exemption to half the federal level and perhaps exclude the value of a residence as well. These measures stand a good chance of passage even as lawmakers are considering raising income taxes on millionaires, says Kenneth Brier, an estate lawyer with Brier & Ganz LLP in Needham, Mass., who tracks the issue for the Massachusetts Bar Association. State officials “are worried about a silent leak of people down to Florida, or even New Hampshire,” he adds.

I’m not sure the leak has been silent. There’s lots of data on the migration of productive people to lower-tax states.

But what matters is that tax competition is forcing the state legislature (which is overwhelmingly Democrat) to do the right thing, even though their normal instincts would be to squeeze upper-income taxpayers for more money.

As I’ve repeatedly written, tax competition also has a liberalizing impact on national tax policy.

Following the Reagan tax cuts and Thatcher tax cuts, politicians all over the world felt pressure to lower their tax rates on personal income. The same thing has happened with corporate tax rates, though Ireland deserves most of the credit for getting that process started.

I’ll close by recycling my video on tax competition. It focuses primarily on fiscal rivalry between nations, but the lessons equally apply to states.

P.S. For what it’s worth, South Dakota arguably is the state with the best tax policy. It’s more difficult to identify the state with the worst policy, though New Jersey, Illinois, New York, California, and Connecticut can all make a strong claim to be at the bottom.

P.P.S. Notwithstanding my snarky title, I don’t particularly care whether there are tax cuts for rich people. But I care a lot about not having tax policies that penalize the behaviors (work, saving, investment, and entrepreneurship) that produce income, jobs, and opportunity for poor and middle-income people. And if that means reforms that allow upper-income people to keep more of their money, I’m okay with that since I’m not an envious person.

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What’s the best argument for reducing the onerous 35 percent corporate tax rate in the United States?

These are all good reasons to dramatically lower the corporate tax rate, hopefully down to the 15-percent rate in Trump’s plan, but the House proposal for a 20-percent rate wouldn’t be a bad final outcome.

But there’s a 9th reason that is very emotionally appealing to me.

  • 9. Should the rate be lowered to trigger a new round of tax competition, even though that will make politicians unhappy? Actually, the fact that politicians will be unhappy is a feature rather than a bug.

I’ve shared lots of examples showing how jurisdictional competition leads to better tax policy.

Simply stated, politicians are less greedy when they have to worry that the geese with the golden eggs can fly away.

And the mere prospect that the United States will improve its tax system is already reverberating around the world.

The German media is reporting, for instance, that the government is concerned that a lower corporate rate in America will force similar changes elsewhere.

The German government is worried the world is slipping into a ruinous era of tax competition in which countries lure companies with ever-more generous tax rules to the detriment of public budgets. …Mr. Trump’s “America First” policy has committed his administration to slashing the US’s effective corporate tax rate to 22 from 37 percent. In Europe, the UK, Ireland, and Hungary have announced new or rejigged initiatives to lower corporate tax payments. Germany doesn’t want to lower its corporate-tax rate (from an effective 28.2 percent)… Germany’s finance minister, Wolfgang Schäuble, …left the recent meeting of G7 finance ministers worried by new signs of growing beggar-thy-neighbor rivalry among governments.

A “ruinous era of tax competition” and a “beggar-thy-neighbor rivalry among governments”?

That’s music to my ears!

I”d much rather have “competition” and “rivalry” instead of an “OPEC for politicians,” which is what occurs when governments impose “harmonization” policies.

The Germans aren’t the only ones to be worried. The Wall Street Journal observes that China’s government is also nervous about the prospect of a big reduction in America’s corporate tax burden.

China’s leaders fear the plan will lure manufacturing to the U.S. Forget a trade war, Beijing says a cut in the U.S. corporate rate to 15% from 35% would mean “tax war.” The People’s Daily warned Friday in a commentary that if Mr. Trump succeeds, “some powerful countries may join the game to launch competitive tax cuts,” citing similar proposals in the U.K. and France. …Beijing knows from experience how important tax rates are to economic competitiveness. …China’s double-digit growth streak began in the mid-1990s after government revenue as a share of GDP declined to 11% in 1995 from 31% in 1978—effectively a supply-side tax cut. But then taxes began to rise again…and the tax man’s take now stands at 22%. …Chinese companies have started to complain that the high burden is killing profits. …President Xi Jinping began to address the problem about 18 months ago when he launched “supply-side reforms” to cut corporate taxes and regulation. …the program’s stated goal of restoring lost competitiveness shows that Beijing understands the importance of corporate tax rates to growth and prefers not to have to compete in a “tax war.”

Amen.

Let’s have a “tax war.” Folks on the left fret that this creates a “race to the bottom,” but that’s because they favor big government and think our incomes belong to the state.

As far as I’m concerned a “tax war” is desirable because that means politicians are fighting each other and every bullet they fire (i.e., every tax they cut) is good news for the global economy.

Now that I’ve shared some good news, I’ll close with potential bad news. I’m worried that the overall tax reform agenda faces a grim future, mostly because Trump won’t address old-age entitlements and also because House GOPers have embraced a misguided border-adjustment tax.

Which is why, when the dust settles, I’ll be happy if all we get a big reduction in the corporate rate.

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Seven years ago, I wrote about the “Butterfield Effect,” which is a term used to mock clueless journalists.

A former reporter for the New York Times, Fox Butterfield, became a bit of a laughingstock in the 1990s for publishing a series of articles addressing the supposed quandary of how crime rates could be falling during periods when prison populations were expanding. A number of critics sarcastically explained that crimes rates were falling because bad guys were behind bars and invented the term “Butterfield Effect” to describe the failure of leftists to put 2 + 2 together.

Journalists are especially susceptible to silly statements when writing about the real-world impact of tax policy.

They don’t realize (or prefer not to acknowledge) that changes in tax rates alter incentives to engage in productive behavior, and this leads to changes in taxable income. Which leads to changes in tax revenue, a relationship known as the Laffer Curve.

Here are some remarkable examples of the Butterfield Effect.

  • A newspaper article that was so blind to the Laffer Curve that it actually included a passage saying, “receipts are falling dramatically short of targets, even though taxes have increased.”
  • Another article was entitled, “Few Places to Hide as Taxes Trend Higher Worldwide,” because the reporter apparently was clueless that tax havens were attacked precisely so governments could raise tax burdens.
  • In another example of laughable Laffer Curve ignorance, the Washington Post had a story about tax revenues dropping in Detroit “despite some of the highest tax rates in the state.”
  • Likewise, another news report had a surprised tone when reporting on the fully predictable news that rich people reported more taxable income when their tax rates were lower.

And now we can add to the collection.

Here are some excerpts from a report by a Connecticut TV station.

Connecticut’s state budget woes are compounding with collections from the state income tax collapsing, despite two high-end tax hikes in the past six years. …wealthy residents are leaving, and the ones that are staying are making less, or are not taking their profits from the stock market until they see what happens in Washington. …It now looks like expected revenue from the final Income filing will be a whopping $450 million less than had been expected.

Reviewing the first sentence, it would be more accurate to replace “despite” with “because.”

Indeed, the story basically admits that the tax increases have backfired because some rich people are fleeing the state, while others have simply decided to earn and/or report less income.

The question is whether politicians are willing to learn any lessons so they can reverse the state’s disastrous economic decline.

But don’t hold your breath. We have an overseas example of the Laffer Curve, and one of the main lessons is that politicians are willing to sacrifice just about everything in the pursuit of power.

Here are some passages from a story in the U.K.-based Times.

The SNP is expected to fight next month’s general election on a commitment to reintroduce a 50p top rate of tax… The rate at present is 45p on any earnings over £150,000. …civil service analysis suggested that introducing a 50p top rate of tax in Scotland could cost the government up to £30 million a year, as the biggest earners could seek to avoid paying the levy by moving their money south of the border.

If you read the full report, you’ll notice that the head of the Scottish National Party previously had decided not to impose the higher tax rate because revenues would fall (just as receipts dropped in the U.K. when the 50 percent rate was imposed).

But now that there’s an election, she’s decided to resurrect that awful policy, presumably because a sufficient number of Scottish voters are motivated by hate and envy.

This kind of self-destructive behavior (by both politicians and voters) is one of the reasons why I’m not overly optimistic about the future of Scotland if it becomes an independent nation.

P.S. I’m not quite as pessimistic about the future of tax policy in the United States. The success of the Reagan tax cuts is a very powerful example and American voters still have a bit of a libertarian streak. I’m not expecting big tax cuts, to be sure, but at least we’re fighting in the United States over how to cut taxes rather than how to raise them.

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I like the main components of the Trump tax plan, particularly the sweeping reduction in the corporate tax rate.

But, as I say at the beginning of this Fox Business interview, there’s a big difference between proposing a good idea and actually getting legislation approved.

But just because I’m pessimistic, that doesn’t change the fact that a lower tax burden would be good for the country.

Toward the end of the interview, I explained that the most important reason for better tax policy is not necessarily to lower taxes for families, but rather to get more prosperity.

If we can restore the kind of growth we achieved when we had more market-friendly policy in the 1980s and 1990s, that would be hugely beneficial for ordinary people.

That’s the main economic argument for Trump’s plan.

But now I’ve come across what I’ll call the emotionally gratifying argument for Trump’s tax cuts. The Bureau of National Affairs is reporting that European socialists are whining that a lower corporate tax rate in the United States will cause “a race to the bottom.”

U.S. President Donald Trump’s plans to slash corporate taxes by more than half will accelerate a “race to the bottom” and undermine global efforts to combat corporate tax evasion by multinationals, according to a second political group in the European Parliament. The Socialists and Democrats, made up of 190 European Parliament lawmakers, insisted the Trump tax reform, announced April 26, threatens the current work in the Organization for Economic Cooperation and Development and the Group of Twenty to establish a fair and efficient tax system.

As you might expect, the socialists make some nonsensical arguments.

Paul Tang—who heads the Group of the Progressive Alliance of Socialists and Democrats and leads the European Parliament negotiations on the pending EU Common Corporate Tax Base (CCTB) proposal—accused the Trump administration of pursuing a “beggar-they-neighbor policy similar to those in the 1930s.”

Huh?!? Does Mr. Tang think there were tax cuts in the 1930s?

That was a decade of tax increases, at least in the United States!

Or is he somehow trying to equate tax cuts with protectionism? But that makes zero sense. Yes, protectionism was rampant that decade, but higher tariffs mean higher taxes on trade. That’s the opposite of tax cuts.

Mr Tang is either economically illiterate or historically illiterate. Heck, he’s a socialist, so probably both.

Meanwhile, another European parliamentarian complained that the U.S. would become more of a tax haven if Trump’s tax cut was enacted.

Sven Giegold, a European Green Party member and leading tax expert in the European Parliament, told Bloomberg BNA in a April 27 telephone interview that the Trump tax plan further cemented the U.S. as a tax haven. He added the German government must put the issue on the agenda during its current term as holder of the G-20 presidency. …The European Green Party insists the U.S. has become an international tax haven because, among other things, it has not committed to implement the OECD Common Reporting Standard and various U.S. states, including Delaware, Nevada and South Dakota, have laws that allow companies to hide beneficial owners.

He’s right and wrong.

Yes, the United States is a tax haven, but only for foreigners who passively invest in the American economy (we generally don’t tax interest and capital gains received by foreigners, and we also generally don’t share information about the indirect investments of foreigners with their home governments).

Corporate income, however, is the result of direct investment, and that income is subject to tax by the IRS.

But I suppose it’s asking too much to expect politicians to understand such nuances.

For what it’s worth, I assume Mr. Giegold is simply unhappy that a lower corporate tax rate would make America more attractive for jobs and investment.

Moreover, he presumably understands adoption of Trump’s plan would put pressure on European nations to lower their corporate tax rates. Which is exactly what happened after the U.S. dropped its corporate tax rate back in the 1980s.

Which is yet another example of why tax competition is something that should be celebrated rather than persecuted. It forces politicians to adopt better policy even when they don’t want to.

That is what gets them angry. And I find their angst very gratifying.

P.S. You may have noticed at the very end of the interview that I couldn’t resist interjecting a plea to reduce the burden of government spending. That’s not merely a throwaway line. When the Congressional Budget Office released its fiscal forecast earlier this year, I crunched the numbers and showed that we could balance the budget within 10 years and lower the tax burden by $3 trillion (on a static basis!) if politicians simply restrained spending so that it grew 1.96 percent per year.

P.P.S. It’s worth remembering that the “race to the bottom” is actually a race to better policy and more growth. And politicians should be comforted by the fact that this doesn’t necessarily mean less revenue.

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To pick the state with the best tax policy, the first step is to identify the ones with no income tax and then look at other variables to determine which one deserves the top ranking.

For what it’s worth, I put South Dakota at the top.

Picking the state with the worst tax policy is more difficult. There are lots of reasons to pick California, in part because it has the highest income tax rate of any state. But there are also strong arguments that New York, Illinois, and New Jersey deserve the worst rating.

And let’s not forget my home state of Connecticut, which invariably ranks near the bottom based on research from the Tax Foundation, the Mercatus Center, the Cato Institute, the Fraser Institute, and WalletHub.

The Wall Street Journal opined yesterday about Connecticut’s metamorphosis from a zero-income-tax state to a high-tax swamp.

Hard to believe, but a mere 25 years ago—a lifetime for millennials—Connecticut was a low-tax haven for Northeasterners. The state enacted an income tax in 1991 that was initially a flat 4.5% but was later made steeply progressive. In 2009 former Republican Governor Jodi Rell raised the top rate on individuals earning $500,000 or more to 6.5%, which Democratic Gov. Dannel Malloy has lifted to 6.99% (as if paying 0.01% less than 7% is a government discount). Connecticut’s top tax rate is now higher than the 5.1% flat rate in the state formerly known as Taxachusetts.

This big shift in the tax burden has led to predictably bad results.

…the tax hikes have been a disaster. A net 30,000 residents moved to other states last year. Since 2010 seven of Connecticut’s eight counties have lost population, and the hedge-fund haven of Fairfield County shrank for the first time last year. In the last five years, 27,400 Connecticut residents have moved to Florida. …More than 3,000 Connecticut residents have moved to zero income-tax New Hampshire in the last two years. While liberals wax apocalyptic about Kansas’s tax cuts, the Prairie State has welcomed 1,430 Connecticut refugees since 2011 and reversed the outflow between 2005 and 2009. Yet liberals deny that tax policies influence personal or business decisions.

The good news is that the state’s leftist politicians recognize that there’s a problem. The bad news is that they don’t want to undo the high tax rates that are causing the problems. Instead, they want to use some favoritism, cronyism, and social engineering.

Connecticut’s progressive tax experiment has hit a wall. Tens of thousands of residents are fleeing for lower tax climes, which has prompted Democrats to propose—get this—paying new college grads a thousand bucks to stick around. …proposing a tax credit averaging $1,200 for grads of Connecticut colleges who live in the state as well as those of out-of-state schools who move to the state within two years of earning their degree.

As the WSJ points out, special tax credits won’t be very effective if the job market stinks.

Yet the main reason young people are escaping is the lack of job opportunities. Since 2010 employment in Connecticut has grown at half the rate of Massachusetts and more slowly than in Rhode Island, New Jersey or Kansas.

By the way, this isn’t the first time that Connecticut’s politicians have resorted to special-interest kickbacks.

The Wall Street Journal also editorialized last year about the state’s one-off bribe to keep a hedge fund from fleeing to a state with better policy.

Last week the Governor presented Bridgewater with $5 million in grants and $17 million in low-interest, forgivable loans to renovate its headquarters in Westport along the state’s Gold Coast.

But the bit of cronyism won’t help ordinary people.

Connecticut has lost 105,000 residents to other states over the last five years while experiencing zero real economic growth. …So here is the new-old progressive governing model: Raise taxes relentlessly in the name of soaking the 1% to pay off government unions. When that drives people out of the state, subsidize the 0.1% to salvage at least some jobs and revenue. Ray Dalio gets at least some of his money back. The middle class gets you know what.

What’s particularly frustrating is that the state’s leftist governor understands the consequences of bad tax policy, even though he’s unwilling to enact the right solution.

Mr. Malloy said that other states including New York were trying to lure Bridgewater, and Connecticut couldn’t afford to lose the $150 billion fund or its 1,400 high-income employees. …The Governor’s office says Nutmeg State tax revenues could shrink by $4.9 billion over the next decade if all of Bridgewater’s employees departed. …“We see what happens in places like New Jersey when some of the wealthiest people move out of the state,” Mr. Malloy warned. This is the same Governor who has long echoed the progressive left’s claim that tax rates don’t matter. Maybe he was knocked off his horse by a vision on the road to Hartford.

This is remarkable.

Governor Malloy recognizes that tax-motivated migration is a powerful force.

He even admits that it causes big Laffer Curve effects, meaning governments actually lose revenue over time when tax rates are punitive.

Yet he won’t fix the underlying problem.

Maybe there’s some unwritten rule that Connecticut has to have bad governors?

Mr. Malloy’s Republican predecessor Jodi Rell raised the top marginal tax rate to 6.5% from 5% on individuals earning more than $500,000, and Mr. Malloy raised it again to 6.99%. Hilariously, Ms. Rell said last month that she’s also moving her residence to Florida because of the “downward spiral” in Connecticut that she helped to propel.

And lots of other people are moving as well.

The death tax plays a role, as explained in a column for the Hartford Courant.

Connecticut spends beyond its means and, therefore, taxes more than it should. …they’re driving the largest taxpayers away. We’ve passed the tipping point beyond which higher taxes beget lower revenues… The wealthy, in particular, have decided in swelling numbers they won’t be caught dead — literally — in our state. Evidence strongly suggests that estate and gift taxes are the final straw. To avoid Connecticut’s estate tax, wealthy families are moving to one of the 36 states without one.

And the loss of productive people means the loss of associated economic activity.

Including tax revenue.

Where wealthy families choose to establish residency has important ramifications for Connecticut’s economy and fiscal health. The earlier these golden geese flee, the greater the cumulative loss of golden eggs in the form of income taxes, sales taxes, jobs created by their companies, philanthropic support and future generations of precious taxpayers.

The data on tax-motivated migration is staggering.

Between 2010 and 2013, the number of federal tax returns with adjusted gross incomes of $1 million or more grew only 9.5 percent here vs. 22 percent in Massachusetts, 16 percent in New York and Rhode Island, and 30 percent in Florida. Slow economic growth and ever higher taxes are both cause and effect of out-migration. …In 2008, the state Department of Revenue Services asked accountants and tax lawyers whether clients moved out of state due to the estate tax, and 53 percent of respondents said it was the principal reason. …The outflow accelerated following 2011’s historic $2.5 billion tax increase. In the following two years, Connecticut suffered a net out-migration of more than 27,000 residents who took nearly $4 billion in annual adjusted gross income elsewhere, a stunning $500,000 per household. According to the Yankee Institute, the average adjusted gross income of each person leaving tripled in the past 10 years. At an average tax rate of 6.5 percent, this represents more than $250 million in lost income tax revenue annually, which is 50 percent more than the state collected in estate and gift taxes in 2014.

By the way, just in case some of you are skeptical and think that Connecticut’s deterioration is somehow unconnected to tax policy, I’ll close with this excerpt from some academic research that calculated the nationwide impact of state tax policy differences.

We consider the complete sample of all U.S. establishments from 1977-2011 belonging to firms with at least 100 employees and having operations in at least two states. On the extensive margin, we find that a one percentage point increase (decrease) in the state corporate tax rate leads to the closing (opening) of 0.03 establishments belonging to firms organized as C corporations in the state. This corresponds to an average change in the number of establishments per C corporation of 0.4%. A similar analysis shows that a one percentage point change in the state personal tax rate a§ects the number of establishments in the state per pass-through entity by 0.2-0.3%. These effects are robust to controls for local economic conditions and heterogeneous time trends. …This lends strong support to the view that tax competition across states is economically relevant.

To be sure, the numbers cited above may not sound large.

But keep in mind that small changes, if sustained over time, grow into very big results.

In the case of Connecticut, we have a state that has suffered dramatic negative consequences ever since the income tax was imposed back in 1991.

P.S. While my former state obviously has veered sharply in the wrong direction on fiscal policy, I must say that I’m proud that residents are engaging in civil disobedience against the state’s anti-gun policies.

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