Unintended Consequences

“Money is the mother’s milk of politics”

Jess “Big Daddy” Unruh

California Speaker of the Assembly 1961-1969

Unruh was one of our more colorful politicians – another quote of his that bears repeating for the professional politician:

On lobbyists: “If you can’t eat their food, drink their booze, screw their women and then vote against them you’ve got no business being up here.” 

He was right on both counts.

On the money issue – politicians need it to win elections but also keep offices. And they try to keep their offices by dispersing tax money, which is confiscated voluntarily given by us to give to others.

They make one mistake though – they tend to think that tax revenue is a constant un-variable stream – like turning the water faucet to get more water. (I’ll substitute spigot for those of you in the rest of the country. 😉

Only it doesn’t work that way.

People’s behavior changes when taxes are changed. Lower taxes and the economy is stimulated – companies buy more equipment that they can depreciate, the factories that make that equipment make money, the factory workers make money.

Raise taxes and once a threshold is reached, people hunker down.

Or move to a friendlier tax climate.

Democrats in California have raised taxes on the rich again and again, and liberals claim it has no effect on taxpayer migration and does no harm to state tax revenue. A new study finds the opposite.

…In sum, the study estimates that outward migration and taxpayer behavioral responses erased 45.2% of the expected revenue gains from the tax hike on top earners. This is especially relevant since liberal economists argue that the rich don’t care about marginal tax rates and raising the top income rate to 70% won’t affect revenue or incentives to work.

The study suggests Sacramento should think again. And watch out for the next recession when investment income and capital gains fall for the affluent. Democrats will have to soak the middle class even more than they already do to finance all of the new spending demands they are creating in the good times (e.g., free health care for undocumented immigrants)…

A few days later was a letter to the editor of the WSJ:

Your editorial “California’s Tax-the-Rich Boomerang” (Oct. 22) reports a study that “estimates that outward migration and taxpayer behavioral responses erased 45.2% of the expected revenue gains from the tax hike on top earners.” By the Journal’s standards, that is a failure. By progressive standards, perhaps not. Chasing out the high earners does, after all, reduce inequality.

S. Paul XXXXX

New York

It also chases out the people who are the chief source of funding for these programs.

 

With all the rhetoric, no, demagoguery, of “the rich”, they are the ones who pay a far disproportional amount of our taxes.

The top 1% of earners pay 30% of Federal taxes.

 

A tax law that should have become a lesson for politicians, but apparently fell on deaf ears, was a luxury tax in 1990. Politicians wanted more revenue and figured that “the rich” wouldn’t mind paying a “little more” on things like yachts.

Only the rich changed their behavior. They either bought yachts made overseas or didn’t buy them. The yacht makers suffered and, of course, all those who worked for them.

What went wrong with the luxury tax was that, in trying to go after the rich guys’ toys, Congress put the toymakers out of business. The rich guys, meanwhile, bought other toys (including foreign-made ones) not covered by the tax; or they bought used toys and refurbished them; or they simply saved the money, waiting to spend it another day. 

I believe that eventually California will implode. Too many programs and no way to pay for them.

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