A Lesson on Incentives: How Taxing the Rich Hurts the Economy
People who are concerned about the genuinely needy should keep in mind that government doesn’t create resources, it merely takes money from one group and hands it to another. In the process, the government actually makes the total pie smaller, because of the disincentives of taxation. If the government reduced its parasitism on the productive classes, then private charitable giving would increase. And let’s be honest — state governments have plenty of ways to cut down on their spending.
Thinking on the Margin
Tax hikes on “the rich,” especially at the state level, are not nearly as effective at raising revenue as most people think. High-income earners and businesses really do take into account a state’s tax policies when deciding where to locate. It’s true, any particular individual might not sell his house and leave just because of a new tax. But on the margin, a new tax will push more people over the edge. (Or, going the other way, a new tax hike will deter people from moving into the state who otherwise would have.)
…To see how silly Stahl’s rhetorical strategy is, suppose Nicholas Cage is reading a part for an action script. He loves it, and tells his agent to jump on it. The producer offers Cage $1 million to play the leading-man role. Cage insists that his agent ask for $2 million.
The agent tries to talk him down, explaining that at such a high price tag, the producer will look elsewhere. “What other actor could they pick?” Cage demands to know. The agent throws out names like Tom Cruise, Brad Pitt, Robert Downey Jr., Will Smith, and Daniel Craig. Cage dismisses this notion as absurd, because after all, some of those actors insist on being paid more than $1 million themselves. Therefore it is inconceivable to Cage that he could lose the part if he insists on more money.
The flaw in Cage’s (hypothetical) logic is that he thinks movie producers care only about money. On the contrary, there are all sorts of factors they must consider when picking a leading man for an action role. Not every movie casts the biggest star in Hollywood, because the biggest star commands the highest paycheck. Obviously, some producers opt for actors who will draw in smaller crowds, but they do this to contain their own expenditures.
The situation is analogous when it comes to state income-tax rates. Any particular individual — especially a business owner — decides where to locate for a variety of reasons, including the location of family, love of certain weather, and proximity to cultural activities. But not everyone moves to California or New York. Some people settle for “less cool” places, because of the savings in taxes.
It’s unpopular, but true. I was sitting in a meeting the other day where we flat out said we weren’t interested in expand a particular product to certain countries because the regulatory environment was too complicated.
I’ve argued before on this blog, but I strongly believe the best way to stimulate jobs in this country is to gives countries every incentive to keep jobs here and to hire more employees. You DON’T do that through a more rigid tax structure that makes “the powers that be” at companies run. It hurts companies and it hurts individuals, because unfortunately, “the powers that be” that make those decisions in companies are the rich ones.
You show me a country that had high economic development over a long period of time while maintaining high tax rates, and I’ll be willing to re-evaluate this view, but I doubt you can find one.
