It is a fact that we exist in a world of limited resources. Taxes paid to the government reduce disposable income for individuals and available funds for investment. Private activity, including innovation and entrepreneurship, gets crowded out when more funds go to the government. This is an unavoidable fact. But taxes provide the revenue needed to operate shared services provided by government entities, many of which are important, such as first responders and defense resources. At the same time, some services are up for debate, and it is rare that a government authority demands less money… they always want more.
But when taxes get too high, behaviour changes, and individuals adapt by taking rational steps to reduce their tax exposure and keep more of their money.
In some countries, tax avoidance is a national art. In the US, enforcement is more stringent, as tax authorities can be very aggressive in pursuing scofflaws, and penalties are severe. Today, a simple way to lower taxes in the US for the masses is to move to a jurisdiction with lower state and local taxes, like no income tax.
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, and Wyoming have no state personal income tax of any sort. It has been widely reported that innovators and the affluent are quickly migrating to these states, while high-tax states are experiencing a decline of talent and wealth. California is considering a wealth confiscation tax that would target unrealized capital gains. Many high-profile residents have fled the state in response to the possible new tax.
While some policymakers believe taxes can never be high enough to meet collective demands, a recent White House report shows why low state taxes benefit the state and its residents.
The report notes that state income taxes harm the state by leading to outmigration, “brain drain,” and stifling innovation, thereby lowering GDP. Citing data from the Council of Economic Advisors (CEA), when states eliminate or “phase out” taxes, this improves the state economy by:
- A 1 to 1.6% increase in the level of GDP for the average state;
- A 16 to 19% increase in new startups for the average state;
- A $4,000 increase in the average wage;
- A significant influx of new high-income taxpayers;
The research states that sales taxes effectively replace any change in state tax revenue. Governments could always seek to reduce operating costs by cutting employment and eliminating unnecessary programs.
It is a truism that businesses, motivated by profit, operate more efficiently than public sector entities. Governments are motivated by power and tend to be disconnected from the concept of limited resources and their efficient allocation. Lower taxes do not imply fewer or inferior public resources. A case in point is Florida’s state budget, which is approximately the same as the City of New York’s, yet Florida runs a budget surplus, while New York City has a growing deficit and is seeking to raise taxes to fund the never-ending needs of an expanding government and boondoggle projects.
At the same time, an increasing number of fast-growing firms, as well as established businesses, are relocating to lower-tax states with reputations for being business-friendly. Once these firms leave, it is pretty difficult to get them back. Keeping them is easier, and lower taxes are a key variable.
