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18

May 2009

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Tax Competition Shows Why Federalism Matters

Written by , Posted in Taxes

I have previously written about the diminishing influence of the principle of federalism in America.  From Arthur Laffer and Stephen Moore, we today see an excellent example of why this principle is so important.  In their Opinion Journal piece, the two economists describe the consequences faced by state governments that seek to soak the rich: the loss of rich people.

Here’s the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

…Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Whether it be the USSR, Cuba or California, it seems that fleeing from statism is universal.  The ability to vote with one’s feet is an important check on the abusive growth of government.  Unfortunately, there’s no reason to believe the collectivist will stop there.  When faced with the reality that people choose not to accept their forms of government, the typical statist response is to eliminate anything else as a choice.  In Europe, the  high tax nations have pushed to make tax competition illegal.  That is, they want to make it so that their neighbors can’t offer anything lower than their own oppressive rates.

It’s unlikely we’ll see a similar push here, as that’s probably too illegal even for our constitutionally oblivious government.  But the same thing can be accomplished by different means.  By federalizing government roles, they can remove the benefits of moving from state to state.  The more functions of government that are funded by the federal government, the fewer oppressive taxes you can escape by relocating.  They can’t redistribute money within states, because the rich can just leave before they get fleeced, but they can do it between all states.  If state governments get their money from Washington, which can tax across all states, rather than their own constituents, then there is no where left to run.  That’s why it is imperative to oppose this trend of federal infringement on state sovereignty and to reject the infusion of federal dollars into state coffers.  It’s not the rights of state bureaucrats that are important and in need of protection, but our own.