Friday, May 6, 2011

Tax Rates=Incentives=Revenues

About ten years ago, give or take, then California Governor Gray Davis gave a press conference to discuss the Golden State's financial crisis (yes, even then). In that press conference he explained to reporters that it was not that state government spent too much, rather that the revenues weren't large enough. The translation of his remarks for the economically naive is: despite the fact that Californians are among the highest taxed citizens in the nation (exceeding even New Yorkers) they weren't paying enough for the state's services. If they were, we can extrapolate from Mr. Davis' statement, the revenues would be great enough to cover spending.

Thou hath not changed much California.

Except in one regard: businesses and wealthy individuals are fleeing the state. In 2007 according to the Pew Research Center, California experienced net migration of -681,000 individuals. In other words, California, in one year alone lost almost 700,000 taxpaying citizens to other, more tax-attractive states. In one year alone. From 2004-2007 the net loss of California citizens was 1,900,000. That's 1.9 million.

The California revenue problem has continued to deteriorate.

Enter Dr. Arthur Laffer (who also exited California during that period). He identified the importance of tax policy to economic growth illustrated best by the Laffer Curve. The Laffer Curve demonstrates that lower tax rates increase incentives to produce income and economic growth thereby resulting in increased tax revenues. There are two points on the Laffer Curve--picture a side-saddle bell curve--where tax revenues equal zero: at a zero percent tax rate and at an 100% tax rate. The former equation is obvious--absence of a tax rate will result in no revenues. At a 100% tax rate, zero tax revenues are also collected because all incentives to produce are removed when the government's take reaches 100%.

Economic growth and job creation needs to return to the forefront of our national dialogue. A realistic and economically sound tax policy should be debated. Economic class warfare benefits no one. Dr. Laffer believes, "the 2012 election will be a referendum on the economic policies of President Obama."

I certainly hope so.

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