Beware Unintended Consequences

My old friend, Art Laffer (of Laffer Curve fame) often says if you want less of something--tax it.   Economics, the ancient art of encouraging certain behaviors with incentives and discouraging others with penalties is akin to parenting.  We reward good behaviors in our children and--if we are doing our job--we penalize others.   The end result is, we hope, harmony and productivity.  The body politic functions the same way.

If we follow President Obama's plan we will continue to place an extraordinary penalty on those who produce the most and, by the way, already pay an inordinate percentage of income taxes.  According to the independent National Taxpayer's Union, the top 1% of earners in the U.S. pay 36.73% of the tax bill.  The top 5% pay 58.66%.  President Obama wants them to pay more.  Laffer's view is supported by history--if you want less of something, tax it.  The rich have and always will be able to find ways to minimize income.  Eduardo Saverin, one of Facebook's founders renounced his U.S. citizenship right before the big payday.  Tax it?  You get less of it.

We see how tax policy affects behavior if we examine state population growth relative to state tax policy.  As a native Californian--a native San Franciscan to be precise--I know that it takes a great deal to nudge someone out of that glorious state, yet since 1990 the net migration in California has been a negative 3.6 million people (American Council of Engineering Companies among other studies).  Californians pay the second highest state income tax in the nation second only to Hawaii.

So here we sit, in an election year, hearing that the rich simply aren't paying enough.  That we can engage in profligate and unaccountable spending on the one hand (has anyone figured out where the $870B stimulus went and what exactly we received for it?) and demand that the most productive among us work harder and pay more.

For crying out loud, even the Russians have figured out that a flat tax--a uniform rate of tax on the income of individual--makes sense.  And while our citizens pay income taxes of as much as 50% to federal and state governments, the Russian citizen pays a mere 13%.

Finally, Barron's reported today that tax avoiders owe the IRS an estimated $385 billion.  That is more than one-third of the U.S. budget deficit.  I would support any president who solves that problem before demanding more of the property of hard-working and law-abiding Americans.