Sunday, August 28, 2011

Tax a moving target?

Published in The Tennessean, Sunday, August 28, 2011

by Richard J. Grant

The pattern of migratory flows throughout history suggests that people move from situations that they perceive to be relatively unsatisfactory to destinations where the living conditions are expected to be better. In a big world there will always be someone traveling in the other direction, but the greater flows of people tend to be toward those areas perceived to be better-suited to their survival, prosperity, and sense of life.

Border controls are in place to manage the flow of people in both directions. But some borders are particularly geared to controlling traffic in one direction rather than another. That is why Hong Kong had to devote more resources to controlling inward-migration from Canton than did the People's Republic of China have to devote to controlling traffic coming the other direction. China's concern was with losing people, especially the most talented or productive.

The same was true at the Berlin Wall. People of similar culture, language, and history were separated and forced to live under two very different systems of government and economic organization. As long as those differences were enforced, the greatest migratory forces pushed toward the West. People knew that they could live more free and fulfilling lives in an environment where they were treated with individual dignity, and where their choices and productivity were respected.

We see similar migratory flows within the United States. There are no “pass laws” that control migration within the US, but it does matter which state you live in. Each state differs in its level and structure of taxes, the severity and type of regulations, and the types of spending projects it supports. This is why some states tend to be more prosperous or more resilient during recessions, and why they tend to attract people from other states.

Some states resort to gimmicks to attract companies that will supposedly “create jobs.” But the premature promotion of fad-industries, such as solar or wind energy, is based on wild assumptions and takes huge risks with taxpayers’ money. Narrow interest groups visibly benefit while the taxpayer vaguely perceives a net loss. In other words, such projects generally destroy wealth. When the subsidies stop, the wasted effort is revealed.

State governments that commit themselves to unsupportable spending plans often see as their only way out the expansion of the tax base and the increase of tax rates. In January, Illinois increased its income tax rates by about 67 percent and increased corporate tax rates as well. Perhaps the governor now wishes that he could put up a fence around his state much as East Germany had a fence along the entirety of its border with West Germany. Illinois is losing job creators and some of its most productive people.

Even if there were such a fence that could keep the people in, reducing people's disposable incomes is not a way to promote productivity. Taking resources from those who are the most productive stewards of those resources, especially when those resources are transferred to unproductive projects and less-productive people, is a recipe for reduced standards of living.

When the most productive people in a society depart or slow down, it is the least-productive who suffer the most. For they are the ones, whether they know it or not, who benefit the most from their association with those who are wiser or more productive.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011