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Posts Tagged ‘income tax’

The world is a laboratory and different nations are public policy experiments. Not surprisingly, the evidence from these experiments is that nations with more freedom tend to grow faster and enjoy more prosperity. Nations with big governments, by contrast, are more likely to suffer from stagnation.

The same thing happens inside the United States. The 50 states are experiments, and they generate considerable data showing that small government states enjoy better economic performance. But because migration between states is so easy (whereas migration between nations is more complicated), we also get very good evidence based on people “voting with their feet.” Taxation and jobs are two big factors that drive this process.

Looking at the census data and matching migration data with state tax systems, here’s what Michael Barone wrote. He finds (not that anyone should be surprised) that the absence of a state income tax is correlated with faster growth, which attracts people from high-tax states.

…growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England. Altogether, 35 percent of the nation’s total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade.

And here’s Diana Furtchtgott-Roth, writing for Realclearmarkets.com. She uses the presence of right-to-work laws (which prohibit union membership as a condition of employment) as a proxy for the degree to which big government and big labor are imposing restrictions on efficient employment markets. Not surprisingly, the states that have a market-friendly approach create more jobs and therefore attract more workers.

The American people have been voting with their feet, the Census Bureau announced on Tuesday, leaving states with heavy union influence and choosing to live in “right-to-work” states with higher job growth where they cannot be forced to join a union as a condition of employment. …As a result of geographic shifts in population uncovered by the 2010 Census, nine congressional seats will move to right-to-work states from forced unionization states. Some winners are Texas, Florida, Arizona, Georgia, and South Carolina, while losers include New York, Ohio, Michigan, Illinois, and New Jersey. Over the past 25 years job growth in right-to-work states has been over twice as high as in unionized states.

This leaves us with one perplexing question. If we know that pro-market policies work for states, why does the crowd in Washington push for more statism?

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When all you have is a hammer, everything begins to look like a nail. That old saying makes a lot of sense. As a tax economist, I’m sometimes guilty of looking at all sorts of issues based on their relationship with the tax code. In my defense, however, the tentacles of the IRS now reach into almost every nook and cranny of our society. And greedy tax collectors on the state and local level make a bad situation even worse. Two things from today’s inbox illustrate my point.

First, you may remember that the IRS is going to be a chief enforcer of Obamacare. Well, our friends at the tax collection agency have just released a draft form for the “credit for small employer health insurance premiums.” We already have a tax system that takes up 72,000 pages and requires more than 1,000 different forms and publications, but now we can add 25 more lines of mind-numbing, eye-glazing bureaucratese, all of which doubtlessly will lead to innocent mistakes that cause many more taxpayers to have nightmarish interactions with the IRS. (click here to see a full-size version of the form)

Second, Hiwa Alaghebandian at the American Enterprise Institute has an article on telecommuting which largely focuses on the environmental and quality-of-live advantages of people working from home. What does this have to do with taxes, you ask? It turns out that greedy state politicians have an annoying tendency of trying to tax people who live elsewhere. This form of taxation without representation imposes both bureaucratic and economic barriers that hinder an otherwise desirable development.

Possibly the biggest barrier to telework are state tax laws. Many states implement some form of double taxation on out-of-state teleworkers. For example, New York applies a “convenience of the employer” doctrine on out-of-state teleworkers who work for a New York–based organization, which requires them to pay income tax to New York for telework days outside of the state. All work done outside of New York is subject to New York income tax, unless the work is done outside of New York out of necessity to the employer . In 2005, the New York State Court of Appeals upheld the “convenience of the employer” doctrine in Huckaby vs. New York State Division of Tax Appeals. Thomas Huckaby, a Tennessee resident, worked for a New York–based company, but teleworked 75 percent of the time. On his New York State nonresident tax returns, Huckaby allocated 25 percent of his income to New York, and 75 percent to Tennessee; however, the New York State tax department determined that Huckaby should have paid New York income tax on 100 percent of his income. The court sided with the New York State tax department, stating that the doctrine was constitutionally applied. As many as 35 states have some form of double taxation for teleworkers.

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This is just a rumor, but some of the “stimulus” money has been spent to buy new pencil sharpeners for the IRS. Apparently, the new equipment puts agents in the right frame of mind before auditing taxpayers.

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Being a lazy procrastinator, I filed an extension April 15 and then waited until this weekend to do my tax return. This experience has reinforced my hatred and disdain for our corrupt and punitive tax system. I don’t even have a remotely complicated tax return, just a Cato salary and a few payments for articles and speeches on the income side, along with a standard set of itemized deductions for things like home mortgage interest.

But even dealing with a relatively simple tax return causes lots of angst and makes me long for a simple and fair flat tax. Actually, it makes me long for a limited government, as envisioned by our Founders, in which case we might not need any broad-based tax. And I suppose I shouldn’t blame the IRS. The real villains are the politicians who have spent the past 97 years turning the tax code into a monstrosity.

Now that I’m done venting, I suppose I should include some educational content. In honor of tax day for procrastinators, here are three videos on the flat tax, the IRS, and the global flat tax revolution.

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Caroline Baum of Bloomberg has an excellent column explaining why soak-the-rich taxes don’t work. Simply stated, wealthy people are not like you and me. They have tremendous control over the timing, composition, and level of their income. When the rich are hit with higher tax rates, they adjust their behavior and protect themselves by reducing the amount of taxable income they earn and/or report to the IRS. That usually causes collateral damage for the economy, but the class-warfare crowd is either oblivious or uncaring about real-world effects.

Why, after all this time and an extensive body of data, are we still questioning whether reductions in marginal and capital- gains tax rates increase economic activity enough to generate more revenue for the federal government?

“Because they don’t like the answer,” Laffer says of the doubters. “It’s not tax cuts that pay for themselves. Tax cuts on the poor cost you lots of money. Tax cuts on the rich pay for themselves. Rich people can afford lawyers, accountants, and can defer income.”

…The rich have the luxury to respond to incentives, to opt for more work and less leisure when the return on work is greater. They are motivated to take risks, maybe start a business, invent something, and get even richer while giving others the opportunity, through hiring, to do the same.

The opposite is true for low-income workers. When the government raises taxes, someone struggling to put food on the table for his family may have to go out and get a second job to maintain his level of take-home pay. For this socio-economic group, higher taxes translate to more work.

To ignore evidence that the rich behave differently is silly. The government can’t get more blood from a stone, yet it keeps trying. Instead of demagoguing tax cuts for the rich, Democrats should try embracing them for a change.

…Academics are busy churning out articles claiming tax cuts for the rich deliver less bang for the buck because the rich save more of the money than the poor.

That’s true. It also misses the point. The goal isn’t spending, or distributing other people’s money to create “aggregate demand.” That’s a wealth transfer, not a net stimulus. (Fiscal policy gets its punch from monetary policy, from the increase in the money supply to pay for the spending.)

The goal should be to incentivize individuals to work hard, save and invest in the future. It’s about growing the pie.

Sound familiar? We’re right back to square one. I, for one, would like to see the debate shift from class warfare over tax rates and targeted tax relief to tax reform. Either scrap the tax code and introduce a simple flat tax with no deductions, or scrap the IRS and move to a consumption tax.

If you want to get money out of politics, there’s only one way to do it. Take the tax code out of Congress’s hands.

Baum’s column touches on most of the key issues, but she doesn’t address the political economy of class-warfare taxation. In this video on soak-the-rich tax policy, I provide five reasons why high tax rates are misguided – including the oft-overlooked point that politicians impose punitive taxes on the rich as a prelude to hitting the rest of us with higher taxes.

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Supporters of the Cleveland Cavaliers, especially the owner of the team, are upset that basketball superstar LeBron James has decided to sign with the Miami Heat. The anger is especially intense because the Cavaliers offered $4 million more over the next five years. But their anger is misplaced, because more money in Cleveland, Ohio, actually translates into about $1 million less disposable income when the burden of state and local income taxes is added to the equation. Rather than condemn James for making a rational choice, local basketball fans should tar and feather Ohio politicians. This story from CNBC walks through the calculations.

…if you match up what James’ salary would be for the first five years in Cleveland and the five years in Miami, you find that the Cavaliers are only offering him $4 million more. That advantage gets erased — and actually gives the Heat the monetary edge over — when you consider the income tax difference.

…Playing in Cleveland, LeBron would face a state income tax of 5.925 percent, plus a Cleveland city tax of two percent.

Over the first five years of a new contract with Cleveland, James would give back $3,953,060 combined to the state and city for the 41 games each season he’d play at home. But James would have to pay none of that for home games in Miami since Florida doesn’t have an income tax.

Athletes have to pay income taxes to states that they play in on the road, so the games he’ll play away from home — whether he played for Cleveland or Miami — are essentially a wash.

But there are, on average, 11 away games per season where James would have to pay Ohio and Cleveland taxes. Why? Because he has to pay when he plays in the six areas – Florida, Texas, Washington D.C., Illinois, Toronto and Tennessee – that have no jock taxes.

That’s another $1,061,128 he’ll have to pay in taxes that he wouldn’t have to pay in Miami.

New York basketball fans also should be angry. With some of the highest taxes in the nation, many of which target highly productive people as part of a class-warfare policy, New York is bad news for professional athletes. The New York Post, commenting on the probability that James would sign with the Miami Heat, identified the real villains.

…blame our dysfunctional lawmakers in Albany, who have saddled top-earning New Yorkers with the highest state and city income taxes in the nation, soon to be 12.85 percent on top of the IRS bite. There is no state income tax in Florida.

On a five-year contract worth $96 million — what he’d get from the Knicks or the Heat — LeBron would pay $12.34 million in New York taxes. Quite a penalty for the privilege of working in Midtown.

Now let’s look at the big picture. The calculations that LeBron James made when deciding to sign with the Miami Heat are the same calculations that companies make when deciding whether to build factories and create jobs. So when people wonder why high-tax states such as Ohio, California, and New York are losing jobs to zero-income tax states such as Florida and Texas, part of the answer should be obvious. And if we move to the global level, folks should not be too surprised that companies and investors, all other things equal, are likely to avoid the United States, with its punitive 35 percent corporate tax, and instead create jobs and build wealth in places such as Hong Kong, Ireland, and Switzerland.

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