Forum Post: You can't tax people into prosperity...

In Maryland – where my company is headquartered – the Democratic state government couldn't balance the budget in 2009, so it decided to double the income tax rate on citizens with more than $1 million in annual income. That left the rich facing a 9.45% marginal state and local income tax. Put that on top of a 36% federal rate, throw in another 6% for Social Security and Medicare, and you're looking at a top marginal rate in excess of 50%. What kind of smart, hard-working citizen is going to give the government more than half his income if he can move somewhere else and pay substantially less?

The liberal editorial board at the Baltimore Sun happily praised the measure and predicted Maryland's top earners would "grin and bear it."

What a bunch of fools.

Instead, the rich left town. The number of million-dollar incomes in the state of Maryland declined by more than 30%, from 3,000 filers to only 2,000. Rather than gaining the predicted $106 million in income from these filers, Maryland collected $100 million less than it did the year before.

Do you think Maryland will rescind such stupidly progressive taxes? No way. It's good politics to promise the voters that only the rich will pay. No, it doesn't work. But that doesn't matter – not until the entire system collapses. And that's why such a collapse is inevitable. It happens all the time. The political promises expand and expand. The rate of marginal tax goes higher and higher. The tax base narrows and tax collection declines. Government debts soar, until... sooner or later... the interest rate soars because lenders realize there is no way they will ever get their money back.

That's what's happening now all over Europe.

And it will happen here next.

The states and their union employees have reached the inevitable endgame. The numbers in many states are mind-numbing. Illinois' pension liability now exceeds $100 billion. Roughly half is unfunded. In California, the pension liability is $50 billion. Another 10 states have unfunded pension liabilities in excess of $10 billion.

http://www.stansberryresearch.com/pub/reports/201112PSI_issue.html#continue

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Americans vote with their feet, and strong economic freedom draws workers and businesses. According to United Van Lines, South Dakota ranked seventh in inbound migration in 2007. That’s one way of saying that lots of people are moving there. Nevada ranked second. By contrast, California tallied more outbound shipments than inbound. People are fleeing California partly because of economic aggravation. For every one-place improvement in a state’s Index ranking of economic freedom, its net migration per 1,000 people typically increases by one person. This means that for Michigan, the top-ranked outbound state, a one-spot improvement in economic freedom would result in a net increase of about 10,000 people moving into the state—resulting in much-needed new consumers, workers, entrepreneurs, and investors.

Economic freedom—or the lack thereof—affects states in multiple ways. Migration alters the political map through congressional apportionment. Current projections suggest that California’s mass exodus will deprive it of a seat in the U.S. House of Representatives after the 2010 census. Economic freedom also impacts pocketbooks. In 2005, per-capita income in the 15 most economically free states grew 31 percent faster than in the 15 states with the lowest levels of economic freedom. Policies friendly to economic freedom help states shore up their finances, too. The 15 freest states saw their general-fund tax revenues grow at a rate more than 6 percent higher than the 15 states with the least economic freedom. California lawmakers should keep these figures in mind as they grapple with the state’s yawning budget deficit.

http://www.city-journal.org/2008/eon1023lm.html