The Wall Street Journal looks at the severe falloff in tax revenues from millionaires in Maryland after the state socked them with a new, higher tax rate for the purpose of closing a budget gap, a move hailed at the time by supposedly big-thinking liberals. Somehow, Maryland liberals were surprised that this didn’t work out:
One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.
The easy partisan divide on this issue is over how much of the decline in revenues is attributable to millionaires leaving the state or voluntarily reducing their taxable income (by working less or hiding money in tax shelters) as opposed to the effects of the recession, which the WSJ notes as an obvious contributing factor. But that’s only one problem with sharply progressive tax rates; the Journal notes a structural problem that is at least equally serious in times of recession, as New York and California in particular are discovering to their grief. Specifically, the surplus annual income and investment returns of the wealthy tend to be much more volatile year-to-year than the great mass of incomes earned by average citizens.
Let’s consider an illustration: in a boom year, the stock market rises 20%, and housing prices rise 30%. Lots of people (proportionately to the number of millionaires) make big gushing spigots of money from this, not just capital gains from sales but commissions, year-end bonuses, the whole gamut of ways people profit in eye-popping amounts from a boom. The average guy sees some extra money too, but he’s less likely to see a dramatic percentage increase in compensation. Despite some variations across different boom era, by and large, this has always been true.
When booms turn to busts, though, the high-end incomes are the hardest hit in percentage terms. We think of down times as being harder on the average worker because in human terms they are: it’s a lot worse to lose your job than to go from making $10 million a year to $800,000. But when unemployment goes from 5% to 10%, the dropoff in the tax rolls isn’t that dramatic, especially given that a lot of those lost jobs were people paying little or no income or capital gains taxes to start with, and so the state budget literally does not feel their pain. Whereas collections from high-end incomes can and do drop off far more than 5% in a year, as the Maryland example illustrates. Here in New York, investment banker bonuses that were once the core of the state and city tax bases evaporated overnight. Put simply, taxing the rich is the least recession-proof revenue-raising strategy you could design.
This would be problematic enough if the federal and state governments were trying to sustain a stable income and socking away the extra money for a rainy day (Gov. Palin in Alaska did something like this with the revenue from oil boom years, but Alaska too is subject to the laws of political gravity). Instead, Congress and the states tend to create new permanent claims on temporary income in the best of times, creating long-term self-perpetuating entitlement and spending programs and hiring more unionized workers. (The Obama ’stimulus’ bill combined the worst of both worlds, giving states temporary revenues while demanding that they use them to permanently increase funding obligations, and doing so during a recession). This tax-on-the-boom, spend-through-the-bust philosophy is designed for certain failure; it’s not possible it could ever succeed.
Yet, that’s exactly how all tax-the-rich systems are designed. And no amount of failure will ever teach their proponents anything.
I am shocked, who would have guessed this...
DONTREADONME Thursday, May 28th at 10:03PM EDT (link)oh, wait a minute, isn’t this something we have been trying to tell the masses and for how long? My guess is we will remain the only people in the country that understand that this is what happens when you intentionally play culture warrior. Then again, I guess Robert Erlich did such a horrible job that we had to put the mayor of one of the worst cities in the United States as Governor… Whoops, budget deficit, I wondered how that happened.
For all to know, I left Maryland ten years ago because I saw this coming. Now it is spreading to Virginia, pretty soon Oklahoma. God save Oklahoma.
“The UN is right? you can’t be any more “un”; Than you are right now, the UN is undone, Another mushroom cloud, another smoking gun, The threat is real, the Locust King has come, Don’t tell me the truth; I don’t like what they’ve done, Just give me ammo for the United Abominations”-Megadeth
high taxes
thetexan Thursday, May 28th at 10:17PM EDT (link)high rates equals less revenue. no way.
Please stop being silly, there are still 2,000 millionaires in Maryland!
Cheetah772 Thursday, May 28th at 10:39PM EDT (link)We are WORKING HARD to drive them out, out, out of Maryland.
Yes, I know, it’s a frightening thought….
Daniel 2:20 And he [God] changeth the times and seasons: he removeth kings, and setteth up kings: he giveth wisdom unto the wise, and knowledge to them that know understanding.
5, they just need 20 more Democrats in the Legislature, bye 2000 >$1M-nt
DONTREADONME Thursday, May 28th at 10:45PM EDT (link)“The UN is right? you can’t be any more “un”; Than you are right now, the UN is undone, Another mushroom cloud, another smoking gun, The threat is real, the Locust King has come, Don’t tell me the truth; I don’t like what they’ve done, Just give me ammo for the United Abominations”-Megadeth
My favorite 'law of unintended consequences' was GHWB's
eburke Thursday, May 28th at 10:47PM EDT (link)luxury tax on yachts (yep, part of that ‘read my lips’ snafu where moderates and liberals once again shone the bright light of electability politics for squish ‘Pubs…ya listenin’ John Cornyn?)
Anyway, I digress. Good ol’ pappy, egged on by the usual coterie of mods and libs who ALWAYS have the GOP’s best interests at heart, plopped a massive tax on yachts to show he, too, could gut the rich and show how compassionate he was. Only problem was that most rich people didn’t get rich by being stupid so…they just stopped buying luxury yachts. Next thing you know, 14,000 middle class yacht builders were out of a job.
Oops!
Blasted trickle down economics. And to think my union boss said it was all just a scam perpetrated by ‘The Man’ to keep the masses down.
“All that need be done for evil to triumph is for good men to do nothing.”
“Dead fish go with the flow” ~ izoneguy
“We have a Statue of Liberty not a Statue of Necessity” ~ ColdWarrior
Back to Kennebunkport
molybdanthan Thursday, May 28th at 11:08PM EDT (link)While he was taxing yachts, he was captaining speedboats. During the 1st Gulf War, this episode, and whenever he could get away from it all, you’d see pictures of him boating off the Maine coast. Possibly he did it so he could go faster, not having to worry about all the extra yachts in his way.
How can you spread the wealth if you kill it first...?
NeoKong Thursday, May 28th at 11:49PM EDT (link)That’s called trickle down poverty.
I’ve said it before. Millionaires put people to work. Poor people do not.
One millionaire putting a large addition on his home will spread money out to fifty people directly and in turn those people will spread the wealth out to others.
Unemployment checks can never replace good paychecks.
Some people can’t understand that simple fact.
Democrats think that millionaires pick money off a tree in the yard.
The opinion of a wise whitino male.
He thought he had enough wealth to spread for 4-8 years, but
Mike gamecock DeVine Thursday, May 28th at 11:52PM EDT (link)he’s already squandered it in 4 months.
Mike DeVine’s Examiner.com, Charlotte Observer and The Minority Report columns
“One man with courage makes a majority.” - Andrew Jackson
and eight days - nt
Mike gamecock DeVine Thursday, May 28th at 11:53PM EDT (link)Mike DeVine’s Examiner.com, Charlotte Observer and The Minority Report columns
“One man with courage makes a majority.” - Andrew Jackson
Maryland deserves it
carlsbadd Thursday, May 28th at 11:56PM EDT (link)What a mess that state is, as a Virginian I just can’t understand what they are doing across the potomac. Even in good times they are always running short and threaten to cut teachers firefighters cops ,etc.
Now that it’s hit the fan for real they are scrambling once again
just wait carlsbadd, VA took the refugees but is now saddled with...
DONTREADONME Friday, May 29th at 1:06AM EDT (link)democratic voters. They bring that garbage across the Potomac and are slowly eating away at the beautiful state of VA. Next stop Oklahoma.
“The UN is right? you can’t be any more “un”; Than you are right now, the UN is undone, Another mushroom cloud, another smoking gun, The threat is real, the Locust King has come, Don’t tell me the truth; I don’t like what they’ve done, Just give me ammo for the United Abominations”-Megadeth
What about Oklahoma?
molybdanthan Friday, May 29th at 1:24AM EDT (link)We’ve got enough democrat voters, thank you. It’s plenty conservative here, finally, but the Blue guys still lurk throughout the land.
Oklahoma...
DONTREADONME Friday, May 29th at 1:58AM EDT (link)I think you misunderstand me, I love Oklahoma. There is a large population of conservatives in that state, just look at the map from this last election.
Now, what I am trying to say is that liberals and democrats are like locusts they move to where there is opportunity and economic prosperity. Once they arrive, they bring their liberal voting habits with them. Once they turn the state’s government blue as blue can be, taxes go up and the economy and prosperity are destroyed. Following the utter devastation from the liberal agenda, they move out of the state on to the next area with jobs and prosperity. Just look at what is happening to VA. Much of what you are seeing (i.e. VA voted Zero) is a result of the influx of New Englanders and Marylanders to suck the economic life out of VA. That is why I need to go to OK, it seems that OK has some time before the liberal locusts reach your state. I am serious about this, just watch the electoral map and census numbers, you will see how the blue of the blue states population has decreased considerably while the red states have acquired more population. This influx of transients has caused prosperous states to go belly up under the weight of the liberal agenda.
So in conclusion, I love OK, it is the heart of this great country and we can not let that heart die with the liberal disease.
“The UN is right? you can’t be any more “un”; Than you are right now, the UN is undone, Another mushroom cloud, another smoking gun, The threat is real, the Locust King has come, Don’t tell me the truth; I don’t like what they’ve done, Just give me ammo for the United Abominations”-Megadeth
Whew
molybdanthan Friday, May 29th at 2:38AM EDT (link)Thought you maybe heard something.
Like a reverse of the Dust Bowl, when thousands of Okies went West. Will Rogers, commenting on the exodus, said something along the lines of, “It immediately doubled the IQ of both states.”
This time around, there might be millions of Californians heading East. I don’t think we want them back.
Maryland State House: It takes a village of idiots to raze a millionaire.
blooch Friday, May 29th at 12:37AM EDT (link)For those millionaires who voted with their feet, it is their good fortune that they can still find refuge in more sensible states. How long this will last is anyone’s guess. Obama and his cadre already sneer at States’ Rights and long for the day when our individual states will be remade as soviet-style units of uniformity, nicking the Tophats equally across the borders.
“I have to admit that Karl Marx (1818-1883) was a smart man. He was, in many ways, a psychologist.”–drealoth
Excellent Posting.
Flagstaff Friday, May 29th at 1:16AM EDT (link)One fact of economics can be added. (I wish I could draw a chart here.)
If a graph of total tax revenues vs tax rates were drawn, it would look somewhat like a camel’s hump, or a haystack, or a bell curve. As you increase rates to the right, total revenues go up until a certain point is reached, they start to level off, then they start down again. Total tax revenues start at zero and return to zero.
It’s like a sales revenue vs unit price graph. As the unit price goes up, revenues increase, then they fall as they pass the optimum price.
My point is that our tax rates have been on the right, downhill, side of that haystack for years. As the government tries to bring in more revenue, they generally move further right, with the result that revenues go down, not up. Only during the Reagan Administration did we reduce rates significantly, and the result was much higher tax revenues. But I doubt that we ever reached the “optimum” tax rate, the rate which would maximize tax revenues. We just approached it.
Had we reduced rates still further, we could have gone to the similar point on the left, uphill, side of the hump, where total tax revenues would have been the same. If we had done that, if we were there now, it would make sense to raise tax rates, because it would move us toward the optimum rate. As we raise rates now, however, we move away from the optimum rate, and revenues will go inexorably down. But nobody in control in DC or Cahleefowneeyah or New York would have the slightest understanding of what I just wrote.
Simply put, unnecessarily high tax rates have been stifling economic growth for years.
Pluto, the Ninth Planet - Forever!
Okay, I'll Bite. What's Your Optimization Point?
redstatebluestate123 Friday, May 29th at 3:42AM EDT (link)The Laffer Curve is a famous economic argument (although not necessarily, I should add, a “fact” of economics so much as a logical theory). I’m curious to know what you think the optimization point is on the graph, I.E, for what value of “tax rate” does “tax revenue” reach its maximum point on the graph?
Learn more math
Neil Stevens Friday, May 29th at 4:00AM EDT (link)You need it.
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The optimum rate changes from year to year.
Flagstaff Friday, May 29th at 5:00AM EDT (link)Even from day to day.
You are right, it is a logical theory. There is no way to prove it “factually,” other than to show that it accurately describes reality in a given set of circumstances. It’s hard to argue against its logic, however.
Right now, the optimum is below our current tax rates, IMHO.
See more below in my reply to Neil.
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Just say "Extreme Value Theorem"
Neil Stevens Friday, May 29th at 5:16AM EDT (link)Make *him* go take a math class.
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I am aware of the extreme value theorem Neil
redstatebluestate123 Friday, May 29th at 12:29PM EDT (link)To quote wikipedia’s exact definition: “the extreme value theorem states that if a real-valued function f is continuous in the closed and bounded interval [a,b], then f must attain its maximum and minimum value, each at least once.” This is accurate.
He describes the graph of tax rate vs. tax revenues as a “camel hump,” and I have previously heard the Laffer curve described as a “distorted parabola.” It therefore seems that he is making the claim that the Laffer Curve is a continuous function. The interval is closed and bounded by the fact that tax rates cannot be less than 0 or higher than 100, so the Laffer curve, by his description, is a function f(x) on 0<=x<=100. This makes it a real-valued function continuous in a closed and bounded interval. Therefore, according to his argument, it must have a maximum, the point where revenue is optimized.
I’m asking what he thinks that point is. How is this an illegitimate question?
The only thing illegitimate about your question,
Flagstaff Friday, May 29th at 1:30PM EDT (link)at least as far as I’m concerned, is that it implies that anybody could answer it. Reading your subsequent posts, I conclude that you know it isn’t answerable because the optimum rate isn’t a static rate, and there is no way to verify it empirically, anyway.
I answered you in the only way possible: it’s lower than where our tax rates are now.
Pluto, the Ninth Planet - Forever!
I thought a camel's hump wasn't
Flagstaff Friday, May 29th at 1:43PM EDT (link)a bad substitute for a “distorted parabola,” having the added advantage of being more readily visualized than the abstract mathematical concept.
Meant to add that before.
Incidentally, the tax function would not be strictly continuous, as few things in nature are. But it’s close enough for the purposes of my exposition to consider it so. Any formula developed to describe that distorted parabola probably would be continuous, however, just to make it workable.
Pluto, the Ninth Planet - Forever!
Here's the catch though Flagstaff
Neil Stevens Friday, May 29th at 1:46PM EDT (link)If the tax curve has discontinuities, then the tax hikers then have the burden to show that tax hikes will raise income, since their logic assumes a simple, continuous relationship between revenue and rates, as well.
*Both* sides of the tax dispute are assuming a nice, smooth curve. So I’m allowed to make that assumption all day and all night!
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Neil, let's stipulate that you can't reason
Flagstaff Friday, May 29th at 2:34PM EDT (link)with unreasoning people. The fact that they can be unreasonable too is just concrete on the hardtack.
Interesting that even in economic mathematics, leftists assume a simplistic answer (a more-or-less linear function), whereas conservatives recognize that it’s a lot more complex than that.
Pluto, the Ninth Planet - Forever!
Complexities
Neil Stevens Friday, May 29th at 2:40PM EDT (link)We’re just better at the hard sciences. They’re more focused on the social sciences, full of fudge factors and untestable formulas.
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Not Quite True Neil
redstatebluestate123 Saturday, May 30th at 2:43PM EDT (link)In fact, the tax curve is continuous, there is no assumption involved. This is because we actually DEFINE the tax curve as continuous before constructing it. After all, we are not constructing the graph based on a formula so much as constructing the formula based on a graph. What does the graph say is tax revenue from 52.867485684% tax rate? Well, we connect the dots from 52% to 53% and see where that falls. In other words, since we’re doing a scatterplot, then connecting the dots, then deriving the formula, we can actually define the graph as continuous rather than simply assuming that it is.
"Extreme value theorem" eh?
Flagstaff Friday, May 29th at 1:48PM EDT (link)The only advanced math terminology I can remember is Newton’s approximation, and that’s because I used it twenty years ago in a computer program.
I subbed last week in a high school calculus class, but no teaching was required.
Pluto, the Ninth Planet - Forever!
Heh, yeah
Neil Stevens Friday, May 29th at 2:38PM EDT (link)Basically, any continuous function in a closed range (such as y = x^2 between x = 0 and x = 1, including x = 0 and x = 1) has a maximum and a minimum in that range.
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One error in your post
Neil Stevens Friday, May 29th at 4:01AM EDT (link)Mathematics demand that there be a maximum, but we don’t know that there’s only *one* local maximum in the curve.
Laffer didn’t and can’t demonstrate the precise shape of the curve. Only that there is an absolute maximum somewhere between f(0) and f(100).
So you can’t say we know the shape.
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I almost added a disclaimer that my argument was simplified
Flagstaff Friday, May 29th at 4:54AM EDT (link)for purposes of illustration.
Yes, there may be multiple inflection points, and there may be more than one point where tangent to the curve is horizontal. But logically, there won’t be (or if there are, they won’t be far apart), because of the factors within the economy which shape the curve in the first place. Those factors dictate that it will be something like a haystack, because tax revenues have to increase from zero to something, and once they start down the right side, reality forces revenues to continue to fall as rates continue to rise. The rate of fall may change for various reasons, but it will always have a negative slope, at least once it gets a bit away from the peak.
The fact of multiple tax rates complicates the curve, as does the complex economy. That means there really isn’t a single tax rate to plot. For simplicity, I was thinking of the top marginal rate.
The curve undoubtedly changes greatly over time as well. A given “tax rate” will produce different total tax revenues in different years, and the slope of the curve at that rate will also change. It would probably take at least a 4-dimensional graph to come close to reality.
I read in the AAII Journal some years ago that Dr. James Cloonan believed the optimum tax rate for revenue purposes was about 19%. I don’t know if he was thinking of a graduated income tax rate or a flat rate, or whatever other disclaimers he might have included. He may have even been writing about capital gains taxes.
My opinion is that the optimum tax rate is the one at which some critical mass of taxpayers are taking steps to avoid the tax or at which they are prevented from improving their business due to the tax’s effect on their paying customers. In a recession like we have today, the optimum rate has moved well to the left, I believe. That’s wh I argued that we’d have been better off if we got ourselves positioned on the left side of the haystack when times are good. As the optimum rate moved lower during the bginning of a recession, revenues might not increase, but they wouldn’t go down as fast as they do on the right side of the hump. It was announced today that YTD tax revenues are down 34% from last year.
Most of the above is irrelevant to my original point, but it’s interesting, anyway.
Pluto, the Ninth Planet - Forever!
When I Represented the Tax Collector's Office
papalee Friday, May 29th at 8:10AM EDT (link)Before the Board of Supervisors my rule of thumb was that they were never going to understand nor appreciate the attitude of ordinary people to new or raised taxes. They always believed that they would collect 100 percent of any new or increased rate when the truth was that they would generally get some where between thirty to forty percent. In the GHWB yacht example what was ignored was the ability of the really wealthy to go buy their yachts abroad - which is precisely what they did.
If you want increased tax revenues it is much smarter to construct your tax code so that it will be easier for business men to make more money and then take a little of that. That little will add up to quite a lot if the government doesn’t get too greedy. It is greed on the part of government which kills economys. But there are certain folk who will never understand this. They believe that there is just so much good the government could do if only they could take a little more of your money - first a little and then a lot more. The result is that soon (and that was probably some time ago) they have taxed a great number of industries right out of the country.
Incidentally, Oklahoma doesn’t want refugees. We finally have a Republican legislature for the first time since statehood and we would like to keep them sane and honest for as long as possible. Under the old regime you had to leave briefcases full of the green stuff behind a certain toilet in the upstairs men’s room to have the representatives even look at your legislation. It may get back to that, but we do hope it takes a while.
On the other hand, we could be just a little bit smarter and dispose of our income tax as Texas has and it might give us a greater chance at jobs and industry moving into the state.and staying.
Thanks for commenting, papalee.
Flagstaff Friday, May 29th at 1:24PM EDT (link)I can add that my addendum still leaves out many complicating factors, such as the difference between “maximizing revenues in the current year” and “maximizing revenues over a period of years.” Also ignored is the question of whether it’s a good idea to maximize tax revenues during peacetime.
I haven’t written an article about it yet, but my personal belief is that we’d all be better off now if the “stimulus” money had been used to reduce or eliminate taxes, rather than to set up permanent, make-work government programs. That way the government wouldn’t be choosing and playing favorites, and the general public wouldn’t be (rightfully) worrying about the massive federal deficits and confiscatory taxes that are looming in the future. The economy would be far better off than it is now, and we’d be in a position to recover without rampant inflation, by being on the left side of the tax revenue hump.
Pluto, the Ninth Planet - Forever!
Flagstaff, You Seem To Have An Exceptional Grasp of these Issues.
papalee Saturday, May 30th at 2:03PM EDT (link)Having worked to make my local government money and keep expenses down, it is always frustrating to find that the legislators have no understanding of tax economics at all.
But the big problem is one that Obama seems to think most important, which is not that taxes should raise money for appropriate programs, but, in his opinion, they should be used to punish the people of whom he disapproves.
Thanks, papalee.
Flagstaff Saturday, May 30th at 9:16PM EDT (link)I don’t claim to “know” I’m right. I just know it makes sense, and that there is some evidence to back up some of it. I can’t say the numbers are exactly right, but the ideas are legitimate and worth considering. It would take a lot more resources than I have to prove any of my extrapolations.
I also share your opinion that Obama is using government for his own purposes, and I’m not yet sure just what those purposes are. If you take him at his words, he’s admitted that punishment is one of them. I often wonder if he’s a pawn for George Soros, which, if so, then leads me to question which of them will eventually survive the other.
IMHO, he’s pretty much doing the exact opposite of what will be good for the country in all of his executive decisions and policies. The question is whether he is doing it innocently or intentionally to destroy.
Pluto, the Ninth Planet - Forever!
Put into a simple business example
Common_Cents Friday, May 29th at 12:34PM EDT (link)Raising taxes hoping for more revenue is like a business that has slowing revenue raising its prices! Not enough sales? Business a little slow? Just raise your pices!!!!
Yes, you can have pricing power to raise your prices more so in a strong demand market, not a slowing/stagnant/declining market.
Normally, business have things called “SALES”(as in price cuts=tax cuts) to raise some revenue.
How hard can this be?
Oh yeah, in Obama uptopia land real world stuff doesn’t really matter.
“Never interrupt your enemy when he’s making a mistake.” Napoleon - Well, unless he is ruining your country! Common Cents
A cult of personality arises when a country’s leader uses mass media to create a heroic public image, often through unquestioning flattery and praise.[1] Cults of personality are often found in dictatorships.