Friday, August 07, 2009

Tax Policies in a Small World

The cliché that the "world is small" has increasingly become fact and not merely a clever statement. In fact, one of the most important books on the changes the world has faced in recent years is "The World is Flat" by Thomas Friedman. In it, Friedman points out that the lag time between information and decision making is at a all time low. Not only do people know where the best places are for the best deal on a car or a TV, they know the best states and countries for doing business.

Ireland went from what was practically a "third world" country in Europe to one of the fastest growing economies in the world. That was directly linked to its efforts of pursuing the lowest corporate tax rates in the industrialized world. Meanwhile, in the same time frame, Japan's economic situation has only become more dire as it continued to pursue high tax policies and garnering the dubious distinction as having the worse tax environment for business among modern economies.

The problem facing governments is simple, because in addition to being able to find our information fast on changes in government policies, people are able to move capital at a more rapid rate than any time in history. This is particularly true for the very wealthy (who have the resource to move money), who are always a popular target for high tax policies. The problem is not only among countries, but among regional or state governments (depending on the country).

Take the problem facing Maryland. The Wall Street Journal notes that the state of Maryland was in a terrible fiscal crisis and the government decided to saddle the deficit on the backs of the rich and "created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley, a dedicated class warrior, declared that these richest 0.3% of filers were 'willing and able to pay their fair share.' The Baltimore Sun predicted the rich would 'grin and bear it.'" The article goes on to point out that a year after the tax increases, "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."

There is no doubt that the recession is playing a role in the problem of less revenue coming into the states. However, the amount of revenue that Maryland is losing far out paces the majority of the states in the union. The rich are people and not blocks of wood. Unlike an inanimate object, when people are attacked (in this case "the rich" in the form of high taxes) they "fight" (which is why they join the many other income groups adversely affected by government in protests) or they "flight" (capital leaving to find safer or more profitable places).

Obama has waged a war on those he deems affluent. This is beginning to include those who make less than $250,000 a year as seen in cigarette taxes and Cap and Trade. Even before many of Obama's policies have been put into law, businesses are responding. USA Today reports that Federal tax revenue "plunged" by the largest amount since 1981." There is no question that many of the dollars disappeared due to the recession, but there appears that much may have taken "flight" to safer places.

If the US is serious about increasing its revenues, it will need to develop tax policies that allow it to compete with other countries that are fighting to improve their economic circumstances. Just as companies have to compete with low prices, countries now have to compete with lower taxes.

Kevin Price is Host of the Price of Business, the longest running show on AM 650 (M-F at 11 am) in Houston, Texas and on AOL Radio. His articles often appear in Chicago Sun Times, Reuters, USA Today, and other national media. Steve Moore of the Wall Street Journal calls Price the “best business talk show host in the country.” Find out why and visit his blog at www.BizPlusBlog.com and his show site at www.PriceofBusiness.com. You can also find Price on Strategy Room at FoxNews.com.

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