Day 7: Eight Days Of Logic and Sanity That Prove Raising Taxes Is Just Plain Stupid

This is the seventh in an eight post series to show how utterly stupid it is for any American, rich or poor, to pay another penny in taxes, given how incompetent our political class and the government functions it operates are. From wasting hundreds of billions of dollars every run through the ineptly run Medicare, Medicaid, and Social Security programs to an IRS that fails to collect hundreds of billions of dollars every year from tax evaders to a Navy ships that are never used to consulate buildings that are never occupied, the waste is never ending.

That is why the American pubic should demand competency from our politicians. BEFORE anyone gives them an extra cent in taxes. Tomorrow, we will prove that it is possible to make the Federal government $9 TRILLION more efficient over the next ten years without raising taxes, it is that simple.

However, today we will look at some hard core economic examples to show that even if the government does raise taxes, it rarely, if ever, works out well in the end. These are not economic theories, these are actual economic results that show raising taxes is never a good thing for the economy and its citizens and rarely gets government spending under control.

Before we talk again about how stupid it is to raise taxes on wealthy earners, let me put things in perspective, from a personal basis. A couple of disclaimers up front before anyone gets into a snit. I am not close to being a high earning American. My family pays our income taxes to the Federal government at the 15% marginal tax bracket. I live in a typical suburban, middle class home of about 2,000 square feet. I drive a eight year old vehicle and my wife drives a six year old vehicle. Thus, what I am about to talk about is not because I have any financial stake in how the rich are taxed.

Let’s start with a case of raising tax rates but getting less in tax revenue that actually occurred once upon a time in Maryland. A number of years ago, the Maryland state government decided to raise the state income tax rate on millionaires living in the state, expecting to annually get an additional $106 million worth of tax revenue from the tax increase on millionaire earners.

However, when the tax returns were tabulated a few short years later, it turned out that rather than gaining $106 million more in tax revenue from millionaires, the state actually ended up getting $257 million less in tax revenue from millionaires (Wall Street Journal - March 12, 2010). The number of millionaires filing Maryland taxes actually dropped by 30% as a possible result of 1) some died and did not need to file, 2) some had bad economic years and did not make a million dollars and 3) some moved out of Maryland into states that were more tax friendly.

If I was betting, I would bet the third factor was the biggest component since: I doubt 30% of the millionaires all died in one year and I doubt 30% all of a sudden did not make a million dollars, especially since the article did not report similar drops of income for millionaires in the 30% range in surrounding states.

Was it fair to make the rich in Maryland pay more in taxes? I do not know, that is a subjective judgment. However, understand that by making Maryland millionaires pay more, many of them took themselves and their families, and possibly their businesses, elsewhere, along with their tax receipts. They also took their disposable income that they may have spent on Maryland restaurants, movies, clothes, cars, etc. The state government may have lost $257 million in tax revenue directly but the state as a whole probably lost a lot more in disposable income and jobs. Higher tax rates was stupid since it reduced the overall tax collection volumes.

The same thing happened in Britain when it raised the top tax rates on wealthy British earners. The British government actually saw tax revenues go down from this high income group. A December 9, 2012 NewsMax article documented what happened:

• In the 2009-2010 tax year in Britain, more than 16,000 people reported annual income of more than 1 million pounds (equal to about $1.6 million).
• In 2010, Prime Minister Gordon Brown, a member of the Labor Party, implemented a new 50% top income tax rate for high-income earners.
• Shortly after that, the number of British citizens reporting income of at least 1 million pounds fell to 6,000.
• “It is believed that rich Britons moved abroad or took steps to avoid paying the new levy by reducing their taxable incomes,” The Telegraph reported, a major British newspaper.
• Harriet Baldwin, a Conservative member of Parliament, said: “Labor’s ideological tax hike led to a tax cull of millionaires.”
• Instead of raising revenue, the tax hike cost the U.K. 7 billion pounds ($11.2 billion) in lost revenue.
• Now, the government of Conservative Party Prime Minister David Cameron has announced that it will lower the top rate from 50% to 45%, a move the Labor Party officials have called a “tax cut for millionaires.”
• Since Cameron’s government announced the lower top rate, the number of Britons reporting income of at least 1 million pounds has risen to 10,000, about a 66% increase.

Raise taxes, less tax revenue, two real life examples of what will likely happen if Obama keeps harping on “taxing the rich.” He will end up with less government revenue, still have the same out of control spending problem and rely more and more on middle and lower class taxpayers to make up the difference.

Whether it is at state level or a country’s national level, people will try to minimize their pain of taxes, whether it is moving out of state or out of the country, putting their wealth into tax shelters or non taxable assets, or just doing a tax evasion dance altogether (given that the IRS fails to collect over $380 billion from tax evaders today, this last option might be pretty low risk, at least in the U.S.).

But raising taxes and getting less government tax revenue does apply only to income tax rates. Consider what is happening in the area of cigarette smuggling and how raising cigarette taxes actually reduces government tax revenue without solving the problem of people killing themselves via tobacco. The following details come from the same NewsMax article cited above, based on information from an article in the Economist:

• Since 2007, at least 27 states have raised their cigarette taxes to erase deficits or cover healthcare costs. In New York, the tax on cigarettes is $4.35 a pack, and an additional tax in New York City boosts the total to $5.85 a pack.
• However, the cigarette tax in Virginia is just $.30 a pack, so smugglers can buy bulk quantities of cigarettes in Virginia and sell them in New York and other high-tax states at a huge profit.
• This smuggling process is a racket known to police as “smurfing,” according to The Economist.
• The math is simple and attractive: A pack of cigarettes legally sold at retail in NYC is $5.55 more expensive than a pack sold in Virginia, all other things being equal. Thus, there is a whopping $5.55 gross margin profit on each pack that a smuggler can work with when buying in Virginia and selling in New York.
• Other low-tax states include Louisiana (36 cents), Georgia (37 cents), and North Carolina (45 cents), while Rhode Island imposes a $3.46 tax, and Connecticut a $3.40 levy.
• According to the article, in New Jersey, which imposes a tax of $2.70 per pack, about 40% of all cigarettes are reportedly smuggled in from Virginia and other states.
• Thus, raising state government taxes on cigarettes in New Jersey probably cost the state a lot of money since the revenue base on cigarette sales went down 40%.
• The Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that illegal cigarette sales cost local, state and federal governments nearly $10 billion a year.
• Profit margins for cigarette smugglers are better than from cocaine, heroin, marijuana or guns, according to the Virginia State Crime Commission, and criminal penalties are far lighter than for drugs — five years in jail under Federal law, compared to possible life in prison for smuggling heroin.
• Virginia recently made it illegal to buy and possess, with intent to sell elsewhere, more than 5,000 cigarettes.
• But smugglers can easily fit 600 cartons, 120,000 cigarettes, in a car, which makes it easy for law enforcement to miss.
• If there are 10 packs of cigarettes in a carton, and the tax difference gross margin is $5.50 a pack, just one car load has the potential for a gross margin haul of over $3,000 before expenses.
• Pack up an SUV or truck and you are likely into the hundreds of thousands of dollars per haul.
• Interstate 95 earned the moniker “iron highway” when gun-running along the Atlantic Coast was at its peak, The Economist adds, but now “it is the new Tobacco Road.”

Rather than solve the root cause of cancer deaths from cigarette smoking, government and the political class take the easy but incorrect route of raising taxes. This leads to less tax revenue but no less smoking, as criminal elements take advantage of the raised taxes to skim profits for themselves. To solve this problem you have to change the behavior, not raise taxes.

Same thing with out of control government spending. You do not solve the problem by raising taxes, you solve the problem by changing the bad behavior, spending too much.

Consider another example, this one from Illinois. A primary driver of the chronic Illinois state budget deficit is a state employee public pension liability of $80 billion. Unfortunately, the state political class has so mismanaged the financial aspects of the pension program that only about 51% of the $80 billion pension liability is funded. This is the lowest coverage of any state in the union.

To combat these budget shortfalls, about a year ago the Illinois state government raised corporate taxes from 7.3% to 9.5%, a 30% increase, and increased the personal income tax rate from 3% to 5%, a 67% increase. The new state corporate tax rate gave the state the seventh highest corporate tax rate in the country.

However, the state government did not address the real root causes of their problems. It was not that they did not tax their state residents and businesses enough, the state politicians were spending too much relative to their tax streams. One could have predicted at that time that this was not going to end well since both businesses and individuals had the option of moving to less taxing states.

According to news reports several months after the higher tax rates took effect, at least six states were actively courting large businesses that were currently located in Illinois, trying to get these businesses to relocate their businesses and the related jobs to their states. As a result, these same businesses are using the out-of-state courting to pressure the Illinois state government for large tax breaks in return for them not leaving the state:

• Motorola was offered $100 million in state tax breaks to keep its operations and 3,000 employees within Illinois.
• The truck and engine company Navistar has already received $65 million to stay in Illinois.
• Sears has threatened to move its 6.000 employees out of Illinois unless the tax incentives it currently enjoys, courtesy of the state government and residents, is renewed when they expire in 2012. The state of Ohio has already offered Sears a package of tax breaks worth $400 million if Sears was to relocate to that state.
• CME Group, which operates the Chicago Mercantile Exchange, and CBOE, another financial trading company, are also asked for tax relief.

Thus, the state is putting itself right back where it started. It raised tax rates and businesses threatened to leave the state or actually left the state, reducing overall tax revenue despite higher tax rates. The state had to bribe some of these larger businesses to stay in Illinois, offsetting a lot of the revenue it gathered from the higher tax rates.

Sound familiar? The Illinois state politicians never solved the root cause of their budget deficits, they spend too much money. They mistakenly raised taxes and immediately had to turn around and return some of those increased taxes to keep businesses in the state. Thus, higher tax rates, lower tax revenue, and still budget deficits.

One last example that is starting to unfold, this one in California.
However, first let’s set the stage for what happened in that state last month:

• In November, Californians voted on Proposition 30 which raised the tax rates on a whole slew of California state taxes including taking the top income tax rate to well over 10%, the highest in the country, and raising the sales tax rate.
• During the run up to that election, Gov. Jerry Brown and supporters of proposition campaigned and assured voters that there was no possibility at all that raising state taxes again, this time to astronomical heights, would drive away any of the state’s businesses or wealthier citizens.
• Brown went so far to commission a study from the Stanford Center on Poverty and Inequality which, not surprisingly, found that millionaires would rather stay put than let even higher tax rates drive them away.
• The California mainstream media backed up these assumptions with stories assuring readers that California could continue to tax the rich without any dire consequences.

Their sales pitch and promotion campaign worked since the proposition was passed. But last week, State Controller John Chiang announced that the state’s revenue for November came in a whopping $806.8 million under projections. This is more than 10% under budget for the month.

The breakdown of the trouble is a very high $842.5 million plunge in personal income taxes, $187.8 million decrease in corporate taxes, offset by an increase of $99 million in sales taxes. Now, one month of very, very bad tax revenue results immediately after the election, and before the tax raises have actually taken effect, is not a trend.

For all we know, this is just a one time anomaly in the tax revenue stream and we will see that Brown and the state legislature was right to raise taxes. But, based on the experiences in Illinois, England and Maryland, do not be surprised if the same situation occurs here, richer people and businesses doing what is right for themselves and shielding their wealth from the higher rates.

Whether it is moving, switching to non-taxable investments, or just evading taxes altogether, this is not likely to end well for the people of California. Why? Because the root cause of the California budget problems is not enough tax revenue, it is too much spending.

The lesson to the political class that run the different levels of government and the people that vote them in: running a low debt, low tax government operation is the best way to have a growing population, a growing economy, steady job creation, and stability. Anything else is stupid, no matter how fair or unfair you think it is and regardless of what President Obama says. Because let’s face it, his economic track record is a pretty sorry record:

1. Failed economic stimulus program
2. Failed Cash For Clunkers program
3. Failed Cash For Appliances program
4. Failed HARP mortgage salvation program
5. Failed alternative energy investment programs
6. Failed small business investment incentive program
7. Failed financial industry reform legislation (Dodd-Frank)
8. Failed health care reform legislation (Obama Care)

Tomorrow, we solve the entire economic problem facing the country, without raising taxes.

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