December 7, 2011

Lefties Love the Static Quo!

California Gov. Edmund Gerald "Jerry" Brown, jr. (son of former California Gov. Edmund Gerald "Pat" Brown, sr.) is pushing hard for a big, punitive state income-tax hike on "the rich," meaning the top 1% -- who pay nearly 50% of California income tax.

New York Gov. Andrew Cuomo (son of former New York Gov. Mario Cuomo) just cut a deal to raise taxes an extra two percent (from 6.85% to 8.82%) on those earning $2 million per year or more.

And numerous other blue states are seeking to do the same... as is, of course, President Barack H. "Lucky Lefty" Obama (son of no one).

One thing all these economically challenged chief executives have in common is their inability -- or unwillingness -- to grok the idea of dynamic economic analysis, and their subsequent slavish devotion to static analysis. That is, they assume that a new tax policy will not itself alter people's tax-avoidance behavior. Or else they pretend to assume it, as it helps their duplicitous schemes; I lean towards the latter explanation.

Their real or feigned "reasoning" goes thus:

1. We have a state income tax of 7% that brings in $10 billion.
2. We have a budget shortfall of $2 billion.
3. Therefore, all we need do is raise taxes to 8.4%; if 7% brings in $10 billion, then jacking it up by 20% of that 7% -- by 1.4% extra -- will surely bring in $12 billion.
4. Problem solved! Q.E.D.

Leave aside for a moment the first obvious point: No such plan has ever or will ever allocate all the extra money to deficit reduction; even if it seems to do so and is actually written into the law, money is fungible... and the state legislature (or Congress) will simply increase other spending... thereby increasing the deficit by even more than it was reduced by revenue from the new tax. But we're not here to talk politics; let's just stick with the tax itself for a moment.

The syllogism above is a perfect gem of static analysis: The politicos argue (honestly or mendaciously) that if 7% raises $10 billion, then 8.4% will raise $12 billion. If we continue the argument, then a state income tax of 14% will raise $20 billion, 50% will raise $71 billion -- and if the state would only have the guts to raise its income tax to 100%, that would firehose a whopping $143 billion into the state coffers!!1!

Which points out (a) the absurdity of the naïve static hypothesis, and (b) the proper use of reductio ad absurdum.

It's clear to anyone with more than a couple neurons to rub together that any increase in tax rates will trigger people to engage in more tax-avoidance tactics. It's a no-brainer. And what socioeconomic group do you reckon is best equipped to legally avoid taxes? Yep, that's what I reckon, too: the rich.

For state income taxes, the absolute best tax-avoidance tactic is (drum roll) to move out of the high-tax state into a low- or no-tax state... of which there are plenty; they're called "red states." Until and unless Democrats begin requiring internal passports for travel -- any month now, I expect -- they can't stop the Evile Rich from fleeing California to repatriate in Nevada or Texas.

But beyond moving, the very, very successful also have the unique ability to restructure their revenue stream, shifting it, say, from ordinary income to capital gains, or from American sources to foreign sources, or to delay receipts until a more favorable tax situation presents itself. If need be, they can forgo salaries and such for years without feeling any pain, living off savings or just mooching off friends (who will expect reciprocity in their own time).

The ne plus ultras can engage in tax-reduction activities, taking advantage of "loopholes" that are, in reality, congressional subsidies to lure rich investors into otherwise unexciting ventures. The rich can get their friends to receive their income for a while, then pay it back later. And of course, the rich can afford legal beagles who are paid a hundred times as much as, and therefore are correspondingly cleverer than, the IRS's own pathetic, also-ran tax lawyers.

The ultra-rich are the very people that municipalities, counties, states, and even the feds are least able to reel back in state, should the designated victims decide they're being overtaxed. The Capitalists always win; in the long run, the invisible hand of the market beats the invisible foot of the government every time.

And if worse comes to worst, the little Monopoly guy can just buy a few more congressmen.

Ergo, since such surcharges on the rich are notoriously uncollectable, static economic analysis is as futile a gesture as passing a law declaring pi to be equal to 3.0 (which the state legislature of Indiana, I believe, nearly did); as futile as passing a law declaring that the United States will return to the carbon footprint it had in 1980. Trying to repeal the laws of economics is like trying to repeal entropy: You can make a good show of it for a geological microsecond; but in the end, you're left with nothing but a big bag of fully expanded hot air.

By contrast, those of us willing to use dynamic analysis -- where we assume that human beings will actually respond intelligently to stimuli -- then we already know what happens when states lower, rather than raise, their taxes, whether personal, business, or capital gains, as well as when states reduce regulations and defund the unions (including public-empoyee unions): Money, talent, genius, and especially people pour into the newly financially attractive state, the new free-trade zone; this in turn causes an economic sonic boom.

But don't expect any of that from elected liberals. I've long been convinced that they're neither stupid nor ignorant of economic laws; they just reject market reality and substitute their own, imposed by executive fiat.

That, in a nuthouse, is what Michael Barone means by calling Obamunism "gangster government."

Hatched by Dafydd on this day, December 7, 2011, at the time of 1:01 AM

Comments

The following hissed in response by: snochasr

The above hissed in response by: snochasr at December 7, 2011 9:39 AM

The following hissed in response by: Dafydd ab Hugh

The above hissed in response by: Dafydd ab Hugh at December 7, 2011 11:50 AM

The following hissed in response by: snochasr

The above hissed in response by: snochasr at December 8, 2011 7:36 AM

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