5/28/09

Stage Two, nobody's grinning

In the book Applied Economics: Thinking Beyond Stage One, Thomas Sowell wrote that most bad public policies are a result of political decisions that consider “policies, institutions, or programs in terms of their hoped-for results” rather than the “actual characteristics of the processes set in motion.” If you've read a lot of Sowell then you may recall that he made this point in his 1980 book Knowledge and Decisions.

Politicians will only consider Stage One--the contrived press conference, the pretty press release pronouncing the great hoped-for results, the alleged short-term benefits, the clear beneficiaries. They don't address the long-term consequences of such policies or "invisible victims." Sowell highlights Stage One thinking when it comes to things such as business tax increases, price controls, minimum wage laws, anti-discrimination laws.

Snipped from a Cato Institute review of the book: In stage one, government raises the minimum wage, and entry-level workers get a pay increase. In stage two, fewer marginal workers are hired as employers stretch the existing staff to work harder and longer. Further down the road in stage three, the companies re-structure their operations and invest in labor-saving equipment, substituting capital—now relatively cheaper—for the more expensive labor.

To connect this to an issue in the news now: In stage one, a major increase in business taxes may meet its immediate goal of boosting the revenues collected by a city, county, or state government. But not too far down the road, in stage two, companies experiencing higher costs and diminishing profitability will begin to shift existing production to other locations. And in stage three, many companies already affected by the tax and others that might be looking for a plant or office site will choose to locate their facilities elsewhere.

Or, if we can believe the Wall Street Journal:
http://online.wsj.com/article/SB124329282377252471.html
Maryland couldn't balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis 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."

One year later, nobody's grinning. 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. No doubt the majority of that loss in millionaire filings results from the recession. However, this is one reason that depending on the rich to finance government is so ill-advised: Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey (see here).

The Maryland state revenue office says it's "way too early" to tell how many millionaires moved out of the state when the tax rates rose. But no one disputes that some rich filers did leave. It's easier than the redistributionists think. Christopher Summers, president of the Maryland Public Policy Institute, notes: "Marylanders with high incomes typically own second homes in tax friendlier states like Florida, Delaware, South Carolina and Virginia. So it's easy for them to change their residency."

All of this means that the burden of paying for bloated government in Annapolis will fall on the middle class. Thanks to the futility of soaking the rich, these working families will now pay Mr. O'Malley's "fair share."

* * *

Or, as I've been saying for years...once I realize an ass-whipping is coming, don't expect me to show up on time for the scheduled event...

CJL