Pur Autre Vie

I'm not wrong, I'm just an asshole

Saturday, April 30, 2016

The Great Man Theory of Tax Revenue

It appears that David Tepper's move from New Jersey to Florida is going to cost New Jersey hundreds of millions in tax revenue.

I think this story is important for a number of reasons.  Most obviously, it highlights the extreme disparities in wealth that have developed in our society.

Also, you sometimes hear the argument that it is futile to tax the rich because rich people are able to avoid taxes anyway.  That argument is wrong in its stronger forms—if David Tepper could easily avoid taxes, then he wouldn't pay hundreds of millions of dollars in taxes to New Jersey in the first place.

Of course it is true that Tepper can avoid the taxes by moving to Florida.  This is another reason the story is important.  Redistribution at the state or local level is very difficult precisely because rich people can simply move away from high-tax jurisdictions.  This is not to say that states shouldn't do their best—as the article notes, New York, California, and New Jersey all continue to attract wealthy people despite high taxes.  But there are limits on the degree of redistribution that is supportable at a local level.  (This can be seen in a state like Maryland, which is incredibly rich and yet suffers extreme poverty.)  The limits are far less restrictive at the federal level, which is why I've argued for higher federal taxes, with the extra revenue going to states and local governments so that they can provide adequate services without resorting to highly regressive taxes and other regrettable policies like aggressive asset forfeiture.

But finally there is a perverse phenomenon I want to highlight.  As taxes on the very rich increase, the government becomes dependent on them in a way that potentially threatens public policy.  From the article:

Mr. Sullivan [a Connecticut official] said that when one of the state’s rich hedge fund executives planned to move his family and company to a lower-tax state, state officials met with him and persuaded him to leave some of his work force in Connecticut. 
“We knew we were going to lose him,” Mr. Sullivan said. “But we wanted to keep some of the higher-paying jobs.” He said the state worked out a deal to keep the jobs in exchange for an agreement about the owner’s regular visits to family and friends in Connecticut. (Homeowners who spend more than 183 days in the state are considered residents for tax purposes.) He said the state was holding discussions with other top earners in hopes of keeping them. 
“I’m not saying we’re sending fruit baskets and get-well cards,” said Mr. Sullivan, a former Democratic legislator. “But we’re trying to send a more welcoming message to the high earners as a group.”
I hasten to point out that this is not a reason to avoid high taxation.  Better to impose high taxes and then give small concessions than to forego the revenue in the first place.  But inevitably there are going to be distasteful compromises (much like the tawdry deals that attract professional sports teams), and this is a more-or-less inevitable consequence of the situation in which we find ourselves.


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