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Conservatively Speaking

State Senator Mary Lazich (R-New Berlin) represents parts of four counties: Milwaukee, Waukesha, Racine, and Walworth. Her Senate District 28 includes New Berlin, Franklin, Greendale, Hales Corners, Muskego, Waterford, Big Bend, the town of Vernon and parts of Greenfield, East Troy, and Mukwonago. Senator Lazich has been in the Legislature for more than a decade. She considers herself a tireless crusader for lower taxes, reduced spending and smaller government.

Soaking the rich backfires

Economy


I quoted highly acclaimed economist Dr. Arthur B. Laffer in my May 23, 2009 blog, “Soaking the Rich.” 

Laffer put it succinctly:

“States cannot tax their way into prosperity.”

Laffer, president of Laffer Associates, and Stephen Moore, senior economics writer for the Wall Street Journal cited a number of states subscribing to the president’s budget philosophy of soaking the rich. They wrote in a Wall Street Journal column:

“Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states. And the evidence that we discovered in our new study for the American Legislative Exchange Council, 'Rich States, Poor States,' published in March, shows that Americans are more sensitive to high taxes than ever before. Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.”

The wealthy move from higher-taxed states to lower-taxed states. There is another negative effect from the simplistic tactic of jacking up taxes for the wealthy. The New York Times reports those with higher incomes are spending less, having a detrimental impact on the economy.

Skittish about the stock market and the economy in Europe, the affluent have tightened their wallets. As a result, the reported recovery is running out of gas, prompting discussion about another federal stimulus.

The New York Times reports, “B
usinesses and economists want to see people of all incomes spending more, because the demand for goods and services would in turn encourage companies to hire workers. The American consumer accounts for an estimated 60 percent of the country’s economic activity. But the Top 5 percent in income earners — those households earning $210,000 or more — account for about one-third of consumer outlays, including spending on goods and services, interest payments on consumer debt and cash gifts, according to an analysis of Federal Reserve data by Moody’s Analytics. That means the purchasing decisions of the rich have an outsize effect on economic data. According to Gallup, spending by upper-income consumers — defined as those earning $90,000 or more — surged to an average of $145 a day in May, up 33 percent from a year earlier. Then in June, that daily average slid to $119.”

Suddenly, the sentiment that we have experienced the worst is gone. Economic anxiety is back.

An economist quoted by the New York Times credits the wealthy for carrying the economy on its collective back and preventing an even worse recession. While the less affluent stopped spending, in large part because of unemployment, wealthier Americans continued to exercise their spending power. The trend is dissipating as those with higher incomes are starting to pull back. America’s economic recovery is the loser.

The New York Times has more details.

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