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“California’s Tax-the-Rich Folly,” by Joshua Rauh
While some seem to believe that high earners can provide unlimited resources, the evidence from prior tax hikes suggests that the introduction of these tax rates is not even likely to raise revenue for the state. At the same time, it will hammer job creation.
The problem is that high earners do not simply sit there and take it when the state goes after their income.
In a detailed study of the 2012 California ballot measure that raised the top state rate to 13.3 percent, Ryan Shyu and I found that just two years later, the state was only collecting 40 cents of every dollar that it had hoped to raise from the tax increase.
The reason?
High income taxpayers affected by the 2012 tax increase suddenly began to flee the state at higher rates, especially to zero tax states like Nevada, Texas, and Florida.
Even more importantly for the state budget, those that stayed began declaring considerably less taxable income than they would have otherwise, apparently either scaling back their productive activities or engaging in tax avoidance.
The economist Arthur Laffer has famously argued that there is a tax rate beyond which a government’s revenue will decline if it raises taxes further, due to the disincentive effects of high taxes.
While the federal government may be helped by limits on what American citizens can do to escape federal taxation, state governments tread on much thinner ice when faced with the ability of taxpayers to move their residences and their earnings generation to other states.
In another study, Xavier Giroud and I found that each percentage point increase in individual tax rates that the average state implements leads to losses of up to 0.4 percent of all non-corporate jobs in the state.
Starting from California’s already astronomical top rate, the impact would be expected to be even larger.
These job losses will negatively impact the well-being of Californians and further reduce state tax revenues.
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