Monday, January 27, 2014

Will High State Taxes Drive High Earner Out of State?

It’s a question that every community has to ask itself at some point. Should the wealthy members of society be taxed at a greater rate than those less wealthy? For some states, the answer is clearly yes. For others, state tax for higher earners comes at a cost. Wealthier residents have one less economically fruitful reason to stay in a state that takes away a greater percentage of their fortune than another. Whereas New York City and California, for instance, are happy to impose high state tax on the rich, other states such as Texas and Tennessee have no state income taxes at all. The question remains, which is the better option? 

The benefits

The benefits of taxing high earners are relatively clear. For starters, the state has more money to spend on the things it prioritises for the community. This may mean more revenue for health care and social security for example. Money to fund these kinds of social benefits has to be drawn from somewhere and it seems reasonable that those with higher incomes should contribute more. After all, the wealthy typically enjoy an abnormally high standard of living. In fact, for many of any given state’s richest inhabitants, increased taxation would barely be felt, such is the magnitude of the incomes enjoyed by top earners. If only others could be so fortunate. With growing national debt and the spectre of domestic and international crisis looming, can states really afford not to tax their higher earners? If the recent recession has taught us anything, surely it’s that the problem of unsustainable profit-seeking combined with federal deficit has to be addressed; and soon. One of the obvious steps to be made is to enforce tax laws that reflect the needs of the times we live in, where untaxed millionaires can no longer avoid contributing to state funds some of their own disproportionate wealth. In this way, governments can make steps towards the redistribution of wealth and the containing any disproportionate influence enjoyed solely as a consequence of their affluence. 

The downsides

The rich know how to stay rich. There is the possibility that by altering state tax, higher earners will simply alter their spending in response, an economic phenomenon known as the Laffer Curve. By changing investment and tax behaviours, revenues can even decrease as a result of upping taxes for the wealthy. In general terms this seems obvious; higher taxes means less money to spend and invest and a slowing of the economy, which in turn can mean additional costs, such as support for any resultant increase in unemployment or homelessness, as changes affect poorer members of society. It is important to stay on top of how taxes might affect you, preferably by being connected to tax preparation services. These kinds of taxes, targeted at higher income brackets, can end up hitting the middle classes – particular during periods of inflation. Furthermore, there is no guarantee government will use any additional money it receives to spend and invest efficiently. In fact, it can risk only acting as providing less incentive to careful government budgeting and cutting at a time when governments should be leading the way. The most obvious set-back is the reaction of the rich themselves. Not only can laws whereby the wealthy are taxed at a higher rate than the poor be seen by some to antagonise class differences – there is the very real possibility that richer inhabitants of the state will simply leave, and move to another area where they are taxed less. Lower taxes means more money, more potential profit and more investment opportunities, opportunities that may taken elsewhere should higher earners feel tax rates are too high in the state they currently reside in. 

What to do?

It certainly is a difficult question. Power comes with wealth, and with wealth should come both certain responsibilities. As is well known, federal debt in the US runs into the trillions, as does its annual spending. What the government takes in per year does not even come close to covering its costs, yet alone its debts. Something has to change, and fast. Some states have opted for increased revenues; taxing the rich to alleviate the economic problem. With movements like Occupy Wall Street gaining ground in America and internationally, it is no secret that the top 1% own between 40 and 50 percent of given wealth. These arguments seem convincing, and merit strong consideration. However, other states have argued that the rich already pay a significant amount of total taxes to federal governments, while lower classes sometimes pay nothing at all. Whether or not higher taxes on the rich can go some way to solving current economic difficulties is something that has to be worked out within each state – but undoubtedly, it’s a conversation each state needs to be taking seriously.

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