Two recent stories in the WSJ dramatically illustrate once again that people respond to incentives. And taxes are incentives.
The first story suggests that one reason LeBron James might have chosen to go to Miami is to avoid the punitive taxes in the other places he was considering—especially Ohio and New York. The income tax rate in Ohio is just over 7%, and the rate in New York is set to become a whopping 12.85%. Florida’s income tax: zero. For someone about to make approximately $100 million in salary over the next five years, that amounts to a $7 million and a $12.85 million premium just for the privilege of living in Ohio or New York, respectively. I’m sure James’s first concern was basketball, but he’d be a fool not to consider these huge tax differences; and James is no fool.
Some Cleveland fans are pretty upset with James’s decision, pointing out that they were offering him $4 million per year more than what Miami offered. But even with that extra money, James would still end up about $1 million per year in the hole if he stayed in Ohio—solely because of the taxes. Some people in New York are suggesting that disappointed fans might direct some of their ire toward Albany, which has engineered the tremendous penalty for living in the state of New York.
The second story relates that with the federal estate tax set to resume at much higher rates as of January 1, 2011, people who are wealthy face the perverse and agonizing incentive of contemplating whether to commit suicide before the end of the year so that their heirs do not face a tax bill that could come to millions of dollars. As one 81-year-old Iowa businessman puts it: “You don’t know whether to commit suicide or just go on living and working.”
The tax disappeared in 2010, creating an incentive to live, but its return in 2011 is creating, as actual people in affected situations are putting it, a “death incentive.”
It is not exactly news that people respond to incentives, or that the tax structure creates a system of incentives in response to which people will alter their behavior. Just because a new tax being proposed does not affect you does not mean it affects no one. As William Graham Sumner argued, every dollar that the government raises through taxation is a dollar taken from someone, somewhere. You may not know the person from whom it is taken, and you may not care about him; he is effectively a “forgotten man.” But he labors under the burdens we place on him.
I suspect that some base motives are involved in our desire to tax the rich. When listening to people argue for such taxes, one often detects a faint whiff of—what is it? Is it envy and jealousy? Is it selfishness? Greed? These are not motives to be proud of. But let us not try to convince people to stop feeling these base instincts. Instead, let us remind ourselves that successful people make our lives much better. The spillover effects of successful people’s achievements come not from skimming ever larger portions of it and putting it in others’ pockets, but instead from the goods, services, and wealth they produce that we all, in turn, can enjoy.
People will always respond to incentives, so it is pointless to assume—as politicians and many in the public seem to do—that people’s behavior will not change no matter what the tax structure is. If you raise taxes on millionaires, they will go elsewhere; this has been proven over and over again.
These considerations lead me to suggest a different tack. Let’s put the fact that people respond to incentives to work for us, instead of working against it. If your state is struggling with its finances, consider, instead of raising taxes, lowering them the more people make. Perhaps institute a maximum threshold: once your income reaches a certain level, no taxes at all. If New Jersey, for example, did something like that, potentially thousands of disaffected wealthy people would flock there from the surrounding states, which would have all sorts of beneficial consequences. It might reverse New Jersey’s currently bleak demographic trends, and, given Laffer-esque effects of lower taxes, it might actually help it address its more-than-bleak fiscal situation.
That might also encourage us not to deepen social division by resenting those wealthier than we are, but rather to appreciate what they do for us and thus increase social cohesion and a sense of community. We might thus all be better off.
And—who knows?—we might even get a good basketball team.