Whither Taxes?*

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If you’re the “average” American, 2017 tax reform means that your taxes have gone down a bit … although they’ve gone up for those unfortunates, whether or not “average,” who live in the wrong States and cities.

Taxes soon eventually will be going up for everyone. Today’s Federal budget deficits will have to be paid. The only way to do so will be with tomorrow’s tax increases.

The Tax Cuts and Jobs Act of 2017 was targeted at providing a tax subsidy for political allies cutting taxes for taxpayers who live in States (and engage in the sorts of businesses, like real estate) that vote primarily for Republicans (Red State residents) and penalizing raising taxes for residents of States that vote primarily for Democrats (Blue State taxpayers). The principal mechanism for doing so was eliminating deductions for state and local taxes. This targeted Democratic-leaning States like New York, California, Illinois, Connecticut and New Jersey. Blue States generally have higher tax rates. They use the additional taxes to provide generous services and facilities that Red States don’t provide or that they provide at more modest levels. These Blue State benefits include liberal pensions and annuities for state employees, supplemental Medicaid benefits, childcare subsidies, supplemental benefits for the disabled, the needy, veterans and the elderly, subsidies for pre-school and university education, infrastructure projects and incentives, prison construction and maintenance, etc., etc., etc.

If you live in a Blue State and you’re not in a favored industry, your taxes have gone up significantly. If you continue to live in a Blue State, they’re going to go up even more. If you live in a Red State, your taxes likely have gone down. They’re not likely to go up over the next few years.

An over-simplification would be: If you live in a Blue State, move to a Red State.

If enough people do so – moving from Blue States to Red States, some Red States will turn blue Blue, which isn’t at all what the drafters of 2017 tax reform intended. A sufficient movement of taxpayers from Blue States to Red would have far-reaching national policy consequences. It also has serious State-by-State consequences.

New Jersey’s experience with its then-richest single resident provides a chilling thought-provoking example. New Jersey in 2016 taxed its wealthiest residents at a top rate of 8.97{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. It also has the country’s highest property taxes. When its richest resident in 2016 relocated (and moved his business as well) to a Red State in order to save tens of millions of tax dollars per year, it created a budget hole that could be balanced plugged by the State of New Jersey in one of two ways: either by reducing expenditures, or by increasing its tax rate. New Jersey chose the latter – reducing expenditures would have alienated too many voters and thereby endangered incumbents’ re-election prospects. It now has a 10.75{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} tax rate for taxpayers who earn more than $5 million. It also increased its corporate tax rate on businesses that earn more than $1 million from 9{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} to 11.5{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. Surprisingly to The Lonely Realist, it did so in the belief that this would balance its budget – it didn’t – and would not incentivize other wealthy New Jerseyians to migrate – it did. New Jersey has lost 1 million of its residents since 2010, the highest percentage of any State. Assuming that people act in their own benevolent self-interest (a basic principle of capitalism), it doesn’t take a crystal ball to forecast what is likely to happen to New Jersey’s budget deficit going forward. What will happen nationally if tax revenue in high-tax Blue States is hollowed out by a similar exodus of the wealthiest residents?

A high percentage of the wealthiest Americans – the proverbial 1{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} – have almost unlimited flexibility in choosing where to live. Many own their own businesses. Their residency and the residency of their businesses not only means that they and their businesses pay taxes and consume goods and services in the same State, it also means that their employees pay taxes and consume goods and services in that same State. When they relocate, most often their businesses and employees also relocate. The negative impact of their departure therefore pyramids – and the abandoned States suffer pyramiding budget deficits.

Middle class and poor Americans do not have the same mobility. They cannot easily pull up their roots and relocate, a change from the tremendously mobile American society of the mid-20th Century. Census Bureau statistics show that “[t]he percentage of Americans moving over a one-year period fell to an all-time low in the United States … in 2016,” a percentage that has been steadily declining for decades. The decline in labor mobility means that middle- and lower-class Americans are quite likely going to remain in their Blue States. They are less able to pick-up and pursue opportunities elsewhere. This is true not only because they lack labor mobility, but also because Blue States are where they receive more generous benefits and entitlements. Blue States therefore are likely to become Blue-er.

If New Jersey is representative of how Blue States are going to respond to increasing budget deficits – and that appears to be the case as New York, Connecticut, Illinois and Rhode Island, among others, also are raising taxes rather than reducing entitlements to plug budget shortfalls –, there are two obvious consequences. First, since the exodus from Blue States to Red States will continue, some States will tip from Red to Blue. This will change the national political landscape. Second, Blue States will become radicalized as tax collections shrink, budgets are cut, services are reduced and infrastructure is allowed to decay. Residents will be feel powerless. They will demand change at the national level. AOC, Trump and similarly-inclined populists will do their best to capitalize on the anger. Socialism, anti-liberalism and fascism increasingly more extreme “isms” will gain momentum. The contrast between Red State politics and Blue State politics will intensify. That competition may become toxic. Radicalism on both all sides will be substituted for America’s historically democratic moderation and compromise. The country will become ever more divided – geographically as well as politically.

The Tax Cuts and Jobs Act of 2017 threw kerosene on an already raging fire of actual perceived inequality unfairness. Its goal of effecting Federal tax-neutrality among the many States may have been laudable even if the motive for that goal was not. The way to correct the consequences of 2017 tax reform is not necessarily to reverse the repeal of State tax deductions, but rather to address the perception causes of inequality reduced social and labor mobility and a declining faith in American capitalism, American democracy and American principles. Doing so will require strong, bipartisan leadership, something America has found wanting for a number of years. Recognizing that there is a problem is a first step.

A Reader’s Comment on “Elbridge Gerry’s Salamander” in the April 24th TLR:

“Your proposal of a possible legislative solution for gerrymandering doesn’t promote democracy but rather creates more issues as to who are the ÔÇÿindependent advisors’ who will create the electoral districts which will be ÔÇÿfair.’ I’m surprised that people today somehow think that any revision to long-standing rules, laws or principles has to be better than what is being replaced, that what is being suggested somehow is better and more democratic than what the Founding Fathers created 230 years ago.”

“Since 1789 there have been gerrymandered districts and we have the Due Process clause to protect against discrimination. We are a federal republic and each State should decide its election districts and leave the dysfunctional Congress to stay within its constitutional bounds as it politicizes everything it seems to touch. I don’t want Ocasio-Cortez to have any say in what my election district is in Florida and bet that if put to a vote the democratic way the vast majority of voters would feel exactly the same way.”

“Usually the districts sort themselves out over time and the result may not be pretty but it is far better than any independent group outside the political arena interfering with the political process. If you want a country run by specialists look to Europe and then decide if that is what democracy really means. I think not, and certainly not for the U.S.”

Finally (from a good friend)

Achieve Inner Peace:

I am passing this on to readers because it definitely worked for me today, and we all could probably use more calm in our lives. Some doctor on TV this morning said the way to achieve inner peace is to finish all the things you have started. So I looked around my house to see things I’d started and hadn’t finished, so I have managed to finish off a bottle of Merlot, a bottle of Chardonnay, a bodle of Baileys, a butle of wum, a pockage of Prungles, tha mainder of bot Prozic and Valiuminun scriptins, the res of the chesescke an a box a chocletz. Yu haf no idr how bludy fablus I feel rite now. Plaese sned dhis orn to dem yu fee ar in ned ov iennr pisss. An telum,u blody luvum!! Xxx

*┬® Copyright 2019 by William Natbony. All rights reserved

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