Competing For Tax Revenue

Wealthy Brits are buying homes on the island of Guernsey, says The Economist,  so they can easily move there if Jeremy Corbyn is elected.  Corbyn wants to apply the 45% tax rate to those making just $105,000, and establish a new 50% rate.  And create a wealth tax, and raise the tax rates on inheritance and capital gains.  And extend the 20% value-added tax to private-school tuition and put a tax on all financial transactions.

Guernsey’s income-tax rate is a flat 20%, and there are no capital-gains taxes or inheritance taxes.  Income-tax rates are even lower for residents of the Bahamas, the Cayman Islands, Bosnia, Guatemala, Hong Kong, Hungary, Macau, Monaco, and Montenegro.  The point is that wealthy people can easily escape increased taxation.  If taxes are raised to levels they feel are unfair, they will move to a more-friendly jurisdiction.

In most of the 1950s the top income tax rate in this country was 91%, but we didn’t collect much in tax revenue.  A chart provided by the St. Louis Fed shows that federal tax collections in those years averaged about 16.5% of GDP.  From 1988 to 1992 the top U.S. tax rate was 28% and 31%, but revenues were higher.  In those years we collected about 17.2% of GDP. 

State taxes are the same way.  Most Americans pay less than $10,000 in state and local income tax, so they’re not troubled by the new limit on deductions;  but wealthy people in high-tax states find it very painful.  They’re discovering that they can save real money by living 6 months of the year in a second home in Florida or Nevada.  Expect annual budget shortfalls in New York, Vermont, and Oregon;  and a crisis in California.       

The average taxes paid by Californians aren’t very high, but the rich pay at rates that top out at 13.3%.  “The top one percent income earners in California pay 48 percent of the state’s income tax” says Tom Campbell, a professor at Chapman University.   If a third of those one-percenters leave, it’s going to put a gigantic hole in the state budget. 


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