This is must see viewing from the CATO Institute:

“…for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle.” – Winston Churchill

From Monday’s Wall Street Journal:

Here’s the problem for states that want to pry more money out of the wallets of rich people.  It never works because people, investment capital and businesses are mobile:  They can leave tax-unfriendly states and move to tax-friendly states.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas.  We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

We believe there are three unintended consequences from states raising tax rates on the rich.  First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state.  Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place.  This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.

Soak the Rich, Lose the Rich by Arthur Laffer and Stephen Moore

HT:  Carpe Diem

(Via MoreNewMath.com)

Many folks have called me this year worried about paying higher taxes in the future and have asked about “tax havens.” 

Below is an excellent report about that by Dan Mitchell at the CATO Institute on behalf of the Center for Freedom and Prosperity.

Dr. Mark Perry and Brian Wesbury are both very good economists that I like.  This past week the two have been going back and forth on the concerns of inflation. 

On Tuesday Brian wrote this editorial in the Wall Street Journal.  Here are a few highlights:

Today’s problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s.  The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly. 

As is so often the case, after the Fed has acted, but before the typical lag in monetary policy has fully played out, conventional wisdom argues that the Fed has become impotent.

. . .

One of the reasons that monetary policy is so loose today is that our economy is addicted once again to easy money and low interest rates.  We hear over and over that the Fed cannot tighten because the housing market and the economy are vulnerable.  This was the same argument made in the pre-Volcker 1970s, when the U.S. bounced from one economic crisis to the next.

Shortly after, Mark countered with this post on his blog and then he added another post to address Brian’s comments.        

My Thoughts:  Both arguments have validity, hence, in the short term, I can argue either way.  In the long term, politicians will be politicians, and as long as there is no restraint (such as a gold standard) there WILL be inflation because it’s a hidden tax, and politicians will take advantage of it. 

According to the “Wall Street Journal,” Washington is teeing up “the rich” for a big tax hike next year, as a way to make them “pay their fair share.”  Well, the latest IRS data have arrived on who paid what share of income taxes in 2006, and it’s going to be hard for the rich to pay any more than they already do.  The data show that the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history.

The nearby chart shows that the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years.  The top 10% in income, those earning more than $108,904, paid 71%.  Barack Obama says he’s going to cut taxes for those at the bottom, but that’s also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%.  Perhaps he thinks half the country should pay all the taxes to support the other half.   

Aha, we are told: The rich paid more taxes because they made a greater share of the money.  That is true.  The top 1% earned 22% of all reported income.  But they also paid a share of taxes not far from double their share of income.  In other words, the tax code is already steeply progressive. 

My Thoughts:  The average American today works from January 1 to July 16 just to pay for government before they begin working for themselves.  Isn’t it ironic that just a few weeks ago we celebrated the Fourth of July, a national holiday that honors early Americans who rejected an oppressive tax system?

We once had a Democrat President who understood economics and the relationship between tax rates and tax revenue.  Can you imagine the liberal loons of today using similar rhetoric?

(HT: http://www.cato-at-liberty.org/) 

All too often when listening to a group of people casually discussing the topic of taxation, I’m reminded of the old saying, “All the world’s insane but thee and me, and sometimes I’m not so sure about thee.”

That’s because those who follow a statist (big government) agenda tell me that to soak the rich, we must increase their taxes.

Now I consider myself a rather open-minded, rational guy but when I’m confronted by an ideology that differs from my own, I want to see evidence.  Show me the proof that back up your claims. 

MAJOR PROBLEM:  In the case of taxing productivity, there isn’t any proof.  I’m done extensive research and there is nothing that shows me that the benefits of increasing taxes on the wealthy outweigh the costs. 

No surprise there since in today’s world most people blindly follow a traditional socialist model:  our progressive tax system. 

200 years ago early Americans would have overthrown their government had they been forced to pay a tax on their production.  The only federal taxes forced on them were on tobacco, liquor, and imports. 

Present day Americans are simply lifetime tax servants to an ever-growing Master in Washington, D.C. and they love it. 

So here’s a modern history reality check:

• In the 1920s when President Calvin Coolidge cut taxes, the US economy grew faster than Nebraska corn.
• When JFK cut taxes in the 1960s, America went from having one car on every block to having one car in every garage. 
• Ronald Reagan’s tax cuts in the 80s helped move us from a demand-management, consumption-oriented society to one that stimulated capital savings, investment, and production.

Translation:  Tax cuts result in healthy wealth creation for all citizens. 

One of the most inspiring individuals I studied early in my career was free market thinker Ludwig von Mises.  If you have any interest in fiscal policies that big government thugs prefer you not understand, I recommend reading anything written by him. 

In his book, PLANNING FOR FREEDOM, von Mises writes:

If the present tax rates had been in effect from the beginning of [the 20th] century, many who are millionaires today would live under more modest circumstances.  But all those new branches of industry which supply the masses with articles unheard of before would operate, if at all, on a much smaller scale, and their products would be beyond the reach of the common man.

Fast forward to 2007.  Looking back on the tax cuts of 2003 we learn that even though the tax rates of higher income individuals were reduced by 50 percent, the amount of taxes collected on the wealthiest Americans has almost doubled. 

And one more thing, the budget deficit has fallen.

It’s precisely what history teaches us – cut taxes on the wealthy and revenues to the Treasury soar.  That’s good fiscal policy. 

So what does this all mean for investors?

Depends.  Most will continue their “government will save us” thinking and hope for the best.  You and me are better off taking an anti-statist, self-educated approach to managing our financial lives and informing as many people as we can along the way. 

Check out Part I of this brief tutorial from the Cato Institute’s Dan Mitchell explaining the relationship between tax rates, taxable income, and tax revenue:

For more, see Part II and Part III.