Eureka! Overtaxation leads to Unintended Consequences

Editorializing about the "Charitable Conundrum," the ProJo provides this bit of evidence that some Democrats may (finally!) be learning about basic economic principles:

The opening years of the 21st Century have not been happy ones for many nonprofits in Rhode Island. High taxes have driven many rich people away from the state, for at least more than half of the year, and with them went the charitable dollars that are crucial to helping our neediest citizens and maintaining the region’s quality of life.

Matters were made worse by a 2001 state Supreme Court ruling that found that charitable giving could be used to determine residency for tax purposes. Since then, accountants have been advising their clients who live more than six months of the year in Florida or other low-tax states: If you don’t want to be taxed as if you live in Rhode Island, don’t give a cent here.

Thus, we highly commend Senate Majority Leader Teresa Paiva-Weed and House Majority Leader Gordon Fox for filing legislation to address this problem. Under their bills, no longer could Ocean State tax authorities use charitable gifts as a weapon against the givers.

It is encouraging to see these State House powers demonstrate such a grasp of reality. They have apparently come to realize that in a free society where people are allowed to live where they want, slapping more taxes on people does not always generate more tax revenue — it may merely prompt the well-off to take their money elsewhere, often to Florida and other Sunbelt venues but also to such lower-tax states in our region as New Hampshire — and, yes, Massachusetts. The apparent decline in charitable giving in Rhode Island underscores the law of unintended consequences.

For example, in a perfect liberal world, we could tax all corporate profits, say, 50% (yes, I know they'd probably really prefer closer to 100%, but this is just an example). So, if a company made $1 million, well, cool! The state would get $500,000. Awesome! But wait, what if the company decided they couldn't afford this because--surprise--they wanted to keep more of their money? (It is their money, too. Not the government's). Such a high tax rate would be a big enough disincentive to convince the company to relocate to, say, Massachusetts. So now, that 50% tax rate is applied to one less company. And 50% of $0 is still $0. RI wouldn't get anything and all of those programs would be underfunded! Bad company! How dare they want to keep their own money! So, how can we keep companies (or people, for that matter) from moving?

Simple, have a competitive tax rate. It doesn't even have to be less than our neighbors, just close enough to be competitive. (But if you really want to attract business, you make it less). And, to paraphrase my comment made on an earlier post, it is better for working families if the state becomes more business friendly and tax-competitive. As more businesses come, they compete with each other for RI workers and maybe even attract out of state workers. This increased competition for workers would translate into higher wages. This would lead to higher taxable incomes and, thus, higher revenue. The end result? A broader tax base with steadier revenue from more workers making more money working for more companies. And all of that money could be used to help out those who are less fortunate.

The theory really is that simple. So why can't liberals grasp this? Despite all of their protestations of being intellectually superior, they continue to betray a particular ignorance of basic economic theory, don't they? Instead, their first response is always to tax and tax and tax, paying no heed to the aforementioned "law of unintended consequences." But it takes some time to get the word out the RI is now business friendly. That's why the State has been offering tax incentives to businesses who want to relocate here. Remember, RI has a reputation to overcome. That won't happen overnight.