Wednesday, May 20, 2009

Driving Away High Earners

If I told you a company was considering adopting a new policy that reduced the compensation of its most productive employees, what would you predict to happen? Some of those employees would probably leave to go to companies that don't have such policies. And, you would probably question whether this policy was a particularly good idea.

According to this article from the WSJ, we're seeing a similar effect with individual states raising tax rates on high-income individuals.
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.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

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, New York 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.

1 comment:

  1. Offshore Avoidance of U.S. Income Taxation
    by Timothy Walton

    Introduction

    No person should pay more taxes than the law requires.1 People who use tax shelters and legal loopholes are not unethical.2 Congress made t hose options available in order to influence people in their use of money.3 This page will examine two loopholes available to the United States taxpayer today. One method of avoiding taxes is to incorporate a business concern in a foreign jurisdiction that does not tax income.4 Another method is to renounce United States citizenship.5 This webpage will compare the two loopholes from the point of view of a U.S. citizen with personal income, examining the dangers and benefits of each method. The situation of a corporation seeking to use a t ax haven is extremely complex and beyond the scope of this page.

    Conclusion

    Taxpayers should use all legal methods for lessening the bite of income taxes. Available methods of doing so, including the renouncement of U.S. citizenship or establishment of a foreign company, may entail a significant amount of expense and effort. Remaining within the letter of the law, however, allows the taxpayer and her attorney to sleep well at night.



    © 1996 Timothy J. Walton
    All Rights Reserved

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