The statement that raising taxes often lowers tax revenues seem to be anti-logical. If the government raises tax rates shouldn't it follow that tax revenues also should rise?
Well not necessarily. This logic often falls flat because it makes a large assumption: tax payers will behave identically after a tax increase as they did before. The beauty of capitalism is the ability for capital to move from one person to the next, from one business to the next or from one location to the next. This free flow of capital is what makes for a robust economy. If Bob's baseball card deal is the same as Billy's but Billy's is less expensive, then Billy gets the sale. No one forced us to buy from Bob who had more expensive deal, so we went with Billy. The same goes for businesses and taxes. When a businesses' tax burden becomes too great, businesses will look for a more tax-friendly location.
People behave the same way — just look at California. California has the highest taxes in the nation. You would think they were doing well then. Well not really. Tax receipts were down 22% this past February compared to February 2011. What happened? Both people and businesses continue to leave the Golden state for more friendly havens. According to Spectrum Locations Consultants,
254 California companies moved some or all of their work and jobs out of state in 2011, 26% more than in 2010 and five times as many as in 2009.
The Top Ten reasons businesses are leaving California are
- Poor rankings in surveys
- More adversarial toward business
- Uncontrollable public spending
- Unfriendly business climate
- Provable savings elsewhere
- Most expensive business locations
- Unfriendly legal environment for business
- Worst regulatory burden
- Severe tax treatment
- Unprecedented energy costs.
So when we hear the Wizards of Smart in Klamath County claim that the answer to solving fiscal problems is to create a new taxing district to raise the funds necessary to save their cause, we should ask them to put on the brakes for a moment and to think. By raising taxes what businesses will they encourage to leave the county? By raising taxes what businesses will the discourage from coming to the county? By raising taxes what businesses will they prevent from expanding (because government took the revenue that the business would have used for expansion)?
The big elephant in the room is Jeld-Wen. One of the economic cornerstones of Klamath County, Jeld-Wen is no longer is principally owned by one man who loves this county. So the more Jeld-Wen hears that Klamath County will be needing more of their wealth to help government solve its fiscal problems the more likely the search will be to find a more pro-business location? If you don't think this is a real possibility, then let me introduce you to my friend Bob — he has a baseball card he'd like to sell you.