Taxpayers Are Not Sheep Lining up to Be Sheared

An article last week in The New York Times, "Greek Wealth Is Everywhere, Just Not on Tax Forms," described a wealthy Athens suburb where just 324 households admitted on tax forms that they own a swimming pool. Curious, tax officials obtained satellite imagery of the area and counted 16,974 pools.

Oops. Notwithstanding the claims of many tax-friendly Lansing politicians and their government employee union patrons, it appears that, at least in Athens, taxation really does matter. Why else would so many people hide their assets?

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Taxes matter in other places too. While the academic literature on the subject is mixed — academic literature on most subjects frequently is — reason, logic, history, experience, theory and the preponderance of empirical evidence indicate that even the smallest tax changes really do affect people's behavior. This includes the level of taxation itself. History is full of examples.

In England and Scotland, one can still see the remnants of the "window tax" from the 18th century, which led homeowners to brick up their windows to avoid paying the tax. This was horribly inefficient, as it led people to work by candlelight during daylight hours.

Jumping ahead, a 10 percent luxury tax imposed in 1991 by the first Bush Administration on luxury items including yachts and high-end autos cost more than it generated the first year, as social welfare costs from increased unemployment in the affected industries outweighed the revenue generated by the tax. (Yacht sales reportedly dropped 77 percent.) In that instance, Congress had the good sense to repeal the destructive levy.

Broader, more systematic evidence supports these anecdotal examples. Martin Feldstein's well-known 1998 paper "Can State Taxes Redistribute Income?" is one example. Another, titled "Do Tax Havens Flourish?" looked at low-tax countries and found that they are magnets for foreign investment and enjoy superior growth rates.

The Mackinac Center's own Michigan-specific research has found a link between personal taxes and outbound migration. For every 10 percent increase in Michigan's personal taxes, an additional 4,900 people flee the state every year thereafter. And this is a conservative estimate. In 2007, Michigan's personal income tax rate was hiked 11.5 percent, pushing people and their wealth from our state. Another tax hike would only compound this outbound movement.

Michigan is on the cusp of another budget and tax debate. Expect to hear more self-serving "taxes don't matter" rhetoric in the coming months from government spending beneficiaries loath to give up their perks and privileges, regardless of this state's economic basket-case status.

H/T - George Nastas III