People and businesses respond to incentives, and government policies change incentives. It’s really fairly simple. People, especially the rich, can change how much work they do, where they earn money, how they earn money, and when they earn money.
Just compare the UK’s economic growth before and after the tax-reducing Thatcher government. Or look at the USA before and after President Reagan took office. Reducing the burden which government places on the economy, through tax, is the surest way to promote growth. I have never heard of a country that taxed itself into prosperity. And for a simple reason. If Britain raises capital gains and other taxes, people and businesses will be less inclined to locate their assets in the UK and as a result, jobs, profits and taxes will move offshore.
In the United States, we have 50 states, each of which has its own tax system. The lessons to be learned on how easily people, jobs and businesses can move are profound. Over the past decade, those nine states with no state income tax grew 36 per cent faster than did those nine states with the highest state income tax rates. The nine states with no income tax also had population growth almost 10 per cent greater than the nine states with the highest income tax rate. But even more to the point, the nine states with no state income tax had total tax receipts growth a full 22 per cent greater than those nine states with the highest income tax rates.
This is all common sense, rather than complex economics.
Arthur B. Laffer, no Spectator
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