I am visting California for a few days, and the fiscal/business woes here caused me to reflect on the mentality of those who are industriously ruining the country. The canker is well-advanced in some states — Illinois, say, or California — but the problem is everywhere.
So why are Californians leaving California? What is causing the business bleed? Why was the governor of Texas just here trying to encourage companies to think about Texas in their relocation dreams? Well, the answer lies in what we might call the incentive system.
You may carve it into marble if you wish, because it is not going to change anytime soon. You get more of what you subsidize and less of what you penalize. This means that if you start to fund Centers for the Empowerment of Deaf Alcoholics, you are going to get more of them. It means that if you jack tax rates up past the tree line, you are going to get less of whatever it is you are taxing, which in this case would be productivity.
If tax rates are at just and reasonable levels, which means the phrase “fair share” has not come out of any politician’s mouth for at least twenty years, this means that they are at levels that will not drive business decisions. When tax policy starts to drive businesses to relocate, then by definition I would argue that the tax rates are at punitive levels. And when they are at punitive levels, they do what punitive measures do. They discourage certain behaviors.
Think about it for a minute. Suppose you have a business that might dispose of some substance or other in a non-approved way, and suppose further that there is a government fine of 10K for anybody who disposes of that substance in that way. Why is this fine in place? What is the rationale? Well, the point is to use the threat of taking away ten thousand clams — and the intent is to make them think twice about disposing of whatever that substance was, in whatever way they were going to do it. Makes perfect sense, right?
But now suppose this same business is going to get soaked an additional 50K if they hire one more person, or if they make a bigger profit next year, or if they want to build a second warehouse. Now what? Well, all the disincentives that reside in the fine are still there in the taxes, only to the tune of a greater amount. Not only so, but you have added the element of frustration and anger because now you are fining the company for doing good.
This shouldn’t be hard to understand. Suppose we didn’t use fines as a disincentive. Suppose polluters were flogged in the public square, ten lashes, and then they were put in the stocks and pelted with over-ripe vegetables. All of sudden the river is cleaner, what happened? And now imagine what would happen if we took the owner of Acme Widgets, the guy who just hired three new guys to stock his shelves, which put him over the regulated limit for some agency or other and bumped him into a new trouble realm with the government. This guy gets twenty lashes, and an extra day in the stocks.
And then three months later, we discover that Acme Widgets has relocated to Houston. We don’t understand! What happened? This is a profound mystery! We don’t understand!