Thursday, January 25, 2007

Tax Competition

As Maarek pointed out in his post, Over-Taxed Wealthy Fleeing to Switzerland, there is an interesting situation beginning to play itself out there, namely, Swiss Cantons competing with one another by lowering taxes in order to attract citizens. This is interesting in and of itself, but even more so when one considers that a similar situation is beginning to take shape in the US. As CARPE DIEM points out, several states (Georgia, South Carolina, and Mississippi) are considering repealing their income taxes as a way to spur economic development. (As I pointed out in a previous post, lowering income tax has the effect of removing an economic detterent to actively pursuing the growth of one's productive contribution to society.)

If the states do indeed repeal or lower their income taxes, I expect that they will not have to wait long to see the development heat up. The attraction of low or no state income taxes, which, as everyone knows can cost taxpayers many thousands of dollars a year, will be extremely strong for workers in industries that are either already in these states or soon will be. As well, I expect that a great many workers who can telecommute will be eager to take the states' up on their offer.

If the states lower their taxes, I also expect that we will see a similar effect that we did at the national level, i.e., a tax rate cut will produce a tax revenue increase. On the other hand, if the states repeal their income taxes, I wonder how well the resulting economic development will offset their lost revenue. Obviously, business tax revenue would increase, along with things such as sales tax revenue, but would it be enough? I suppose time will tell. While I know this won't happen, it would be great if the states planned on not making back the money and, as a result, started trimming their budgets.


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