If You Tax Something, You Get Less of It

I hear it time and time again.  Liberals say, “Let’s raise taxes on the rich people.  Just a little bit.”  Then, conservatives answer, “If you raise taxes, you’ll drive people and businesses away.”  We’re going through this right now in Illinois.  In January, the Illinois state legislature raised the individual tax rate 66%, and raised the corporate income tax rate 49%.  Do higher tax rates actually drive people and businesses away?  Or is this just conservative fear-mongers beating their fear drum?

Population change

Just from our state’s experience in Illinois, since the state government raised rates in January, we’ve had a large company each month announce that they’re thinking about leaving the state because of the undue burden.  Caterpillar, Sears, Jimmy Johns, Motorola Mobility, and the CME Group (which runs the stock exchange in Chicago) have all threatened to leave the state to save money.  The CME Group said that they would save $50 million per year if they left the state.  Jimmy Johns contemplated moving their headquarters to Florida, where there’s no income tax.

Most of these companies decided to stay, though.  Why?  A recent article in the Chicago Tribune states that larger companies are getting huge incentives to remain in Illinois.  Motorola Mobility got $110 million in financial incentives to stay in Illinois.  All told, Governor Quinn has handed out over $500 million in tax breaks or incentives to these large corporations after being threatened.

Does this mean that tax policy doesn’t affect individuals behavior?  Not at all.  In fact, it appears that the effect of the tax policy is not to drive the state revenue to where it needs to go (paying off debt, funding services, etc.), but to divert funds to big businesses to keep them in the state.

Let me offer three statements (examples, principles, etc) of how taxes affect behavior:

  1. Interstate moving has been from high-tax states to low-tax states.
    If you look at the most recent census, you see that people have been moving from high-tax states to low-tax states.  Because of the high-tech revolution, business owners are no longer prisoners of geography.  Look at the states where people are going to: Nevada, Texas, Arizona, Florida, Utah, Idaho, Wyoming, Colorado, North Carolina, South Carolina, Georgia, Alaska, Virginia–all low- or no-tax red states.Now look at the ones they’re leaving: New York, New Jersey, California, Massachusetts, Rhode Island, Connecticut, Illinois, Michigan.  People are pulling up roots and taking their businesses with them.  They’re leaving the high-tax states and moving to low-tax states.
  2. If something is cheaper to make in another country, it will be made in another country.
    We all know this from experience.  Wal-Mart outsources to China, because China makes things for less money.  Large companies (and medium-sized companies, and small companies) move their manufacturing overseas, they move their call centers overseas, etc, because they can do it more cheaply.Taxes affect the production cost of goods.  When you raise taxes, you affect how much it costs a company to produce their goods.  If they can produce it for less elsewhere, they will go elsewhere.  The CME Group said that the new tax rates will cost them $50 million per year to stay in Illinois.  Caterpillar told the governor that the new rates will cost them and their employees $40 million per year.  These are not small sums of money!
  3. If you tax something, you get less of it, and when you reward something, you get more of it.
    We tax cigarettes because, at the margins, fewer people will smoke if smoking costs more.  If you tax rich people, you will get fewer rich people.  If you tax income, you will get less income.  If you tax investment, you will get less investment.  If you tax saving, then fewer people will save.  This is Tax Theory 101.

Here’s a closing thought from Mark Perry at Carpe Diem:

Texas eschews while Illinois embraces the Obama model of more government, more unions, more central planning, higher taxes. So it’s not surprising that while Obama’s Illinois flounders, Texas has created 37% of all new net jobs since June 2009.

Illinois is losing a congressional seat as businesses and people leave. Texas is adding four seats as that state prospers. Build it and they will come; tax it and they will leave.”

Question: What structure does your state follow–more taxes or less taxes?  How’s it working out for you?  You can leave your comments by clicking here.

  • http://brocmiddleton.blogspot.com/ Broc

    1.  I know this isnt exacly a response to your post but I wanted your comment. Check out this video by Robert Reich http://youtu.be/JTzMqm2TwgE 
    2.  Also would you support a tax for soda and other junk food if it could be objectively defined?
    3.  Would you support an end to the tax subsidy for corn?

    • http://bobewoldt.com Robert Ewoldt

      1. Let me think about it a little bit, and I’ll get back to you (maybe even do a post on it).  It’s a very well-produced video, but I don’t think it gives the complete picture.  It gives you the picture that MoveOn.org wants to give you.
      2. No, I wouldn’t.  Even though we want less consumption of soda and junk food, I don’t think that taxing it heavily (like we do cigarettes) is the best way to do it.  What about you?
      3. Yes, I would support an end to corn subsidies (and other agriculture subsidies).  Corn subsidies are part of the reason why prices of other food products are increasing (i.e. we’re getting more production of corn, but less production of other foods).  And, corn subsidies are going toward producing ethanol, which is an iffy proposal when it comes to alternative fuels (you have to put more energy into production than you get out).

      • http://brocmiddleton.blogspot.com/ Broc

        1. Well a “complete” picture would be difficult to truly provide in a 2 min video…lol
        2. I would absolutely support a soda tax/ not a junk food tax.  In your own words… We tax cigarettes because, at the margins, fewer people will smoke if smoking costs more. Why would that logic not apply to soda.  Obesity/diabetes is the No. 1 driver of our national health crisis; while we can not lay all the blame at the feet of Coco-Cola and Pepsi, rising consumption of soda over milk, water, and natural juices feeds the problem. 
        3. Holy crap we agree!!!! Yes E85 is not efficient and does not help us become energy independent on any level because of how much fuel is needed to create it.

        • http://brocmiddleton.blogspot.com/ Broc

          I am sure you are aware of the studies documenting the link between consumption of soda and obesity.  http://www.publichealthadvocacy.org/bubblingover.html 

          FINDINGS. The study found that 41 percent of children (ages 2 – 11), 62 percent of adolescents (ages 12 – 17) and 24 percent of adults drink at least one soda or other sugar-sweetened beverage every day. Regardless of income or ethnicity, adults who drink one or more sodas or other sugar-sweetened beverages every day are 27 percent more likely to be overweight or obese. Soda consumption rates vary from county to county and city to city, with dramatic variations between some counties and some cities.

          • http://bobewoldt.com Robert Ewoldt

            Sure, there’s a link, but is it causal? Are people getting fat because they
            drink soda, or is drinking soda something that’s done by people who are on
            their way to obesity? In other words, do fat people just drink more soda
            than other people?

        • http://bobewoldt.com Robert Ewoldt

          2. It’s not that I dispute the evidence that soda is linked to obesity. I
          don’t. However, I’m not sure that the government should be in the business
          of dictating (through the tax code) how people eat. There’s a lot of ways
          that people become obese; I’m sure that soda is not the only cause. Why not
          make them pay for the consequences of obesity, rather than for ONE input of
          obesity? In other words, why not make them pay more for their health
          care? That would be a more market-based solution.

          • http://brocmiddleton.blogspot.com/ Broc

            However, I’m not sure that the government should be in the business of dictating (through the tax code) how people eat…So do you then oppose the cigarrette tax as well?

          • http://bobewoldt.com Robert Ewoldt

            Yes. It’s not something that I hold with a very strong conviction (same
            with a tax on soda). Here’s the problem that I have with the cigarette tax
            (off the top of my head):

            1. It seems to be just a revenue source for government.
            2. At some point, you’re just taking money from one group of people and
            giving it to other people.
            3. Everyone knows that cigarettes are bad for you. If we removed the tax,
            would THAT many more people actually take up smoking? This is why I said
            cigarette taxes, at the margins, causes fewer people to smoke. I
            would wonder at what point the tax stops working.

          • http://brocmiddleton.blogspot.com/ Broc

            That seems to be a reactive not PRO-active solution.

          • http://bobewoldt.com Robert Ewoldt

            One also has to answer the questions:

            1. How much must we raise the price of soda to make people stop buying it?
            2. Do we want to destroy an $18.7 billion industry?
            3. Why introduce a tax, and not regulation of the industry to make their
            drinks better?
            4. Why focus on taxation, and not health education? THAT would be the real
            proactive solution.

          • http://brocmiddleton.blogspot.com/ Broc

            1. I do not want to tax people to “make them stop buying” soda, but reduce the amount of soda Americans are consuming to a healthier level.
            2. If we can reduce the costs on our healthcare system the lost revenues to the soda industry would abosolutely be worth it. Also it would not “destroy” the soda industry just as cigarettes are still selling. 
            3. How is government regualtion of HOW a product is made better than government taxing a product?
            4. LETS DO BOTH!!!! WHY ONE OR THE OTHER?

          • http://bobewoldt.com Robert Ewoldt

            The bottom line is, why should the government be involved at all? What I
            have a fundamental problem with is the government trying to control
            industry/commerce at a basic level. Why does the government have to do
            central planning (i.e. control this industry over here in order to help this
            other industry over on the other side)?

          • http://brocmiddleton.blogspot.com/ Broc

            It seems that no one accepts the idea of social responsibility any longer, everyone is looking out for there own interests, just looking out for Number 1.   Soda companies do care that their product is a significant factor in the rise of obesity/diabetes, they care if they are making money, which is “business” do not get me wrong I do not think they shouldn’t make a living; but there is a socially responsible way of doing that and an irresponsible way.  They are choosing the irresponsible way, maximize profits, and then to avoid blame they point the finger at fast food and other junk foods that use the same socially irresponsible business tactics and finger pointing.  We are talking about businesses that market to kids, happy meals that have very little/zero nutritional value but come with a toy, soda vending machines IN SCHOOLS. Full Throttle, Monster, Rock Star huge over caffeinated beverages with massive amounts of sugar and useless added calories to a diet. I am not saying that these products have no place in society however if when its cheaper and faster to eat junk food how are we setting people up for success when the options that lead to failure are the easier choices?

            Let’s speak in business terms for a moment, the government has an invested interest (via the economy, education, healthcare cost, social safety net programs) in the health and wellbeing of its citizens, a moderate soda tax wont put the soda industry in the toilet and perhaps it could be apart of a larger initiative to combat the health crisis in our country.  If we are serious about turning around the tide of obesity/diabetes these steps are not overreaching at all. We do the same thing with cigarettes, why not soda?

          • http://bobewoldt.com Robert Ewoldt

            A moderate soda tax also will not change behavior. It would take a LARGE
            soda tax to impact behavior to the point that’s needed.

          • http://brocmiddleton.blogspot.com/ Broc

            So what are you saying…since a soda tax won’t turn around the health crisis alone that it is not worth doing? 

            You do not want to destroy the soda industry in the name of health.  You cut the same way you should the budget, small cut here, small cut there, small cuts in numerous areas that add up to a big impact.  A moderate soda tax, a removal of sodas and other junk foods in vending machines and lunches from public schools, increased emphasis on health living choices and food education, and create an incentive for healthy food choices. 

            If you have not watched “Jamie Oliver’s Food Revolution” on Hulu.com I HIGHLY recommend it.  It shows the fight for healthy foods in our schools. 

          • http://bobewoldt.com Robert Ewoldt

            What I’m saying is this… just implementing a soda tax doesn’t solve the
            problem. In order to solve the overall problem (what you call a health
            crisis), the government would have to be involved in a HUGE initiative, with
            far-reaching implications for a person’s life, all in an effort to control
            what a person eats. This is central planning at its worst. You solve one
            problem, and then you create another problem that you have to solve. You
            solve that one, and find another problem that requires that government be

            The solution is to let individuals make their own decisions. If a person
            drinks too much soda (or smokes too many cigarettes, for that matter), they
            will have higher medical costs. If they have higher medical costs, they
            have to choose: do I continue my current lifestyle and die earlier (in debt
            because of my medical bills), or do I alter my lifestyle so that I am
            happier with my body, happier with my lifestyle, and happier with my budget.

            I don’t think that the government has to be involved in making decisions for

          • http://brocmiddleton.blogspot.com/ Broc

            First of all its not “me” saying there is a health crisis in America. That is the CDC, experts and health organizations all over the country.  It is no longer of IF we are in a health crisis, WE ARE. 

            I question if you are aware of the full scope and scale of the obesity crisis on a variety of levels.  Please take the time to watch “Jamie Oliver’s Food Revolution” I think you will be shocked at some of the issues he highlights such as basic food education.  You solution seems to be if they make poor choices make them live with them, what if they do not know what the consequences of those decision are? I understand your thought about personal responsibility however that doesn’t mean society should make bad decisions the easier decisions. As a society no one lives their life in a vacuum, and some people just need a little help in making the right decisions. This isn’t a ban on soda or prohibition, its not 1984. We both agreed that cutting healthcare cost is critical to our financial future; however you oppose a moderate soda tax which would increases revenues and possibly curb unhealthy habits, are simply afraid of a “slippery slope”?

            Should schools allow sodas and junk food to be sold in vending machines on campus?

  • theleftmakesmegag

    I’d like to know your opinion of WA state.  There is no personal or corporate income tax, no capital gains tax but a gross receipts tax on business that can be burdensome, especially for companies that are growing but not yet profitable.  There are a number of various credits and exemptions to mollify the burden of this tax–wondering if you see those as positive and necessary to lessen the burden of a gross receipts tax. 

    In addition, the state continues to do very well in the tech sector–Microsoft and Amazon keep hiring and Google, Facebook, Zynga and others have set up offices–primarily engineering/software dev because of the talent pool.  A fair number of mid size tech companies are also doing quite well, such as Isilon/EMC, F5, Concur, etc.