Danish Taxes

According to Wikipedia, "Denmark, with a mixed market capitalist economy and a large welfare state, ranks according to one measure, as having the world's highest level of income equality. Denmark has the best business climate in the world, according to the US business magazine Forbes. From 2006 to 2008, surveys ranked Denmark as "the happiest place in the world," based on standards of health, welfare, and education." The country is also pretty high in the GDP per capita and employment rankings. It pays generous unemployment benefits, and has free universal health care.

How is this utopia paid for? What a shocker - taxes. As of 2010, the top marginal rate of 42%, and the VAT is 25% (source). What's going on here? Something's gotta give, and sure enough, something does. Young Danes are leaving in droves - leaving, that is, after getting free education, which also includes English proficiency. From the article:

"The Organization for Economic Cooperation and Development, which is based in Paris, projects that Denmark’s growth rate will fall to an annual rate of slightly more than 1 percent for the five years beginning in 2009, reflecting a dwindling supply of a vital input for any economy: labor... studies suggest that about 1,000 people leave the country each year, a figure that masks an outflow of qualified Danes and an inflow of less skilled foreign workers who help, at least partially, to offset the losses."

Who would have thought that when you tax something, you get less of it? So when you tax productive people heavily, and pay others generously not to work... Gee, this is getting complicated. This is the point at which most politicians would stick their fingers up to their elbows in their ears, yell "La-la-la-la, I cannot hear you!", and hope you buy all the BS about the joys of equality and security - which are guaranteed if you only (re-)elect them, and doubly guaranteed if you only let them tax and spend more.

As a parting note, consider that 67% is not the total tax burden you pay in Denmark. The tax rate on non-electric vehicles is 200%, as noted by Dr. Perry at Carpe Diem. There is tax on income from securities, corporate tax, and property tax.

As some poet with economic literacy (or economist with poetic talent) wrote:

Tax his land, tax his wage,
Tax his bed in which he lays.
Tax his tractor, tax his mule,
Teach him taxes is the rule.

Tax his cow, tax his goat,
Tax his pants, tax his coat.
Tax his ties, tax his shirts,
Tax his work, tax his dirt.

Tax his chew, tax his smoke,
Teach him taxes are no joke.
Tax his car, tax his grass,
Tax the roads he must pass.

Tax his food, tax his drink,
Tax him if he tries to think.
Tax his sodas, tax his beers,
If he cries, tax his tears.

Tax his bills, tax his gas,
Tax his notes, tax his cash.
Tax him good and let him know
That after taxes, he has no dough.

If he hollers, tax him more,
Tax him until he's good and sore.
Tax his coffin, tax his grave,
Tax the sod in which he lays.

Put these words upon his tomb,
"Taxes drove me to my doom!"
And when he's gone, we won't relax,
We'll still be after the inheritance tax.

However, if something cannot go on forever, it will stop (Stein's Law), and socialists always run out of other people's money.

Dr. Laffer on Tax Rates

It should not be a hard concept: if you increase tax rates to punitive levels, the ones who pay the most tax would find ways not to pay, be it legal backdoors or outright relocation. Quote: "Laffer readily admits that middle and lower-income folks lack the flexibility of the rich when it comes to changing behavior in response to changes in tax rates. Where the rich can shelter, defer and give away income, taxpayers at the bottom rung are like lambs going to the slaughter. Raise tax rates, and they fork it over to the government. Lower tax rates, and the government gets less revenue."

Quite so. I would contend, however, that the middle and lower income folks have a different weapon at their disposal - numbers. If they were to simply start massively underreporting income, they would be in theory criminals, but the government would not have the means to enforce, and most singular audits, let alone lawsuits, would not be cost efficient for the government. The bureaucrats may know Joe Average is screwing with them, and this may get any single Joe in trouble, but not any reasonable number. As it is, the IRS audits approximately 1% of individual returns, with a heavy focus on those with "red flags" - tax shelter investment losses, complex investments, large business expenses relative to income, tax transactions without explanation, etc. Thus, Joe Average is (mostly) safe, and the government is reduced to raising the rates on the "low-hanging fruit" - the wealthy and the corporations. This is precisely the counterproductive thing to do. Quote #2 from the above article: "If the government is truly interested in maximizing its revenue, not in redistributing income, it should cut taxes on the rich. Blasphemy, I know."

As Churchill put it, "If you destroy a free market, you create a black market. If you have ten thousand regulations, you destroy all respect for the law." Transocean, Weatherford, and Tyco are just the pioneers moving to corners of the world where capital is treated with respect, not villified and extorted.

California's Muerte Anunciada

One of those stories that leave a lot unsaid.

Quote: The number of people leaving California for another state outstripped the number moving in from another state during the year ending on July 1, 2008. California lost a net total of 144,000 people during that period — more than any other state, according to census estimates. That is about equal to the population of Syracuse, N.Y. ... California's loss is extremely small in a state of 38 million. (emphasis mine) And, in fact, the state's population continues to increase overall because of births and immigration, legal and illegal. But it is the fourth consecutive year that more residents decamped from California for other states than arrived here from within the U.S.

Ahem, maybe so, but the only 4 years ago, a $6.7 bln deficit was considered "deceptively difficult challenge" there, and now they are talking about $41.6 bln. Cutting spending just does not happen over there, taxes are already the highest in the US, and businesses are running for the border because of regulatory overkill.

Furthermore, when a state or country begins to lose people because of high taxes, the first "refugees" tend to be the wealthiest and the most mobile - because they stand to lose the most, and can move with the least amount of disruption to their lives and careers. Those same "refugees" contribute disproportionately more taxes - as California is discovering now (to wit, California charges a 1% additional tax on incomes over $1 mln - with the proceeds used for... mental health services; maybe they need to charge 2%, given the number of mental cases in their government ). Those with AGI over $200,000 accounted for 4% of filers, and 65% of personal income taxes paid, as of 2006 - approximately 582,000 thousand taxpayers. Thus, even though the 144,000 people who left California are a tiny portion of the population, they are very likely about 58,000 (assuming 2.5 persons per household - grown-up children, couples filing separately, etc.) households, and (again, my guess) disproportionately in the $200,000 AGI group. If only half are indeed in that group, then California lost in one single year almost 5% of those filers, and thus over 3% of its personal income tax revenue. I have thrown in a lot of assumptions, but they do not appear very unreasonable, and I am aiming for a ballpark number anyway.

How unreasonable is it to expect that this flight will not only continue, but also accelerate, especially as taxes are further raised to make up for revenue lost? You decide. If you want to invest conservatively for retirement in the relatively near future, short California bonds and buy just about any other bonds you can think of - okay, not New York or New Jersey, maybe. Socialism failed everywhere else, it'll fail in California too - and California cannot print money, only bonds.