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  • Whether In A County or the Country, Higher Taxes Spell Trouble

    Raising taxes does not mean more overall revenue, recently seen in Montgomery County, Maryland, which has had a particularly bad fiscal year after a recent tax hike. The county, which is just across the northern border of the District of Columbia, saw many residents making over $1 million move out when a tax hike was introduced in 2008, and now there are not enough high-income residents in the county to pay their share of taxes. The result of the high tax flight? The county now runs a budget deficit.

    The drop in revenue was not entirely due to the recession but rather to unfortunate fiscal policy that drove away the highest earners in the county; Montgomery officials said that after the increase in taxes, the tax revenue dropped 13 percent between 2008 and 2010, while actually rising 40 percent before the tax increases, in 2005 to 2007.

    In the Washington Post’s report, county executive Isiah Leggett sums up the situation nicely in a recent session with council members: “Remember what I said years ago. This is a structural deficit. Structural.” What Mr. Leggett means is that the county government has been growing quickly in recent years, and now, since some high-income individuals have moved out, the county cannot cut spending as quickly as revenue has dwindled.

    Let us set aside the similarities between Montgomery County’s tendencies to grow with our federal government’s desire to expand under the Obama Administration; this lesson– that increased taxes do not necessarily lead to higher revenues– should be noted by President Obama. The county’s revenue problem is a specific example of the results of the Laffer curve, which says that government can raise taxes up to a point in order to increase revenue, but after that point total revenue actually starts to decrease with higher tax rates.

    What is especially worrying about the difficult choices that must be made by Montgomery County officials to cut costs is that 250 government jobs may be lost in order to close the budget gap. Now is an especially unfortunate time for people to lose jobs, and raising taxes makes job creation harder in both the public and private sectors.

    The President has stated previously his plans of a tax hike for American households with high incomes. Although Americans might not be able to move to different states in the event of a tax increase, the ones with the most money will be able to manipulate their taxable income and finances, with the help of crafty lawyers, which on a larger scale could very well have an effect similar to what has occurred in Montgomery County. Remember, there were federal revenue shortfalls in the 1950s and 1960s when individual income tax rates exceeded 70 percent. Let us learn from the mistakes in this region so that we may not have to repeat them on a much larger scale.

    Aleksey Gladyshev is currently a member of the Young Leaders Program at the Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm

    Posted in Ongoing Priorities [slideshow_deploy]

    5 Responses to Whether In A County or the Country, Higher Taxes Spell Trouble

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    3. Robert Magill says:

      We've been watching businesses and higher income individuals leaving California for years. Since California has become the "welfare capital" of the country, I'm looking forward as to how the Democrat controlled legislature plans to get us out of the mess we're in. Unfortunately. I think they'll elect Brown and all that will do is compound the problem since he's a lockstep progressivist Democrat. I don't hold out a lot of optimism for this state. I believe the phrase [As goes California, there goes the country] is unfortunately going to bear out to be true.

    4. stirling, Pennsylvan says:

      Economics 101. If you tax something it produces less of what you tax. So tax those who spend money means less tax revenue. Those who create jobs get taxed more means unemployment rate goes higher and government gets even less tax revenue. Layed off workers don't pay taxes due to less income. Result government borrows more money. Answer to problem – broad based tax cuts across all income levels. This has worked in the past, and will work today if the administration would drop the assault on the Capitalist system. No matter how much people on the left may think that taxing those with money doesn't affect everyone the facts show differently.

    5. Jon Smith says:

      250 government jobs lost? Something good came out of that black hole where our money disappear and which we call government. Or it is "may be lost"? Does it mean that they will do whatever it takes in order to keep those jobs? Government's interests come first, as always. And if they start to fire someone that will be simple people, policemen and firemen, and not that fat bureaucrats that occupy numerous offices in town halls. May be they should start with cutting those offices first? And may be in this case there would be no need to raise taxes at all?

      But if we put jokes aside, the problem is more serious that it looks. All problem with tax evasion related to fact that most money in America are made on stock exchanges and in services. One can live in Virgin Islands or Capri and still make millions in New York. America stopped to make anything. All industry except printing money is dying. We are becoming a nation of hair dressers and restaurant waiters. Solid, strong middle class is disappearing. There are fewer and fewer people who know how to Make Things. Fewer and fewer people are proud of what they do and proud of the place they live. When last time have you seen a shoe that has "Made in America" label in it? If that misfortune county had shoe factory the financial problems of that county would be less severe. And if another factory next to it were making, say, cork openers, we wouldn't hear about tax problems at all.

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