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I happened to be reading each of these two pieces at the same time – eerily harmonious they are:

  1. Marty Feldstein and Marian Vallient on, “Can State Taxes Redistribute Income?”
    In it they say:

    The evidence presented in this paper supports the basic theoretical presumption that
    state and local governments cannot redistribute income. Since individuals can avoid
    unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a
    relatively unfavorable tax will cause affected individuals to migrate out until the gross wage
    is raised to a level at which the resulting net wage is equal to that available elsewhere.
    Similarly favorable tax rates attract in-migrants until their gross wage is depressed to the
    level at which there is no net advantage to locating in the state
    .

    The current empirical findings go beyond confirming this long-run tendency and show that gross wages adjust rapidly to the changing tax environment. Thus, states cannot redistribute income for a period of even a few years.

    The adjustment of gross wages to tax rates implies that a more progressive tax system raises the cost to firms of hiring more highly skilled employees and reduces the cost of lower skilled labor (Wintercow: is it any wonder why Progressives bemoan the lack of “good-paying” jobs?). A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees.

    Since state taxes cannot alter net wages, there can be no trade-off at the state level
    between distribution goals and economic efficiency. Shifts in state tax progressivity, by
    altering the structure of employment in the state and distorting the mix of labor inputs used
    by firms in the state, create deadweight efficiency losses without achieving any net redistribution of income. This same conclusion applies of course to local governments and to any other political jurisdictions, including nations, when there is sufficient scope for migration.

  2. Arnold Kling on “Public Financing of Political Campaigns.”

In it he says,

The traditional libertarian solution for corrupt government is Constitutional restrictions on government activity. Smaller government means smaller scope for corruption.

I am not sure I believe that the traditional libertarian solution works. I suspect that what really makes for limited government is the opportunity for exit. In the early 1800’s, it was possible for an American to pick up and move to a remote area where government had very little impact. That possibility tended to limit the power of the central government.

I think that the big challenge for libertarians is to create conditions that enable people to exit from overbearing government.

Of course, it is far harder to migrate across national borders than it is to migrate across state borders. And the reason this is alarming is because the U.S. political system is becoming far less “federalistic” and far more nationalistic. In other words, the heavier tax and regulatory burden imposed by the central federal government, the less scope there is for inter-state tax competition.

An interesting hypothesis would be to ask which states in the union prefer heavier federal intervention and which ones less. My untrained priors indicate that it would be the high-tax, high regulatory states. But thinking more carefully suggests a more nuanced answer. If the federal tax burden is broadly increasing (and not merely replacing state and local taxes and regulations, which I suspect is true), then my intuition would be correct. Why? Because a heavier federal tax and regulatory burden would serve to decrease the relative price of living in a high-tax state relative to a low-tax state (ignoring for the time being Feldstein’s finding that wage levels would adjust). How? Suppose the average annual tax burden in Weedworld is $8,000 while it is only $4,000 in Lawnworld. Thus, living in Weedworld is twice as costly as living in Lawnworld. Now imagine the Feds nail everyone with a $2,000 increase in costs per year because of CAFE standards, another $2,000 per year because of giving away free-health care to everyone and another $2,000 per year to pay for the stimulus. Increasing costs of both Weedworld and Lawnworld residents by $6,000 would now make Weedworld cost $14,000 and Lawnworld $10,000 – meaning that living in Weedworld is only 1.4 times as costly! Of course, I am abstracting from progressivity of the tax code and other spending questions, but the point is meant to be illustrative.

However, if these federal cost increases substitute for existing state tax and regulatory burdens, then you would not see any change in relative prices, and from a migratory perspective states would be indifferent. But I do not view federal spending as a pure substitute for state spending, otherwise in the data you would see some sort of muted correlation between the two, which we definitely do not observe.

Feldstein’s result would seem to change this conclusion – a point which will be addressed in a later post. The lesson above is, of course, there is nowhere to exit when the Progressives get their way. However, if the classical liberals had “their way” the statists could be free to organize themselves in any state and be as collective as they wished to be. There is something oddly ridiculous that the Progressives do not recognize the lack of symmetry, and inherent tyranny, of such a thing.

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