Why Tax Hikes Never Solve Budget Deficits  

With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich.
Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1% or 2% or 5% of their citizens. New Illinois Gov. Patrick Quinn wants a 50% increase in the income tax rate on the wealthy because this is the "fair" way to close his state's gaping deficit.

There is only one problem. Higher taxes never solve budget deficits.

Taxation has been under the microscope ever since Adam Smith first distilled the principles of good and bad taxation in the 18th century. Two hundred years of evidence later the science is clear: high taxes don't work. They bring the Treasury less revenue, not more. And on the way, they really mess up your economy.

The reasons for this failure of higher taxation is simple:
(1) Higher taxes destroy incentives to work.
(2) Higher taxes destroy enterprise.

Study after study after study; example after example; time and again show the same thing: Increasing taxes hurts the economy and decreases revenues to the treasury. You can raise taxes on the rich, but you cannot make them stay put. This Wall Street Journal piece contains some great insights:

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states. George Gilder summed it up years ago. “Taxes don’t redistribute wealth, they redistribute taxpayers.”