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Oct 15, 2008

The Supply Side Robin Hood

You Can Steal From the Rich Until They Wise Up

The American Legislative Exchange Council (ALEC) promotes free markets, low taxes, and limited government. Their policy recommendations are based on fact filled research.

Rich States/Poor States on their website provides a long study measuring state wealth and success, related to factors like tax rates and regulation. The ALEC-Laffer Economic Competitiveness Index is a downloadable PDF of the study. I have read only a few sections. The following is an excerpt from page 31, edited for flow and clarity.

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The highly progressive tax structures in California or New York do not help the poor, minorities, or the politically weak. Intuition tells us that when government taxes people who work, there are fewer of them. When government pays people who don’t work, there are more of them.

Most of us want to help the people who have difficulty helping themselves. The problem is how to do it.

If the rich are taxed and the money is given to the poor, do not be surprised if the number of poor persons increases and the number of rich persons decreases. People respond to incentives. If you tax an activity, people do less of it. If you subsidize an activity, people do more of it.

Supply-Side Economics is the view that all people are better off, including the poor, when production is encouraged through lower tax rates. The opposite view is that tax rates should be high to pay for programs which aid the poor.

The Supply-Side Version of Robin Hood

Robin Hood and his band of merry men start their days hiding among the trees in the Sherwood Forest waiting for hapless travelers on the trans-forest throughway.

If a rich merchant comes by, Robin Hood strips him of all his belongings. Before you feel sorry for him, remember he is so rich that there will be an abundance of jewels and wealth waiting for him when he gets back to his castle.

If a prosperous merchant comes by, Robin Hood takes almost everything. He seizes a moderate chunk of an everyday businessman’s belongings. He takes only a little token from a poor merchant who barely makes a living.

In the language of our modern society, Robin Hood has a progressive stealing structure. This is similar to the California government or other tax systems used in this country.

At the end of the day, Robin Hood and his men take their contraband back to Nottingham to help the poor. They distribute their treasures to citizens based on their poverty. The more a person makes, the less Robin Hood gives him, and the less a person has, the more he receives. Robin Hood robs from the rich and gives to the poor.

Now, put on your supply-side economics hat and imagine that you are a merchant back in Nottingham. How long would it take you to learn not to go through the forest? Those merchants who couldn’t afford armed guards would have to go around the forest in order to trade with the neighboring villages.

Of course, the route around the forest is longer, more treacherous, and more costly. Those merchants who could afford armed guards (today’s equivalent of lawyers, accountants, and lobbyists) would go through the forest and Robin Hood couldn’t rob them. As a result, Robin Hood had nothing to give to the poor. All he had succeeded in doing was drive up the cost of doing business, which meant the poor had to pay higher prices. By stealing from the rich and giving to the poor, Robin Hood made the poor worse off.

And so it is in high-tax states. The poor, who rely on the state for their sustenance, are having their benefits cut to the bone. Because of some states’ unfriendly business policies, unemployment rates rise. We could go on, but the point is simple enough. Progressive tax structures do not benefit the truly needy.

Government never succeeds in its attempts to redistribute income. Taxes do not change the distribution of income, but taxes can and do lower the volume of income. As we look across the world at the progressive tax structure of California and other economies, it is amazing how the distribution of income, if anything, is made worse.

ALEC ranked states by employment, income per-person, and growth in population. From 1996-2006, the low-tax states Texas, Florida and Arizona were the most successful. The high-tax states Illinois, Ohio and Michigan were the least successful.

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