The Laboratory of Democracy

As Nobel laureate Edward C. Prescott reminds us, real cumulative taxation of our most productive citizens is far higher than most people recognize. That’s particularly true in certain states like California, New York, and Illinois. In previous Trends issues, we explained how, in a global economy, “jurisdictional competition” siphons risk-taking and talent away from locations that punish it to those that reward it. Furthermore, tax-funded subsidies for dysfunctional behavior encourage that behavior and attract those seeking the subsidies. Not surprisingly, recent empirical data generated in real time show that higher marginal tax rates still lead to lower revenues for government. Eventually, falling revenues and rising subsidies lead to bankruptcy. Going forward, we’ll no longer have to guess about the efficacy of various policies; the diverging policies of various states represent a real-time experimental test-bed. What are these experiments revealing? What are the likely implications of the short- and medium-term policy battles — and what are the longer-term implications? We’ll explain.

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