Where is Everyone Going?
2013-03-23 · Guest: Travis Brown (Author of How Money Walks) · 82:25
State tax policies and wealth migration
Bob Zadek interviews Travis Brown, author of How Money Walks, to discuss how state tax policies drive massive migrations of wealth and people across the United States. Using IRS data, Brown demonstrates that taxpayers are “voting with their feet” by fleeing high-tax jurisdictions like California and New York in favor of low-tax states like Florida and Texas. The conversation also explores the shift from income to consumption taxes, the financial crisis in Cyprus, and a libertarian critique of state-licensed marriage.
Topics: Tax Policy, Migration, IRS Data, California, Texas, Florida, New York, Consumption Tax, Laffer Curve, Cyprus, Gay Marriage, DOMA, Prop 8
Speakers:
- Bob Zadek - Host
- Travis Brown - Author of How Money Walks
- Caller (Harvey) - Listener
- Caller (Terence) - Listener
The Freedom to Choose and the Marketplace of Ideas [00:00]
Bob Zadek: Here it is, noon on Sunday, and this is The Bob Zadek Show. I’m your host, Bob Zadek. We are the leading libertarian talk radio show in the Bay Area and around the country. Thanks so much for listening. We are the show of ideas, not attitude; stuff, not fluff. Thanks so much for listening.
Our country, of course, was founded on the principle of freedom, liberty, freedom. And as Milton Friedman famously said in his book and in his very successful PBS television series, Free to Choose, freedom means the freedom to choose. We are free to live where we wish, buy what we want, pay the price we want to pay or not, free to vote for who we want. Freedom means freedom to choose.
And that’s not an abstraction because it is, of course, recognized by political scientists, by economists, that the way to determine whether an idea or a product is what the people want is to let the marketplace decide. As Adam Smith put it, “the invisible hand of the market.” That will set prices, that will determine desirability, and one can tell if you are offering a product or service or anything that people want by the demand for that product and therefore by the price people are willing to pay for it. And if people are willing to pay what you hope to sell it for, then you have a successful product. If not, the market will control and will send you a message.
So the marketplace, the pricing mechanism in the marketplace, is what sets the value of a commodity. And it is set by millions and millions of individual decisions being made by millions and millions and millions of people. And that collective decision-making is far more valuable and far more accurate a predictor of what something is worth than is a dictate by somebody in Washington or Sacramento and Albany telling you what a price, what the price of a commodity ought to be, or whether the commodity ought to be sold.
So we all trust the marketplace. Indeed, our elections—majority rules—we trust the wisdom of 50-plus-one voters to decide who the best candidate is. That’s what our country is all about. That’s what it’s all about in its politics, and that’s what it’s all about more or less in its economics.
The Marketplace for Governance [03:22]
Bob Zadek: Today’s guest explains how the marketplace will help us determine what form of government is the most desirable to the people, what structure of taxation is the structure that people will support and what will they not support. There is a marketplace for tax ideas. There is a marketplace for the level of taxation. And that marketplace is just as harsh, just as cruel to the losers as is the economic marketplace or the marketplace for candidates.
We have a very, very vigorous marketplace for forms of political governance. And that marketplace is the 50 states. Each state is more or less free to set, to determine by the will of its people and its elected officials, what is the nature of the government of that state. How much will taxes take wealth from the people and what will they give the voters in exchange for that level of taxation? And we have 50 states and therefore theoretically 50 different concepts of the right mix of taxation and services, and of course, efficiency and skill and political philosophy.
And one can tell whether an idea or a concept for state government is successful, not by pricing, but by the taxpayers, the citizens, who can and very often do vote with their feet. They vote with their feet by moving from a state where the system of government is unappealing and to a state where the system of government is more appealing. And one can tell by seeing the collective taxpayers voting with their collective toes what they support and what they don’t support.
Of course, figuring out what the movement is, where the movement is to and where the movement is from, requires an understanding of statistics, ability to read and synthesize a lot of data, and to understand what that data is telling us. Well, fortunately for us, my guest today has done all the heavy lifting. He has done the analysis. And he, Travis Brown, is here to share with us what he has learned about what forms of government at the state level seem to be working and seem to be appealing to taxpayers because they move there, and what systems of government are unappealing to taxpayers because they are moving from there. And that lesson will tell us, just like the product pricing in the economic marketplace, which systems work and which systems don’t.
Travis Brown and How Money Walks [07:00]
Bob Zadek: Travis, thanks so much for joining me today. Welcome to the show.
Travis Brown: It’s a great pleasure to be here, Bob. We’re very excited to give you lots of stuff with very little fluff because all of this is Internal Revenue Service data that we ultimately assimilated in the book, How Money Walks. Generally, we show in the data across 50 states and all counties from across America that taxpayers in the past 15 years are fleeing high-tax states and flocking to low-tax states.
Bob Zadek: And tell us, first of all, your book, Travis, How Money Walks. What is the premise of that book? What have you done in the book and at your website and at your app, which we’ll talk about later?
Travis Brown: Sure, sure. Well, the premise of How Money Walks, and everything’s available at howmoneywalks.com, is to do exactly what you just described. That we wanted to know exactly on a net transfer basis, looking at all migration patterns in every county in America, from where to where taxpayers are voting to determine where they’re most welcome. If you think of the state tax regimes as variable and therefore in competition—that is, a California taxpayer that doesn’t like the California tax system can choose to live elsewhere on the West Coast or across the United States—and we started to measure that.
In order to do that, we had to sift through over 134 million taxpayer records available from the Internal Revenue Service taxpayer data file and then make that intelligible in conjunction with the US Census Bureau data on population count as well. And so the book describes America’s biggest winning states, such as Florida and Texas, and America’s biggest losing states—people and taxpayer wealth losses in the measure of adjusted gross income.
Bob Zadek: My friend Travis knows every county and who has left every county in the country and where they have gone. So by the way, if you have a particular friend who is no longer around and you want to know where that friend went, contact Travis. Travis will tell you where that person is and how much tax that former neighbor of yours is paying.
Questions for Travis, by the way, 800-345-5639. Please do not ask Travis for names of realtors in Texas or Florida. That’s not the deal. You’ll have to find that on your own. If you live in California, that might be on your to-do list is move to Texas and/or Florida and perhaps Nevada. Nevada, if I remember correctly, is the biggest recipient of former Californians, as Travis has analyzed in his book. Now Travis, what are the global—we’ll get to specifics in a moment—but you were able to draw very, very specific conclusions which are really unassailable, the conclusions are, because they are drawn from so much data.
Travis Brown: Well, that’s right, Bob. We, by looking at where every taxpayer in America has declared their residency over time, over a 15-year span, beyond one administration, beyond one recession, one boom time, one bust time, over that kind of period from 1995 to 2010, sifting through all of this data, you get a clear picture for a long-term pattern. Is this notion that Californians are fleeing because of high tax on personal income real, or is it overblown? And what we show in How Money Walks and the app, you can see for yourself by your county, by your metropolitan—your city, your MSA—or by the statewide totals. You can see the massive amount of movement. 20% of the wealth going to states like Arizona, over $6 billion there to the Phoenix area from California, and even more, $8 billion as you alluded to earlier, going to Vegas in Nevada.
Defining MSAs and the Movement of Wealth [11:56]
Bob Zadek: Now Travis, let me interrupt you. Two concepts I want to make sure the audience is able to follow. First of all, you mentioned MSAs. Explain that. And second of all, the premise of the book is about the movement of wealth. Now, it’s about the movement of people, but more significantly, the wealth that they bring with them. Tell us about what you mean by the movement of wealth and tell us the dollars because they are quite meaningful.
Travis Brown: Sure, sure. Well, the first question was what is a Metropolitan Statistical Area or MSA? We often refer to that because it’s a pretty good—it’s a federal definition of what is the metropolitan area of San Jose, for example, or San Francisco. If you look at the metro area, all the counties in the general areas where our federal government considers that to be a part of the San Francisco area, you’re showing a loss of about $10.2 billion in adjusted gross income, net of all transfers in versus all transfers out, over a 15-year period.
Bob Zadek: Travis, let me just help the audience. That means that when an individual moves, not only does he move his family and his dog and his golf clubs, but he takes with that individual—he or she takes with them—their earnings, which now are available to be spent in the new state and are not going to be spent in the old state. So the movement of a person, while significant in itself, is more significant because of the spending power and investment power that that individual takes with them. So what you focus on, quite correctly, is how much wealth is going with these people because that’s what gets people’s attention. Sorry, Travis.
Travis Brown: Yeah, no, you’re exactly right. If I am a California taxpayer this year and I become a Nevada resident next year, this year’s tax returns will be filled out with some kind of version of a state 1040 tax return. Ultimately at the bottom of that form, come April 15th, that will be your adjusted gross income that we’ll be starting to see over these statistical long-term trends. If next year you’re now a Nevada resident, well, we show that you’re no longer—you’re a subtraction from the California totals and you’re an addition to the Nevada totals. And by looking not just at the people count of over 240,000 folks on a net basis losing and leaving California, but on an adjusted gross income basis, we can tell with some degree that whether these are working families or, you know, Fortune 50, you know, corporations responsible for these kinds of moves, etc., etc.
Lessons for High-Tax States [15:04]
Bob Zadek: Now, if you were a voter in California, Texas, Florida, Maine, Nevada, what are the lessons of your book? And more importantly, if you are part of the political class in one of these states, what are the inescapable lessons of the book? What does the book teach all of us about the marketplace for state government? Because after all, state governments are very much in a marketplace competing for businesses and competing for taxpayers.
Travis Brown: Right. Well, I think the most fundamental lesson that a California listener can learn from How Money Walks is that when you start to raise the price of work, to make it hard—harder to collect your disposable income—you can expect to see less of it. And when there are other domains just next door that may offer you many of the same advantages with a lower price of work, taxpayers are moving to those jurisdictions like Las Vegas and Phoenix in relatively large numbers. And even in the areas like San Jose, where you see a lot of people at first moving within California counties before you see a migration over the long term to Nevada, you’re still talking about numbers that are roughly equivalent to the profits of Apple. So these are not insignificant numbers of folks moving around, responding to the market one at a time. Intuitively, you probably have family and friends out there whom you know in the process of doing this or who have done it. But now we can put accuracy and clarity behind what this means in dollars and cents to every county in California.
Bob Zadek: This is Bob Zadek. I’m talking to Travis Brown. Travis Brown has studied the movement of individuals and their earnings with them from certain states to certain other states. And the conclusion that Travis has reached is that it is a direct result—it is clearly, it is inescapable, a direct result—of punitive tax policies in the states that are losers and sound tax policies in the states that are winners. 800-345-5639, questions for Travis or for me. We’d love to take your calls.
Of course, the concept of people moving simply to a better political environment is as—or tax environment—is very common. We, of course, have discussed on the show many times immigration. Immigration is nothing other than the same issue, except the movement is not state to state, but rather country to country, and for lots of reasons. Also, on a more narrow level, it is very common for individuals to move from within a state simply to get, for example, better schools. So people do feel themselves to have the freedom, as Milton Friedman says, freedom to choose, the freedom to say, “I’m out of here. I’m not—I can’t take this anymore. I want more for my dollars that I earn.” And rather than simply moving from one county to another or one school district to another to get better schools, we now have individuals more than ever before moving because of tax policies, because they want to retain more of their own money.
And what have been—now Travis, the basket cases are of course well known to most of my audience. California is a basket case. New York is a basket case, as you have learned. And Florida and Texas are—well, I don’t quite know the opposite of basket case, but they are whatever the opposite of basket case is.
Travis Brown: The economic powerhouse today.
Bob Zadek: Economic powerhouse. Now, what is there about, for example, Nevada and Florida and Texas that makes them such, your words, economic powerhouses, at least in terms of their ability to draw very productive people?
The Price of Work: California v. Texas [19:53]
Travis Brown: Sure. Well, you keyed in on the price of work being the—now it was in the data that we looked at previous to California at least a 10.3% personal income tax rate. Now recently raised to be the highest in the country at 13.3. Let’s understand two graduates that are leaving school for a very good career. One who wants to return home to California and another who wants to go home to Texas. Once those two people depart and go to their home states, this reality, the difference between a zero income tax in Texas versus a tax rate as high as 13.3 in California, can make a huge difference on their lifetime’s earning potential. If they’re starting out, it’s the difference of lowering their student debt. If they’re going along, it’s maybe the difference on when they afford their first down payment on a mortgage in their first home.
And over time, it can literally—and we have people we meet throughout the national book tour every week that come up to me and say, “You know, by staying in or going to a zero income tax state, this has changed our life in our family because we were able to pay for college tuition with the money we saved.” So this is not insignificant. And you tend to see it all over the country. Every state has a little bit different offering in terms of why people find it attractive—different job climate. But on average, by having zero income tax, the states—there are nine of them like that—have collectively gained over $146 billion over this 15-year period. If you do the reverse, interesting, if you reverse and say, “What are the nine states with the highest personal income tax rate and how did they perform as a group?” They collectively lost over $100 billion. And you’ll see other things as you see other correlations going on and on and on in those states like Texas where labor participation keeps increasing, jobs even in this, you know, past three to five years have been better than almost anywhere else in the country. When you get out of the way of work, Americans will work more.
The Luxury Tax of Living in California [22:24]
Bob Zadek: And what’s so interesting to me is, here I live in California. I live in a beautiful small town right north of the Golden Gate Bridge. And I, of course, needless to say, libertarian that I am, I’m not that fond of paying taxes, and indeed especially to my state and my county because I don’t like how the money is spent. But yet I say to myself, it’s worth it. I love it here. I love exactly everything about my life. That the, let’s say the $20,000—I’m making up that number—let’s say it’s a $20,000 difference between state taxes that I might pay in California and I might pay in Texas. It’s worth it. I’m getting something of value, not from the government, but from being in California, from the weather, from the Dungeness crab, whatever it is. So I have made a decision that I am willing to spend the premium—and it is a premium—to live in California.
And the most interesting part of this conversation and research Travis has done is, I like that California and New York and New Jersey and Illinois have punitive tax policies and very much more of a welfare state than the other states. And the reason I like it is I like the idea that taxpayers have a choice. That they have voted with their feet, either by staying or by leaving. And so the states have a marketplace and they get a chance to test their theory in the marketplace. And California may have a very high tax policy, but it’s not enough to chase me out. But it is enough to chase other people out.
This is Bob Zadek. I’m talking with Travis Brown. We are talking about why money walks, why people move from state to state for tax policy. 800-345-5639. We’ll be back in 90 real short seconds.
[Break]
Bob Zadek: Welcome back to The Bob Zadek Show. We come back into this segment compliments of California Dreamin’, the Mamas and the Papas. There was a time that the whole country was California dreamin’. They wanted to move to the sun, to the Golden State of California because of the weather, the opportunity, the jobs, the freedom, the freedom to live the way you want to live. How times have changed since California Dreamin’ in the ’60s.
I’m talking with Travis Brown this morning. Travis Brown’s book, How Money Walks, explains to us why or how state taxation policy influences where people move from and where people move to. We have 50 states. We have 50, in the words of Justice Brandeis, we have 50 laboratories of innovation. Justice Brandeis called them laboratories of democracy, where Justice Brandeis marveled at our system of federalism. He said, “A state may, if its citizens choose, serve as a laboratory and try novel social and economic experiments without risk to the rest of the country.” 50 laboratories of democracy. Each state experimenting on what’s best for it. And that is of course the core principle of federalism. 50 states co-equal in many ways with the federal government, but where you have policies—think Obamacare—at the state level, we have 50 states experimenting with the right combination of taxation versus benefits to its citizens. And the success of one state will be dictated by the movement in or out of that state by its taxpayers. Rather than if we have one big state, i.e., the federal government, doing all the experimenting, then our choices to move to a different country are a far, far, far more drastic decision than a decision to move from one state to another. So God bless federalism. It helps us learn what works and what doesn’t work.
Structural Tax Reform in Other States [27:48]
Bob Zadek: Now Travis, these days, especially with so many governors jockeying for position to run for president in 2016, the governors are getting very aggressive in, I’ll call it their marketing efforts. Their efforts to appeal to the citizens of their state and to other states to try to bring in more customers, more taxpayers. And you have observed that Bobby Jindal and Brownback are—to name two—of course even Governor Christie, who is hardly a conservative, has been at least giving lip service to adjusting its state tax policy to make their states more appealing. What have you seen happening at the state level, which no doubt is in part a reaction, if not to your book per se, at least to the inescapable messages of your book?
Travis Brown: Well, it’s been exciting to watch this year. If you’re watching the reactions of all states, governors are doing more than just marketing efforts. This takes bold action, structural tax reform. In a state like Louisiana, where two weeks ago I was called by Governor Bobby Jindal to come explain this data to parish by parish across the state of Louisiana, they’re looking at a complete zeroing out of personal income tax, corporate income tax, and even corporate franchise taxes because they’re right next door to the big powerhouse of Texas, which gained $22 billion according to our analysis in How Money Walks.
So you’ve got that. You’ve got governors in the middle of America. I’m from Missouri, we’re next door to Kansas. Governor Sam Brownback just laid down the gauntlet to do and execute what he described as a play for making an economy more like Texas and less like California. When he mentioned that, he meant that he wants zero income tax on small businesses, Subchapter S corps, LLCs, LLPs, all those little small business formations that are so vital to a strong barometer in their state economy. He’s done that January 1 of this year, passing major legislative reforms. Governor of Indiana, Ohio, North Carolina, and you mentioned New Jersey, all are on that list looking at, you know, what can they get done to put more money in the hands of taxpayers, in part because I think they sense that small businesses need all the help they can get right now in this economy. And that includes how they might spend their disposable income versus how the government might, you know, balance it a different way.
The Economic Death Spiral of New York [30:51]
Bob Zadek: The outlier, of course, is Governor Cuomo in New York, who has just raised the taxes on high earners, strangely enough. So I guess Governor Cuomo has not read or processed properly the lessons of your book because he’s going in the opposite direction, strangely enough. But what has been your observation about the money walking into or out of New York? And before you answer, Travis, 800-345-5639, questions for Travis Brown or myself on why money walks from one state to another. Go ahead, Travis. What have you learned about New York?
Travis Brown: Well, New York is on a death spiral economically. In the past 15 years, How Money Walks analysis shows over $58 billion leaving, over $16.7 billion of that going straight to Florida. So it’s not just New Jersey and Connecticut and states next door. People are checking out of the Northeast economy and with that, taking all of their consumption, all of their hard-earned investment, and a lot of other things. It used to be—and you mentioned why you’re still in San Francisco and the Bay Area—there were cities that were attractive because of the gains in trade, ultimately. That’s why we created cities. And a city like New York City, even them, they have a limit to the number of taxpayers with mobility that they can afford to lose. And so what’s stunning in this environment, in this economy, is that you do have governors still ignoring the evidence.
We were privileged to have a foreword from Dr. Art Laffer, who’s had 40 or 50 years of state evidence looking at not just tax migration, but economic growth and employment figures, the strength of state revenues. And all of the data points clearly to helping lower marginal tax rates so that you can see an expansion of work in your state.
The Laffer Curve and Marginal Tax Rates [33:09]
Bob Zadek: Art Laffer, of course, is of the famous Laffer Curve, a sine curve drawn on a napkin to explain to President Reagan how if you lower tax rates, you increase tax revenue because if you reduce the tax on something, you obviously get more of it. If you tax an activity, that activity will diminish. Tax cigarettes, and the theory is cigarette consumption goes down, tax earnings, and earnings go down. Well, Art Laffer of the Laffer Curve is the Laffer that Travis was referring to.
So Travis, you make a really important point, and that is that certain areas, states, because we are talking about states this morning, have enough going for them that they will retain a core. Those people who just plain, like me, like it here, and I consider it to be a bit of a luxury tax, which I’m willing to pay because I can’t replace the lifestyle. But for many people, it’s not a luxury tax they can afford or they are willing to pay.
And to show you how aggressive this is, recently Governor Perry of Texas—well, background. Most of my listeners know that states will set up offices in other countries to try to bring business from those other countries into the US. And they’ll set up commercial missions to bring in business. Well, Governor Perry has been marketing in the state of California, marketing businesses to move to Texas. Has been running ads in California inducing people, “Come to Texas.” So it’s gotten pretty down and dirty these days where Governor Perry understands that his state will be far better off the more high earners he brings from California and other vulnerable states into Texas. So that competition is very aggressive these days because with taxpayers, Texas is driven by somewhat of a higher property tax than California. So obviously Governor Perry wants to bring people into California who have high net worth, who will buy more expensive houses and pay higher property taxes. So he makes a profit every time he poaches a California taxpayer and brings them into Texas.
Travis Brown: Well, that’s right, Bob. Everyone wants that high-income entrepreneur, that next big investor that’s taking bold risk to expand their company, create literally a new industry, or sustain a lot of other jobs in the future. And that’s why you see Governor Rick Perry so aggressive. But I also want to point out that the taxpayers you leave behind in a high-tax state who do not have the mobility that you mentioned—that you view your situation as a luxury tax to be in California—those that don’t have that luxury really face more and more dire consequences in the future if in fact the state and local revenue does not prove to be balanced or enough to sustain it. Because when those people do exercise mobility—i.e., the people that can leave, do—you’re left taxing only the tax base of people who cannot leave. And that puts a tremendous burden on many of the most vulnerable in any state.
Income Tax v. Consumption Tax [37:28]
Bob Zadek: And what’s also happening, of course, is all as a result of the very dynamic you have pointed out is, states are—and this to me is really fascinating—states are questioning whether or not to have, as you had pointed out, an income tax at all, but rather to use a sales tax, a consumption tax, to replace the income tax. Now, that’s being done for the very same reason. If you have a sales tax, you don’t punish earnings. You tax consumption.
Now, people who study this stuff say, “Oh, consumption taxes are really bad because they’re regressive, because lower-income people consume a much higher percentage of their income, therefore they pay all the sales tax.” That, of course, can be fixed by simply giving a tax credit for certain necessities to lower-income people. That’s fixable. But the second dynamic is how many states are considering getting rid of the income tax and replacing it with a consumption tax. And for me, the libertarian sense of it all is, I love that. Because if it’s a consumption tax, it’s built into the price of a product that I buy. And if I choose to buy something, I am making a choice. I am deciding I will buy something and buying it is worth the price, even building in what might be a much higher sales tax. If I don’t like the combined price, I don’t buy it. Whereas I am driven because of my DNA to earn as much as I can. And the thought that I might someday—I can’t even mouth the words, I would hate it—be driven to make a decision to earn less because I don’t get to keep enough of what I earn, that would just—it would deny me my soul. I couldn’t stand that. Whereas I don’t mind one bit paying a high sales tax because I will simply decide not to buy the product.
So the movement, born of freedom, freedom to move, is giving birth to another freedom: the freedom to earn as much as I want and to decide whether to pay a higher sales tax. So the movement away from income tax and towards a sales tax or other consumption tax is another very healthy result of exactly what you have pointed out, Travis.
Travis Brown: Well, that’s right. And you know, what choice do you have other than to not become a resident of California on how much state income tax you pay today? All the choices you just mentioned, the free consumer choices to self-regulate your consumption—and let’s review that consumption, personal consumption is up to 70% of our US GDP in America. It is literally what drives our national economy. So we know that consumption’s very important. But consumption can only occur when you have some kind of means, some kind of production or earnings. So taxing your most mobile resource, your personal income, ends up being very damaging, not just because it’s collected from your wages, but because it impacts and lessens your ability to save, to consume, or to invest, or to share it in any other way.
Bob Zadek: So your book, which really contributed so much valuable information, really is encouraging state governors to give us all more freedom. And it shows us that when they deny us freedom, they will lose us, more or less. Not every one of us, but many of those who insist upon the freedom to earn and the freedom to spend or not spend. Whatever else you may think about Governor Perry or Governor Scott in Florida or those other states, whatever else you might think about them, those states really do support freedom far more than states like California and other states.
And there is also, Travis, a very interesting study that comes out every year, a study of economic freedom. Overall freedom and economic freedom. And interestingly enough, which considers factors in addition to taxation—it includes paternalism and free choice and licensing of occupations—and what’s interesting is, on overall freedom ranking, overall, the three lowest states in the entire country: California (48), New Jersey (49), New York (50). The top three states: New Hampshire, South Dakota, and Indiana. Hmm. I wonder what the top three have in common. I wonder what the bottom three have in common.
Caller Harvey: Revenue Sources in Low-Tax States [43:27]
Bob Zadek: And Travis, before we—we’re sort of running out of time, we have about five minutes to go—we have a caller, Harvey. Welcome to the show. What’s on your mind this afternoon?
Caller (Harvey): I’d like your guest to compare the sources of revenue from states like Texas and Florida to high-tax states like New York and California. Obviously, the states have to have a big source of revenue like Florida and Texas to supply the services. I’d like to know where the revenue comes from.
Bob Zadek: That’s a great question. Travis, you have a great answer?
Travis Brown: Yeah. I mean, basically, states like Texas have been surviving with a general shift towards consumption taxes. They also have severance royalties and things like that from petroleum, but on a percentage of their gross state product, it’s less than 4% even for a large state like Texas. So generally what they see—a good example of this dependency is the state of Tennessee, which is in the middle of the country, border eight states, cities all around its porous borders where they have a very high retail consumption tax, state plus local, of 9.25 to 9.75, which for Appalachia and the Midwest is very high. They collect 75% of their tax collections from that state sales tax. Many states also have a relatively hollow sales tax base because their sales tax systems were created over 80 years ago. And I think that’s another reason why you see many other states changing and adapting and modernizing their tax code, first to consumption, also looking at other streams of revenue.
Many of the other states, by the way, in the Midwest that found shale energy plays are choosing to change their royalty systems there so that they can help lower production and taxes on income for many of their small businesses. That phenomenon is occurring in states like Ohio. What’s interesting, and we go back to the pleasure to work with Dr. Art Laffer on this, who studied this for so many years, is that state revenue growth is actually better from those states that have relied less upon income taxes. And so this is very contrary to the nature that Governor Jerry Brown has recently supported with the passage of Prop 30 in your state.
Spending Problems v. Income Problems [46:03]
Bob Zadek: And what’s also interesting is there are two factors. First of all, as states go to a consumption tax, it means our economy has changed from a goods economy to a service economy. It means taxing services: barbers, hair salons, attorneys, lawyers, accountants. Traditionally, services have not been the subject of a sales tax. It is inevitable that these services will also be taxed. And as a practicing attorney, fine with me. It just is a price my clients have to consider when they buy our services. So that’s point number one.
Point number two, part of the problem always is, as I say so often on the show, it is in part, and maybe a substantial part, a spending problem. That California starts with a decision of how much to spend and then secondarily figures out how to pay for it. Other states will determine a level of taxation that encourages growth and then say, “This is the amount of money we have to spend. Now how shall we spend it?” So if it is income first, spending second, no problem. If it’s spending first, income second, then it’s a problem. Harvey, thanks so much for your call. We appreciate you being a listener.
Caller (Harvey): Thank you for your great show, Bob.
Bob Zadek: Thanks a lot. Now Travis, what other—in your conversation with governors, we have only a few seconds left before we regretfully have to end the show—how much activity is going on at the state level? How much do you feel governors and state legislatures feeling the competition of other states? And how much of this is driven by—and this is a hard question, of course, Travis—Bobby Jindal, of course, has his eye on a presidential run, maybe Perry does as well. How much of this is driven by these state government policies, driven by what you and I believe ought to be the driver, which is competition, and how much is driven by just bare political ambition?
Travis Brown: Well, I’m pleased to say in the case of Governor Jindal, having reviewed his plan for several hours in his joint legislative committees with his Department of Revenue and many other people at the local staff level, this is a very serious, very well-balanced, and very deliberate plan. And from after looking at it, it’s clear that it’s way beyond just higher ambition and headlines. And this is also true for many other governors. Governor Brownback in Kansas, Governor Walker in Wisconsin, Governor Kasich in Ohio, all have specific plans that they feel are within reason, within strike zone of them giving more money back in the hands of taxpayers so that they can do more, invest more, consume more, and generate more activity in their state.
Bob Zadek: So it’s really being done because the states are so much in competition with each other. And of course, by just reading any media, any national media, we are so aware of the competition. We see how states—Michigan, for example, just enacted a right-to-work statute, done because they were responding to competition from the Southern states which had no right-to-work laws. We have states which are competing to bring business into a state by offering them sometimes too generous a tax package. So the competition at the state level is so healthy.
And a libertarian view of taxation doesn’t have to be just theoretical. We can point to, to prove that we are right—and by right, I mean we are proposing something that most people favor, that we are getting 51% of the vote, if you will. We don’t have to talk in abstractions about freedom and economic freedom and keeping what you earn and deciding to whom you give it. We don’t have to make these arguments in the abstract. We can point to Travis’s data and we can prove that we are right.
Now Travis, we have only about a minute left. Tell the audience about your app. It’s a really cool app.
Travis Brown: Sure. Well, How Money Walks and howmoneywalks.com, you can find everything from the book to the smartphone app. Literally in the palm of your hands, in less than several minutes, you can download the results, the true performance of your county and any other county in America by simply selecting that and looking at their net loss or gain in adjusted gross income. I encourage you to do so. It’s what governors are looking at when their data comes in. It’s why we’re having this debate and why state tax regimes can even be a hedge against some of the rising federal taxes and economic burdens. So I think it’s an important application and an important book to have out there, available on Amazon, Kindle, all the different venues you can find it. howmoneywalks.com.
Bob Zadek: It’s really cool when you’re sitting next to somebody on an airplane, find out where they live and you can see if he’s a friend or an enemy, if he’s taking your people away. Travis, thanks so much for sharing your information with us. This is Bob Zadek, 800-345-5639. I’ll be back after the hour. We’re going to talk about the Defense of Marriage Act, gay marriage, US Supreme Court, two whole days of deliberation. Which way will they decide and why? Gay marriage is the subject. 800-345-5639. Thanks again to Travis. Please stay tuned. I’ll be right back after the hour.
[Break]
The Cyprus Bank Levy and Sovereign Risk [52:25]
Bob Zadek: Welcome back to The Bob Zadek Show. 800-345-5639. I sure appreciate your spending an hour and a half with me every Sunday. We are the leading libertarian talk radio show in the Bay Area and around the country. We look at the world through the very toasty warm prism of a libertarian point of view.
We’re going to talk about gay marriage in a moment. Gay marriage is relevant because it’s an important issue, but also because the US Supreme Court, in somewhat an unusual calendaring for the Supreme Court, the Supreme Court will be hearing argument on Tuesday and Wednesday of this week on two different cases, both dealing with the subject of gay marriage, each from a somewhat different perspective.
Before we get to gay marriage, which we’ll cover for most of the segment, a few thoughts on Cyprus. Now, of course, Cyprus—why am I a libertarian guy talking about Cyprus? Well, there was an interesting issue, and the reason I say it was interesting is anytime that I think about an issue and then change my mind, I perk up because I don’t do that that often. I sort of am not always right, but I’m always sure, sort of my mindset.
And when I first heard about the government of Cyprus, which is in deep financial difficulty and under great pressure to raise revenue very fast to keep friends with its fellow members of the European community, the government of Cyprus proposed a scheme where they were going to all of a sudden, without warning, assess a tax, a meaningful tax—a number of 25% was bandied about, maybe 10%—going to tax all money on deposit in a bank account.
And my first reaction was, “Whoa, whoa. How would I feel if I woke up one morning and I was told that all of a sudden I had 10% less in my bank account than the day before just because a tax was sprung upon me?” I said to myself, “Oh my God, nothing could be more punitive or confiscatory than that. How horrible.” And I felt as somebody who respects one’s right to private property that that was as offensive to me as a government act could be.
But you know, then I thought about it. And I said to myself, “Well now, wait a second. The depositors—and I should mention that as I understand it, Cyprus does have government deposit insurance as we do with our FDIC, but the deposits, many of the deposits are uninsured, I guess because they are over the deposit insurance limit. And the government was going to tax these uninsured deposits.”
Well, then I said to myself, “Hold it, Bob.” That’s how I address myself. “Hold it, Bob. Maybe this policy isn’t quite as punitive as it first seemed. After all, the depositors in these Cypriot banks are nothing other than creditors, as you all I think know. When you deposit money in the bank, you are lending money to the bank, probably interest-free or at a very low interest rate, but you’re a creditor. Well, if one is a creditor, then one takes the risk that the one who owes you the money is not going to pay you back. And when you lend money across borders, you take what is known in finance as a sovereign risk. That is, if you buy bonds from the government of Argentina, one of the risks you run that you take willingly is that the government of Argentina will rewrite their debt and pay you less. And indeed, that’s what happened to American bondholders of Argentina back about a decade ago when Argentina just decided to stick a thumb in your eye and tell you they’re only going to pay you 75 cents on the dollar. That was a risk you take.
And didn’t these depositors into Cypriot bank accounts willingly take the sovereign risk? And wasn’t what was happening, the very high level of taxation on these Cyprus deposit accounts, wasn’t this nothing other than the realization of a risk which they took? The risk that the sovereign, Cyprus, would default. They were—when they lent money to the bank, they took that risk. So maybe it’s not so bad after all.
And I share that with you because it is—you get so wrapped up in and such a strong reaction to taxation that somehow in this context of Cyprus and its financial problems, I had a visceral reaction, an immediate reaction, which was maybe not so well thought out. And maybe I just clouded—I had my libertarian sense crowd out my business sense. And perhaps these depositors do not have a moral complaint after all. Now, they may have a business complaint—who likes to lend money and not get it back?—but I’m not so sure they have a legal or moral complaint. We’ll see how this plays out.
The Legal Status of Marriage and Gay Marriage [59:29]
Bob Zadek: Gay marriage. Gay marriage is right now a very big deal in this country. A bit of background. Marriage has for most of the history of society been a totally private affair, not driven by any governmental action. In the history of Earth, when people would commit to each other—and I’m not using the word marriage in the legal sense—when people would decide, “You’re for me and yes, I agree you’re for me as well,” and they commit to join forces and make a life and to procreate and to share income and to share labors and to live together, that is a totally private decision in which the state—and state I mean in the broad sense of government—the state doesn’t have any interest whatever. A government doesn’t care or shouldn’t care who people decide to live with, who people decide to share their money with, share their labors, who people love and who they want to procreate with. States should not care. That is a private decision. That is as private a decision as a decision to become baptized or bar mitzvahed. It is totally private. The state doesn’t care. And indeed, the state has for most of the history of the planet, the state didn’t care.
The History of Marriage Licensing and Racism [61:33]
Bob Zadek: And until about—and then all of a sudden, somewhere around 1830 or so, states—and I believe it started in New England—states decided to license what used to be an unlicensed activity. Now, license is a word that you must have—I hope that you have—an immediate and very negative reaction to. A license is a permission by a state. And remember, state means in this morning together, state means permission from the state to do something. To me, licensing should be an infrequent activity. The state for the most part doesn’t care or shouldn’t care about what activity you do so long as it doesn’t affect somebody else.
But licensing has become a big deal in this country. And in 1830, marriage, an unlicensed activity, started to become licensed. And do you know why all of a sudden in 1830 marriage became a licensed activity when it wasn’t licensed? What happened early in the 1830s that governments decided to license marriage? And when you think about it, how can a government tell you, “You cannot be with this person and procreate together unless we permit it”? How dare they? But they did. And do you know why?
Well, like many other statutes in—important statutes in this country, such as minimum wage, in this case we’re talking about marriage license, it is born of clear, blatant racism. What started to happen in the 1830s is white women started to marry black men. And marry in the sense of taking up household together and living together and having children. And our country was not ready for that. So the way to prevent that from happening is to first of all license marriage, and then once you license it, you get to say who can do it and who can’t do it. And the early state marriage licensing statutes prohibited women from marrying a drunk, a mulatto, and certain Asians, certain Asian subcultures. Yes, you couldn’t marry if you were a white woman a mulatto or a drunkard. Now, that was not done—now remember, the white woman was doing what she chose to do, dictated by her heart and her mind. The state shouldn’t care. But as a way to affect blatant social policy, states said, “You can’t do it.” So we prohibit it. So the history of marriage license, of marriage licensing, is ugly.
Marriage as Access to Economic Benefits [65:22]
Bob Zadek: Okay, now we flash forward to the present. Now the status of marriage is very unusual in the sense that if you think about it, a license in most cases is permission by the state to do something: drive a car, practice law, practice medicine, be an electrician. It’s permission by the state to do an activity. Offensive though that is.
However, what is marriage? Well, marriage is two people—it could be more, but let’s say two people—who make a decision to live together, have children perhaps, share money, share household chores, own property together, enjoy survivor benefits from Social Security, enjoy health insurance benefits. There’s a whole lot of other benefits that come from the status of marriage. But all of the activities of marriage, the activities, can be done without a license. You are free to live with who you want. You are free to share property with whom you want. You are free to procreate with whom you want. You are free to leave property to whomever you wish. You can do all of the activities of which constitute collectively marriage, you can do them without a license.
Well, if you can do all of the marriage-type things without a license, why do you need a license? Well, that’s because so many benefits in society are only available if you are, quote, “married.” So the legal status, the legal status of marriage, has nothing to do with an interpersonal relationship. It has to do with getting the benefits. Whether it’s tax benefits or survivorship benefits or health insurance benefits, getting the license is access to economic benefits. That’s all it has to do with. And under federal law, there are over a thousand benefits that inure to people who are married that don’t inure to people who aren’t married. So a marriage license, a marriage license, is merely allowing people who are married to have access to benefits that people who aren’t married don’t have.
So the whole fight over gay marriage or polygamy or any other prohibited marital status, the whole fight is not about can you live together, can you raise children. It’s about are these people who are as emotionally committed, even though they are of the same sex, the whole question is can people who are living in a marriage-type relationship, are they to be denied the 1,000-plus benefits of marriage, or are they to be allowed access to those benefits?
Now, if you frame the issue that way, how could anybody on earth argue against gay marriage? I don’t understand the argument. We are not talking about who gets to live together. We are not talking about who one gets to love or raise a family with. Those issues are done because that is permitted today. We are talking about the thousand federal and many more state-level benefits that flow to people who have the license that don’t flow to people who don’t have the license. What is the argument in favor—to support denying these same-sex married couples, but not married in the legal sense, what is the argument to deny them those benefits? There is none. 800-345-5639, if you disagree or agree, all calls are welcome.
Prop 8 and DOMA [70:34]
Bob Zadek: The point is—so the issue is not should same-sex people live together. We’re not discussing that. The issue is not should same-sex people share property. We’re not discussing that. We’re not discussing should same-sex people raise children. We’re not discussing that. We are discussing only should they have access to all of the countless legal benefits that flow from that relationship.
Now, that’s the issue before the country now. Now, there—the issue is framed and the issue comes before the Supreme Court because of two cases. Briefly, there’s California Prop 8. California Prop 8 was a proposition passed by a majority of the citizens of California which said that under the California Constitution, marriage can only be between people of different sexes. That was Prop 8. Prop 8 is being challenged on constitutional grounds as violating the equal protection clause of the 14th Amendment, and the Supreme Court will hear argument on that.
The other case is something called the DOMA, Defense of Marriage Act, a federal statute, Clinton-era federal statute, which Clinton signed, I dare say under duress, but he signed it, where Congress enacted a federal statute that said that for the purposes of federal law—remember, there are a thousand federal statutes that bestow benefits on married couples—that for the purpose of federal law, marriage can only be between a man and a woman. Now, that’s really weird because up until DOMA, the federal government has always left the issue of who is married to the states. That is a state issue. Washington does not care about that purely social issue. But yet because conservative Republicans controlled Congress at the time, they enacted DOMA, which was just mean-spirited legislation against homosexuals. So DOMA, Defense of Marriage Act, is a federal statute now before the Supreme Court testing whether you can have a federal statute that says, “We will not respect the state decision on who can be married.” That’s the issue before the Supreme Court.
The libertarian view, of course, is that states should not be in the marriage business and just get rid of marriage licenses, get rid of the whole legal concept of marriage so there is no such thing. Whether or not you are living together, who cares, and have no federal statute ever bestow different rights on people who are, quote, “married” than on people who are not, quote, “married.” That would be my view. That is the libertarian view.
Caller Terence: Procreation and Tax Deductions [73:59]
Bob Zadek: Now Terence, welcome to the show. You have a point of view on all this, I guess.
Caller (Terence): Oh yeah. I believe honestly that it’s a procreation deduction, you know, the institute of marriage. And if you can’t have kids, you can’t get the deduction. I mean, I’m a single man, I’ve never been married, I’m not gay, but I just don’t believe that we should, you know, just—it’s all about the money. It’s about nothing else. It’s about the money.
Bob Zadek: You’re exact—Terence, you’re exactly right. Now, the question is—
Caller (Terence): Because I have a Malinois, I can take my Belgian Malinois and take it to vote because it doesn’t need an ID. I can marry my dog and get a deduction or move in with a friend of mine and the government’s going to pay me money? Which is, you know, we’ve really fallen far from—
Bob Zadek: I think your dog just thought you proposed to it, it seems to be barking.
Caller (Terence): No, I’ve got two Belgian Malinois, unfortunately.
Bob Zadek: Well, Terence, that would be canine polygamy. Terence, you’re exactly right in what you—when you say it’s all about the money. Now, how would you feel about a policy that simply—or a federal statute instead of DOMA that said, “Henceforth there is no legal distinction between married and not married. That any federal statute that drew any—and they’re all economic, Terence, you’re exactly right—a federal statute that said there can be no distinction under law between married and not married. No tax deduction, no anything.” Would that appeal to you or not?
Caller (Terence): No, I think that the people that have kids, I don’t begrudge—I think they should get the deduction.
Bob Zadek: Why should I pay for somebody else’s children? Why—
Caller (Terence): You know, I’m a single guy and when I work they take 50% of my money. And I don’t make, you know, $200,000 a year. If I—you know, they always take half of my money because I’m single with no kids. So yeah, I’m a little sick of it. You know, there’s people with four kids collecting $500, $600 more a week to do the same job. But you know, what can I do? It’s not going to change like that. So I just think it should be left alone. You know, our laws were unfortunately, a lot of them came out of the Bible.
Bob Zadek: Don’t tell George Washington, quote, “It’s not going to change.” Of course it could change. Everything changes.
Caller (Terence): Yeah, if they all, you know, were hanging out somewhere else, if they all, you know, they didn’t come over from England, if they came over from let’s say, oh gee, I don’t know.
Bob Zadek: Well Terence, instead of walking down history lane, let me ask you this question. If you feel that it is important to give benefits to people solely because they have children, why should that not be based upon having children as opposed to being based upon—
Caller (Terence): I believe in the deduction and the $1,000—I believe in that. I don’t believe in, you know, if they’re deadbeats and they want to give them, you know, their collected food stamps or they’re gaming the system like that gal who’s making 80 grand. You know, 80 grand, that’s more money than I’ve ever made in one year in my life. And she collects it, you know, from the government. You know, we’ve got more than half the people taking it, less than half making it. We’re doomed, I’m sorry. You know, I lived in Mexico for eight years. The Latin American population, yeah, they’re hard-working, but also the vicious criminal types are coming here too because the pickings are good and easy.
Bob Zadek: Terence, the subject before us now is of course is gay marriage. And how would you feel, just a narrow question and we’ve got to go to another caller, but how would you feel, Terence, if there was—forgetting about benefits to children or to parents of children, focus only upon the somewhat technical legal status of marriage. What if there was no distinction on earth between people who are quote “married” or not? Is that okay with you?
Caller (Terence): Uh, no, I don’t think so. I think that—I don’t think society could run like that. I think that would be a little bit too left-leaning, you know, even though you’re libertarian and you’re your hands off. I think that would be just that’s right out of left field, man.
Bob Zadek: It’s right out of right field! But Terence, thanks so much for your call. We appreciate you being a listener.
Caller (Terence): Yep, you have a great day.
Bob Zadek: Thanks a lot.
The Libertarian View: Abolishing Legal Marriage Status [79:06]
Bob Zadek: I would point out, of course, that if you get rid of marriage, you get rid of divorce. And now there is no legal proceeding for divorce. Splitting up any relationship, whether it’s partners in an economic partnership or partners in an emotional partnership. Splitting up, as they say, splitting up or breaking up is hard to do. Well, it’s hard enough to do without all of the legal stuff, which means unwinding the legal relationship.
I would submit to you that the healthiest thing would be for society to have no legal status whatever. No form where you check a box that says “marital status.” There is no such thing. Nobody should care. It’s like saying “baptismal status.” So I hope that the Supreme Court, on whatever constitutional grounds it can, finds that the Defense of Marriage Act is unconstitutional under the equal protection clause of the 14th Amendment, and I hope that it strikes down California’s Prop 8. I would love a world without marriage as a legal status. I love obviously the fact that people care enough to live together, have children or not, but that decision is by far and away private. And treating gays as somehow second-class because they don’t get to check the marriage box is wholly offensive to me. There should not be a thousand federal statutes that give benefits to people who are quote “married.”
That’s the view from the libertarian world. Thanks so much for listening. I sure enjoyed spending an hour and a half with you. Looking forward to being with you next week as well. 800-345-5639. Bob Zadek saying so long for now.
[Outro Music]