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Old 05-18-2009, 11:52 PM  
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Soak The Rich

And lose em.

http://online.wsj.com/article/SB124260067214828295.html

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Soak the Rich, Lose the Rich

Americans know how to use the moving van to escape high taxes.


By ARTHUR LAFFER and STEPHEN MOORE

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.




Mr. Quinn and other tax-raising governors have been emboldened by recent studies by left-wing groups like the Center for Budget and Policy Priorities that suggest that "tax increases, particularly tax increases on higher-income families, may be the best available option." A recent letter to New York Gov. David Paterson signed by 100 economists advises the Empire State to "raise tax rates for high income families right away."


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.


And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.


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.


Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.


Martin Feldstein, Harvard economist and former president of the National Bureau of Economic Research, co-authored a famous study in 1998 called "Can State Taxes Redistribute Income?" This should be required reading for today's state legislators. It concludes: "Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust. . . . A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees."


More recently, Barry W. Poulson of the University of Colorado last year examined many factors that explain why some states grew richer than others from 1964 to 2004 and found "a significant negative impact of higher marginal tax rates on state economic growth." In other words, soaking the rich doesn't work. To the contrary, middle-class workers end up taking the hit.


Finally, there is the issue of whether high-income people move away from states that have high income-tax rates. Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the "soak the rich" tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average.



Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.


This result was all the more remarkable given that these were years when the stock market boomed and Wall Street gains were in the trillions of dollars. Examining data from a 2008 Princeton study on the New Jersey tax hike on the wealthy, we found that there were 4,000 missing half-millionaires in New Jersey after that tax took effect. New Jersey now has one of the largest budget deficits in the nation.


We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.


Those who disapprove of tax competition complain that lower state taxes only create a zero-sum competition where states "race to the bottom" and cut services to the poor as taxes fall to zero. They say that tax cutting inevitably means lower quality schools and police protection as lower tax rates mean starvation of public services.


They're wrong, and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.


Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation -- much worse than those in New Hampshire. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.


One last point: States aren't simply competing with each other. As Texas Gov. Rick Perry recently told us, "Our state is competing with Germany, France, Japan and China for business. We'd better have a pro-growth tax system or those American jobs will be out-sourced." Gov. Perry and Texas have the jobs and prosperity model exactly right. Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year.
The Texas economic model makes a whole lot more sense than the New Jersey model, and we hope the politicians in California, Delaware, Illinois, Minnesota and New York realize this before it's too late.
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Old 05-19-2009, 12:49 AM   #2
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Ah, good ol' Art Laffer. The man whose theories only work at 70% marginal tax rates. Also, the man that blew up a mutual fund in about a year.

This analysis is overly simplistic and doesn't account for many factors that would influence something like this. This is about as shoddy as economic writing gets.

Quote:
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.
WTF is mostly? He puts all these other stats in there but conveniently leaves out exactly what % of people leaving those states that actually move to one of those states listed. This is info that they clearly have (and it's very telling that he didn't include it).

Also, did he account for the bubble in real estate bubble along the coasts in which many people that had significant property gains sold and moved to cheaper states? This is a major factor here in Dallas-Fort Worth. There are a ton of California transplants and many of them moved to get to a lower cost of living state.


Here comes one of the most impressive cherry picking of data sections I have ever seen.

Quote:
Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.
Funny how he cites a couple of studies later but doesn't cite any here.


Quote:
Martin Feldstein, Harvard economist and former president of the National Bureau of Economic Research, co-authored a famous study in 1998 called "Can State Taxes Redistribute Income?" This should be required reading for today's state legislators. It concludes: "Since individuals can avoid unfavorable taxes by migrating to jurisdictions that offer more favorable tax conditions, a relatively unfavorable tax will cause gross wages to adjust. . . . A more progressive tax thus induces firms to hire fewer high skilled employees and to hire more low skilled employees."

More recently, Barry W. Poulson of the University of Colorado last year examined many factors that explain why some states grew richer than others from 1964 to 2004 and found "a significant negative impact of higher marginal tax rates on state economic growth." In other words, soaking the rich doesn't work. To the contrary, middle-class workers end up taking the hit.
I don't even know where to start here. He's arguing that taxes encourage people to move and then by use of an ellipsis says that higher taxes cause firms to hire less high skilled people. All I can say is wow. How does a higher tax rate cause them to hire less skilled employees and more low skilled employees? Compensation is an expense which lowers taxable income for a business. It makes no difference it it's a person making a $1000 or 10 people making $100. It results in the same compensation expense for the business.

For the second paragraph, why doesn't he cite the other factors? Also, how much is the significance of the impact? Statistically significant or just significant in the view of that author? Then he pulls out another Carl Lewis quality long jump and says that middle class workers take the hit without any justification.


Quote:
Finally, there is the issue of whether high-income people move away from states that have high income-tax rates. Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the "soak the rich" tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.

This result was all the more remarkable given that these were years when the stock market boomed and Wall Street gains were in the trillions of dollars. Examining data from a 2008 Princeton study on the New Jersey tax hike on the wealthy, we found that there were 4,000 missing half-millionaires in New Jersey after that tax took effect. New Jersey now has one of the largest budget deficits in the nation.
I really like the cherry picking here. This is some great contortion here. A 3 year period? Seriously? Couldn't have anything to do with the real estate bubble starting to crack in 2005 could it? Also, I really like the red herring of stock market gains somehow having something to do with the 2008 Princeton study showing a decrease in half millionaires. Again, the job losses and real estate crash are given no aknowlegdement in his article when they are very prominent factors in peoples' net worths.

Quote:
We believe there are three unintended consequences from states raising tax rates on the rich. First, some rich residents sell their homes and leave the state; second, those who stay in the state report less taxable income on their tax returns; and third, some rich people choose not to locate in a high-tax state. Since many rich people also tend to be successful business owners, jobs leave with them or they never arrive in the first place. This is why high income-tax states have such a tough time creating net new jobs for low-income residents and college graduates.

Those who disapprove of tax competition complain that lower state taxes only create a zero-sum competition where states "race to the bottom" and cut services to the poor as taxes fall to zero. They say that tax cutting inevitably means lower quality schools and police protection as lower tax rates mean starvation of public services.

They're wrong, and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.
So apparently Mr Laffer and his co-author are education experts now. What's funny is he doesn't mention Texas Schools (which suck ass) even though he cites them as the favored model later. Another thing that really sticks out here is the lack of discussion of the difference in property taxes.

Quote:
Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation -- much worse than those in New Hampshire. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.

One last point: States aren't simply competing with each other. As Texas Gov. Rick Perry recently told us, "Our state is competing with Germany, France, Japan and China for business. We'd better have a pro-growth tax system or those American jobs will be out-sourced." Gov. Perry and Texas have the jobs and prosperity model exactly right. Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year.

The Texas economic model makes a whole lot more sense than the New Jersey model, and we hope the politicians in California, Delaware, Illinois, Minnesota and New York realize this before it's too late.
Here we get back to Texas (which has high property taxes which he conveniently ignores). He quotes Gov. Good Hair and how Texas is competeing with Germany et al. Again, another fine job of cherry picking. Texas is a massive state with a ton of natural resources (oil and gas) which has been responsible for a majority of the growth in the state.

Art Laffer is a shrill who has no business giving economic advice.
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Old 05-19-2009, 08:23 AM   #3
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Ah, good ol' Art Laffer. The man whose theories only work at 70% marginal tax rates. Also, the man that blew up a mutual fund in about a year.
I don't know which theories you're talking about (since you didn't specify), but Laffer's most famous theory, represented by the Laffer Curve, works at any marginal tax rate.
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Old 05-19-2009, 08:32 AM   #4
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Old 05-19-2009, 08:39 AM   #5
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Since Laffer is a Shrill with no business giving advice I'd love for our own non-partisan economic genious to layout why higher taxes bring jobs, higher levels of prosperity and economic growth.

Further, I'd love to see why people are moving out of high tax states in droves, and why low tax states are growing--since it has nothing to do with taxes.

Come on KC Native, educate us!
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Old 05-19-2009, 08:48 AM   #6
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This analysis is overly simplistic and doesn't account for many factors that would influence something like this. This is about as shoddy as economic writing gets.
After reading your response, I've concluded that it's about as shoddy as criticism of economic writing gets.

Most of your criticisms complaining about a lack of exhaustive detail can be accounted for by the fact that this is a newspaper editorial not an article from an economics journal or an academic thesis.

I'll address one of your problems specifically:

Quote:
Originally Posted by KC native View Post
I don't even know where to start here. He's arguing that taxes encourage people to move and then by use of an ellipsis says that higher taxes cause firms to hire less high skilled people. All I can say is wow. How does a higher tax rate cause them to hire less skilled employees and more low skilled employees? Compensation is an expense which lowers taxable income for a business. It makes no difference it it's a person making a $1000 or 10 people making $100. It results in the same compensation expense for the business.
You missed their point completely. They're not talking about business taxes, they're talking about income taxes. When they say that "a relatively unfavorable tax will cause gross wages to adjust" they mean that a high individual tax rate on the wealthy will force businesses to increase the amount they offer to these high income earners so that they can compete with the after-tax compensation packages of competing businesses in low tax states.

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Art Laffer is a shrill who has no business giving economic advice.
What's a "shrill" and what business do you have assessing economic advice given that you've made at least two basic mistakes in your analysis (as described above)?
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Old 05-19-2009, 09:08 AM   #7
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I don't know which theories you're talking about (since you didn't specify), but Laffer's most famous theory, represented by the Laffer Curve, works at any marginal tax rate.
Is that so? Why don't you actually look at the Laffer Curve instead of making claims which you know nothing about. Patty, your word games can't change the shape of the Laffer Curve. The Laffer Curve says that a cut in tax rates will bring in higher government revenue (which has been shown during Reagan and Shrub Jr that it's not true). If you're cutting from high (as in 70% and above) tax rates then yes a tax cut will pay for itself however moving from a 40% tax rate to a 35% tax rate creates deficits.
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Old 05-19-2009, 09:13 AM   #8
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anyone ever hear of the KC native curve?

..didn't think so.
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Old 05-19-2009, 09:17 AM   #9
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Come on KC Native, educate us!
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Old 05-19-2009, 09:23 AM   #10
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After reading your response, I've concluded that it's about as shoddy as criticism of economic writing gets.

Most of your criticisms complaining about a lack of exhaustive detail can be accounted for by the fact that this is a newspaper editorial not an article from an economics journal or an academic thesis.
Just because you don't understand my criticisms doesn't make them untrue. Also, I'm not asking for exhaustive detail but rather an honest argument. This editorial is full of logical fallacies (specifically if A happens and B happens then C must be because of A and B) and cherry picking. If you look at the changing dates and metrics he uses it's quite clear to anyone with a financial background that he is cherry picking his data to fit his argument.

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I'll address one of your problems specifically:



You missed their point completely. They're not talking about business taxes, they're talking about income taxes. When they say that "a relatively unfavorable tax will cause gross wages to adjust" they mean that a high individual tax rate on the wealthy will force businesses to increase the amount they offer to these high income earners so that they can compete with the after-tax compensation packages of competing businesses in low tax states.
That still doesn't explain how it's any different from hiring 10 people who make the same amount as 1 person. They claim that higher taxes cause businesses to hire more low skill employees. Since a low skill worker is going to be less productive they are going to have to hire more low skill workers to make up for the difference in productivity. Net effect is no different.





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What's a "shrill" and what business do you have assessing economic advice given that you've made at least two basic mistakes in your analysis (as described above)?
So, what do you have to say now that I've shown you that your claims of errors are incorrect?
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Old 05-19-2009, 09:24 AM   #11
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Is that so? Why don't you actually look at the Laffer Curve instead of making claims which you know nothing about. Patty, your word games can't change the shape of the Laffer Curve. The Laffer Curve says that a cut in tax rates will bring in higher government revenue (which has been shown during Reagan and Shrub Jr that it's not true). If you're cutting from high (as in 70% and above) tax rates then yes a tax cut will pay for itself however moving from a 40% tax rate to a 35% tax rate creates deficits.
As I expected, the problem here is that you don't understand the Laffer Curve not that the Laffer Curve is flawed.

The top portion of the Laffer Curve predicts that cutting tax rates will increase revenue, but the bottom portion predicts that further cuts will cause decreases in revenue.



Of course, the value of maximum revenue point and the exact shape of the curve will vary depending on the complex interaction of a lot of different variables other than tax rates, but that's not a flaw in the concept, just an inherent difficulty in it's application.
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Old 05-19-2009, 09:27 AM   #12
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anyone ever hear of the KC native curve?

..didn't think so.
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Old 05-19-2009, 09:28 AM   #13
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Originally Posted by SBK View Post
Since Laffer is a Shrill with no business giving advice I'd love for our own non-partisan economic genious to layout why higher taxes bring jobs, higher levels of prosperity and economic growth.

Further, I'd love to see why people are moving out of high tax states in droves, and why low tax states are growing--since it has nothing to do with taxes.

Come on KC Native, educate us!
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Let's take Texas for example. When oil and natural gas took off, employment in Texas took off. This state's growth has been fueled by the oil and gas business. Texas also has vast open spaces where wind energy is being put into to place. These three sectors alone are responsible for most of Texas' growth. Don't you think that these dynamics are a little more relevant that taxes rates in explaining growth?

This editorial was focused on income tax rates while ignoring the total tax picture. Yes, Texas has no income tax but we do have high sales tax (even on most groceries) and we have high property taxes. You can't make claims that growth is dependent on low tax rates while ignoring the differences in tax environments in different areas.
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Quote:
Originally Posted by Iowanian View Post
I'm just a little pussy from Iowa
Posts: 18,906
KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.
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Old 05-19-2009, 09:29 AM   #14
KC native KC native is offline
a toda madre o un desmadre
 
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Join Date: Feb 2009
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Quote:
Originally Posted by stevieray View Post
garble garble garble.
Hey Elvis, maybe you should lay off the benzos so I can understand you.
__________________
The diameter of your knowledge is the circumference of your actions. Ras Kass

Quote:
Originally Posted by Iowanian View Post
I'm just a little pussy from Iowa
Posts: 18,906
KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.
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Old 05-19-2009, 09:32 AM   #15
KC native KC native is offline
a toda madre o un desmadre
 
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Join Date: Feb 2009
Location: Fort Worth, TX
Casino cash: $17393
Quote:
Originally Posted by patteeu View Post
As I expected, the problem here is that you don't understand the Laffer Curve not that the Laffer Curve is flawed.

The top portion of the Laffer Curve predicts that cutting tax rates will increase revenue, but the bottom portion predicts that further cuts will cause decreases in revenue.



Of course, the value of maximum revenue point and the exact shape of the curve will vary depending on the complex interaction of a lot of different variables other than tax rates, but that's not a flaw in the concept, just an inherent difficulty in it's application.
Ah, that's a nice symmetrical graph which completely ignores reality. Anyways, I've never said it was completely invalid however when you look at the graph my point stands. When you're moving from a very high tax rate then the curve works however when you're moving from lower rates to even lower rates it doesn't pay for itself. Thanks for showing that you don't know how to read a post nor a graph.
__________________
The diameter of your knowledge is the circumference of your actions. Ras Kass

Quote:
Originally Posted by Iowanian View Post
I'm just a little pussy from Iowa
Posts: 18,906
KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.KC native is too fat/Omaha.
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