Socialism vs. The Laffer Curve

Mike Dunn – Author – mutualfunddirectory.org

Socialism is in the news and why is it Important to Investors?

Margaret Thatcher (famous Great Britain Prime Minister) said it best: “Socialism is great until you run out of other people’s money.” For most people on this investor information website, YOU ARE the “other people’s money.” Regardless of where you fall on the political spectrum, investor’s wealth (your wealth) is the target of the socialists. The 1960s slogan from the communist party was “Eat The Rich.” Unfortunately, I am sure you will hear that slogan resurrected in the next political cycle. This not what many investors what to hear for many reasons.

What is the Laffer Curve and how does it affect investors?

According to the “Laffer Curve,” rich people can and will live anywhere. At some point, a percentage of rich people may move from high taxed areas to lower-taxed areas like Florida, Texas, South Carolina or Nevada. In other words, at some increased tax rate, state and local governments will actually collect less in taxes after raising tax rates because of some their tax base has moved away and taken their money to be taxed with them.

What is the end result of the Laffer Curve?

A person making $1,000,000 will pay $52,500 per year in state income taxes if that state’s rate is 5.25%. In the State of New York, the tax rate is 8.82%. The same person who makes the same $1M in NY pays, $88,200 in state taxes if they stay. However, if they move away, they would pay $0.00 X 8.82% = $0.00 in taxes to the state of New York. California’s income tax rate is 13.3%. In California, due to supply and demand, the tax rate is so high that “you have to pay 4X more to rent a U-haul one way to Texas” than from Texas to California. The U-haul case study is a clear example of the end result of the Laffer Curve.

How does the relocation of wealth affect investors?

When a factory or any large employer leaves a small town, the jobs and income in a town nearly stop. The town tends to “dry up” as people must leave town to find work. When the tax rate drives rich people from a state with their wealth and investment leaving an area, the macroeconomic multiplier effect slows. The further economic slowing, or downward economic spiral, drive even more people to leave the area. On the other hand, the area where the rich people move to with the lower tax rate may see an economic boom. Investors want to invest in an area that may see high economic growth or an economic boom. They should focus on growth niches that will benefit from the increased local business.

Author’s Note

I go to great lengths to keep politics out of this website. My goal is to help everyone. There are plenty of other sites on the web and newsfeeds who make it very clear they are right. My focus is macro and microeconomic information and analysis focused on helping investors.