The left is facing yet another potentially devastating challenge to its high-tax, big-government agenda: Tax competition is breaking out everywhere.
Free marketers believe in competition. That competition includes prices, quality, labor costs and, something often overlooked, tax rates.
Unfettered competition typically leads to lower prices and higher quality goods and services in the private sector. But it can also lead to lower tax rates when local, state and national governments compete to attract people and businesses.
One of the major concerns at the recent World Economic Forum in Davos was the Trump-Republican tax reform law. It lowered the corporate tax rate from 35 percent—the highest in the developed world—to 21 percent, about equal to most of the European Union economies.
For decades, and especially during the Obama years, other countries have benefited tremendously from high U.S. corporate tax rates, which pushed many U.S. companies to merge or “invert” with foreign companies in order to procure the foreign country’s lower corporate tax rate.
At the same time, EU bureaucrats would pressure any member country with a lower-than-average corporate tax rate (e.g., Ireland) to raise it, fearing that EU-based companies would move to the lower-tax countries. But some enterprising EU countries may now decide to keep their lower corporate tax rates, or lower them even further, to compete with the U.S.
Something similar is now happening among the U.S. states.
States set their own tax rates. Some states pride themselves and boast about their efforts to keep taxes low. Not New York, New Jersey, Illinois and California, to name some of the worst offenders. Those states’ politicians relish their high tax rates—their citizens not so much—and frequently try to bump them even higher.
So when the Republican tax law capped at $10,000 the amount of state and local taxes (SALT) people can deduct from their federal tax bill, which exacerbates the gap between low-tax and high-tax states, several blue-state leaders turned, well, blue.
They are desperately seeking some way to repeal the $10,000 deduction cap or find a work-around.
New York Governor Andrew Cuomo and other high-tax leftists—like so many EU leaders—fear that even more people and businesses will join the growing exodus fleeing their states. Cuomo has filed suit, but it will surely fail.
The federal government has the constitutional right to set its tax rates as high or as low as it wants. And it has the right to determine what individuals and companies may deduct from their federal taxes. High-tax states will simply have to decide whether they want to compete on tax rates or not.
Thus the tax reform law directly lowered taxes for millions. And it may be indirectly responsible for lowering taxes for millions more, both here and abroad.