Tax Arbitrage July 24, 2006Posted by federalist in Taxation.
Democratic governments have demonstrated a tendency to grow in size. The inflationary force stems from political pandering and special interests (the tyranny of many motivated minorities).
Democracies do occasionally muster quantum reversions towards small government. Witness the great reforms of the early 1980s in the United Kingdom, the United States, and New Zealand.
But in the normal course of affairs tax arbitrage is the sole beautiful mechanism that can oppose the inflationary forces on government. If you get enough free nations in close enough market proximity, then people and businesses can choose to move away from the governments with high taxes, onerous regulations, and entrenched special interests, and towards those with lower burdens.
In the U.S. each state has devised its own tax system, which provides a large market for tax arbitrage. For example, five states have flat personal income tax rates (IL, IN, MA, MI, PA). Seven states have no personal income tax (AK, FL, NV, SD, TX, WA, WY). Five states have no sales tax (AK, DE, MT, NH, OR). And California can’t stand that it has low-tax Nevada right on its border, and that so many of its millionaires and entrepreneurs are choosing to move there:
Nevada transplants account for more than 20% of all tax disputes made public earlier this year by California tax authorities.
In a national and world market of competing polities, tax court may be the last refuge of big government.