Tax Policy 101: Raising taxes diminishes incentives

I’m a little late on blogging about this, but apparently Phil Mickelson has created quite a stir  with his comments about the tax policies of America and his state of residence, California:

Mickelson, regarded as the “People’s Choice” for his connection with fans, put his popularity on the line with polarizing comments about how much he has to pay in state and federal taxes. The four-time major champion said it might lead to “drastic changes,” such as moving from his native California, and that it already caused him to pull out of the San Diego Padres’ new ownership group.

Mickelson has apologized for his comments, which basically consist of telling the truth about the impact of state and national tax changes on his life:

“Finances and taxes are a personal matter, and I should not have made my opinions on them public,” Mickelson said in a statement released Monday night. “I apologize to those I have upset or insulted, and assure you I intend not to let it happen again.”

Mickelson first made a cryptic reference to “what’s gone on the last few months politically” during a conference call two weeks ago for the Pebble Beach National Pro-Am, where he won last year for his 40th career PGA Tour title. After his final round Sunday at the Humana Challenge, he was asked what he meant.

“There are going to be some drastic changes for me because I happen to be in that zone that has been targeted both federally and by the state, and it doesn’t work for me right now,” he said. “So I’m going to have to make some changes.”

Mickelson said the new federal tax rate, and California voting for Proposition 30 to increase taxes on the earnings over $250,000, contributed to total taxes that tap into more than 60 percent of his income.

Golf Digest magazine, in its annual survey of top earners in the sports, said Mickelson made just over $45 million last year on and off the golf course.

For all the controversy, Mickelson’s comments appear to reflect the opinions of many PGA players, including Tiger Woods:

A majority of PGA Tour players live in Florida and others in Texas, two states that have no state income tax. Tiger Woods grew up in Southern California and played two years at Stanford. He was a California kid when he won an unprecedented three straight U.S. Amateur titles, but when he made his professional debut in Milwaukee a week later, he was listed as being from Orlando, Fla.

“I moved out of here back in ’96 for that reason,” Woods said Tuesday.

In short, Mickelson is proving every supporter of higher taxes on the rich wrong – tax policies do affect those at the top. They do change behaviors and impact choices. They do prevent business investment (Mickelson decided to not invest with the San Diego Padres because of the tax changes).

In addition to incentivizing Mickelson to change his business decisions and potentially move his residence, raising his taxes does two other bad things: first, it gives strength to the lie that both California and America have a tax revenue problem, not a spending problem. Second, it says to all Americans their money belongs first to the government, and whatever is left belongs to the earner.

Mickelson is not the only upper-income person changing residences because of tax policies, and he won’t be the last. But his might be the most high-profile example as to why higher taxes are not the answer to the nation’s spending problem.