Will Jeffrey Gundlach Lead An Exodus From High-Tax States?Advisor Perspectives
As high-tax states like California, New Jersey and New York contemplate spending less or taxing even more, the backlash is growing. Now wealthy residents like Jeff Gundlach are grabbing headlines for expressing a sudden interest in “low tax, well governed” states.
Could millions follow Gundlach’s lead, fostering an exodus? Since the 1950s, the question has kept countless social scientists gainfully employed.
Charles Tiebout, an economist and geographer at the University of Washington, cracked open the debate in 1958, publishing a now famous paper in the Journal of Political Economy. At the time, most economists had more or less concluded that public goods and services – schools, trash pickup, and many others – were not responsive to market forces. Unlike ordinary consumers, who can withhold purchases or only buy things when the price drops, taxpayers didn’t have that option: They pay the tax and they get the services, whether they need them or want them.
Tiebolt took issue with this consensus. He argued that geographical mobility offered a way for ordinary citizens to bring market forces to bear on the unresponsive beast of government. Tiebolt put it this way: “Just as the consumer may be visualized as walking to a private market place to buy his goods, the prices of which are set, we place him in the position of walking to a community where the prices (taxes) of community services are set.” As he bluntly summarized his argument: “Spatial mobility provides the local public-goods counterpart to the private market’s shopping trip.”
This was an elegant explanation, and it made a lot of sense: Tiebout’s “consumer voters” would shop around for locales that hit the sweet spot of maximum services for minimum taxes. He gave an example where lifeguards in a town with beaches got higher wages through higher taxes. Residents who didn’t care about beaches would have to make a decision: Eat the cost or pick up stakes. Either way, market forces would triumph.
Academic economists embraced the idea, comparing it to the magic equilibrium they saw in the private economy. But as Tiebolt himself acknowledged, it actually wasn’t so simple. And this was the part that got lost in subsequent popularizations of what became known as the “Tiebout hypothesis.”
First, Tiebout had titled his paper “A Pure Theory of Local Expenditures.” This wasn’t a reflection of the messy reality of life, but a rarefied abstraction. In a footnote, he even acknowledged that he was proposing an “extreme model,” where residents chose to put all their worldly possessions into a moving truck with the same carefree calculation that they brought to the purchase of pork chops.
Read the full article here by Stephen Mihm, Advisor Perspectives