These days, however, they can be journalists as well, because we’re watching economic theories playing out in real time — in European economic crises and in images of riots in the streets of major cities there.
The latest example is the visible proof of the “Laffer Curve” — the principle that raising taxes can have the opposite of the intended effect, by driving away economic activity and thereby reducing revenues. Higher tax rates, less tax revenue.
“Spain’s corporate tax take has tumbled by almost two-thirds from pre-crisis levels as small businesses fail and a growing number of big corporations seek profits abroad to compensate for the prolonged downturn at home,” the Reuters news agency reports. “That the companies have continued posting profits at all is largely thanks to earnings abroad, but as foreign profits are generally taxed where they are made, Spain’s coffers have seen less and less.”
That’s because money — capital — is mobile. And so are capitalists, by the way. We noted in July that the wealthy in Italy were quietly slipping their dock lines, and sailing their yachts to harbors in other countries — just ahead of a big tax hike.
Italy didn’t just lose the taxes it hoped to collect. It lost much more.
The same thing is happening now, with corporations, in Spain.
“In 2010, 30 of Spain’s 35 blue chip companies had subsidiaries in territories considered tax havens, according to the latest report by Spain’s Observation Group for Social Corporate Responsibility,” Reuters explains. “The organization, which is partially subsidized by the Labor Ministry, put the number at 18 before Spain’s economic crisis began.”
Spain is beginning to connect the dots, however.
“While the government wants to increase tax returns, it doesn’t want to limit companies’ scope to invest and employ more,” Reuters adds. “Its 2013 budget unveiled last week focused on spending cuts rather than new taxes.”
Many domestic states have seen the same phenomenon. Maryland had a “millionaire’s tax” that started in 2007. And it had an exodus of upper-income residents and some businesses that started in 2007, as well.
That “soak the rich” tax hike resulted in a net loss of $1.7 billion in state revenues, according to estimates.
President Barack Obama isn’t paying attention. He wants to raise taxes on the “wealthy,” but his definition of that word includes individuals making $250,000 and more, and many small companies, too. In a recent debate, he called this “a new economic patriotism.”
Economics is called the “dismal science,” but it’s only a science at all in that it has theories that can and should be measured against history.
Now, however, some of those theories are being played out before our eyes.