Today’s corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market.People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.It shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.Likewise, who is gobsmacked when they are told that the two wealthiest Americans—Bill Gates and Warren Buffett—hold the bulk of their wealth in the nontaxed form of unrealized capital gains? The composition of wealth also responds to incentives. And it’s also simple enough for most people to understand that if the government taxes people who work and pays people not to work, fewer people will work. Incentives matter.People can also change the timing of when they earn and receive their income in response to government policies.
By Arthur Laffer, June 8, 2010 WSJ Op-ed