The Ten Golden Rules of Taxation: Jonathan Williams on American Radio Journal

By any rational standard, a government should collect only the revenue it needs to fund core government services with the least amount of damage to the economy. The 10 golden rules of effective taxation from Rich States, Poor States are not revolutionary. They’re common sense. But in politics, common sense can be anything but common.

Rule number one: Tax something more, you get less of it. You tax it less, you get more of it. That’s not ideology. That’s arithmetic. The notion that people will continue to work just as hard or invest just as much regardless of how much is taken from them ignores human behavior and reality.

Rule number two: People work to improve the standard of living for themselves and their families, not for the privilege of paying taxes. If working harder means keeping less, many will choose to work less. It’s a simple tradeoff between effort and reward. But you wouldn’t know that from the way some legislators behave—as if taxation were a patriotic duty rather than a government imposition.

Number three: Taxes create a wedge between what a worker earns and what he takes home. And when that wedge grows, the economy contracts. What an employer pays is not what the employee receives. After federal, state, and payroll taxes, that paycheck may shrink by nearly half. Add in sales taxes and property taxes, and the incentives to work and hire begin to erode. And once again, that’s not hypothetical—it’s how it plays out in reality, every time a business chooses not to expand or a worker decides overtime might not be worth it.

Number four: Raising tax rates doesn’t guarantee raising revenue. In fact, it often does the opposite. As rates go up, people look for ways to shelter income, avoid taxable transactions, or simply opt out. The so-called Laffer Curve is not about magic. It’s about incentives. When people are penalized for being productive, fewer choose to be. And when tax rates fall, the economy grows—and the base of taxable activity grows with it.

Number five: There’s a point at which tax rates become counterproductive, and that point is reached sooner than most politicians dare to admit. A 0% tax rate raises no revenue—but neither does a 100% tax rate, because no one works for the privilege of paying taxes. The real question is where the sweet spot lies. Too many states are way past it—and certainly, we are in Washington, D.C.—chasing revenue with higher rates only to see economic activity vanish across state lines.

Number six: The more mobile the capital, the more sensitive it is to taxes. In the 21st century, money moves at the speed of a mouse click. Taxing capital too heavily, and it will leave. That’s not theory. It’s happening. When California raises taxes on businesses, Nevada smiles. And when New York clamps down on investment income, Florida sends a thank-you card.

Number seven: Tax one activity heavily, and you distort the others. When you raise a business tax, you get fewer jobs and less personal income tax as well. Lower them, and the opposite happens.

Rule number eight: A broad base and a low rate will beat a narrow base and a high rate every time. High tax rates encourage loopholes, deductions, and evasion. A low rate with a broad tax base reduces distortions and compliance costs—but it also treats everyone equally. Something our current progressive tax system claims to do, but doesn’t. The tax code should be simple enough for ordinary citizens to understand—and not a full-employment program for accountants and lobbyists.

Number nine: Transfer payments function as reverse taxes on work. The more generous the welfare benefits, the less there is an incentive to work. In high-benefit states, people can receive the equivalent of a $20-an-hour job without working. That’s not compassion. It’s economic sabotage. And because welfare benefits are phased out as income rises, they impose punishing effective tax rates on the poor—and discourage upward mobility and the very work needed to escape poverty.

And finally, rule number ten: People and businesses can move—and they do. If state A raises taxes and state B cuts them, you don’t need an advanced economics degree to predict what happens next. Factories relocate. Families move. And taxpayers vote with their feet.

If politicians want economic growth, job creation, and long-term prosperity, they would do well to learn by these 10 golden rules of taxation—or at the very least, stop acting as if incentives don’t matter when it comes to policy. Because they do.