Posted: February 1st, 2014

Managerial Econ

The State of California is conducting a grand economic experiment.  Over the past decade, it has consistently raised taxes on Californians and especially upon upper income Californians.  Its highest marginal state income tax rate now is 12.3%.  (This is the state rate, not the federal rate).  The latest rate increase was from 10.3% to 12.3% for the highest earners.

There is some evidence that upper income Californians have been leaving the state in response to these rate increases, but the final evidence is not in.

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Gov. Brown of California has advocated raising tax rates in order to raise more tax revenues because the state faces a humongous financial deficit.   He clearly believes the tax rate increase will help deal with this deficit.

Under what precise economic circumstances will the state tax rate increase actually raise additional tax revenues for the State of California?   Under what circumstances will it actually reduce the state’s tax revenues?  (Hint: Think of the tax increase in the same way you would think about price increase, say, on gasoline.)

What assumptions about economic conditions in California have you made in your answer?

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