"High taxes keep a wealthy community wealthy"?

Economics Economics Questions
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1

At my place of employment, my boss and I work side by side, and we often pass the day by talking politics and economics. He is a pretty conservative guy (primarily on social issues), but he also has a generally anti-tax/anti-government philosophy (though more subdued). He supported Huckabee during the presidential primaries if that’s any indication. He got a letter from the local City Hall with a monthly update on what they’ve been doing and other random facts. In the letter was a chart that showed our community and several surrounding communities, and the local income tax rates that each of these communities had. The two economically healthiest communities in our area had vastly different tax rates. One (Beavercreek, OH) has no local income tax, while the other (Oakwood, OH) has the second highest tax rate in the area (second only to Dayton, OH, which is an economic disaster area).

We got to talking about how some communities do so much better than others, and he mentioned that it’s nice that Oakwood has such high taxes, because it keeps poorer people out of the neighborhood. Immediately, that statement struck a sour chord in my mind, but I wasn’t exactly sure how to respond, because, to an extent, he was right–Oakwood is a very wealthy area and is very cost prohibitive to families that don’t have a lot of income, and they’re well known for having a very safe, clean, and prosperous environment.

I made the argument that there are other ways to “discriminate” against the poor (just using this phraseology for the sake of the argument, leaving aside the moral considerations), and that one was to maintain a higher cost of living than the surrounding area. I went on that maintaining a higher cost of living would have to be done by having higher prices, and that the only way that businesses in the area could have higher prices and not go out of business is if they offered superior products and services. I told him about Bastiat’s “That Which Is Seen And That Which Is Not Seen,” and talked about how Oakwood could be even more prosperous if they lowered their taxes, because if all the money that was taken from Oakwood residents (in order to fund the lavish public facilities, the immaculate public parks and flora, and all the extravagant little bells and whistles that makes Oakwood Oakwood) was left in the hands of the residents, those residents would have the money to keep their neighborhoods just as clean and immaculate AND they would be able to invest in the local economy, making the area even more prosperous, and creating wealth instead of stealing it. He seemed to understand and eventually agree, but the point is a good one:

Can high taxes keep a wealthy community wealthy?

How far on- or off-target was I with this response, and what are your thoughts?

2

That seems rather paradoxical. Communities don’t get wealthy by means of taxation (unless they’re taxing someone else from another community that is) so how would you expect taxation to keep a community wealthy. Fundamentally wealth is an ample satisfaction of the needs of all the individuals that make up a community and Mises did some pretty sterling work back in the 1920s to show (quite correctly) that problems of social calculation make it all but impossible for people’s needs to be met adequately without market pricing mechansims. Taxation is essentially the antithesis of market pricing mechansims - it takes stuff out of the market’s hands and puts it in the hands of some central controller for them to decide what everyone “needs” (something the central controllers are completely incapable of doing - it’s impossible for them to have the vaguest idea of what everyone needs… it’s pretty difficult for individuals to accurately forcast their own needs, so often do they change, let alone the needs of another or indeed an entire group or other people).

So, in short, no taxation can’t keep a community wealthy. In all likelihood it will make them poorer. It could conceivably impose prohibitive costs on the residents in a community, but this wouldn’t be “keeping them wealthy” - it might prevent other less wealthy people from mingling with them, if that’s what you meant.

Very likely they would spend the money on something better (i.e. which better satisfied their needs) if they didn’t have to give it to government (which probably doesn’t satisfy their needs to anywhere near the same extent that they could do themselves). This is no guarantee that prices would become prohibitive for poor people though. An abundant supply of cheap goods would go a long way to making anyone wealthier and this might very well be the way in which the residents of the said community found themselves to be wealther once taxes were reduced. Without high taxes, shopkeepers could offer their goods more cheaply without hurting their margins and, presuming there is genuine competition in the communities you’re talking about I’d expect this is exactly what would happen. But then if the main objection to poor people is their lack of disposable income, you probably wouldn’t have much to worry about since an abundant supply of cheap goods would also make poor people less poor (maybe even to the point of being middle class)… or is it their relative poorness that your boss objects too - as opposed to their absolute poorness?

3

My boss’s basic rationale was more along what you said at the end of your second paragraph. He was lauding Oakwood’s high taxes as a tool to keep other less wealthy people from coming into the community with all the problems that are stereotypically associated with the poor (higher crime, less interest in keeping property looking nice, etc.).