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Trading  | April 28, 2018

Over the past decade, more than 3.5 million Americans have left high-tax blue states like California, New York, and many others in the Northeast, for low-tax red states like Arizona, Florida, and Texas.

While the migration has been happening for years, conservative economists Arthur Laffer and Stephen Moore are forecasting the next significant movement out of blue states could be right around the corner.

Earlier this week, in an op-ed in the Wall Street Journal titled “So Long, California. Sayonara, New York,” Laffer and Moore spoke about a provision within the brand-new tax bill that could create a mass migration of roughly 800,000 people – fleeing their estates in California and New York for better days in low-tax states over the next three or so years.

Both authors said capping the deduction for state and local taxes (SALT) to $10,000 will accelerate the velocity of the migration of high-income earners from the Northeast and California to regions like “Arizona, Nevada, Tennessee, Texas, and Utah.”

“High earners in places with hefty income taxes – not just California and New York, but also Minnesota and New Jersey – will bear more of the true cost of their state government.

Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states – including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.”

The authors describe how a high-income earner in Silicon Valley or Hollywood would see their effective income-tax rate in California surge from 8.5 percent to 13 percent. The pair also said similar figures would be seen in Manhattan, once New York City’s income tax is factored in. This would mean, a high-income earner in NYC making $10 million or more could see a potential tax hike of 50 percent.

Laffer and Moore are speculating that these hikes could be the trigger point to spark an exodus of residents out of high-tax liberal states to lower or no income tax regions.

“In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states. This migration has been happening for years. But the Trump tax bill’s cap on the deduction for state and local taxes, or SALT, will accelerate the pace. The losers will be most of the Northeast, along with California. The winners are likely to be states like Arizona, Nevada, Tennessee, Texas and Utah.”

Although 90 percent of taxpayers are untouched by the change, high-income earners in places with overbearing income taxes — such as California, New York, Minnesota and New Jersey — “will bear more of the true cost of their state government,” said the pair. Liberal states like Connecticut and Illinois could be in serious trouble, as high-income earners “will feel the burn now that they can’t deduct these costs on their federal returns,” the authors added. However, on the flipside, there are nine states — including Florida, Nevada, Texas, and Washington — that impose no tax at all on earned income.

Since the global financial crisis in 2008, low-tax states like Texas and Florida have gained nearly 1.4 million and 850,000 residents, when compared to other states. On the other hand, California and New York have collectively lost more than 2.2 million residents in the same period, according to Laffer and Moore.

The pair said the exodus could force a crisis for liberal states, meanwhile, red states should brace for an influx of new residents.

“Red states ought to brace themselves: The Yankees are coming, and they are bringing their money with them. Meanwhile, the exodus could puncture large and unexpected holes in blue-state budgets.”

They also said high-tax blue states should realize that the shift could force a “fiscal bloodbath.”

“As far as we can see, the only way for blue states to prevent this coming fiscal bloodbath is to start taking tax competitiveness seriously — and to cut their tax rates in response. Progressives should do the math: A 13% tax rate generates zero revenue from someone who leaves the state for friendlier climes.”

“Blue states ought to be able to lower their taxes and spending dramatically without jeopardizing vital services,” the pair write, warning that as the battle for residents among states heats up, high-tax blue states will either have to lower taxes or face a “fiscal bloodbath.”

Meanwhile, Texas Republican Gov. Greg Abbott fired the first shot at New Jersey residents last week, enticing them to migrate to Texas for lower taxes.

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