01:00 AM EST on Saturday, March 18, 2006

This editorial is instigated by the Rhode Island debate over whether to make its income-tax system roughly commensurate with that of Massachusetts, which we believe is competitively necessary -- indeed, simply common sense.

One of the central requirements of good public policy is to understand, accept, and work with human nature. Failure to do so leads to disaster.

Consider human acquisitiveness and possessiveness. People will generally look to their economic self-interest. But in so doing, they usually create goods and services of value for the broader society.

It is government's job to referee between our selfish interests and society's communal needs, which are met in no small part by taxes. Of course, no one has come up with a perfect balance between the need to encourage people to work and produce -- and take big economic risks (which most people fear) -- and paying for such public requirements as law enforcement, schools, physical infrastructure and welfare.

Each side needs the other. Capitalists need a stable society with solid public infrastructure and services; all of society needs capitalists to energize the provision of goods and services. In each jurisdiction, the ratio of duty and benefit between them swings back and forth. And it can get murky.

What is clear, however, is that we must study human nature and how it responds to incentives and disincentives. Some folks say that taxes should always go up and/or stay up to pay for new or expanded public programs. After all, human needs and/or wants are infinite. And many people consider the very existence of rich people a moral and aesthetic affront, and would like to do away with them -- to make everything perfectly "fair," at least economically. Better to have everyone poor. That was tried in communist states. The effect, besides the deaths of millions, was economic paralysis, which wasn't very fair even to poor people, and the creation of the new sole class of rich and privileged people: the ones running the government.

Meanwhile, some people, especially in the social services, assert that taxes aren't all that important to people with plenty of money. But that is a fantasy. Just look at the big ads in the Florida papers enticing people to spend money on making the Sunshine State their official domicile to lower their taxes. Consider these headlines over ads for financial consultants: "You Might Be Costing Your Family Millions . . . If You Haven't Declared Florida Domicile" and "Leave a Legacy -- Not a Tax Payment."

(The advice to rich people from these tax-reduction entrepreneurs includes, by the way, sharply reducing their charitable giving in the state they want to leave, so as to help protect their new-found status as Florida residents. Sometimes proving that you live in Florida six months and one day a year isn't enough to satisfy the revenue agents in the high-tax state you're trying to flee.)

So Florida is chockablock with refugees from high-tax states who have decided to lower their taxes by moving themselves and their money out of state.

And many middle-class people, including former public employees, also migrate to lower-tax states in their retirement. Before their move, some proclaim the need to boost public spending in their home states, but once they no longer directly benefit from it as much, they flee the cost of such government. But then, they are merely making a rational decision.

Taxes are far from the only reason people move, of course. That, to many, Florida's nice winters offset its stifling summers (and there's always air conditioning) is more than enough. Further, very good public services in high-tax states (Minnesota, for instance) can reduce the irritation that affluent folk might feel in paying for them.

Still, the presence of so many "private-wealth management" firms in the Sunshine State serving so many people from, well, here tells the tale.

Rhode Islanders must bear that in mind in crafting realistic tax policies. This doesn't mean that the Ocean State should become a low-tax state; its history and culture would almost certainly prevent that. But as long as Americans can move where they want within the country, Rhode Island must familiarize itself with and adjust to the policies of other states. There is no perfect formula, but to deny the role of taxes in the movement of money is foolish, however "fair" we want life to be.

Policymakers must work with human nature, not as we wish it, but as it is. So the Ocean State at least shouldn't be less competitive in tax policy than its big neighbor Massachusetts.