Steve
gave me a copy of Laffer, Moore and Willliams book, Rich States, Poor States.
Bombshell conclusions! Laffer is
the economist who first studied Sweden and concluded that there was a relative
maximum at which the state can tax. Tax
more than that and revenues actually fall because people are hiding their
incomes and avoiding taxes. He then
applied this to USA and found that during the Eisenhower Administration, taxes
reached this max and that by cutting taxes, Kennedy actually achieved higher
revenues. This Supply Side Theory then
became the hallmark of Reagan’s revival of Carterville, Thatcher’s revival of
the British Disease and the Pacific Tigers’ (Japan to Australia) fabulous
success . Steve Moore is the well-known
guest on FOX business channel and senior economist for Wall Street
Journal. Jonathan Williams worked for
the non-partisan Tax Foundation for years and is now director for Center for
State Fiscal Reform.
These
guys researched the matter of ‘what makes a state prosper’ and considered many
things. For example, they looked at
right-to-work states. Turns out that
right-to-work states are slightly more prosperous than Union shop states but
not significantly. This either overturns
older research in the 70’s or maybe it is simply because only about 10% of
people are still unionized today, down from 42% in the fifties. State
indebtedness also somewhat correlates, but not strongly. They began looking at taxation because tax
incentives matter to people. People
don’t just work for the purpose of giving it all to the government. They found there was no clear link between
sales tax rates and economic performance.
Similar results were found for property taxes. But when they studied
personal income and corporate taxes, the explosions of correlation began.
Now
just because you have correlation between two things, doesn’t mean you have
cause. Just because you have poor students
in school that are malnourished, doesn’t mean that food makes brainpower or
that all the skinny girls are dumb. It
may mean that the true cause of poor school performance is uncaring parents
sending kids to school without breakfast and not caring if the kid gets an
education either. So when you deal with
economics, which can’t do double-blind testing, you rely on duration and broad
scope for proof. If it has been going on
for a long time in a variety of circumstances, then correlation is likely causal proof.
So
here’s what they found. 9 states with no
personal income taxes were compared with the 9 states with highest income taxes
and highest overall taxes. In every
category of growth, the 9 Zeros outperformed the 9 Soakers—Gross State Product
growth, employment growth, population growth and tax revenue growth. Moreover virtually ALL the Zeros did better
than the Soakers. Two stunning
statistics: In employment growth, all nine Zero Taxers outdid the 9 high tax
states. (Performance of each Zero was better than best performance of ANY
high tax state.) If this upcoming election is going to be about jobs, put that
in your pipe and smoke it! Tax revenue
growth to the state was better in 8 of 9 Zero taxers than in the average of
high-tax states. Think of that. If you are a liberal, progressive,
love-big-government leftist, why wouldn’t you go for revenue growth for your
state that comes with zero personal income tax policy? You would only oppose it if you are more
concerned with government control over people’s lives via high tax rates, than
with actual government largess.
The
zero taxers come from all around the country—Alaska, Texas, New Hampshire, South
Dakota, Nevada, Tennesee—and so do the high taxers—California, Oregon, Hawaii,
New York, New Jersey, Ohio, Maryland. The only regional skew is that high tax
states do not have any representatives from the deep South. Hence some liberals have cried foul saying
that climate, not low taxes, is the reason for all the growth of the Zeros. That’s amusing. So people are fleeing the paradise states of
California and Hawaii and moving to Texas, Florida, and Arizona which have a
summer fit only for mad dogs and Englishmen?
Or Alaska? Give me a break!
And
this growth result has been going on since at least 1971. Among the Zero states, personal incomes have
grown about 45% per decade vs. 25% in Soaker States. 11 states have initiated an income tax since
1961. ALL eleven have shrunk as a
percentage of the US economy since. ALL
eleven have shrunk in population as a % of US.
The
relationship between corporate taxation and economic growth behaves in much the
same way though less pronounced. The 8 lowest
vs. 8 highest corporate tax states has 52% vs. 43% GSP
growth. (Pers. Inc. Tax comparison of 9 Zeros vs. Soakers is 59% vs. 42% for example.) And the authors run possible groups excluding heavy mineral-rich states like WY and AK through all these calculations to see if reliance on severance taxes makes an effect. It is not much.
growth. (Pers. Inc. Tax comparison of 9 Zeros vs. Soakers is 59% vs. 42% for example.) And the authors run possible groups excluding heavy mineral-rich states like WY and AK through all these calculations to see if reliance on severance taxes makes an effect. It is not much.
The
upshot is that personal income taxes is the most likely target to reform. This might surprise some pro-business Republicans
who would prefer to lower corporate tax rates.
It might surprise some Democrats who would like nothing better than to
tax the rich more. And it probably
surprises the conventional wisdom that since taxes are miserable, states should
spread the misery around by taxing everything possible. Texas and Florida really do know what they
are doing. California, Hawaii and New
York are great states with many advantages but taxwise they are fools. We will have to watch what happens to
Wisconsin and New Jersey under new management.
But most of all it tells Kansas and Oklahoma to press forward with Zero Tax reforms. To create a corridor of states from South
Dakota to Texas where taxes are low would not just transform these states
individually. It would make a free
enterprise zone where incoming businesses could choose their state of preference
based on other factors while staying in the tax-free zone. That is, the “French Quarter Effect”—people go
to the French Quarter of New Orleans to dine, not because of a single
restaurant, but because there is an entire zone of fine dining.
So
then, could our state use a better economy, more jobs and greater revenue?