Prescription for Growth: Eliminate Income Taxes

by Scott Moody on March 5, 2012

in Tax & Spend

Recently, the Sun Journal published an op-ed titled “Repealing Income Taxes Won’t Help State Economies” written by Carl Davis at the leftist Institute on Taxation and Economic Policy (ITEP). He concludes:

“The bottom line is this: no-tax states aren’t booming, and lawmakers should not expect their states’ economies to improve if they join the no-tax or low-tax club. In fact, in terms of the economic factors that matter most to families — income levels, and whether or not they can find a job — the states with the highest top income tax rates are, in most cases, doing better than the no-tax states. If the economy is really the concern of lawmakers railing against the income tax, it’s time for them to put away Arthur Laffer’s tax cut snake oil.”

Dr. Laffer, et al, has responded to these attacks in a new study titled “Economics 101″ published by the good folks at Oklahoma Council of Public Affairs. They make five counterpoints:

1) First, they state that: ”Just because some high-tax states perform well from time to time does not mean that high tax rates do not retard growth. The issue whether high tax rates raise or lower the likelihood of a state achieving prosperity–not whether there is the occasional exception.”

More specifically, they examine the population growth rates between 1970 and 2010 which shows that no-personal income tax states enjoy a significant population growth premium over the highest-personal income tax states.

2) They delve into a couple of case-studies which show that economic performance was worse after the enactment of an income. In both California and New Jersey, economic growth slowed after putting their personal income tax in place.

3) ITEP’s criticism centers on the exclusion of population growth in determining “economic success” because  population is influenced by more than just taxes. Laffer counters by showing that taxes affect both income growth and population growth. In fact, the two are so intertwined that it is impossible to talk about one without the other–which is why Maine’s Demographic Winter problem needs much more attention.

4) While ITEP claims that population flows are more related to climate, Laffer counters that since climate doesn’t change then why would there ever be any shifts in population flows? The reality is that population flows to change when economic policies change. For instance, Oklahoma is now seeing an influx of people in-migrating from California–did California’s weather suddenly change for the worse?

5) Finally, Laffer challenges ITEP to “provide a theory that shows why tax rates, or increasing income-tax rates, increase economic growth.” Naturally, such a theory is impossible since “economics is all about incentives” and taxes simply reduce the incentive to migrate, work or start new businesses.

Laffer summarizes:

“From a theoretical perspective and in everyday life, incentives drive all economic behavior. Taxes are a negative incentive. People do not work, invest, or engage in entrepreneurial activities in order to pay taxes. They engage in such economic activities in order to earn after-tax income. When government increases its share of the income earned by its citizens, the incentive to engage in growth-enhancing economic activities falls; alternatively, the disincentive to these activities rises. The higher the tax on the next dollar earned (the marginal tax rate), the larger the disincentive.”

Unfortunately, Maine has a front-row seat in seeing these economic differences in action by simply looking at the differences in economic performance with New Hampshire (which has no personal income tax or sales tax). As shown in the chart below, Maine’s economic growth has slowed relative to New Hampshire’s each time Maine enacted a new tax–first the sales tax in 1951 and then again with the income tax in 1969. Repealing the income tax is simply the first step on the road to economic recovery.

Chart Showing Differences in Economic Performance in Maine versus New Hampshire

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