It’s The Income Tax, Stupid
WANT A REAL ECONOMIC “STIMULUS?” THIS THIS IS THE TAX POLITICIANS NEED TO CUT …
By Howard Rich || As politicians hunt for votes in the final days before this November’s elections, they would be wise to take a look at fresh data proving the efficacy of income tax relief as an economic stimulant. More than any other government levy, the income tax is directly linked to the health of the economy – with lower marginal rates promoting growth and higher ones inhibiting it.
This bedrock free market principle was reaffirmed this month in the form of a new study from economists Arthur Laffer and Stephen Moore examining state income tax rates.
First let’s look at the raw numbers – compiled by Laffer and Moore using data provided by the Bureau of Economic Analysis, U.S. Census Bureau and Bureau of Labor Statistics.
With regards to popular migration Laffer and Moore found the nine states that do not levy any individual income tax saw their populations expand by an average rate of 13.9 percent during the most recent decade (2001-10). That’s significantly higher than the national average of 8.8 percent. Meanwhile the nine states with the highest income tax rates saw their populations expand by an average of only 5.5 percent.
On the productivity front, the nine “no income tax” states posted average increases in gross state product of 56.1 percent from 2001-10 compared to 45.4 percent nationally and 41 percent for the nine highest-taxed states.
Want jobs? Despite a major recession at the end of the decade, America’s nine “no income tax” states saw their non-farm payrolls expand by 5.5 percent from 2001-10 – well above the average national increase of 0.6 percent. The nine highest-tax states? Their employment actually shrank during the prior decade – by 1.6 percent on average.
These diverse metrics all point to the same unmistakable conclusion: Lower income taxes stimulate the economy, higher income taxes limit its growth.
Certain left-leaning researchers contend that this correlation between economic growth and low income tax is merely “coincidental,” but there is data supporting this fundamental linkage dating back several decades. In 2001 for example Ohio University economist Richard Vedder published research which revealed that between 1990-99, three million Americans voted with their feet – moving out of states that levied income taxes and into states that didn’t.
Vedder also conducted extensive research on state income levels dating all the way back to 1957, concluding that personal income growth was more than twice as high in states that didn’t raise their income taxes (or raised them only marginally) compared to states that enacted larger income tax hikes.
“The income tax is the champion of bad taxes, in terms of its destructive effect on people, prosperity and their economic well-being,” Vedder concluded.
High income tax rates choke off economic growth on two key fronts – consumer activity and small business expansion. Taxpayers have less disposable income to pump into the economy while small businesses, the primary drivers of job creation in our national economy, have less money to invest in hiring. It’s a double whammy – and there’s no amount of “fair share” class warfare rhetoric that can explain it away.
Consider this: The U.S. Joint Committee on Taxation recently concluded that the 3.5 percent of American taxpayers who report annual business income over $250,000 a year – i.e. those who would see their tax rates increase under Barack Obama’s plan – generate 53 percent of all small business income in America.
This isn’t just about taxing wealth, though. According to a recent Ernst & Young study, 54 percent of Americans are currently employed at companies whose owners file taxes individually. Is it really that difficult to imagine the economic carnage that would follow from raising their marginal rates?
“Taxing rich people and giving the money to poor people will increase the number of poor people and reduce the number of rich people,” Laffer and Moore conclude. “The dream in America has never been to make the rich poorer. It has always been to make the poor richer. The best form of welfare is a good, high-paying job, and the best tax for creating jobs is a low-rate flat tax.”
Indeed – and the further our politicians move us away from this demonstrable reality (as Obama continues to do) the further they move us away from prosperity.