Rich State, Poor State: Taxing Truths
“Don’t confuse me with the facts. I’ve got a closed mind.” These words were famously uttered by Rep. Earl Landgrebe (R-IN), a Nixon partisan to the bitter end, at the Watergate hearings. They are all that remain of that legislator’s political legacy. And yet, they reveal a truth. Michael Kinsley defines a gaffe as when a politician tells the truth — some obvious truth he isn’t supposed to say. A statue should be raised in Rep. Landgrebe’s memory for daring to state explicitly one of the governing principles of modern American government: “Don’t confuse me with the facts.”
Obama has taken the position that tax increases — apparently including a whopping half trillion dollar tax increase scheduled to hit on January 1, 2013, called “Taxmageddon” — are the way to go. He seems convinced that not only is this the responsible thing to do, but it is the popular thing to propose. It brings to mind the story recorded in Jeff Birnbaum and Alan Murray’s “Showdown at Gucci Gulch” (Random House, 1987, p. 35), of Walter Mondale at the Democratic convention. Upon nomination he delivered the line “Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.” He then privately turned to Ways and Means Chairman Dan Rostenkowski and said, “Look at’em, we’re going to tax their ass off.” Mondale, famously, went on to lose 49 out of 50 states in a landslide of historic proportions.
Either high tax rates are bad for people — economically or socially (or both) — or they are not. One of the hallmarks of Washington is the degree to which it is guided by dogma rather than evidence, including the left’s dogma that high taxes are good. But “Facts are stubborn things; and whatever may be our wishes, our inclinations, or the dictates of our passion, they cannot alter the state of facts and evidence.” (John Adams, 1770.)
Therefore, it is extraordinarily refreshing when a group of public intellectuals issue a high profile analysis of what’s going on in the real world rather than relying on the doctrinaire polemics that have become the staple of American politics. Each year, the American Legislative Exchange Council, a network of almost 2,000 (about one-third of all) state legislators, issues a rigorous analysis of the impact of 15 different economic policies on the 50 States: Rich States, Poor States. This important report can be downloaded for free, or purchased, here. It is co-authored by iconic economist Arthur B. Laffer, by Wall Street Journal editorial board member Stephen Moore, and by ALEC’s director of the Center for State Fiscal Reform, and Tax and Fiscal Policy Task Force, Jonathan Williams.
ALEC is one of the most influential and respected civic institutes in the United States and one with which this columnist is professionally associated in working, with American Principles in Action, toward equitable public employee pension plan reform. ALEC stands for “limited government, free markets, and federalism.” By virtue of these principles, it recently has become the target of a hard left vilification campaign led, at least in part, by Van Jones. Jones was Obama’s “Green Jobs” White House Czar. Jones issued a midnight resignation from his White House post when the media began to investigate whether he had, perhaps merely carelessly, lent his personal prestige to a 9/11 Denier group as well allegations of ties to a Marxist militant group, STORM, some years before.
Rich State Poor State’s essence is an empirical assessment of the economic policies of all 50 states, both currently and prospectively. It explores the correlation between high taxes (and other economic policies that are defiant of free markets) and the actual social and economic vibrancy of each of these states.
The authors present the key variables they have determined will allow states to thrive, or cause them to struggle, “the ten golden rules of effective taxation.” These are:
· “When you tax something more you get less of it.
· Individuals work and produce goods and services to earn money for present or future consumption.
· Taxes create a wedge between the cost of working and the rewards from working.
· An increase in tax rates will not lead to a dollar-for-dollar increase in tax revenues, and a reduction in tax rates that encourages production will lead to less than a dollar-for-dollar reduction in tax revenues.
· If tax rates become too high, they may lead to a reduction in tax receipts. The relationship between tax rates and tax receipts has been described by the Laffer Curve.
· The more mobile the factors being taxed, the larger the response to a change in tax rates. The less mobile the factor, the smaller the change in the tax base for a given change in tax rates.
· Raising tax rates on one source of revenue may reduce the tax revenue from other sources, while reducing the tax rate on one activity may raise the taxes raised from other activities.
· An economically efficient tax system has a sensible broad base and a low rate.
· Income transfer (welfare) payments also create a de facto tax on work and, thus, have a high impact on the vitality of a state’s economy.
· If A and B are two locations and if taxes are raised in B and lowered in A, producers and manufacturers will have a greater incentive to move from B to A.”
The authors then rank the states according to the ALEC-Laffer “Economic Competitive Index.” This is based on 15 policy variables. “Generally speaking, states that spend less — especially on income transfer programs, and states that tax less — particularly on productive activities such as working or investing — experience higher growth rates than states that tax and spend more.” In other words, smart economic policy creates a bias toward opportunity and prosperity, stupid economic policy creates a tendency toward stagnation and austerity. At the top of the list of Economic Outlook Rankings for 2012 are, from the top down, Utah, South Dakota, Virginia, Wyoming and North Dakota. At the bottom, beginning with the worst, are New York, Vermont, Illinois, Maine and Hawaii.
The correlation is not perfect — as Laffer and Moore write in The Wall Street Journal about their findings, “Taxes aren’t all that matters, to be sure, and low-tax states don’t always outperform high-tax ones. Often people who smoke don’t get cancer, and sometimes people who don’t smoke do get cancer, but that doesn’t mean it’s smart to smoke. It’s a dangerous gamble to raise taxes on capital and businesses to nearly the highest rates in the world and hope that nothing bad will happen.”
It is refreshing to see policy analysts operating from real world experience rather than from doctrine. Policy makers in Washington would do much better to take their cue from what actually creates opportunity and prosperity in the real world. Those who aspire to be elected, or re-elected, to public office, state and federal, would do well to take to heart the lessons of Rich States, Poor States … and remember what happens when a candidate looks down upon the voters and says, “We’re going to tax their ass off.”
Originated at Forbes; used at request of author
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