Thursday, June 28, 2012

The Advantages of High Taxes and the Disadvantages of Low Taxes

Republican legislators often offer themselves up for ridicule by being steadfast in their denial of well-established findings in fact-based areas of study such as the sciences and history. An article by Brian Chappatta for Bloomberg is the latest to poke fun at their strange beliefs. His focus is on the insistence of Republican governors like Sam Brownback of Kansas and Mary Fallin of Oklahoma that cutting state income taxes will lead to greater economic prosperity. Chappatta utilizes data presented in a study by the Institute on Taxation and economic Policy (ITEP).
"The findings show cutting state income taxes to stimulate growth relies on ‘flawed analysis’ based on the theories of economist Arthur Laffer, said Carl Davis, a senior analyst at ITEP in Washington and author of the report. Laffer’s work was cited by Republican Governors Sam Brownback of Kansas and Mary Fallin of Oklahoma as a reason to cut income taxes as a way to stimulate job growth and attract business."

It seems that Brownback has launched his own corollary to the low-tax theory: general cuts in taxes should be combined with an increase in tax for the bottom quintile.

"Kansas passed legislation this year that would cut taxes by more than $760 million a year, though the poorest 20 percent of Kansans, with an average income of $11,000, will have taxes increased, according to a separate ITEP report."

If the governors were correct one might expect low-tax states to fare better economically than high-tax states.

"Nine states have no personal income-tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. The nine states defined as "high rate"by ITEP were California, Hawaii, Maine, Maryland, New Jersey, New York, Ohio, Oregon and Vermont."

How did these states fare over the period 2001-2010? Note that the Great Recession was captured in this interval. Consider median household income:

"Median household income declined an average 0.7 percent among the nine "high-rate" states, compared with a 3.5 percent drop in the nine states without such a levy."

And as for economic activity during this period:

"Per-capita economic output increased an average 10.1 percent in the nine "high-rate" states....The average growth rate for the nine no-tax states was 8.7 percent."

These two comparisons are not terribly dramatic. They suggest that cutting state income taxes might be counterproductive, but keep in mind that state income taxes are not expected to be the prime factor in determining overall economic health. The point being made is that the governors’ contention is not based on fact, but on faith.

Chappatta provides a fitting summary of faith-based economics:

"’Those who don’t believe in Santa Claus or the Easter Bunny anymore, and actually look at facts and data, recognize that since supply-side economics has been implemented in America, the complete opposite of what supply siders had promised has occurred,’ Martire said."

While state income taxes are not likely to dominate the character of a state, they do have a role to play.

"’States that have higher overall taxes have better capacity to weather economic downturns,’ Martire said. ‘Then they can maintain their spending on the salary of workers, who then go out and spend their paychecks on the local economy’."

It might also be argued that states with a higher revenue base have more options in providing an environment where people and companies will want to come and live: better infrastructure, good schools, a healthy environment, cultural charms..... In fact, dynamic economies will demand these things and apply pressure for increased revenue. States that think starvation brings health have few options and see little need for any.


  1. You are a clown.

  2. This made no sense. The truth is, people advocating for bigger government and higher taxes do not want what they believe to be easily understood. If people understood it, then none of their beliefs would ever be credited. Taxes should not be difficult to understand and here is a simple version of how taxes work. When the government taxes heavily, it leaves less for the small businesses to grow and in turn slows job growth and will eventually lead to job loss so the company can cover for the lost revenue due to taxes. This then leads to fewer workers paying income taxes which leads to less government income. When individuals are taxed more, they have less as well and therefore have to cut spending at businesses which further hurts the local economy. An example is this: If the government charged 90% taxes, nobody would work and who blames them. It wouldn't be worth working 40 hours per week for a hundred dollars. They would be more inclined to sit at home and collect welfare, food stamps and other government subsidies.
    Now on the flip side, when the government takes less in taxes these businesses have more money to expand with which can be having a new building built and employs the local construction company or hiring new employees, but either way the money stays local and in the hands of the people who can use it and be thrifty to make their money do the most it possibly can. Lower taxes give more incentive to work hard to make your own way, not for the government to make your life what it is. All of this leads to more people being hired at good wages and they all pay the lower tax, but with more people paying taxes the government in turn makes the same or even more in revenues from the taxes even though these taxes are lower.
    Simply put, government needs to tighten its belt like the rest of small businesses around the country and learn to be thrifty like the rest of America. So anyone who reads this, just beware of bloggers like this guy, who use twisted number from ultra left-wing media like Bloomberg, whose only goal is to make government as big as possible. I hope this helps clarify the truth of taxes that this man was not telling. By the way, Texas, has a surplus of about 9 billion dollars while California is somewhere around the 700 billion mark. So saying that states who spend more is a good thing for the economy is just as bad as believing in Santa Claus.
    Thanks for reading.


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