Wednesday, July 21, 2010

One Fish, Two Fish, High Tax, Low Tax

With apologies to Dr. Seuss, maybe that will be the name of a future book I'll write about the anti-competitive impact of high tax rates. And one of my chapters will be about what we can learn from the states. Richard Rahn's column in the Washington Times reviews some of the key evidence on this issue, noting that states without income taxes are enjoying better economic performance than states with income taxes. Not surprisingly, he also finds states with the highest tax rates are the ones in the most trouble.
Why is it that some of the states with the biggest fiscal problems have the highest individual state income tax rates, such as New York and California, while some of the states with the least fiscal problems have no state income tax at all? High-tax advocates will argue that the high-tax states provide much more and better state services, but the empirical evidence does not support the assertion. On average, schools, health and safety, roads, etc. are no better in states with income taxes than those without income taxes. More importantly, the evidence is very strong that people are moving from high-tax states to lower-tax-rate states - the migration from California to Texas and from New York to Florida being prime examples. ...It is interesting that the high-tax-rate states also, on average, have much higher per capita debt levels than states without income taxes. ...There have been a number of both empirical and theoretical studies showing the negative impacts of state income taxes and particularly those with high marginal rates on economic growth within the state. A recent study published in the Cato Journal by professors Barry W. Poulson and Jules Gordon Kaplan, which was carefully controlled for the effects of regressivity, convergence and regional influences in isolating the effect of taxes on economic growth in the states concluded: "Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue." ...Income taxes, as contrasted with consumption (i.e., sales) taxes and modest property tax rates, are far more costly to administer and do far more economic damage (by discouraging work, saving and investment) and are far more intrusive on individual liberty. The states without state income taxes overall have had far better economic performance for most of the past several decades than have the income tax states - particularly those with high marginal taxes.

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