Analysis: Proof That Reducing Income Taxes Significantly Increases Economic Vitality

We have often talked about the high level of taxation that the American political class places on hard working Americans. Recently, we ran a post where we found that the Tax Freedom Day this year is a day later than last year, with the average American working almost until the end of April just to pay their taxes to all levels of government. This is more than the average American spends on clothes, food, and shelter COMBINED.

And it is not as if the average American gets much good or benefit in exchange for this taxation oppression:

• The Federal government’s welfare programs lose over $200 billion a year via wasteful spending and outright criminal fraud.
• The IRS readily admits that it utterly fails in its mission to collect lawful taxes by not being able to collect almost $400 billion a year from tax evaders, placing more tax oppression on those Americans who do comply with the law.
• We have talked about how the Federal government continues to spend taxpayer wealth on stupid programs and projects such as the study to determine when dogs became man’s best friend, developing a video game to simulate prom week, and other such nonsense.
• The Washington political class continues its rich history of crony capitalism, giving ill-advised taxpayer funded incentives and tax breaks to large corporations and industries that support the continual reelection campaigns of politicians.
• Over the decades, despite high and oppressive taxation levels, the country’s political class continue their perpetual failure to resolve any major issue facing American including a lost war on drugs, escalating health care costs, leaky borders, out of control military spending, the lack of a national energy strategy and plan, etc.

So this sets up the theme of today’s post: would we be better off if taxes were dropped significantly, meaning that politicians would have less government bureaucracies to manage, fund and interfere into our lives and freedoms, considering that high taxation gets us very little in return, as witnessed from our previous statements above?

One way to consider what would happen if taxes were lowered is to see what happens at the state level when tax rates vary. Consider the latest tax analysis and rankings from the American Legislative Exchange Council (ALEC). ALEC recently released its “Rich State, Poor State”analysis and rankings. Their effort is based on the following criteria: “The Economic Performance Ranking is a backward-looking measure based on a state’s performance on three important variables: State Gross Domestic Product, Absolute Domestic Migration, and Non-Farm Payroll Employment—all of which are highly influenced by state policy. This ranking details states’ individual performances over the past 10 years based on this economic data.”

Thus, this effort gives us a good measure across three parameters (overall wealth in a state, how many people are moving in or out of a state looking for a better life, and employment opportunities) of how well the economic conditions are in a state. What we did next is to cross this state level economic conditions with the state income tax rates as published by the Tax Foundation. In our analysis we took the highest marginal income tax rate in each state as a surrogate for the tax burden in that state, i.e. the higher the the highest marginal income tax rate is the more oppression the tax burden in that state.

The top economic performing states according to the ALEC analysis, along with the Tax Foundation tax rate information is listed below:

1. Utah 5.0%
2. North Dakota 3.2%
3. Indiana 3.4%
4. North Carolina 5.8%
5. Arizona 4.5%
6. Idaho 7.4%
7. Georgia 6.0%
8. Wyoming 0.0%
9. South Dakota 0.0%
10. Nevada 0.0%
11. Texas 0.0%
12. Virginia 5.8%
13. Alaska 0.0%
14. Wisconsin 7.6%
15. Florida 0.0%

A few observations:

• The arithmetic average of the above top performing states is 3.4%.
• Six of the top performing states do not have any state income tax at all.
• All of the states without a state income tax in the country are in the top fifteen performing states from an economic performance perspective.

Now let’s look at the worst performing economic vitality states over the past ten years as measured by the ALEC analysis with their top marginal tax rate also indicated (note: in this list, New York is the worst performing state and West Virginia is the 15th worst performing state:

1. New York 8.8%
2. Vermont 8.9%
3. Minnesota 9.8%
4. Connecticut 6.7%
5. New Jersey 8.9%
6. Oregon 9.9%
7. California 13.3%
8. Montana 6.9%
9. Maine 7.9%
10. Pennsylvania 3.1%
11. Illinois 5.0%
12. Rhode Island 6.0%
13. Delaware 6.6%
14. Hawaii 11.0%
15. West Virginia 6.5%

A few observations:

• The arithmetic average of the tax rates of these fifteen worst performing states, 7.9%, is substantially more than twice the average of the best performing states.
• None of the worst performing states are state income tax free.
• Only one of the worst performing states’ top state income tax rate, Pennsylvania, is equal to or less than the average of the fifteen best performing states.

Now, just because there is a strong inverse correlation between tax rates and economic growth (i.e., the lower the tax rate the higher economic vitality) does not mean causality. However, given that the ALEC analysis is measured along three pertinent economic parameters (state GDP, migration, and employment), you could also make the case the lower tax rates make for or cause better economic conditions.

Thus, at least at the state level, allowing residents to keep more of their worth from a state income tax perspective correlates with higher state GDP, better instate migration, and/or better employment opportunities. And that correlation could also be a causality relationship also, less taxation = better state economy.

Given that we get few benefits from the Federal government, a political entity that is better at wasting taxpayer wealth than providing vital and efficient services, why not try the state model at the national level? What have we got to lose? We pay high for low returns, what if we pay less and still get low returns, how much worse off are we than if we continue to pay higher taxes?

And the argument that taxes have to stay high to provide these inadequate government services is inane. Most of this blog’s writing has been to show how the Federal government and the politicians that operate it waste our taxpayer wealth everyday of the year. We have already provided a comprehensive plan of how to take $9 TRILLION out of the Federal government expense stream:

http://loathemygovernment.blogspot.com/2012/02/united-states-of-purple-presidency-plan.html

Thus, our conclusion is take this $9 TRILLION savings plan, reduce government spending, reduce our tax burden, and see if the same good economic results occur nationally that happened at the state level. What have we got to lose except not finding out when dogs became man’s best friend and other such government funded nonsense.

Our book, "Love My Country, Loathe My Government - Fifty First Steps To Restoring Our Freedom And Destroying The American Political Class" is now available at:

www.loathemygovernment.com

It is also available online at Amazon and Barnes and Noble. Please pass our message of freedom onward. Let your friends and family know about our websites and blogs, ask your library to carry the book, and respect freedom for both yourselves and others everyday.

Please visit the following sites for freedom:

Term Limits Now: http://www.howmuchworsecoulditget.com
http://www.reason.com
http://www.cato.org
http://www.bankruptingamerica.org
http://www.conventionofstates.com
http://www.youtube.com/watch?v=08j0sYUOb5w