Inquiry into the Nature and Causes of the Wealth of States

ARTHUR B. LAFFER, PhD, is the founder and chairman of Laffer Associates, an economic research firm focusing on interconnecting macroeconomic, political, and demographic changes. STEPHEN MOORE is chief economist at The Heritage Foundation. He focuses on budget, tax, and monetary policy. REX A. SINQUEFIELD was a co-founder and director of Dimensional Fund Advisors LP. Since retirement, he has become one of Missouri’s leading philanthropists and a dedicated supporter of public policy change. TRAVIS H. BROWN is the CEO and co-founder of Pelopidas, LLC, a public affairs and issue-advocacy firm. He frequently contributes to Fox & Friends and Forbes.com and is the author of How Money Walks.

• Prologue xiiiChapter 1 The Fall from Grace: The Story of States 11 and the Income Tax Adopted 1The Implementation of an Income Tax—A Terrible Mistake 1That Giant Sucking Sound Is People, Output, and Tax Revenue Fleeing Income Taxes 4Economic Malaise 4Misleading Measures 5Ohio 7The Story of New Jersey—A Colorful Example of Opportunity Wasted 10Lower Tax Revenue 10The Rhetoric Surrounding Tax Revenue and the Decline in Public Services 11The Case of the Disappearing Tax Revenue 12Connecticut 13No Bang for the Buck—How Costly Tax Increases Fail to Result in Better Provision of Public Services 16Chapter 2 Economic Metrics 23Primary Economic Metrics 24Tax Revenue Performance of All States over the Past Decade 32The ALEC-Laffer State Rankings 37Internal Revenue Service Tax Migration Data 39Chapter 3 The Nine Members of the Fellowship of the Ring to Balance Out the Nine Nazgûl 53An Analysis of the Top Personal Income Tax (PIT) Rates 56Public Services and the Personal Income Tax 61The Effects of Oil and Severance Taxes 63A Longer-Term View of the Data 67An Analysis of Corporate Income Taxes 69An Analysis of the Overall Tax Burden 73An Analysis of the ALEC-Laffer State Economic Competitiveness Index 76Chapter 4 Piling On 81An Analysis of the Property Tax Burden 82An Analysis of the Sales Tax Burden 82Estate and Inheritance Taxes 88Right-to-Work Laws 90Labor Force Unionization 93State Minimum Wages 96Chapter 5 Give unto Caesar 99New Hampshire—Case in Point 104Top Traders 121Real-Time Mobility Index 127Chapter 6 Why Growth Rates Differ: An Econometric Analysis of the Data 133List of Variables 137Gross State Product Growth: Single-Variable Analysis 141Gross State Product Growth: Two-Variable Analysis 146Gross State Product Growth: Three-Variable Analysis 149Population Growth: Single-Variable Analysis 150Population Growth: Two-Variable Analysis 153Population Growth: Three-Variable Analysis 156Population Growth: Four-Variable Analysis 157Conclusions 158Annotated Econometric Bibliography 159Key Quotes from Econometric Bibliography 186Chapter 7 Fiscal Parasitic Leakages: Texas versus California 193A Tale of Two States—A 55-Point Summary 194The November 2012 Elections in California and Texas 199Economic Performance: California, Texas, and the United States 201A Brief Note on Poverty Metrics 207The Texas Oil Boom and California’s Oil Bust: A Clash of Economic Cultures 208An Overview of Total State and Local Government Revenues—Texas and California 212Texas, California, and the United States: A Comparison of Tax Revenue and Debt Financing 213Policy Variables Affecting Growth 218The Relationship among Taxation, Spending, and the Achievement of Policy Objectives—A Story of Parasitic Leakages 224Intergovernmental Revenues, Federally Mandated Social Services, and State Welfare, Medicaid, and Food Stamp Programs 225The Provision of Public Services by State and Local Governments 229The Performance of State and Local Public Education 235Highways: California versus Texas 239Prisons: California and Texas 241Conclusion 242Chapter 8 Au Contraire, Mon Frère: Criticisms of Our Work— Our Responses 245Conflicts of Interest and Policies 245Taxes and Other Supply-Side Policy Variables Don’t Affect Population and Gross State Product Growth 247Growth Is a Move from North to South, from Clouds to Sunshine, from Cold to Warm 251Growth Is Predominantly a Matter of Education and Not Taxes and Other Economic Policy Measures 252Personal Income per Capita and Median Income Growth as Measures of Success Show Taxes Don’t Matter 253Tax Rate Cuts Are Public Service Cuts 257Other Factors Affect Population Growth (Oil, Sunshine, Accessible Suburbs, Etc.), and Therefore Taxes, Right-to-Work Laws, and Other Supply-Side Variables Don’t 259Correlations between Tax Rates and Growth Reflect a Simultaneous Equation Bias (Reverse Causation); That Is, Growth Causes Tax Cuts, Not the Reverse 261There Are High-Tax States That Outperform Low-Tax States; Therefore the Supply-Side Theory Is Wrong 264The Oklahoma Argument against Tax Cuts 267Income Distribution Becomes More Even with Progressive High-Rate Tax Codes 270The Probity of the ALEC-Laffer Measures Is Nonexistent; Therefore Their Policy Prescriptions Are Wrong 273Federal Tax Rates Are More Important Than State Tax Rates, and Therefore State Tax Rates Don’t Matter 275The Wealthy Used Public Resources, and They—Not Others—Should Pay for Those Public Resources; We Need More Progressive Taxes, Not Less 276When Is Enough Evidence Enough? If the Facts Were Reversed, We Would Concede 277Notes 281Bibliography 295Acknowledgments 317About the Authors 319Index 321

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