Policy group looks at Laffer tax claims

February 18, 2012


With jobs front and center in most voters’ minds, politicians seeking to cut or repeal personal income taxes are marketing their proposals as tools for boosting the economy. Recently, some have sought to bolster this claim by asserting that states without income taxes are experiencing a real economic boom, and by promising that the boom can be recreated in any state smart enough to join the no-tax club.

My organization was skeptical of these claims, so we decided to take a closer look at one of the most prominent studies, cited by the governors of Kansas and Oklahoma, among others. It turns out that the study was done by a consulting firm headed by economist Arthur Laffer, perhaps best known as a longtime spokesman of a supply-side economic theory that George H.W. Bush once called “voodoo economics” because of its bizarre insistence that tax cuts often lead to higher revenues.

In kicking the tires on the study’s findings, we paid particular attention to the same 18 states it includes: the nine without income taxes, and the nine with the highest top income tax rates. But while Laffer chose to focus on clumsy aggregate data (more on that later), we took a look at three of the most important and widely recognized measures of economic success: growth in economic output per person, growth in median income levels, and the unemployment rate. The results we found were very different than Laffer’s.

In terms of the first two measures — economic output per person and median income levels — the nine states without income taxes are actually lagging behind the nine states with the highest top income tax rates, and most no-tax states are actually doing worse than the national average. On the third measure, the unemployment rate, it turns out that no-tax states and “high tax rate” states are essentially neck and neck, which will no doubt shock lawmakers promising that an improved job climate will come hot on the heels of income tax repeal.

We also found that on all three measures, some of the states most frequently disparaged by the tax cut true believers — including Maryland, Hawaii and Vermont — managed to best not only no-tax idol Texas but also most of the other eight states “unburdened” by a personal income tax.

So how was Laffer able to reach the opposite conclusion, and in the process generate a wave of assertions that states without income taxes are booming? It turns out that the aggregate numbers he picked — designed to measure the total size of an economy and its workforce — are heavily influenced by shifts in population. These shifts, in turn, are driven by a slew of factors Laffer fails to control for, like the housing market, population density, birth rates, immigration and even climate. And since most no-tax states happen to be located in the growing south and western regions of the country, they tend to have a lot of these factors working in their favor.

Laffer also makes no effort to account for the tremendous natural resource advantages enjoyed by many no-tax states. The two best performing states, according to Laffer, also happen to be the two states most dependent on mining: Alaska and Wyoming. But one would be hard pressed to find a serious analyst in either state willing to attribute their recent growth to the lack of an income tax.

The bottom line is this: No-tax states aren’t booming, and lawmakers should not expect their states’ economies to improve if they join the no-tax or low-tax club. In fact, in terms of the economic factors that matter most to families — income levels, and whether or not they can find a job — the states with the highest top income tax rates are, in most cases, doing better than the no-tax states. If the economy is really the concern of lawmakers railing against the income tax, it’s time for them to put away Arthur Laffer’s tax cut snake oil.

— Carl Davis is a senior analyst at the Institute on Taxation and Economic Policy in Washington, D.C.; website: www.itepnet.org.


Liberty_One 5 years ago

Sigh. Here's the problem with modern economics shown clearly. Using finessed numbers to justify policy when others can finesse the numbers the other way just as easily only creates a muddled mess and no good answers. Mr. Davis points out some of the errors in the Laffer data, like not taking into account the population changes and the natural resource advantage. But who is to say that Davis and the ITEP accounted for all the correct factors as well? Davis lists the housing market, birth rates, population density and climate as other factors, how many thousands more affect the economy that ITEP's analysis didn't control for? The economy is simply too complex to use data and fish out the impact of tax policy. Only through logical deductions can sense be made of the policy effects.

Not only that, but the economy is a dynamic system that changes over time. You cannot hope to implement the "right" tax policy in the poorest state and have it become the wealthiest in one year.

Additionally, income taxes are only one source of taxation and so don't measure the total tax burden a population suffers under.

Finally, it is impossible to judge the effects only from data because there is no control. We cannot even test the impact of tax rate changes because the conditions can never be replicated. We cannot go back to 2001, change the income tax rate in Kansas to zero, and see if Kansas would be better or worse off.

The whole idea of using statistics to justify economic policy decisions is suspicious from the start and should be ignored as the junk science that it is.

Peter Macfarlane 5 years ago

To all those disbelievers in the stud's findings, I have only one thing to conclude: Don't confuse me with the facts, I have my own opinions!

voevoda 5 years ago

Instead of using empirical evidence and mathematical analysis to understand the economy, Liberty_One would have us resort to invoking the maxims anaracho-capitalists. Regardless of the fact that extant data demostrate that those maxims are untrue. Regardless of the fact that those maxims are more closely related to Communist precepts than they are to American ones.

voevoda 5 years ago

If the United States was founded on "individualism," why isn't the word in the Constitution? The Constitution talks about "We the People" in the collective. The "individualism" myth belongs right up there with the "Christian nation" myth.

cato_the_elder 5 years ago

The Institute on Taxation and Economic Policy is a left-wing cabal located in Washington, D.C. that masquerades as a "non-partisan" analytical organization. It consistently advocates for higher income taxes, providing phony analyses to justify the alleged benefits of ever-increasing income taxation at the state and federal levels. This piece is pure tax-and-spend propaganda.

cato_the_elder 5 years ago

I'm not aware that Art Laffer has ever slanted any data. Since his views have been proven to be correct, I don't know why he would have needed to.

We had close to thirty years of prosperity based in part on Laffer's theories until a subprime crisis caused by government lending policies put in place by Democrats seriously damaged our economy, which has been very slow to recover as the result of Obama's irresponsible, wholly ineffective Porkulus spending.

The responsible voters in this country must remove Obama from office in 2012 in order to restore fiscal sanity to the White House.

cato_the_elder 5 years ago

As opposed to Captain Kangaroo, whose head is buried in something else.

wilburrr 5 years ago

If you're "not aware that Art Laffer has ever slanted any data," check out http://www.itepnet.org/pdf/LafferRegression.pdf . This report is brief enough that you should be able to find a few minutes to explain why it's wrong even if you have a predisposition against this particular "cabal". Laffer made headlines by authoring a report, the headline of which was that Oklahoma could grow its economy by repealing its income tax. And, as the analysis linked above shows, the multivariate regression upon which this headline depends is embarrassingly wrong. Laffer should be ashamed. This short report is making a clear argument that Laffer cooked the books to get the answer he wanted. I challenge you to read this (again, very short and understandable) paper and still assert that Laffer has "never slanted any data." Really-- try it.

Orwell 5 years ago

I'm waiting to see Laffer's evidence identifying the point at which his claim of increased tax revenue from reduced tax rates is no longer true. The existence of such a point is indisputable if we consider the tax revenue derived from a zero tax rate. Meanwhile the elected "hired help" of the super-rich continue to rely on Laffer because he facilitates a good return on their masters' Citizens United investments.

voevoda 5 years ago

Perhaps we should just follow the model of the real Cato the Elder, and confiscate the wealth of citizens who use it for conspicuous consumption, rather than investing it in the improvement of their properties or in the betterment of their fatherland.

cato_the_elder 5 years ago

Yawn. Can't you come up with a new shtick?

voevoda 5 years ago

What, cato_the_elder, you don't approve of the policies of your hero? If not, why choose his name as your own?

cato_the_elder 5 years ago

Get a new shtick. I've answered that question over a dozen times and you still don't get it.

You know nothing about Cato the Elder's mores or about Roman history either, but if you wish to keep making a fool of yourself I can't stop you.

voevoda 5 years ago

cato_the_elder, I base my information on the real Cato the Elder on his own writings, on Plutarch's biography, and on scholars' studies of him. You have no answer based on evidence from Cato's own writings or Plutarch or scholars' research, so you just hurl personal abuse at me. The real Cato the Elder would chide you; he said: "I fight an unequal battle with you: you listen to abuse calmly, and utter it glibly; while for me it is unpleasant to utter it, and unusual to hear it."

cato_the_elder 5 years ago

That last sentence is something you've rolled out now for at least the fourth time.

I'm not going to explain it to you again.

Really brilliant.

voevoda 5 years ago

I already know your explanation, cato_the_elder; you ignore those aspects of Cato the Elder's record that don't coincide with your own philosophy. But rather than admit it, you hurl invective at me for pointing out what Cato really stood for. You could change your screen name, if it bothers you so much to be compared to the real Cato.

cato_the_elder 5 years ago

Why? Since you believe so fervently in the forced governmental redistribution of wealth, and your misunderstanding of the historical Cato the Elder is so abject, are you simply jealous and want to adopt the name for yourself?

Jimo 5 years ago

This comment was removed by the site staff for violation of the usage agreement.

Michael LoBurgio 5 years ago

A Kansas fairytale: Cut income taxes, without taking a hit

The shift of the tax burden from income tax to other taxes would not be pretty. Today, the income tax represents 44 percent of the state’s revenue, or $2.7 billion.

Unless the state comes into a gigantic windfall of new revenue that drops out of the sky — much bigger than the $300 million surplus recently projected — there are only two places to make up for any sizable income tax reductions: sales or property taxes, and sales taxes seem like the way they are headed.

Our state leaders want to believe the fairytale pawned off by economist Arthur Laffer (whom the task force has hired for $75,000), who is telling them with lower income taxes, Kansas will attract enough growth to offset much of the lost revenue.

Laffer may be the only renowned economist in America who believes this bunk. If we cut or abolish our income tax, Kansans will pay for it, one way or the other.

Read more here: http://joco913.com/news/a-kansas-fairytale-cut-income-taxes-without-taking-a-hit/#storylink=cpy

Michael LoBurgio 5 years ago

Brownbacks tax cuts = Class Warfare To compensate for these reductions in income taxes, the Governor’s plan eliminates itemized deductions (including home mortgage interest and charitable contributions). It eliminates incentives for 529 education savings programs and long-term care insurance premiums. It eliminates the refund for sales tax on food for low-income Kansans. I also understand it eliminates part of the Homestead property tax refund.

The plan also eliminates tax credits for: * Adoption * Alternative fuel tax * Assistive technology contribution * Child and dependent care * Child day care assistance * Community service contribution * Disabled access * Earned income (EITC) * Environmental compliance * Historic preservation * Individual development account * National Guard employer health insurance * Small employer health benefit plan * Temporary assistance to families contribution * and more.

It appears that this plan moves the tax burden from the richest Kansans to the middle class and poorest Kansans. For example, sales tax is the most regressive tax we have. Making the 1% sales tax increase permanent not only reneges on our promise to remove the sales tax increase, it puts a disproportionate burden on low-income families. Removing the refund for sales tax on food and the Earned Income Tax Credit is a double whammy for the poorest working Kansans. In fact, President Ronald Reagan once said the Earned Income Tax Credit was “the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

Eliminating the deduction for home mortgage discourages home purchases for the middle class. Cutting the upper marginal income tax rate benefits the richest Kansans the most. Low-income Kansans can buy a Big Mac with their income tax cut while the folks at the top can buy a yacht with theirs. Not only that, when the income tax is eliminated altogether, there will only be sales and property taxes left to pay the bills.

Michael LoBurgio 5 years ago

Brownbacks Poor Tax, over 5000 % increase for the poor.

Under figures provided by the Kansas Department of Revenue, the group of Kansans with adjusted gross incomes of $25,000 or less currently receive a total tax refund of $1.7 million.

Under Brownback’s plan, they would have to pay $86.5 million in taxes, which has been calculated as a 5,102 percent increase. All other income groups would see a tax cut with the largest percentage cut being 18.5 percent for people making $250,000 or more per year.

voevoda 5 years ago

Murray Rothbard was an anarcho-capitalist, whose crackpot theories never made any headway among reputable economists.

voevoda 5 years ago

I've read his ideas, Liberty_One; that's why I know that they are ridiculous.

Paul R Getto 5 years ago

"Community "organizing" and raising cash----that's what it's all about." === Good point. This is what both parties do all the time. It's called the American political system, I think.

Peter Macfarlane 5 years ago

For all true disbelievers and haters of facts that don't go their way: Don't confuse me with the facts, I have my own opinions.

JackMcKee 5 years ago

I really didn't need a study to realize that Laffer's position was full of horse excrement. Trading income taxes for higher property and sales taxes does nothing to change the total tax burden of Kansas. It just places a higher burden on everyone but the wealthiest Kansans.

It's time to start calling Brownback's plan what it is: the largest tax increase in the history of Kansas.

deec 5 years ago

And they, like the 1%, love to take government money while decrying the government for giving it. For example, KC based banks still owe 228 million in TARP money, most of which was gifted from that first bailout under Bush.

JackMcKee 5 years ago

When Obama raises taxes on the poor and middle class to give the wealthiest Americans a tax cut, we can talk.

lunacydetector 5 years ago

some expert! getting funding from george soros's open society institute - love how that isn't mentioned! if it were the kochs that would be another story.

just a progressive smoke screen op-ed

wilburrr 5 years ago

Hi "lunacydetector," a few questions: 1) are you really suggesting that if a guy writes an op-ed, and the guy works for an organization that has ever gotten any money from the Open Society Institute, that the op-ed should be required to disclose this fact somehow? If so, where does this stop? Does George Will need to submit a list of everyone who gives him money anytime he publishes a piece? I'm not saying this is a totally crazy idea-- disclosure is always a good thing--but I don't see how you could ever implement this.

2) How exactly does getting funding from the Open Society Institute make one's opinion so utterly worthless that you don't even have to respond to the arguments this guy makes? The Brookings Institute and the Urban Institute get money from the Open Society Foundation-- does this mean that anything a policy expert from these organizations says can be dismissed without any evaluation whatsoever?

3) do you really believe that if, say, Arthur Laffer had written a piece stating exactly the opposite opinion, that the paper would have found a way to highlight the fact that Laffer's organization got money from the Koch Foundation? If so, can you point me to even one example where the paper has done this to an op-ed writer in the past?

4) Leaving aside this question of whether readers SHOULD know where a writer's funding comes from, don't you have even a word to say about the actual content of the op-ed?

Me, I read this op-ed and I see two economists arguing with each other. Not at all obvious who's right and who's wrong, but your responsibility as a citizen is to try to evaluate the arguments, rather than just assuming one of them must be lying. Wouldn't you agree that we should be exchanging opinions on the policy issue, rather than just questioning the author's intelligence?

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