Wednesday, October 06, 2010

Art Laffer On Washington State's Personal Income Tax Initiative

Art Laffer took on the Bill Gates, Sr. and Jr., of Washington state, in one of yesterday's Wall Street Journal editorials. The Gates' are pushing hard for the state to institute a new personal income tax.

Here's how Laffer described it,

"Mr. Gates Sr. has personally contributed $500,000 to promote a statewide proposition on Washington's November ballot that would impose a brand new 5% tax on individuals earning over $200,000 per year and couples earning over $400,000 per year. An additional 4% surcharge would be levied on individuals and couples earning more than $500,000 and $1 million, respectively.

Along with creating a new income tax on high-income earners, Initiative 1098 would also reduce property, business and occupation taxes. But raising the income tax is the real issue. Doing so would put the state's economy at risk.

To imagine what such a large soak-the-rich income tax would do to Washington, we need only examine how states with the highest income-tax rates perform relative to their zero-income tax counterparts. Comparing the nine states with the highest tax rates on earned income to the nine states with no income tax shows how high tax rates weaken economic performance."

Laffer's a good, empirical economist. He immediately took ends of the distributional spectrum of US states with respect to tax rates, and found,
"In the past decade, the nine states with the highest personal income tax rates have seen gross state product increase by 59.8%, personal income grow by 51%, and population increase by 6.1%. The nine states with no personal income tax have seen gross state product increase by 86.3%, personal income grow by 64.1%, and population increase by 15.5%.
Over the past 50 years, 11 states have introduced state income taxes exactly as Messrs. Gates and their allies are proposing—and the consequences have been devastating.
Over the past decade, the nine states with the highest tax rates have experienced tax revenue growth of 74%—a full 22% less than the states with no income tax. Washington state has done better than the average of the nine no-tax states. Why on earth would it want to introduce a state income tax when it means less money for state coffers?

What's true for those states with the highest tax rates is doubly true for the 11 states that have instituted state income taxes over the past half-century. They too have lost huge sums of tax revenue."

Here's the revealing table from his editorial.

As a sort of coup de grace, Laffer offered this,
"A final thought for those who want to punish the rich for their success: As the nearby chart shows, those states with the highest tax rates, and those states that have introduced state income taxes, have seen standards of living (personal income per capita) substantially underperform compared to their no-tax counterparts."
I won't quote his parting shot to the Gates, but you can guess the nature of it.
Just focusing on Laffer's statistics and chart, it's a stunning picture that he paints. With the publication of this piece, why would any state be mad enough to initiate a personal income tax? Or raise the rate of one it already has?
Laffer doesn't mention it, but, surely, the same relationships must hold between countries, as well.
He has done a wonderful job providing clear, unmistakable evidence that higher tax rates depress standards of living and output. Period.


Joe said...

That last point does seem to be a huge post hoc fallacy.

C Neul said...

I think you are completely wrong. There is no reason to believe that the same relationships among states with differing tax rates won't similarly obtain between countries.

Why do you think that is fallacious?