Lower taxes - higher growth

Rok Spruk linked to the Tax Foundation's 2008 State Business Tax Climate Index rankings, where the first few spots (states with the least burdensome overall taxes) are consistently occupied by Wyoming, South Dakota, Nevada, Alaska, and Florida. The last few spots (states with the most burdensome tax policies) are conversely occupied by Rhode Island, New Jersey, New York, California, and Ohio.

I never thought of Wyoming or South Dakota as prosperous places, so my first instinct was to see how these states fare against New York or California in terms of how their economies have grown in recent years.

I found GSP (Gross State Product) data on the pages of the U.S. Census Bureau, plopped the data in Excel, and indeed:

A comparison from 2000 to 2005 shows that the fastest growing state economy was Nevada, 31.0%, followed by Florida, 26.4%. South Dakota is 9th, 19.8%, while Wyoming is 11th, 19.2%. These states were all among the first 5 in the Business Tax rankings.

Alaska was 38th in terms of growth, 10.5%, regardless of its favorable Business Tax ranking; but the reasons may be apparent. (Who wants to be exiled to Alaska when there's Nevada?)

On the other hand, Rhode Island was 23rd, 14.7%; California was 24th, 14.3%; New Jersey was 33rd, 11.8%; New York was 34th, 11.6%; and Ohio was 49th, 6.1%. These states were the bottom 5 in the Business Tax rankings.

So, yes: based on this simple parallel, it would seem like a favorable tax regime can be correlated with significantly higher growth.

What does this mean for you as an average citizen?

If an average person's purchasing ability follows the growth of the overall surrounding economy in the long run, then it means that, in 20 years, the value of things you can afford as a person living in Wyoming will double; whereas the value of things you can afford as a person living in New York will rise by only about 50%.

Even more drastically, it might mean that, in 20 years, the value of things you can afford as a resident of Nevada will triple; whereas if you're a resident of Ohio, it will grow only by 27%.

And this is just the difference based on differences in taxation among the states. Imagine instead what happened if the U.S. as a whole switched to FairTax.

Comments

Ian said…
While many who are invested in the current income tax system seek to demagog the well-researched FairTax plan, FairTax's theoretical underpinnings have been professionally reviewed, and its acceptance in the professional / academic community continues to grow.

Renown economist Laurence Kotlikoff believes that failure to enact the FairTax - choosing instead to try to "flatten" what he deems to be a non-flattenable income tax system - will eventuate into an irrevocable economic meltdown, because of the hidden aspects of the current system that make political accountability impossible. Tom Frey, of the DiVinci Institute, foresees the coming collapse of the income tax system.

Here is why the FairTax MUST replace the income tax. It's:

• SIMPLE, easy to understand
• EFFICIENT, inexpensive to comply with and doesn't cause less-than-optimal business decisions for tax minimization purposes
• FAIR, loophole free and everyone pays their share
• LOW TAX RATE, achieved by broad base with no exclusions
• PREDICTABLE, doesn't change, so financial planning is possible
• UNINTRUSIVE, doesn't intrude into our personal affairs or limit our liberty
• VISIBLE, not hidden from the public in tax-inflated prices or otherwise
• PRODUCTIVE, rewards, rather than penalizes, work and productivity


Its benefits are as follows:

For INDIVIDUALS:
• No more tax on income - make as much as you wish
• You receive your full paycheck - no more deductions
• You pay the tax when you buy "at retail" - not "used"
• No more double taxation (e.g. like on current Capital Gains)
• Reduction of "pre-FairTaxed" retail prices by 20%-30%
• Adding back 29.9% FairTax maintains current price levels
• FairTax would constitute 23% portion of new prices
• Every household receives a monthly check, or "pre-bate"
• "Prebate" is "advance payback" for taxes payable on monthly consumption to poverty level
• FairTax's "prebate" ensures progressivity, poverty protection
• Finally, citizens are knowledgeable of what their tax IS
• Elimination of "parasitic" Income Tax industry
• NO MORE IRS. NO MORE FILING OF TAX RETURNS by individuals
• Those possessing illicit forms of income will ALSO pay the FairTax
• Households have more disposable income to purchase goods
• Savings is bolstered with reduction of interest rates


For BUSINESSES:
• Corporate income and payroll taxes revoked under FairTax
• Business compensated for collecting tax at "cash register"
• No more tax-related lawyers, lobbyists on company payrolls
• No more embedded (hidden) income/payroll taxes in prices
• Reduced costs. Competition - not tax policy - drives prices
• Off-shore "tax haven" headquarters can now return to U.S
• No more "favors" from politicians at expense of taxpayers
• Resources go to R&D and study of competition - not taxes
• Marketplace distortions eliminated for fair competition
• US exports increase their share of foreign markets


For the COUNTRY:
• 7% - 13% economic growth projected in the first year of the FairTax
• Jobs return to the U.S.
• Foreign corporations "set up shop" in the U.S.
• Tax system trends are corrected to "enlarge the pie"
• Larger economic "pie," means thinner tax rate "slices"
• Initial 23% portion of price is pressured downward as "pie" increases
• No more "closed door" tax deals by politicians and business
• FairTax sets new global standard. Other countries will follow


It's well past time to scrap the tax code and pay for government the way that America's working men and women are paid - when something is sold.


(Permission is granted to reproduce in whole or part. - Ian)
denis bider said…
If the U.S. enacts the FairTax, I'm moving there. Seriously.

That alone would remove all of the reasons why I now wouldn't want to live in the States in one fell swoop.

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