Second Guessing Conservative Tax Theory

Last week the conservative Wisconsin Taxpayer's Alliance released a report based on their interpretation of U.S. Census data.  According to their report, they almost seemed reluctant to admit that Wisconsin's tax burden has gone down for the last several years.  Even so the group ranks Wisconsin as the nation's sixth-highest in taxes for 2004.

Although there is research that demonstrates that this high tax reputation is more hype than fact, there is a different point to be made here.  So for the sake of argument, let's say that the WISTAX ratings are accurate.

Rounding out their list of states with the highest taxes: they rank Vermont in 5th place, then Hawaii, Maine, Wyoming, and the highest taxed state is New York.

Last week the conservative Wisconsin Taxpayer's Alliance released a report based on their interpretation of U.S. Census data.  According to their report, they almost seemed reluctant to admit that Wisconsin's tax burden has gone down for the last several years.  Even so the group ranks Wisconsin as the nation's sixth-highest in taxes for 2004.

Although there is research that demonstrates that this high tax reputation is more hype than fact, there is a different point to be made here.  So for the sake of argument, let's say that the WISTAX ratings are accurate.

Rounding out their list of states with the highest taxes: they rank Vermont in 5th place, then Hawaii, Maine, Wyoming, and the highest taxed state is New York.

Now according to right wing talking points, the higher the tax burden the more people will flee the state right?  So it seemed a worthy endeavor to see if the facts will bear out that popular theory.  Below are the latest figures available for the top 6 taxed states.  The statistics measure population changes from the year 2000 to 2005.  Let's see if there was a mass exodus from these "high tax" states.

Wisconsin's population GREW by almost 200,000- for a 3.2% increase!
Vermont's population GREW by about 15,000-for a 2.3% increase.
Hawaii's population GREW by almost 65,000-for a 5.3% increase.
Maine's population GREW by about 50,000-for a 3.7% increase.
Wyoming's population GREW by about 16,000-for a 3.1% increase.
New York's population GREW by more than 275,000-for a 1.5% increase.

WISTAX stated in their recent report that the state with the lowest tax burden is Alabama.  So since they are so anti-tax, Alabama should theoretically be the closest thing to heaven on earth right?  Alabama should have a much higher increase in their population than Wisconsin with it's "high taxes." People should be falling over each other to move to Alabama if right wingers are correct in their assertions.  Here are the facts:

Alabama's population grew by nearly 150,000- for a 2.5% increase.

So let me get this straight.  Four of the highest taxed states (including Wisconsin) had more population growth than the one state with the lowest tax burden?   What gives?  Well what about jobs?  If Alabama is the state with the lowest tax burden, shouldn't they have had a massive movement of jobs into that state?  According to right wing theories, yes.  Here are the facts once again based on the census figures:

Alabama's private non-farm employment percent change from 2000-2003 was a NEGATIVE 3.4%!

The lesson here is that we should not just blindly accept the oft repeated conservative theory that paying less taxes will always change everything for the better.  It is not the holy grail of public policy as they often portend. Those theories may be good for ideological banter and stuffy research papers, but sometimes they just don't work out in the real world.  Where most of us are trying to live.

*Originally posted on 6-27-06 at One Wisconsin Now's One Blog.

Tags: jobs, population, Taxes, Wisconsin (all tags)

Comments

3 Comments

Bueller... Bueller...

Here is a little story about Laffer's Curve, how he is mostly right, what he forgot, and how his theory has been misinterpreted, misunderstood, and abused for over thirty years.

Art Laffer is famous for the Laffer Curve, which is probably best known as what Ben Stein is trying to teach in his economics class in Ferris Bueller's Day Off.

Laffer theorized that tax revenue at 0% tax rate and 100% tax rate is the same - $0. After all, who would work if the government took every 100% of what you made? (This is one reason why communism didn't work.)

Based on this theory, and a little bit of mathematics, this means there is an optimal tax rate between 0% and 100% where the maximum amount of revenue will be generated. If the tax rate is above the optimal rate, a tax cut will return more revenue to the treasury.

A corollary to this is that for any two points on the curve that generate the same revenue, the lower tax rate will come with greater economic performance.

Laffer's theory is mostly sound, but he forgot to take into account the value of Government services into the equation. A tax hike that pays for a useful service would not hinder economic output as much as Laffer's curve would predict. Likewise, a tax cut that cut useful services would not bring the benefits that Laffer's curve would predict. The concept of what is done with that tax revenue, whether it is useful or wasteful is absent from Laffer's theory.

Both liberals and conservatives have been guilty of misunderstanding (intentionally or otherwise) Laffer's curve. Conservatives only talk about how tax cuts can increase revenue, which is a gross misinterpretation of the theory. (This is only true when taxes are above the optimal rate.) Liberals tend to not understand the theory at all, but base their understanding of Laffer's Curve on what the conservatives (or perhaps Ben Stein) have said about it. Since most liberals do not understand it, they have done a poor job in pointing out its weaknesses, and the conservative misrepresentation of an incomplete theory has dominated the debate.

by wayward 2006-07-01 05:28PM | 0 recs
Re: Second Guessing Conservative Tax Theory

I wouldn't say "liberals don't understand" the theory.  Liberals tend to respond to the facile conservative explanation of the theory.  And the facile conservative interpretation is to equate tax cuts with greater revenue.

It may well be true in theory that there is some tax rate at which revenue will start to decrease.  But it's also fairly obvious that the first derivative for low values of the tax rate is positive, and furthermore, we have no reason to believe we are anywhere near the maximum revenue value implied by the theory.  Emprically, we can witness the fact that every tax cut in practice has led to lower revenue.  So, as theories go, the Laffer curve isn't all that useful.

by RickD 2006-07-02 04:07AM | 0 recs
Re: Second Guessing Conservative Tax Theory

If the value of government services is not part of the equation, then what is the point?  The question not answered in the diary is whether increased income led to increased services.  Or, and this truly disgusts me, maintenance of services.

Whatever happened to "You get what you pay for?" and applying it to necessary government services?

by Dems Need Balls 2006-07-02 04:18PM | 0 recs

Diaries

Advertise Blogads