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14 February 2012

Oxford: States with "High Rate" Income Taxes Are Outperforming No-Tax States

As the Missouri General Assembly continues to debate proposals to eliminate personal income tax and as petition initiatives are circulated that would have this effect, the following reports may be helpful to you. Mr. Laffer has testified at hearings in Missouri and spoken at various public events, so we are apt to encounter him again. And certainly the claim is made on almost a daily bases on the House floor that low taxes are the key to economic growth – despite evidence to the contrary.

Many states are considering cutting or repealing personal income taxes (or not raising them) under the assumption that high tax rates harm economic growth. Recently, one of the most visible proponents of this idea in the states has been Arthur Laffer. The Institute on Taxation and Economic Policy (ITEP) has just released a pair of new reports that rebut Laffer’s claims, and show that states with “high rate” personal income taxes are actually outperforming non-income tax states.

The first report is titled “’High Rate’ Income Tax States Are Outperforming No-Tax States”. It shows that the nine states with the highest top marginal tax rates are outperforming the nine states without income taxes, both in terms of growth in economic output per person and changes in median income levels. Moreover, unemployment rates across both types of states have been virtually identical. The report also explains why Laffer’s analysis, which claims to show higher growth in no-tax states, is seriously flawed in its failure to account for huge regional population trends and the natural resource advantages enjoyed by many no-tax states.

The second report is titled “Athur Laffer Regression Analysis is Fundamentally Flawed, Offers No Support for Economic Growth Claims”. This report explains the problems with a regression analysis created by Laffer attempting to show how much economic growth would result from cutting or eliminating state income taxes. In Oklahoma, for example, Laffer claims that income tax repeal would double the rate of personal income growth and state GDP growth, and would create 312,000 jobs. But Laffer’s results are driven largely by his inaccurate measure of state tax rates. And the regression also fails to account for a huge number of more important factors that contribute to state economic growth.

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