Shoo! How some taxes compel people to leave more than others
A review of the academic evidence on taxes and economic growth makes it clear that all taxes negatively affect economic growth--but some more than others. A Tax Foundation survey of 26 peer-reviewed studies since 1983 found that 23 indicated a negative relationship between taxes and economic growth, while the the three found no relationship at all. Jonathan Williams, Chief Economist at ALEC, digs into the data.
Not all taxes are created equal, and some stunt economic growth more than others. Scholars at the Organization for Economic Cooperation and Development, or OECD, using a panel of data from 21 nations, found that corporate and personal income taxes are far more distortionary and harmful to economic growth than taxes on consumption.
They controlled for various factors, including measures of physical and human capital accumulation, population growth, and time and country-specific effects. Researchers also controlled for the overall tax burden in each country as a share of GDP. This allowed them to isolate the effect of different types of taxes based on the share of tax revenue that comes from each source. Their results indicated that a 1 percent shift of tax revenues from income taxes (both personal and corporate) to consumption and property taxes would increase GDP per capita by between 0.25 percent and 1 percent in the long-run.
Another important finding of this study was that progressivity of personal income taxes substantially reduces
economic growth when compared to flat-rate tax systems. The OECD authors found even more support for
their results by looking at industry and firm-level measures of investment and productivity growth.
They found that corporate taxes, both in terms of the rate and depreciation allowances, reduce growth of investments and productivity.
They write: “a reduction in the top marginal personal tax rate is found to raise productivity in industries with potentially high rates of enterprise creation.”
Economic competitiveness drives income, population and job growth across the states. Rich States, Poor States adds to a growing body of evidence that taxes matter, and some taxes matter more than others. For many years, our research has warned against an over-reliance on income taxes – on both personal and business income. For instance, we analyzed the nine states without an individual income tax versus the nine states with the highest individual income taxes over the past decade. From 2006 to 2016, the population in states with no income tax grew 111 percent faster than their high tax counterparts (11.9 percent vs. 5.6 percent) on an equally-weighted basis. In aggregate, population grew by 15.2 percent in the no income tax states vs. 6.7 percent in their high tax counterparts.
According to the Bureau of Labor Statistics and the St. Louis Fed, over the past 10 years (March 2007-March
2017), private sector job growth in the states with no income tax increased 28 percent faster than the states
with the highest income taxes (6.9 percent growth vs. 5.4 percent growth) on an equally-weighted basis. In
aggregate, private sector jobs increased by 12.2 percent in the no income tax states compared with 7.9
percent growth in the high-income tax states.
Obviously other factors, including right-to-work status, regulatory environment, and makeup of state
economies clearly matter for these statistics; but these general trends are reflected decade after decade for
the past 50 years.
The reasons why income-based taxes are economically damaging to states range from the adverse economic effects of the taxes, to purely public finance objections, such as the volatile nature of income tax revenues.
Read the whole thing here.
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