Famed economist Arthur Laffer provided real-world economic solutions at the Civitas Institute’s legislative training session recently in Raleigh.
First, though he is best known for “the Laffer Curve” showing how tax cuts can bring in more revenue, and for advising President Reagan, he’s not about party or ideology, he said. “It’s economics.” And it’s the economic facts, not just theory. He reviewed the actual history of how the right tax mix can boost the economy — and opportunities for all people.
The U.S. economy boomed after tax cuts by Presidents Kennedy and Reagan. It floundered under the economic policies of most of the other recent chief executives, who often allowed income taxes to rise.
With a move afoot to eliminate the North Carolina income taxes, his discussion of state taxes was especially relevant. Laffer reviewed his research comparing no-income tax states with high progressive income tax states, over five decades. “There is no ambiguity,” he said. The data shows that “the no-tax states way outperform the high tax states — period.”
“There was not one year in which the no-income tax states don’t out-perform the high-tax states,” he added.
He also looked at the 11 states that added a progressive income tax over the past fifty years. To bring that into relief, and to factor in national changes, he looked at what happened to those states’ share of the national economy. “Every one of those states economies declined as a share of the U.S. economy,” he said. “And some of them declined by a lot.”
Take Michigan. Half a century ago it made up 5 percent of the nation’s economy. It passed an income tax, and its economy has collapsed. In the most recent year for which data is available, its share declined to 2.7 percent.
Looking at this, he made it plain that cutting income taxes to boost the economy is not just theory, it’s a fact that has been proved all over the nation.
Also, he emphasized that economics must be based on real human behavior. “The reason to change tax rates is to change behavior,” he said. “People respond to incentives.”
Sadly, too many experts base their theories on the assumption that taxes don’t change behavior. As Laffer said, the game of dodgeball would be easy — if the other players didn’t duck. But they do.
People react to tax policy. “Taxes are a negative incentive,” he said. “They tell people not to report taxable income” — or to stop working, or move to another state.
Meanwhile, if a government pays people for not working, often they react quite rationally and don’t work. Take the young British couple profiled lately in the English newspaper The Sun. They have a two-bedroom apartment, a 47-inch TV, but don’t work. They collect welfare totaling $27,700 a year — and they don’t even bother looking for jobs because work would leave them worse off. If our welfare state isn’t that far gone, it’s getting there.
In the long run, Laffer noted, “if you tax the rich to give money to the poor, soon you’ll have more poor people and no rich ones.”
Yet far from being pessimistic, Laffer presented an upbeat and impassioned vision of how fair taxes help everyone by creating wealth and jobs. He quoted President Kennedy: “The best form of welfare is a good, high-paying job.”
That’s why the North Carolina tax modernization fight is so important, he said. “You can win this fight. It’s your obligation, it’s your destiny.”