The Effects of Taxes on Economic Well-Being

Empirical tests are difficult in the field of economics. There are many reasons why Austrian economists in particular are reluctant to admit them as evidence for or against a position. Nevertheless, sometimes the data are so compelling that the results cannot be ignored. Certainly the data in the accompanying charts to the right suggest that tax cuts (lower taxes) assist the economy.

The Obama Administration thinks taxes are a means of equalizing outcomes. President Obama stated that he favored a higher capital gains tax even though it would bring in less revenue to the government because it would be “fairer.” Sadly, he seems to place that objective ahead of the economy and jobs. Compare the Reagan recovery with the Obama non-recovery. We are lucky to eke out a phony 2.2 percent growth last quarter. Compared to the reported results in the Reagan recovery this performance is dismal!

Now we have a new study comparing states with high and low income taxes. The results should not be surprising to economists or those trained to think like economists. Faster growth occurs in the no income tax states. If you are a government employee or otherwise a parasite on society, this conclusion is likely not pleasing. If, on the other hand, you are a hard-working citizen concerned with feeding your family, you might greet such information with a shrug saying “it’s common sense.”

Such tests are hardly definitive, but it seems the burden is on the big government types to explain why taxes correlate so well (inversely) with economic well-being.

Here is a snippet from the conclusions:

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Read the entire article at the Wall Street Journal

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