Laffer and Moore on state income taxes . . .
Art Laffer, of Laffer Curve-fame and president of Laffer Associates, and James Moore, a member of the WSJ's editorial board, take a sharp tone in their discussion of the impacts of state income taxes on economic growth. Check it out here.
They cite some figures and employ quotable phrases about how states have suffered from passing “soak-the-rich” laws like the Buffett Rule.
The authors judiciously wait until the end of their piece to acknowledge that low-tax states don't always outperform high-tax ones and that there is a possibility that factors other than taxes drive their analysis.
It’s impossible to comment on their analysis without knowing what data the authors used, but it seems clear they avoided complicating the discussion by introducing pesky economic concepts like Game Theory, diffusion and long-run equilibrium.
Interestingly, the authors use an example of smokers to make their point, saying, “Often people who smoke don't get cancer, and sometimes people who don't smoke do get cancer, but that doesn't mean it's smart to smoke. It's a dangerous gamble to raise taxes on capital and businesses to nearly the highest rates in the world and hope that nothing bad will happen”.
This example reminds me of one of Luke Froeb’s lectures about adverse selection and the economic logic of insuring smokers, or people who engage in risky behavior. Individuals moving to low-tax states may engage in riskier behavior, for example, by taking chances and starting more businesses. The really interesting discussion may be whether low-tax states encourage moral hazard because they know high-tax states actually insulate the nation from the full scale of their risky behavior.
What do you think?
I like your embedded links throughout your posting. How did you decide where to use them (like for 'long-run equilibrium')?
ReplyDeleteThe Laffer and Moore article seems to draw some broad conclusions by equivilating State tax structures and Federal tax structures, which possess some inherent difference and definitively falls into a mixed apples-to-oranges comparison. [side note: another possible name for the blog 'Apples and Oranges']
For example: The data (whichever data they are using) shows a correlation between state economic growth rates and low (or no) state income tax rates and the authors therefore imply that lower Federal tax rates will produce similar results. However, they attribute some of the economic growth to the inter-state migration as the wealthy flee high taxes in favor of lower ones - which can be easily accomplished within the United States as you are remaining under the same jurisdiction the entire time, with easy and free movement between states. The same conditions do not apply on the Federal level; moving from CA to TN is not the equivalent of moving from the US to Macedonia (or other similarly low-taxed country), and thus I find the examples to be incomparable and the general conclusion invalid.
Your assertion that there may be a moral hazard associated with 'low-tax' states also seems to be a stretch. In general, state tax rates are far smaller and less significant than Federal tax rates, both at the individual and Corporate levels. (http://www.taxadmin.org/fta/rate/corp_inc.pdf)
Individuals or companies escaping from 'high-tax' states will surely consider the tax structure as a consideration in deciding where to relocate, but the overall growth of new businesses and start-ups does not suggest that taxes alone account for the location decision making (check out the CA and TN comparison on this infographic): http://www.coolinfographics.com/blog/2012/4/18/where-the-startup-jobs-are.html
I just wanted to try linking to concepts or ideas people might be curious to know more about. Plus, some of the terms are obscure. Personally, I appreciate having the option for too much info.
ReplyDelete