Taxes Don’t Matter? The Return of Junk Economics

By Jonathan Williams

Just in time for election season, junk economics is making a 2012 comeback bid. Some well-funded groups on the extreme Left are pulling out all the stops to beat pro-taxpayer reforms in the states under the guise that taxes “don’t matter” in economic growth. Unfortunately, the numbers say otherwise. For decades, states with the most competitive, unregulated economic policies have grown while their big government counterparts have suffered.

Enter personal income taxes. In just the last 10 years, the nine states with no personal income tax greatly outperformed those states with the highest personal income tax rates. Population has grown 149 percent faster in no income tax states than in high tax counterparts. And while states with high income tax rates have hemorrhaged jobs, states with no income tax have seen a healthy 5.4 percent job growth. Even state revenue has grown 82 percent faster in no-income-tax states.

For anyone who has run a business, the idea that taxes don’t matter for economic growth is absurd. High tax rates have a direct, negative impact on work, savings and investment.

The tax-and-spend crowd, including President Barack Obama, argues that high income taxes are necessary to ensure tax “fairness.” In reality, attempts to redistribute wealth through state tax codes fall flat on their faces nearly every time they are tried. Americans have, and exercise, the ability to “vote with their feet” and change their residence to a state of their choice.

Additionally, high income taxes directly impact the ability of another vital sector, small businesses, to grow and create jobs. Small businesses make up more than 90 percent of all businesses, employ more than 50 percent of American workers and pay more than 40 percent of all business taxes. Class warriors often forget that many high-income earners are actually small businesses filing through subchapter S Corporations (S Corps), Limited Liability Partnerships (LLPs) and other “pass-through” entities.

No state has ever taxed its way to prosperity. People and businesses will continue to vote with their feet towards the states with the most competitive business climates.

Jonathan Williams is director of the Center for State Fiscal Reform at the American Legislative Exchange Council.

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