A wise man learns from his mistakes. But the really wise man learns from the mistakes of others. Part of the genius of federalism is that the states can serve as “laboratories of democracy,” from which the country as a whole can learn. And so before Washington embarks on the disastrous course of imposing the worst possible version of an income tax on itself, it should take lessons from other states’ experiences.
Economist Arthur Laffer has a record that distinguishes him from economists who advise today’s leaders. He was right. They have all been wrong. Recall that the Democrats’ greatest assembly of minds predicted that Obama’s $867 billion stimulus plan would prevent unemployment from exceeding 8% and that this past summer would be a robust “recovery summer.”
They were wrong. As Sarah Palin asked: “How’s that Hopey Changey stuff working out for you?” Unemployment is stuck at just under 10% and the real unemployment rate, the one that takes into account those who have given up looking for work, is actually about 16 or 17%. And there’s nothing on the horizon to inspire optimism.
Arthur Laffer advised Ronald Reagan in 1980 that reducing the top marginal income tax rates would stimulate an economic boom. And he was right. Except for a couple of brief corrections, the United States economy grew rapidly for nearly three decades, until Bill Clinton’s final exploding cigar, the housing bubble, burst.
And so Arthur Laffer has the sort of credentials that, while not now in vogue, should certainly make his counsel worthy of attention. He composed a very concise article for the Wall Street Journal this past week in which he examined the experiences of states that imposed income taxes upon their economies and compared them to states that have not. If past experience predicts future results, then should Washington pass Bill Gates Senior’s initiative 1098 this November, it can look forward to a permanently sluggish economy.
Initiative 1098 wouldn’t just impose an income tax on Washington, it would impose the worst possible version of an income tax. The federal government has been corrupting its own income tax code for more than a century and still hasn’t come up with anything this bad.
But aside from the moral degeneracy of imposing a tax on a small proportion of the populace (which is free to leave by the way), the tax would almost certainly smother an already feeble economy.
Arthur Laffer performed the simplest possible analysis of income tax results. He found that states with the highest income tax rates, a group that Washington would immediately move into, experiences about 30% slower growth than states with no income tax, a group that still includes Washington.
Who in his right mind would want to move his state from the healthy category into the unhealthy? Well, Bill Gates Senior and several members of Washington’s Democratic leadership who pushed this idea in the last legislative session do.
In addition, personal income in the income tax-free states grew 26% faster, meaning that there were wealthier, more productive people in the income tax-free states generating revenue for the state coffers through other revenue streams. Meanwhile faster growth means fewer people require state assistance.
It’s one thing to compare one state to another state, but how about the experience of states before and after imposition of an income tax? It turns out that in the last 50 years, 11 states have chosen to impose income taxes and without exception, all have experienced slower economic growth since the tax was enacted.
For example, Ohio, Illinois and Indiana’s annual growth rate declined by 31% after imposing the income tax. Pennsylvania’s growth rate slowed by 32%. And the big winner among the economic auto-castratos is Michigan, which managed to pull its growth rate down by 47% with its income tax.
Personal income showed similar declines.
Initiative 1098 is written in a way that appeals to the basest instincts of resentment and envy. But anyone who thinks they’ll feel satisfaction in the knowledge that his rich neighbor is paying more should consider that his own income and standard of living will likely decline as well. It’s like the old Russian fable. A man is met by an angel who offers him anything, on the condition that his neighbor gets double. The Russian considers for a moment, then asks the angel to blind him in one eye.
That’s Initiative 1098 in a nutshell.