‘The Wealth of the States’ and How Taxation Changes Behavior

In the new book An Inquiry Into the Nature and Causes of the Wealth of the States(Wiley, 2014), coauthored by economists Arthur B. Laffer and Stephen Moore, financial guru Rex A. Sinquefield and lobbyist Travis H. Brown, the quartet argue that a state cannot tax itself into prosperity, just as the impoverished cannot spend themselves into wealth.

Comparing income taxation across the 50 state and applying quantitative analysis, the book explains why eliminating or lowering tax burdens at the state level leads to economic growth and wealth creation. Wealth doesn’t stay put, they argue. Individuals and businesses go where their interests are protected. The Wealth of the States thesis is simple: High taxation is a high motivator; people will move to avoid taxes. The authors closely examine which state policies have created prosperity and which have been spectacular failures.

With a frank nod to Adam Smith, Laffer and his coauthors examined IRS data for the 11 states that have implemented an income tax in the last 50 years. All of them grew more slowly in population and the states’ economies worsened. They were doing something wrong, and taxes are a part of it, the authors argue.

“High tax burdens, higher income taxes, and higher corporate tax rates all have devastating effects on population and output growth,” write the authors. “Just as a state can’t tax it way to prosperity, it also can’t balance its budget on the backs of people who don’t work.”

In 1961, West Virginia adapted its state income tax. Since then, 10 additional states have implemented a state income tax. In addition to West Virginia, we have Connecticut, Maine, Rhode Island, New Jersey, Pennsylvania, Ohio, Illinois, Michigan, Indiana and Nebraska as modern-day adopters of state income tax.

Comparing the 11 states that introduced an income tax since 1961 with the remaining 39  states, not only did all 11 underperform the rest of the nation as a whole, but some — Michigan, Ohio, Pennsylvania and New Jersey — saw their fortunes plunge.

The big losers: High tax state like California, New York, New Jersey, Massachusetts, Ohio, Michigan and Illinois. The big winners: The seven states with no income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington  and Wyoming, plus states with no earned-income taxes like Tennessee and New Hampshire.

To calculate how much you can save by moving to a no tax or low tax state go to the website SaveTaxesByMoving. Families can save hundreds of thousands of dollars over a working life by moving  from a high-income tax state like California to a zero income tax state like Florida.

Smarter tax policy, the authors argue, attracts wealth. Low tax states in every region of the country are outperforming high tax states, they claim. The authors argue passionately that government taxation policies truly matter when it comes to building economic growth and long-term prosperity.


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