#4 State Tax Rates are Not Related to State Income or Growth

Time to Change the Tax Discussion #4

This is the fourth in a five part series about taxes.

It has  become common in the media to argue that state income or sales taxes cannot be increased or it will dampen incentives and hurt the state or local economy. While this might be true at sufficiently high tax rates, there is no evidence that tax rates currently imposed on income or sales by states has any effect on the level or growth rates of the state economy. The following nine plots will let you decide for yourself whether there is any relation between

{Sales tax revenue, income tax revenue, or total state and local government revenue}

and

{Levels of Gross State Product per Capita, One year changes in Gross State Product (the “recovery”) and Ten year changes in Gross State Product per Capita)

If there is, it is a very weak relationship, not worth worrying about. Instead we should be debating whether we want more or fewer government services relative to private goods.

All data used state-level rates as stored on the  web site http://www.usgovernmentrevenue.com maintained by Christopher Chantrill, self-described “writer and conservative”.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I intentionally chose a strong title for this blog. My academic colleagues will reasonably argue that sales and income taxes DO have some dampening effect on a state economy. I do not disagree that there is some effect. But these graphs reveal that it is not detectable when it is realized that tax increases are used to pay for public services. For political decision-making, which of the following two statements is more nearly true? I would go with the latter.

Raising sales or income taxes by one percent in order to invest in bridges, public transit and education will have a meaningful negative effect on the state economy.

Raising sales or income taxes by one percent in order to invest in bridges, public transit and education will have a meaningful positive effect on the state economy.

Here are links to the previous three blogs on Taxes

#1 All Taxes and Budgets Should be Expressed as Dollars per Person

#2. Include Social Security and Medicare taxes when discussing tax burdens

#3 Tax Bads (or at least don’t subsidize them!)

One Comment

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