Budget & Tax

Free Market Friday: Tax cuts will grow economy

November 20, 2015

Jonathan Small

Once each quarter or so, voices from Washington announce how well the American economy is doing. But in reality there are 50 state economies, and what goes on in those 50 state capitol buildings sometimes has a greater effect on local prosperity (or the lack of it) than doings in Washington.

An important new book has examined that truth from every possible angle. I commend to your attention An Inquiry into the Nature and Causes of the Wealth of States by Arthur B. Laffer, Stephen Moore, Rex A. Sinquefield and Travis H. Brown.

The authors conclude that state tax policies are one of the most important factors in how a state performs economically. The book is heavily laden with data and statistics all pointing in one direction: Those states with no or low personal income tax rates will outperform the high-tax states every time.

The authors compare the nine states with no personal income taxes (including Texas) with the nine states with the highest tax rates. The performance gap is stunning. From 2002 through 2012, no-tax states added population at more than twice the rate of the high-tax ones (which had a net loss in in-migration).

Employment grew by 8.9 percent in the no-tax states, and only 1.7 percent in the big taxers. The no-tax states also outperformed the high taxers by more than 12 percent in personal income growth and 16 percent in gross state product growth.

In short, by virtually every possible metric, states with no or low personal income taxes are more prosperous than those that impose high tax rates. Oklahoma policymakers should take note, and embark on a plan to responsibly phase out income tax over several years and replace it with nothing.

The authors spend several pages debunking naysayers – liberal think tanks, a tax-funded Oklahoma economist, and others – who have claimed that we’re doing fine with higher taxes.

Specifically, one claim, that Oklahoma actually beat Texas in gross state product growth, is only true for a brief two-year window that – surprise – came right after we first cut our income tax rate.

This is a serious book that takes a serious look at some fundamental truths, among them that lower taxes will help Oklahoma grow.