To many readers of the Bacon’s Rebellion blog, the connection between low taxes and economic prosperity is so manifestly evident that it doesn’t need defending. But there are many advocates of expansive government who advance arguments to the contrary. Indeed, as evidenced by the steady increase in state/municipal spending in Virginia and the rising tide of taxes, fees and penalties to pay for it, the Axis of Taxes is in the ascendancy.
In my latest contribution to the “Economy 4.0” series, “Taxes, Government and Prosperity,” I make the case that lower taxes create a business climate more hospitable to economic prosperity (defined as per capita income) than higher taxes do. As evidence, I tracked the growth in per capita income of the 50 states between 2000 and 2005. Look at the results: You’ll see that low-tax states clearly out-performed the high tax states. (I found the same pattern over longer time frames as well.)
Of course, the correlation between low taxes and income growth is far from perfect. Equally clearly, there are other factors at work. One of those factors, I suggest, is how states and municipalities use their tax revenues. If they squander it on bureaucracy, pork barrel projects, public sector unions and inefficient human settlement patterns, high taxes are destructive. If states invest their tax revenues in education, the environment, infrastructure and public amenities that add to the quality of life, high taxes can contribute to prosperity.
Bottom line: The central challenge for Virginia government is to keep taxes as low as possible while continuing to deliver the core public services required to sustain prosperity and a high standard of living.
Yes, Virginia must invest in the public sector. But we cannot tolerate Business As Usual thinking. If Virginia wants to prosper in the 21st century, we have to systematically reinvent our schools, universities, government agencies, transportation systems and human settlement patterns. Tinkering on the margins won’t cut it. Businesses have transformed themselves. Not-for-profits have transformed themselves. Now Virginians must transform their old, outmoded, Industrial Wave governmental institutions (to borrow a phrase from Alvin and Heidi Toffler) into Knowledge Wave institutions.