Bacon's Rebellion

Democracy Thrives in Sunlight

Yearning for Something New from “Rich State, Poor State”

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by

James A. Bacon
in ,

rsps

Virginia ranks No. 12 in the American Legislative Exchange Council’s just-issued eighth annual “Rich State Poor State” ranking of the economic outlook for the 50 states based on 15 state policy variables. Generally speaking, states the report authored by supply-side economists Arthur D. Laffer, Stephen Moore and Jonathan Williams, U.S. states that spend less (especially on income-transfer programs) and tax less experience higher economic growth rates than states that tax and spend more.

There is no question in my mind that, all other things being equal, higher taxes discourage business investment, job growth and wealth creation. And the evidence seems incontrovertible that over the long run — ironing out short- and medium-term fluctuations — a lower-tax environment is conducive to economic growth.

However, all other things are never equal. Some public investments, especially in education and infrastructure, have a higher social return on investment than others — and, arguably, a higher return than private investment. Likewise, public investment that is efficiently administered yields greater benefits than public investment guided by politics and cronyism.

The ALEC-Laffer economic competitiveness index was a useful ranking when it first came out. It’s important to know how states compare in their tax burden and other measures of economic freedom, such as debt service, judicial impartiality, number of public employees, right-to-work status and minimum wage. But the discussion can’t stop there. Unfortunately, “Rich States, Poor States” hasn’t substantively advanced the discussion since it was first implemented.

  • Yes, job growth and GDP growth are important measures, but they aren’t the only important measures. How about per capita income growth? How about the distribution of income growth — are the rich getting rich while everyone else stagnates? This study should incorporate a wider range of metrics.
  • Which taxes have the most adverse economic consequences? Do certain taxes distort the economy or alter incentives in ways that are more destructive than other taxes?
  • How have the outlook predictions held up? It would be useful to go back to the very first “Rich States, Poor States” ranking and compare outlook to actual performance. What is the correlation between measures of economic freedom and different metrics of growth? What percentage of the variation between states can be explained by Laffer’s measures? 10 percent? 20 percent? More? Less? What other variables matter?
  • Rather than look at total government spending, the study should look at different segments of spending. Is there a correlation between how much a state spends on education and economic outcomes? How about what a state spends on infrastructure? And how about amenities that supposedly matter to members of the creative class?

It seems like Laffer, Moore and Williams are on auto-pilot. The discussion about economic development has left “Rich States, Poor States” in the dust. Simply reiterating old nostrums, no matter how true in a general sense, doesn’t advance the public policy debate. Whacking tax rates is no recipe for prosperity, as Kansas Governor Sam Brownback has learned from his tax-cutting adventure. If this report doesn’t start plowing new ground, intellectually speaking, it will soon outlive its usefulness.

— JAB

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17 responses to “Yearning for Something New from “Rich State, Poor State””

  1. larryg Avatar
    larryg

    Anyone who thinks you can increase aggregate demand by investing more on production is not playing with a full deck IMHO.. but no shortage of kool-aid drinkers like ALEC and Moore.

    Next – if you want to talk truly about taxes – you need to deal with this – more than a trillion dollars of tax breaks:

    Top 10 Tax Expenditures, 2009-2013 (in billions)

    Exclusion of Employer-Sponsored Health Insurance: $143 billion
    Exclusion of Net Pension Contributions and Earnings: $109 billion
    Preferential Tax Rates on Capital Gains and Dividends: $91 billion
    Deduction of Mortgage Interest: $72 billion
    Earned Income Tax Credit (EITC): $67 billion
    Child Tax Credit: $58 billion
    Deduction of State and Local Taxes: $52 billion
    Exclusion of Capital Gains on Assets Transferred at Death: $48 billion
    Deduction of Charitable Contributions : $35 billion
    Exclusion of Untaxed Social Security Benefits: $34 billion

    these are all income – that is excluded from being taxed.

    you can argue about the merits of the tax policy – perhaps – but you cannot deny that these are choice made by the govt to allow tax-free spending on certain things and that does affect the economy as much or more than taxes themselves.

    Not even in the above list are things like selling health insurance to Seniors for 100.00 a month at a cost of 400 billion to the budget each year.

    nor subsidized student loans which is adding more billions.. to the deficit
    the question is – are we really serious about the issue – enough so we honestly own things like tax breaks as well as taxes..????

    I think you’ll find that my view as the labelled “liberal” in BR – is quite a bit more fiscally conservative than those in BR who claim to be “conservatives”.

    rather .. they’d be conservatives of convenience who totally bail out when we start talking about THEIR tax breaks and subsidies.

    😉

  2. larryg Avatar
    larryg

    I forgot to add – the tax exemption for employer-provided health insurance is not only the top expenditure at 143 billion but FICA tax is also excluded and that amounts to more than 100 billion – more than enough to extend the solvency of Social Security and Medicare Part A and social security disability by decades.
    the
    The irony is that the govt provides not only Federal and State tax free health insurance but also FICA-tax free – AND it requires the insurance providers to insure virtually all employees – even those with pre-existing conditions – and at the same price as others…

    .. all of this – at the same time – beneficiaries of those entitlements – opposing something similar for those who do no have access to employer-provided and who have to rely on taxpayer-subsidized Hospital charity care.

    if we truly wanted a fiscally-fair, equitable system – we’d give those who buy their health insurance out of pocket the same benefits that we give to those who get employer-provided and Medicare.

    Otherwise – we’re basically defending the status quo that we benefit from while opposing similar benefits for others.

    so – I welcome the discussion about taxes.. but we need to deal with the whole enchilada not just the things that don’t benefit us and benefit others.

  3. DonR Avatar
    DonR

    I’ve always wondered why liberals who love Europe and European economic policy so much have such little interest in European tax policy.

    “More generally, the United States taxes capital and income much more than other rich countries, which tend to rely more on sales taxes such as VATs.”

    http://www.washingtonpost.com/blogs/wonkblog/wp/2012/09/26/how-the-world-taxes-in-two-charts/

    1. larryg Avatar
      larryg

      well don’t focus on “liberals” – focus on Conservatives and their attitudes about ANY and ALL taxes of ANY KIND!

      that’s the issue.

      when you say “liberal”, you’re deflecting the discussion about taxes themselves.

      Conservatives are, generally opposed to any and all taxes regardless of the kind and their general belief is that any/all taxes harm the economy…

      that’s the issue – not “liberalism”.

      even then – there are a plethora of taxes and tax breaks that Conservatives love… that are status quo…

      you won’t, for instance, hear most Conservatives talk about the terrible impact that fuel taxes have on the private economy..

      nor will you hear them cry about subsidizing mortgage and employer-provided health care…

      nor – subsidized flood insurance.. or student loans for higher Ed or DOD or Homeland Security spending…

      so there is a level of hypocrisy.. on taxes.. among Conservatives who refuse to own the idea that they really do support taxes – but for the things they want … as opposed to being opposed to any/all taxes for any purpose.

      1. DonR Avatar
        DonR

        I am always entertained by your ability to be willfully wrong. Here’s a quote for you …

        “The federal government ran a budget deficit of $430 billion for the first half of fiscal year 2015, CBO estimates–$17 billion more than the shortfall recorded in the same span last year,” the CBO said in its Monthly Budget Review for March 2015, which was published April 8. “Both revenues and outlays were about 7 percent higher than the amounts recorded in the first six months of fiscal year 2014.”

        In other words taxes, spending and deficits have increased for the first six months of this year vs the first six months of last year – by 7%! The federal government makes Teresa Sullivan look like a piker.

        Government in the US is a slovenly, greedy slob of a creature reminiscent of Jabba the Hut from the Star Wars movies. Taxes can never be high enough, spending can never rise to an acceptable level and the overall quality of life and trust in government can never sink deep enough.

        Our government is an out of control pig like creature stuffing everything in its path into its mouth while gurgling “More! More! More!” through half chewed food and quarts of its own spittle.

        What percentage of GDP do you think all levels of government should spend LarryG? 110%? Is there any limit?

        Government spending at the start of the 20th century was less than 7 percent of GDP. It vaulted to almost 30 percent of GDP by the end of World War I, and then settled down to 10 percent of GDP in the 1920s. In the 1930s spending doubled to 20 percent of GDP. Defense spending in World War II drove overall government spending over 50 percent of GDP before declining to 22 percent of GDP in the late 1940s. The 1950s began a steady spending increase to about 36 percent of GDP by 1982. In the 1990s and 2000s government spending stayed about constant at 33-35 percent of GDP, but in the aftermath of the Crash of 2008 spending has jogged up to 40 percent of GDP.

        If conservatives are trying to reduce government spending they are certainly doing a poor job of it.

        1. larryg Avatar
          larryg

          where did I talk specific budget and deficit numbers but beyond that – I essentially agree with your view.

          I just point out that we can’t seem to control our spending on Defense – we can’t even be honest about what we’re spending in total for defense.

          Further – I point out that we have tax breaks that are easily in excess of our deficit yet who has the courage to deal with them?

          Finally – you ask how much should govt spend – to which I would refer you to a comparison of countries spending as a percent of GDP:

          http://en.wikipedia.org/wiki/Government_spending

          Now, I’m not advocating a particular amount but I am pointing out that we are far from number 1 even though we spend more on “defense” than the next 10 countries combined.

          So no – I’ not arguing that we don’t spend enough or that we’re not spending too much.. I argue that we prioritize spending in certain ways and we pretend otherwise.

          I argue for truth here.

          what is the truth about our spending in terms of what we spend it for?

          but I also ask you this – do you think taxes spent on things like navigation systems in military aircraft are any different than money not taxed spent on TV’s?

          both of them do provide jobs.. right? So how can taxes for navigation systems hurt the economy and taxes for TV’s not?

          This is the basic premise of Conservatives with respect to taxes, right?

          what say you?

          oh.. and taxes for military navigation systems are money spent on American workers while money spent on TV is not.

          so what say you?

          1. DonR Avatar
            DonR

            Finally! We agree on something. We spend too much on defense. We have too many bases in too many countries. George Washington argued against entering “entangling alliances” yet we have more entangling alliances than any other country in the world it seems.

            As far as percentage of GDP – a big country with a big population and a big economy should have a more efficient government. We made it through the 1990s spending about 35% – 37% of GDP by all levels of government. That sounds about right to me.

          2. larryg Avatar
            larryg

            The fact that most (not all) of the OECD countries spend MORE than us as a percent of GDP .. AND – do not spend near as much as us on “Defense” should also be something worth noting.

            but I’m also still not getting an answer to my question about if someone spends money earned towards something that creates a job – like a big screen TV verses the govt taxing that money and buying a navigation screen for an aircraft – which also gives someone a job.

            so why do we say when the govt spends that money – that it is lost from the economy ? that it damages the economy?

            if the govt pays a guy in NoVa to design a heads-up display for a fighter – is that not also just as much as job as if the govt did not tax and let the taxpayer use it instead for a heads-up display for his car?

            In terms of govt spending itself – DOD is no different than UVA – the only difference is the mission and scope/scale of the spending but in both cases – they will spend as much as they can convince the elected to give them.

            Oh.. and I never hear folks make the argument that taxes taken from taxpayers and given to UVA hurts the economy.. nor that higher tuition hurts the economy.. nor research grants to UVA hurts the economy….

            right?

            so why is it that SOME taxes – HURT the economy while other taxes – like for Colleges are never mentioned in that context?

            so I ask again – if the govt taxes you and spends that money on employing someone to provide services – why is that use of money hurting the economy?

            I see this as an important question for anyone who argues that taxes hurt the economy. How about an answer?

        2. larryg Avatar
          larryg

          Oh and here, take a look on who spends more than we do:

          Country Tax burden % GDP Govt. expend. % GDP

          Denmark 48.1 57.6
          France 44.2 56.1
          Finland 43.4 55.1
          Belgium 44.0 53.3
          Greece 31.2 51.9
          Sweden 44.5 51.2
          Italy 42.9 49.8
          Netherlands 38.7 49.8
          Hungary 35.7 49.4
          Portugal 31.3 49.4
          United Kingdom 35.5 48.5
          Ireland 27.6 48.1
          New Zealand 31.7 47.5
          Iceland 36.0 47.3
          Germany 37.1 45.4
          Spain 31.6 45.2
          Israel 32.6 44.6
          Norway 43.2 43.9
          Japan 27.6 42.0
          Canada 31.0 41.9
          United States 25.1 41.6

          so what do you think?

          1. James A. Bacon Avatar
            James A. Bacon

            It looks to me like there’s a strong correlation between government spending and the strength of the economy — higher spending leads to more sluggish economies.

          2. larryg Avatar
            larryg

            what difference does it make if someone spends taxes on a military jeep or the same amount on a jeep for themselves – purely in terms of jobs and the economy?

            seriously.

            don’t both spending paths have the same basic economic effect?

          3. DonR Avatar
            DonR

            You forgot a few …

            Timor …. 139.7%
            Cuba …… 66.7%
            Libya …… 66.6%
            Micronesia …. 65.3%
            Lesotho …. 63.1%

            Of course the more important point is that the US government constantly consuming a higher and higher percentage of a growing economy is not making things better. Are you really better off today than you were in the 1990s? Your government is certainly spending more.

            Virginia is also spending like a drunker sailor at the state level. From FY2004 – FY2013 Virginia state budget increased 20% AFTER adjusting for a combination of inflation and population growth. Meanwhile, the Imperial Clown Show in Richmond just “can’t afford” to continue contributing to higher education.

            We are being robbed LarryG, robbed blind.

          4. larryg Avatar
            larryg

            this is the appropriate time of year to talk taxes for sure as my wife just informed me that we owe – again…

            but I agree with you on the whole with caveats in that people don’t necessarily spend their money in wise ways – either – and yet that money is part of our economy.

            People spend their money on way more frivolous things than the govt does – and waste also.

            wander down to WalMart and look at the toy aisles. lawn & garden, cosmetics, dog and cat beds.. 44inch TVs, gameboys.. you name it.

            and if you gave these same people the choice – they’d not pay FICA taxes, they’d not fund education or roads or public safety, not the EPA, not even the NTSB…. they’d not pay a penny in taxes and they’d spend a lot of that money on just frivolous and wasteful things..

  4. larryg Avatar
    larryg

    the basic premise of Conservatives – as promoted to the gullible and low-information voters is that ANY tax is something that damages individuals, productivity, the economy and the budget.

    that’s their justification for cutting entitlement spending… but they’re feckless cowards when it comes to addressing other spending – from taxes such as DOD, Homeland Security, higher ED subsidies, mortgage interest deductions, employer-provided health insurance, FEMA subsidized flood insurance, etc.

    In other words – they falsely promote their view on taxes so they can use it as justification to cut programs they do not like – but they do not stick to that logic – across the board.

    Nope. When we get into the areas they think “benefit” the economy – like DOD spending – it’s like day and night.

    30,000 new DOD jobs are absolutely necessary to defend the free world but 30,000 health care jobs – seriously damage the economy.

    Even the Tea party folks like Brat and Paul and Rubio – abandon their avowed principles on a free market economy to stand behind – not only DOD spending but National Defense spending which is equal to DOD spending.

    we take in about 1.5T in un-designated income taxes and we spend well over a trillion on national defense but these guys never met a national defense spending program they did not like -even as they say we must cut Medicare and other entitlements because they are “destroying” the budget.

    We could – fully fund all of National Defense – if we cut the current tax-breaks – all of DOD – more than a trillion dollars – AND we could fully fund Social Security and Medicare, getting rid of those pesky unfunded liabilities if we treated all income equally for taxation purposes.

    Our biggest problem is the ignorance of the average voter in understanding these basic realities because politicians routinely lie about it – and no one is the wiser.

    1. DonR Avatar
      DonR

      You live in a fantasy land where all these tax breaks are hindering the government’s ability to spend. 100 years ago government spent 7% of GDP. None of these hallucinations you see in the tax code have kept government from growing like a pig in a candy factory.

      Here’s the reality LarryG – No matter how much more of America’s total economy the government takes and spends things don’t get better. After WWII government spending was about 22% of GDP. Recently it flirted with 40%.

      Government in the US does not suffer from a lack of money. It suffers from a alack of competence, honesty, credibility, etc – but not a lack of money.

      1. larryg Avatar
        larryg

        re: tax breaks and spending.

        Nope. I’m saying we have to tax MORE because we do have the tax breaks and we end up with a deficit.

        do you REALLY THINK that Congress will cut National Defense spending?

        are you listening right now to the discussion about how the sequester is “killing” DOD … and it’s ability to “protect” us?

        “liberals” take a lot of heat on entitlement spending – and rightly so but the pro-defense guys are just as bad but they have the flag wrapped around them.

        Let me lay it out for you:

        List of countries by military expenditures

        Rank Country Spending ($ Bn.) % of GDP

        1 United States United States 610.0 3.5
        2 China China[a] 216.0 2.1
        3 Russia Russia[a] 84.5 4.5
        4 Saudi Arabia Saudi Arabia[b] 80.8 10.4
        5 France France 62.3 2.2
        6 United Kingdom 60.5 2.2
        7 India India 50.0 2.4
        8 Germany Germany[a] 46.5 1.2
        9 Japan Japan 45.8 1.0
        10 South Korea South Korea 36.7 2.6

        The 610 that the US spends does NOT include – the VA hospitals, homeland security, DOE nuke ship reactors and weapons, NASA military satellites, NSA, CIA, and more – that total up to more than 1.2 Trillion in spending.

        remember – we take in about 1.5T in revenues..

        I hear zero complaints from so-called Conservatives complaining how taxes for the military “hurts” the economy.. zip…but plenty of cries that spending for entitlements is “killing” jobs and “killing” the economy.

        Keep in mind that taxes pay for a Captain in the Air Force just as well as it pays for a Doctor who treats Medicare patients but no matter… the money that goes for that Doctor is “job killing” and economy killing.. but that Air Force Captain – no such problem.

        here’s my problem. we pretend. we ignore the realities. we like to believe things – that are simply not the reality… and then we anoint ourselves as “fiscal conservatives” who decry those unfunded liabilities and deficit and debt.

  5. larryg Avatar
    larryg

    no fantasy world Don. I do believe in recognizing he realities. to acknowledge the choices we have made.

    our tax code is unfair and inequitable as well as incentivizing economic behaviors that encourage spending that is not necessarily in our best interests especially if we are bitching and complaining about deficits and debt at the same time we are giving tax-free subsidies for million dollar second homes as well as subsidizing the flood insurance on them.

    or encouraging students to go into such volumes of debt that the govt will
    have to bail them out.

    or to give people tax-free health insurance instead of making them get their insurance on the open market with taxed money.

    or guaranteeing geezers health insurance for 105.00 a month while working people can’t even get insurance.. for any amount of money… we provide geezers with 500 billion dollars worth of subsidized health insurance…

    we spend virtually all the undesignated money we collect in income taxes – on “defense”. That’s the truth. When did we decide we could not afford to spend that much on “defense”?

    that’s the fantasy world – it’s people who don’t know the facts and the realities of the budget – and …. don’t want to know.. just want to believe something else.

    I don’t live in a fantasy. I think we should all want to know the truth.. so that’s what I do seek.

    I notice that you initially claimed the SS trust fund an thus SS was “broke” and now you don’t.

    I noticed that you disbelieved the 1.5T number for our total income tax receipts and now you don’t.

    or that you believed we spent 3+ trillion but did not realize that 800 billion of that was social security and Medicare Part A…

    or that you thought people “earned” Medicare Part B…

    these are the things that I seek all of us to seek the facts on – because once you know the facts – you realize that the tax and spend argument is a different critter than you originally thought.

    The reason why we have a 500 billion deficit is two-fold:

    1. – we spent almost every penny we take in – in income taxes on National Defense

    2. then we add on top of that about a trillion more in entitlements.

    the conservatives want to cut entitlements and then use that money to buy more “defense”.

    you talk about “spending”.. what are we talking about spending MORE for?

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