An Inquiry into the Nature and Causes of the Wealth of States How Taxes, Energy, and Worker Freedom Change Everything

A passionate, detailed, quantified argument for state-level tax reform

An Inquiry into the Nature and Causes of the Wealth of States explains why eliminating or lowering tax burdens at the state level leads to economic growth and wealth creation. A passionate argument for tax reform, the book shows that even states with small populations can benefit enormously with the right policies. The authors’ detailed exposition evaluates the impact state and local government policies have on a state’s relative performance and economic growth overall, backed up with economic data and analysis.

Facts don’t lie. But they do point clearly to the failure of so-called progressive tax schemes designed more to curry favor with selected constituencies than to create an economic system that leads to individual wealth as the reward for hard work and entrepreneurial risk taking. An Inquiry into the Nature and Causes of the Wealth of States is a detailed and critical look at income taxation across the nation, and drills down into an analysis of the economic growth or malaise that results from tax policy. Arguing eloquently that a state cannot tax itself into prosperity, just as the impoverished cannot spend themselves into wealth, the authors point out what many inherently know but often fear to say out loud. The book provides detailed quantitative analysis, and discusses the policy variables that can have enormous effects on the financial well-being of states and individual residents, such as:

• Personal and corporate income tax rates
• Total tax burden as a percentage of personal income
• Estate and inheritance taxes
• Right-to-work laws

An Inquiry into the Nature and Causes of the Wealth of States shows everyone how to evaluate state-level fiscal and economic policies to become more competitive.

ARTHUR B. LAFFER, PhD, is the founder and chairman of Laffer Associates, an economic research firm focusing on interconnecting macroeconomic, political, and demographic changes.

STEPHEN MOORE is chief economist at The Heritage Foundation. He focuses on budget, tax, and monetary policy.

REX A. SINQUEFIELD was a co-founder and director of Dimensional Fund Advisors LP. Since retirement, he has become one of Missouri's leading philanthropists and a dedicated supporter of public policy change.

TRAVIS H. BROWN is the CEO and co-founder of Pelopidas, LLC, a public affairs and issue-advocacy firm. He frequently contributes to Fox & Friends and Forbes.com and is the author of How Money Walks.

Prologue xiii

Chapter 1 The Fall from Grace: The Story of States 11 and the Income Tax Adopted 1

The Implementation of an Income Tax—A Terrible Mistake 1

That Giant Sucking Sound Is People, Output, and Tax Revenue Fleeing Income Taxes 4

Economic Malaise 4

Misleading Measures 5

Ohio 7

The Story of New Jersey—A Colorful Example of Opportunity Wasted 10

Lower Tax Revenue 10

The Rhetoric Surrounding Tax Revenue and the Decline in Public Services 11

The Case of the Disappearing Tax Revenue 12

Connecticut 13

No Bang for the Buck—How Costly Tax Increases Fail to Result in Better Provision of Public Services 16

Chapter 2 Economic Metrics 23

Primary Economic Metrics 24

Tax Revenue Performance of All States over the Past Decade 32

The ALEC-Laffer State Rankings 37

Internal Revenue Service Tax Migration Data 39

Chapter 3 The Nine Members of the Fellowship of the Ring to Balance Out the Nine Nazgûl 53

An Analysis of the Top Personal Income Tax (PIT) Rates 56

Public Services and the Personal Income Tax 61

The Effects of Oil and Severance Taxes 63

A Longer-Term View of the Data 67

An Analysis of Corporate Income Taxes 69

An Analysis of the Overall Tax Burden 73

An Analysis of the ALEC-Laffer State Economic Competitiveness Index 76

Chapter 4 Piling On 81

An Analysis of the Property Tax Burden 82

An Analysis of the Sales Tax Burden 82

Estate and Inheritance Taxes 88

Right-to-Work Laws 90

Labor Force Unionization 93

State Minimum Wages 96

Chapter 5 Give unto Caesar 99

New Hampshire—Case in Point 104

Top Traders 121

Real-Time Mobility Index 127

Chapter 6 Why Growth Rates Differ: An Econometric Analysis of the Data 133

List of Variables 137

Gross State Product Growth: Single-Variable Analysis 141

Gross State Product Growth: Two-Variable Analysis 146

Gross State Product Growth: Three-Variable Analysis 149

Population Growth: Single-Variable Analysis 150

Population Growth: Two-Variable Analysis 153

Population Growth: Three-Variable Analysis 156

Population Growth: Four-Variable Analysis 157

Conclusions 158

Annotated Econometric Bibliography 159

Key Quotes from Econometric Bibliography 186

Chapter 7 Fiscal Parasitic Leakages: Texas versus California 193

A Tale of Two States—A 55-Point Summary 194

The November 2012 Elections in California and Texas 199

Economic Performance: California, Texas, and the United States 201

A Brief Note on Poverty Metrics 207

The Texas Oil Boom and California’s Oil Bust: A Clash of Economic Cultures 208

An Overview of Total State and Local Government Revenues—Texas and California 212

Texas, California, and the United States: A Comparison of Tax Revenue and Debt Financing 213

Policy Variables Affecting Growth 218

The Relationship among Taxation, Spending, and the Achievement of Policy Objectives—A Story of Parasitic Leakages 224

Intergovernmental Revenues, Federally Mandated Social Services, and State Welfare, Medicaid, and Food Stamp Programs 225

The Provision of Public Services by State and Local Governments 229

The Performance of State and Local Public Education 235

Highways: California versus Texas 239

Prisons: California and Texas 241

Conclusion 242

Chapter 8 Au Contraire, Mon Frère: Criticisms of Our Work—Our Responses 245

Conflicts of Interest and Policies 245

Taxes and Other Supply-Side Policy Variables Don’t Affect Population and Gross State Product Growth 247

Growth Is a Move from North to South, from Clouds to Sunshine, from Cold to Warm 251

Growth Is Predominantly a Matter of Education and Not Taxes and Other Economic Policy Measures 252

Personal Income per Capita and Median Income Growth as Measures of Success Show Taxes Don’t Matter 253

Tax Rate Cuts Are Public Service Cuts 257

Other Factors Affect Population Growth (Oil, Sunshine, Accessible Suburbs, Etc.), and Therefore Taxes, Right-to-Work Laws, and Other Supply-Side Variables Don’t 259

Correlations between Tax Rates and Growth Reflect a Simultaneous Equation Bias (Reverse Causation); That Is, Growth Causes Tax Cuts, Not the Reverse 261

There Are High-Tax States That Outperform Low-Tax States; Therefore the Supply-Side Theory Is Wrong 264

The Oklahoma Argument against Tax Cuts 267

Income Distribution Becomes More Even with Progressive High-Rate Tax Codes 270

The Probity of the ALEC-Laffer Measures Is Nonexistent; Therefore Their Policy Prescriptions Are Wrong 273

Federal Tax Rates Are More Important Than State Tax Rates, and Therefore State Tax Rates Don’t Matter 275

The Wealthy Used Public Resources, and They—Not Others—Should Pay for Those Public Resources; We Need More Progressive Taxes, Not Less 276

When Is Enough Evidence Enough? If the Facts Were Reversed, We Would Concede 277

Notes 281

Bibliography 295

Acknowledgments 317

About the Authors 319

Index 321

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