New Study Shows Clear Negative Relationship Between Local/State Tax Burden and Econ. Growth
Arlington, Va. – U.S. metropolitan areas with lower taxes exhibit higher employment growth, faster population growth, and greater increases in real personal income than areas with a higher tax burden, concludes a new study released today by the National Foundation for American Policy (NFAP), an Arlington, Va.-based policy research group. The study, “Higher Taxes, Less Growth,” found that areas with higher taxes had lower employment growth, smaller personal income gains and slower growth of population.“These findings are particularly relevant at a time when many states and cities are proposing to raise taxes to address short and long-term budget problems,” said Stuart Anderson, Executive Director of NFAP.
1. Employment growth between 2000-2006 was 54% higher in the 50 metropolitan areas with the lowest tax burden than in the 50 highest-tax metro areas (measuring the tax burden as state and local taxes as a percent of personal income in 1997 for all 381 metropolitan areas).
2. Real personal income growth was 80% higher between 2000 and 2006 in the 50 areas with the lowest state and local tax burden (as a percent of personal income in 1997) than in the 50 highest-tax metro areas (see chart above).
3. In the 50 lowest-tax areas, population growth at 8.6% (between 2000 and 2007) was more than three times higher than in high-tax metro areas (2.6%).
Conclusion: The results suggest a clear negative relationship between state and local tax burdens and local economic growth.
32 Comments:
"U.S. metropolitan areas with lower taxes exhibit higher employment growth, faster population growth, and greater increases in real personal income than areas with a higher tax burden"
Perhaps the metro areas with all of that growth already have well funded government based on the strong economy. I wonder why "taxes are bad" and "Free market is good" isn't the title of every article on this site. It doesn't matter what the studies say...Mark's conclusion is always the same. Why even continue to provide research links? When you're only looking for material that supports your position you'll find it in everything. What happened to objectivity?
i don't understand what your looking for Michael. He provides links to research because thats what it is, facts that back up a position he holds. Would you rather he did as you do and just throw around the word "perhaps" and base his conclusions off his feelings?
Michael raises an important criticism related to some research in this area, however it does not apply to this particular study. The issue can be dealt with relatively easily by measuring the tax burden as a percent of personal income (or some other measure of the size of the economy) and by using lagged tax data. As a quick look at the study (of which I am the author) would have revealed, both of these approaches were taken. Since the tax burden is indeed measured as a percent of personal income, not in total dollar terms, economic growth will cause both the numerator and denominator to increase at roughly the same rate, leaving the ratio essentially unchanged. Furthermore, the tax data are from 1997 and the growth data are for after 2000. Growth after 2000 could not have possibly had any effect on the tax burden in 1997 anyway.
Michael: What accounts for the disparity then? Please explain in detail. For another trick, please account for the economic success of Hong Kong relative to Britain over the past 60 years since the end of World War 2 without noting that HK's economy has been much freer than Britain's.
http://www.hoover.org/publications/digest/3532186.html
Michael,
You appear to be the one that is not objective. You read studies like this one and want it to fit your biases, then when you find reasoned, plausible results that don't fit your ideology you slander the author. I'm tired of explaining Econ 101 to people who do not want to believe it: raising taxes does not produce economic growth. What state and locale do YOU live in?
I grew up near Fulton, NY (a small city of ~12,000 in 1970). A regional economic downturn in the early 1970s resulted in lower employment and lower sales. With sales tax revenues down, the city raised business and residential property taxes (instead of cutting its budget). This led to more businesses closing down, more tax increases, etc. Fulton finally stabilized with high taxes, no big businesses (a Miller brewery and a Nestles chocolate factory closed), a few medium-sized business, a 15% population reduction, and unemployment of ~12%. Successive city governments refused to break the downward spiral by reducing taxes. Instead, they fought legal battles to annex adjacent lands (that received no city services).
Why isn't the percentage increase in real personal income (RPI) expressed per capita, and then ranked? Ceteris paribus, higher population growth (PG) will yield higher RPI but does it yield higher RPI per capita, which is by definition economic growth.
For instance, Palm Coast, FL (a top-10 hitter in the study) increased RPI by 71% divided by PG of 77% or a 0.92 ratio. It is singularly unimpressive as the median ratio across all MSAs is 1.70 (10.9% RPI divided by 6.4% PG).
"I wonder why "taxes are bad" and "Free market is good" isn't the title of every article on this site. "
You must be delighted with the current administration's conduct....
Mark,
I love your blog, but I think you got this one somewhat wrong. I went through the data and it DEFINITELY does not show a CLEAR relationship as stated. I will try and post my analysis somewhere.
Dean,
Thanks for all your work on the study, it is very interesting and I am still reading it. Forgive me if I don't take a blog post or abstract at face value. A few comments/questions:
Figure 2 has some outliers that skew your correlation. I would say the chart shows that the optimum tax rate for population growth is about 10%, wouldn't you agree?
I find it interesting that you show a scatter plot for population growth vs. taxes but not for either of the other parameters vs. taxes. Why did you choose not to show the scatter plots for these factors?
Based on the scatter plots of your data I made, your conclusion is not fully supported. Moreover a running 15 city average of tax rate vs the three economic parameters would be the most appropriate for telling the entire story of the data. On a chart like this your data shows that metro areas with taxes above a 11% have significant deficiencies in population growth, personal income growth, and employment growth. However, the metro areas with tax rates around 10 percent, on average, have the highest economic growth factors. Yes, based on your assumptions your study is not wrong, but you leave out important details.
The data actually supports that low taxes and high taxes correlate with lower economic growth factors (the three you chose) than a middle range tax rate of 10%, which correlates with the highest economic growth factors.
" I wonder why "taxes are bad" and "Free market is good" isn't the title of every article on this site. It doesn't matter what the studies say...Mark's conclusion is always the same"...
Well Michael isn't that reason enough for YOU to start up a blog (its free you know) extolling the values of the state extorting excess taxes from the productive so as to pander to the parasitic...
I'm not going to start a blog explaining the virtues of excessive taxes because I don't believe taxing is always the correct avenue. I also don't believe free market is the best in every circumstance. My frustration with this blog comes from the fact that there are a broad set of problems that get addressed with a very narrow scope on how to solve them. It gets even more convoluted when simple conclusions are drawn from research with an incomplete scope.
In this case of this article a "clear negative relationship" is shown, however, there are many variables regarding the relationship between taxes and economic growth that are not addressed. What about the way tax dollars are spent in the high tax metro areas? The way that taxes are spent have an impact of economic growth however this study doesn't address any of that. It also doesn't address reasons other than tax burden for a city to show these economic growth factors.
I'm not saying the findings are incorrect. My point is that you can't tell from only looking at this research if the conclusion is true because there are so many variables not accounted for.
Yet you continue to comment on the blog, and therein lays the point. This blog, or any blog, like any conversation doesn't exist to support a point of view, but rather to facilitate the discussion around a topic.
The best discussions on this blog have come out of the most controversial topics, that a lot of people see as one sided, but if they were one sided someone would have taken your comments down Michael. I hope you stay involved in the discussion.
Trevre, I think you are right on. I enjoy reading this blog because it gives a perspective not of my own. Carpe Diem is very good at showing on point of view - however it isn't fair to the audience to confuse correlation with causation.
I understand this controversy is kind of the point. It gets people engaged in a topic they might otherwise not be interested in. But why not use some objectivity when selecting posts? It is possible to produce compelling evidence without breaching logic.
What happened to objectivity?
Ever consider that Marks's position is mostly correct? Why publish material that doesn't support your position, unless you can show that it is wrong.
That said, Mark does tend to fiddle on one string.
Ah one of my favorite posts,
"The words "fair" and "fairness" are two of the most dangerous words in the English language, for the following reasons:
1. People using those words (e.g. "fair trade," "fair wages") almost always follow with some proposal for government intervention, government regulation, or government force of some kind to correct some perceived "unfairness" and impose their notion of "fairness."
And to paraphrase Thomas Sowell:
2. In most cases, it is hopeless to try to have a rational discussion with those who use the words "fair" and "fairness."
3. "Fair" and "fairness" are two words that can mean virtually anything to anybody.
4. "Fair" and "fairness" are two of the most emotionally powerful words, but at the same time are words that are undefined (see #3)."
Michael: Still waiting on your thoughts on Hong Kong's economic miracle...
I suggest you read a little about Sir John James Cowperthwaite.
http://www.telegraph.co.uk/news/obituaries/1508696/Sir-John-Cowperthwaite.html
Bill: Your incessant clamoring for attention to Hong Kong's successful economy is no doubt intended to be a trap for me to step into and realize...wow! taxes suck!
But you are doing the same thing that this blog article is doing. There are a whole bunch of factors that can account for differences in those economies. Not just a single one (ie flat tax/free market) as you're trying to point out. The history of those two economies are so entirely different - by saying the tax issue is what made the difference you'd have you also equate variables that would be impossible to measure.
This will be my last comment on this article (you're welcome everybody!): I don't know of any broad definition that can provide cause for all economic growth or contraction across broad complex economies....and neither do you. So when it looks like there might be a promising answer - look a little closer and you'll find a contradicting point of view that is just as relevant.
Michael: So you are unable to expain HK's stunning success over the past 60 years relative to societies which were more affluent to start with but which had higher taxes and government regulations than HK then? Thanks for admitting that.
I have never met a leftist who was able to take that one on so you are not alone. It is far easier to make a dismissive statement and then exit the room quickly, I suppose.
What is the answer to your question Bill?
micheal, of course all the variables arent there. There are about a million variables that affect everything. If every chart needed EVERY variable to be there then there would never be a chart about anything.
"I also don't believe free market is the best in every circumstance"...
Oh really? O.K. name one other system that has worked better than the free market system even if its only once...
"My frustration with this blog comes from the fact that there are a broad set of problems that get addressed with a very narrow scope on how to solve them"...
Well Michael the fact of the matter is that WITHOUT government interference the K.I.S.S. theory tends to work its magic almost everytime its tried...
"What about the way tax dollars are spent in the high tax metro areas? The way that taxes are spent have an impact of economic growth however this study doesn't address any of that"...
Hmmm, sounds like you think that extorted tax dollars from the productive should be used for someone's social engineering ideas?
"there are many variables regarding the relationship between taxes and economic growth that are not addressed"...
Michael I'm thinking that when people who have more of their own money that's money not wasted in the hands of government bureaucrats with at best questionable skill sets it causes capital to grow and flow with spending and investment by the citizens...
There are examples aplenty where tax dollars in the hands of bureaucrats at local, state, and national level was wealth wasted...
Michael: The obvious and correct answer is that the freedoms allowed by the British in HK unleashed the creative energies of the people there and allowed them to work towards their own self-interests which in the aggregate helped society to prosper. Where an entrepreneur has limited theft (taxation) and limited interference (regulations) from government, he has as a result more time, energy and money to create new businesses, jobs, opportunities and societal wealth. Have the lessons of the 20th Century not yet sunk into your head? Socialism does not work as well as capitalism to bring prosperity to the citizenry.
Bill:
Hong Kong cannot be explained in a single paragraph. Any attempt to will grossly ignore critical information. I'm not arguing for socialism. I instead see the virtues of a well regulated capitalist democracy.
Hong Kong is interesting because you call it "societal wealth" when they have a huge discrepancy in income distribution. Some people are very wealthy & most are very poor. High School education must be paid for our of pocket (with government subsidies helping those who cannot afford it) which has led to a shortage of educated workers. Which has in turn negatively impacted business. Just having wealthy participants in an economy doesn't mean there is "societal wealth" and in many ways that inequality stifles innovation and economic growth.
The 20th century may have shown YOU that free-markets and inequality are beneficial to our society but that's because you're looking for it. Which brings me back to my original complaint - a little more objectivity would help Mark give his opinion credibility. Instead he's using research who's conclusion has been made up before the study was conducted. That's not scientific and its generally misleading.
As for branding my ideology as socialist; I may be to the left of you but I am by far not a socialist. I'm simply a moderate. I think both ideas have virtues a successful economy needs to embrace. I understand that my view isn't as exciting or rabble rousing as yours or Marks. But that doesn't make it socialist or any other political extreme.
Any data to back up your assertions?
Here is some to back up mine:
1) Per capita income (PPP) - Great Britain (2008 est.): $36,600
2) Per capita income (PPP) - Hong Kong (2008 est.): $43,800
SOURCE: CIA World Factbook
https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html
So, the former colony has surpassed its former colonial master. What is to account for this other than greater economic freedom?
HK has no natural resources, aside from its harbor, so it cannot be that. It does have freedom and its people though and that makes all the difference.
By the way, me speaking the truth to economic ignoramuses is not "rabble rousing". It is merely an attempt to educate those who have misplaced trust in the power of government to enhance their lives. I only want what is best economically for the most possible people and capitalism delivers this.
Bill: You're using a figure that doesn't address inequalities. Total output of an economy doesn't matter when it's all concentrated in only a few interests. The idea of our democracy is protecting freedom and equality.
Since you're thirsty for a graph - take a look at the disparity of the Gini Index between UK & Hong Kong.
https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html
Michael,
Didn't you say a few blogs ago that that would be your last blog on this site? Interesting dialogue between you and Bill...I have to say though that Bill has won this argument hands down.
Michael,
You state that it does not matter what the studies say, Mark's conclusions are always the same. Why don't you say the same thing about conclusions the left comes to whether it is the economy, the environment, healthcare, education, etc. Your ideology, biases, and slants are obvious in your posts. Amazing to me how people on the left blame capitalism for everything, when it is proven to be the only economic system that works, flaws notwithstanding. No system is perfect, but I would much rather have the market correct itself then have a centralist government consumed with social engineering goals manipulating the economy. Who will check them??????
Michael: The gini index is a flawed measure and, by itself, proves nothing. Just because a nation has less income disparity (i.e. a low gini index coefficient) does not mean that people in all income quartiles are better off than those in the nation with more income disparity (i.e. a higher gini index coefficient). For example, The HK gini index is 52.3 (2001) and the gini index for Kenya is 44.5. So, using your logic, Kenyans are therefore materially better off than the people of Hong Kong. Obviously, this is not true. Or are you arguing that it is better for everyone (except for a very small elite) to be equally poor and none be rich (as in communism or in much of the Third World) than for some to be incredibly wealthy, some to be merely wealthy, some to be middle classed and some to be poor (as in HK)?
By the way, it is also clear that capitalism delivers the most luxury items to the most people. Witness the omnipresence in the US of cell phones, computers and cars even among the poor. Capitalism makes such luxury items available in large numbers at affordable prices. Socialism meanwhile leads to less new luxuries and economic stasis.
You may think the Gini Index is flawed because it only shows income disparity, that's all it claims to do! It is an effective measure in the case of Hong Kong and UK because we already know (from the information you provided) that these are two healthy economies (unlike Kenya with GDP growth very low).
I keep getting mislabeled by other in this comment thread as being against capitalism - or somehow in favor of big government. I agree that capitalism is the best known economic structure. However, capitalism requires government oversight to maintain equality and discourage abuse. This isn't my idea, Adam Smith wrote about it.
This is way off topic but I would like to know what everyone here thinks about a legal market for street drugs (pot, cocaine, whatever others there are)?
Michael: What you fail to realize however is that maintaining capitalism and "maintaining equality" are two mutually exclusive goals. One must inevitably give way to the other. The best one can hope for is equality of opportunity under a capitalist economy. Equality of outcome is of course the failed road so many communist nations have taken to oblivion.
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