Tuesday, November 19, 2013

Economist Laffer Explains Texas's Success

Economist Art Laffer released a study comparing and contrasting state-level economic and business policies. His study identified striking differences between states with greater Laissez-Faire, capitalist economic and taxation policies such as Texas to states with more Keynesian-based and socialist policies such as California.

Both Laffer and Gov. Rick Perry attended the Texas Public Policy Foundation's Competition and the States: California vs. Texas luncheon, where both spoke.

About the findings in his study, Laffer stated:

"The differences between California's and Texas' economic policies and performances couldn't be more stark. Texas has a low-tax, business friendly environment. California has punitively high tax rates and seems to put up every possible barrier to entry for business. Texas is welcoming more and more companies, jobs and people each year, while California is desperately trying to build a wall to keep its companies, jobs and people from fleeing to greener pastures. The people have spoken."

Laffer's study demonstrates how the more intrusive and involved in private business a government, be it local, state, or federal, becomes, the more it harms the economy and the prosperity of the individual citizens as a whole. Government intrusions benefit only the smallest sectors at the top and bottom, furthering the divides between income brackets, and hindering upward mobility.

In other words, they may help some of the poorest of the poor. But the most wealthy are left usually unhampered or protected, usually as members of the overseeing oligarchy/oligopoly. The quality of life for those in between drops dramatically. The retardation of growth incurred reduces not only opportunities for upward mobility, but eliminates any incentives.

Governor Perry's remarks from the event included this statement regarding Laffer's findings:

"Texas vs. California is a pivotal contrast in a debate that really speaks to our nation's future. Just as we have in recent years, Texas continues to outperform California in terms of employment rate, growth in output and gross domestic product. We also continue to dominate in terms of population shift, which is about as clear a sign of quality of life as you can find. That's because it's the answer to the most basic question: Where would you rather live?"

Dr. Laffer conducted the study with noted economist Steve Moore, Nicholas Drinkwater, and Chuck DeVore. 

Here is and excerpt one of the more interesting sections of  the study, Section VIII:

"Quite understandably, people, even experts, supposedly knowledgeable experts, in state and local finances, use a type of shorthand when they link tax policy to spending objectives. To them, higher tax rates mean more schools, more highways, more policemen, more firemen, more nurses, and more prison guards. If you extend their logic, higher tax rates lead to equal percentage increases in tax revenues and, therefore, equal percentage increases in dollar expenditures which in turn leads to equal percentage increases in real resources for state and local governments to provide to the people, i.e., an equal percentage increase in the provision of public services.

"Unfortunately, this shorthand is simply wrong. The relationship, as espoused, between tax rates and state and local provision of public services gets carried too far when tax rate changes, tax revenue changes, dollar government spending changes, and increases in the provision of public services (i.e., real spending changes) are treated as synonyms. They are not.

a.) Higher tax rates are not synonymous with higher dollar tax revenues.
b.) Higher dollar tax revenues are not synonymous with higher dollar government spending.
c.) Higher dollar government spending is most definitely not synonymous with the greater provision of public services.
The leakages here are the equivalent of “parasitic loss,” a term used to describe the diminution of measured horsepower of an automobile when measured at the engine itself and then measured again at the back tires. Not surprisingly, the loss in measured horsepower is quite large when moving from the engine to the back tires. So too are the losses in the provision of public services from an increase in tax rates—“parasitic leakages".
Now it is very true that to have any state and local government spending, real or nominal, there have to be tax revenues, which means there have to be tax rates and tax bases. But going from that statement to a statement that higher tax rates mean an equivalent increase in state and local government services for state residents is simply false."