With Texas facing a potential budget shortfall measured in the billions of dollars, and a growing dissatisfaction with the state’s “Robin Hood” school finance system compounded by the political season, everyone seems to have adopted a favored method to tax Texans.
Indeed, in coffee shops and cafes from Dallas to Dalhart, San Antonio to Sherman, Texans find themselves debating the merits of various taxing tools the legislature could implement.
But in the arguments over income taxes, regressive and progressive taxes, hidden taxes, loopholes, and all the technical details that become hot political issues, it is easy to lose sight of two fundamental questions: How does any particular tax, or level of taxation, improve the material welfare of the citizenry? Does taxation spur or impede economic growth for everyone?
No one denies that some government is essential for prosperity; the chaos of anarchy is as dismal a place to start a business as one with heavy government intervention – the former Soviet economy providing a case in point. But the overwhelming weight of the evidence clearly demonstrates that in most industrialized countries, government has reached the point where it is a serious drag on economic growth.
For example, studies have shown that for each one percent of increased tax burden, worker output is lowered by about two percent. That finding has been confirmed by state-by-state comparisons between high-tax and low-tax states, according to work for the Texas Public Policy Foundation by internationally acclaimed economist Richard Vedder.
Martin Feldstein of Harvard concluded in 1997 that “the deadweight burden caused by incremental taxation… may exceed one dollar per dollar of revenue raised, making the cost of incremental government spending more than two dollars for each dollar of government spending.”
How, again, does government spending help the economy?
Other studies have shown that high taxes actually discourage business entrepreneurs from locating in a given area; reduce the inflow of new residents into a region and increase the outflow of residents out of a region; and reduce job opportunities and sometimes lead to higher unemployment.
In fact, during the 1990s more Americans moved from high-tax burden states to low tax-burden states such as Texas, than fled East Germany during the entire period of the Cold war.
Dr. Vedder has previously found that income taxes represent the most detrimental of all taxes for economic growth, followed closely by property taxes. Heavy reliance on either should be avoided, if the goal is sustained economic growth for all people.
But beyond questions of specific taxes, what would a growth-oriented fiscal policy look like?
It would stress general tax relief for the entire citizenry rather than targeted tax abatements or other subsidies for specific individual businesses or groups of people. It would emphasize public investment in highways and parks rather than entitlement or income maintenance programs. Finally, it would minimize business governmental regulation and keep a rein on unemployment and worker compensation costs.
Fortunately, Texas, with its low tax burden, has all of these things – for now.
Remembering the discomforting greeting “I’m from the government and I’m here to help you,” let’s hope that irrational campaign-year pronouncements, prompted by concerns of bleak budget forecasts, do not lead politicians to saddle us with more taxes while claiming to help us with more spending.
Michael Quinn Sullivan is director of media and government relations for the Texas Public Policy Foundation.