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March 2013 - Volume 18, Number 1

   

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Setting the Record Straight on the Policy of Tax Reduction

by John Hendrickson

The American Legislative Exchange Council (ALEC), which is a leader in providing conservative limited-government and free-enterprise policy solutions, recently published Tax Myths Debunked. Tax Myths Debunked is an in-depth scholarly policy paper on the importance of limited-government policies.[1] ALEC in Tax Myths Debunked, Rich States, Poor States: ALEC-Laffer State Economic Competitive Index (now in its 5th edition), among other publications, has proved that economic growth stems from following principles rooted in limited government and economic liberty.[2]

 

Tax Myths Debunked was actually written in response to the Iowa Policy Project essay, Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity, which criticized ALEC’s arguments and findings in Rich States, Poor States.[3] Tax Myths Debunked is written by economists Eric Fruits and Randall Pozdena, who argue that states need to follow “policies that will support economic growth and break with the long tradition of high levels of taxation, government spending, and intervention at the state level.”[4]

 

Many states, just as the federal government, are facing great fiscal and economic challenges, which will require sound public-policy measures in order to create economic growth. These policy measures should be based on ideas rooted in free-market principles rather than the traditional progressive and liberal policies “of higher taxes and greater government involvement.”[5]

 

Tax Myths Debunked explores seven major arguments that are commonly utilized by progressives and liberals. These arguments are:

 

1. Increased government spending stimulates the economy during recessions.
2. Lower tax rates are bad for the economy in a recession.
3. Raising tax rates will not harm economic growth.
4. Austerity in the form of spending cuts will harm growth and employment.
5. Real household income has not grown in the past 20 years.
6. The distribution of income is increasingly inequitable.
7. Raising tax rates on the rich will not harm the economy.[6]

 

This debate over tax policy and government spending is at the heart of our current national question over economic policy. As Fruits and Pozdena wrote:

 

More than five years after the recession began in 2007, the U.S. economy continues to be plagued by weak economic growth. Keynesian deficit spending remedies have not only failed to stimulate economic growth, but also have left the country with a huge overhang of debt. This debt, in total, now exceeds the entire annual gross domestic product (GDP) of the nation.[7]

 

The national economy, which is plagued by high debt, uncertainty, and continuous high unemployment, is not only problematic for the private-sector and individuals, but also for the states. Across the nation, state Governors and Legislators are trying to grapple with a variety of policy problems such as education, health care, transportation, and tax and spending policy, while being faced with an uncertain economy and a federal government which is broke.

 

The national debt and fiscal crisis “poses a particularly challenging problem for the 50 states.”[8] As Fruits and Pozdena argue:

 

They [States] cannot realistically expect to receive any significant increase in aid from the federal government. Many state economies remain weak, while economic conditions and demographics put greater service responsibilities in their hands. Put simply, states must engineer their own economic and fiscal policies. Against this background, prominent economists are counseling the states to move away from high tax policies that discourage growth and instead consider policies that stimulate business, investment and job growth.[9]

 

These pro-growth policies consist of “free markets, low marginal tax rates, fiscal restraint, and small government.”[10]

 

The current fiscal crisis, marked by high debt due to government spending and growing entitlement costs must be addressed. "With U.S. federal, state, and local government debt at 84 percent of GDP and rising, policymakers should begin taking debt drag into account when considering new deficit spending," wrote Salim Furth, a Senior Policy Analyst with The Heritage Foundation.[11] This debt crisis represents a serious policy challenge to policymakers and it is bringing the nation to the brink of economic ruin. Furth notes some of the impact the debt crisis is already having on the economy:

 

1. Debt added from 2009 to 2011 has already cost Americans $200 billion in forgone growth.
2. Higher debt will cost Americans $2.4 trillion over the next five years.
3. Higher debt will cost Americans $9 trillion over the next ten years.[12]

 

Tax Myths Debunked provides an academic analysis and response to the progressive and liberal charges that low tax rates and reducing government spending will lead to economic ruin. State policymakers as well as the citizenry would be well advised to read Tax Myths Debunked in order to understand the importance of policies based upon limited-government and free-market principles. The future of the nation as well as Iowa will depend on who wins this philosophical battle of ideas.

 

Endnotes:

[1] Eric Fruits and Randall Pozdena, Tax Myths Debunked, American Legislative Exchange Council, Washington, D.C., 2013, <http://www.alec.org/publications/tax-myths-debunked/> accessed on February 22, 2013.
[2] Arthur B. Laffer, Stephen Moore, and Jonathan Williams, Rich States, Poor States: ALEC-Laffer State Economic Competitive Index, American Legislative Exchange Council, Washington, D.C., 2012, <http://www.alec.org/docs/RSPS_5th_Edition.pdf> accessed on February 22, 2013.
[3] Peter Fisher, Greg LeRoy, and Philip Mattera, Selling Snake Oil to the States: The American Legislative Exchange Council’s Flawed Prescriptions for Prosperity, A Joint Publication of Good Jobs First and The Iowa Policy Project, November 2012, <http://www.iowapolicyproject.org/2012docs/121128-snakeoiltothestates.pdf> accessed on February 22, 2013.
[4] Fruits and Pozdena, p. 4.
[5] Ibid.
[6] Ibid., p. 6.
[7] Ibid., p. 7.
[8] Ibid.
[9] Ibid.
[10] Ibid., p. 35.
[11] Salim Furth, "High Debt Is a Real Drag," Issue Brief No. 3859, February 22, 2013, The Heritage Foundation, Washington, D.C., < http://www.heritage.org/research/reports/2013/02/how-a-high-national-debt-impacts-the-economy> accessed on February 22, 2013.
[12] Ibid.

 

John Hendrickson is a Research Analyst for Public Interest Institute.

 

LIMITS is one of our quarterly membership newsletters, arriving in March, June, September, and December. It consists of short articles and essays on protection of human rights by limiting the powers of government.

 

LIMITS is published by Public Interest Institute at Iowa Wesleyan College, a nonpartisan, nonprofit, research and educational institute, whose activities are supported by contributions from private individuals, corporations, companies, and foundations. The Institute does not accept government grants.

 

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