It’s time to stop thinking of taxes as a “burden” and start thinking of them as a “launching pad”…a way to create the infrastructure we all need.
Taxes, after all, are just a way to pool our resources to invest in the things we require to function in a world where more and more activity is interconnected. Amazon needs roads and airports, researchers need labs, kids need the Internet, we all need weather satellites. Infrastructure is ‘social’ as well_ the US took a leap forward in international trade when it made public education free starting in the 1850-70 period, switching from tuition-funding (like the backwards-looking fee system for American colleges today) to a system supported by property taxes.
In my view, a society that tries to “balance” its budget is not looking or spending far enough into the future…government is not like a business, government is the launching pad for business. Its budget should not “balance”. It should always be reaching ahead; spending more than it takes in. The trick, of course, is to find that balance between expenditures and progress.
State taxes give us a way to test that theory.
U.S. states with the highest tax rates for their high-income earners have faster economic growth, faster average income growth, and lower unemployment rates than the no-tax states, according to the Institute on Taxation and Economic Policy. The GDP growth per capita in the nine (Democratic) states with the top personal income tax was 39%, v. 30% for the nine (Republican) states with the lowest income tax.
In GOP states, levels of public spending are simply too to meet urgent societal challenges. The economic importance of investing in people and communities should not be surprising - except evidently to the GOP - since value in the economy is created by working people using good infrastructure (and the point of an economy is ultimately to serve people).
This shows up in ways that do not seem connected, of course. Florida and other states are now facing impossibly high insurance rates for residential protection, because of the effects of climate change: more storms and floods. It is a straight-line connection. But this is confusing to some governors.
The other piece missing in the hullabaloo from the states that get the most attention – like Florida, Tennessee, and Texas – is that their low taxes only apply to the wealthy. These states actually levy some of the highest rates in the nation on low-income and working-class families, because their tax codes are regressive: those who have the highest incomes pay the lowest share of their income.
Higher tax rates give a big boost to one group in particular: children. The Child Well-Being Index (CWI) is most-comprehensive measure of children’s quality-of-life, and the CWI finds a strong relationship between children’s well-being and the amount that a state can invest in their support. Because less than 10 percent of the federal budget is invested in children’s programs, state spending has a huge impact.
High taxes are linked to better outcomes for children – and that covers education, health and life-assistance benefits. The child poverty rate for example is three times higher in Mississippi than in Vermont.
Many forget that the U.S. once led the world in education spending – and it drove the American economy to growth rates unseen by any other nation.
But taxes on wealthy people are bad, aren’t they? Surely Donald Trump can’t be Wrong? Doesn’t higher taxes for the rich will slow state economic growth? Whatever happened to ‘trickle down’ economics, where giving the rich more money leads to more money for everyone?
It was never more than a fevered campaign slogan. The truth is that taking more money away from rich people is the best way of ensuring that everyone else gets more money…and the whole economy grows faster.
The seven most populous states, California, Texas, Florida, New York, Illinois, Pennsylvania and Ohio are naturally the seven biggest contributors to U.S. GDP, according to the Bureau of Economic Analysis. Yet, California is way ahead of the competition as far as per-capita contribution goes. While 11.7 percent of Americans live in California, the state contributed 14.2 percent to GDP in Q1 of 2023. New York state, where 5.9 percent of Americans live, contributed 8.1 percent of GDP that quarter.
Florida, which has a 6.7 percent share of population, only contributed 5.5 percent of GDP. That is because Florida’s wealthy are not being taxed enough. In fact, Florida’s tax rate is very low, so the odds are poor that any re-distribution will occur through spending on new social infrastructure like schools or colleges.
Texans have the 10th highest tax rates in the country, and contribute 9.2% to the GDP.
High tax equals high economic result.
The nine high-rate states - California, Hawaii, Oregon, New Jersey, Minnesota, Vermont, New York, Maine and Maryland – grew their personal income per capita by several percentage points more than the lowest nine states.
Taxes pay back.
The opposite theory - that trickle-down economics will allow higher-income earners with lower taxes to promote job creation and investment – is nullified by Kansas’ failed experiment in tax cuts.
In 2012 and 2013, Kansas Gov. Sam Brownback implemented tax cuts to boost the state economy. He cut the top rate of the state’s income tax from 6.45 and 6.25 percent to 4.9 percent, allowing these taxpayers to pay the same marginal rate as middle-income earners, and the bottom rate fell from 3.5 to 3 percent. The Republican-controlled legislature later reversed the cuts as a failure after it led to sluggish growth and shrank revenue, which fueled cuts to government spending on priorities such as education and infrastructure.
Average incomes are growing more quickly in the states with the highest top tax rates. Per capita personal income and disposable per capita personal income both grew more rapidly in these states over the last decade. Per capita personal consumption growth is also more robust in the states with the highest top tax rates.
Residents of states with the highest top income tax rates are more likely to have a job than people living in states lacking income taxes. Compared to states without income taxes, a larger share of people in their prime working years (ages 25 to 54) has found work in the states levying the highest top tax rates. Additionally, under a wide range of measures, the unemployment rate is lower in the states with the highest top income tax rates.
On the flip side, rapid population growth in the states without personal income taxes has not resulted in an improvement in economic well-being for the typical resident of those states.
Relative to the states with the highest top income tax rates, states without personal income taxes levy higher overall taxes on the poor, due largely to their heavy reliance on regressive sales and excise taxes to fund public services. High-income taxpayers are the largest beneficiaries when states refuse to levy personal income taxes.
Tax cuts and incentives—especially when they occur at the expense of public investment—are not the best means to expand employment and spur growth.
States sometimes think that firms will move to them in order to reduce costs, since lower costs may result in higher profits for business owners. But state and local taxes are not typically a significant cost of doing business. All state and local taxes combined make up but a small share of business costs and reduce profits only to a limited extent. Indeed, the costs of taxes pale in comparison to many other location-specific costs, and numerous location factors—including qualified workers, proximity to customers, and quality public services—can be more critical than taxes. The availability of these vital location factors depends in large part on each state and locality’s commitment to public investment—and their ability to pay for it.
Growing the economy by shrinking the public sector also does not work. In today’s complex techno-economy a certain investment in public service is in fact essential to coordinate state responses to the fast-changing world of opportunity and threat. Every company wants educated workers, a well-functioning transportation system, dependable utilities, and a sustainable economy. Cities and states that invest in themselves are attractive places to do business.
The use of tax cuts to create jobs can carry uneconomical “costs per job.” For each private-sector job created by state and local tax cuts, governments may lose between $39,000 and $78,000 or more in tax revenue annually. This substantial revenue loss forces governments to lay off public employees in numbers that probably exceed the number of jobs created in the private sector. The net effect of tax cuts is thus likely to be a loss of employment. In addition, the public would lose the value of the public services that would no longer be provided.
The Economic Policy Institute says that tax increases used to enhance public services can be the best way to spur the economy. By stimulating growth, generating jobs, and providing direct benefits to residents, improvements in state and local public services can be one of the most effective strategies to advance the quality of life of citizens.
According to Therese McGuire, a professor of strategy at the Kellogg School, and a tax policy expert with experience working for state governments, it is a false narrative to say that increasing taxes is bad for business”
“The evidence doesn’t support it. I wouldn’t feel confident telling a policymaker that the best way to boost your economy is to lower your taxes—in fact, I think it would be malpractice to make that kind of pronouncement.”
For McGuire, the best tax policies for state and local governments seeking to grow their economies are those that offer long-term certainty to businesses and individuals, are coupled with wise public investment, and are designed with the principles of efficiency, simplicity, and equity in mind.
Such policies—based on economics principles, not political whim—also have the best chance of promoting fairness across the board.
McGuire adds another dimension: “The most important thing policymakers can do is create a tax strategy that offers fiscal certainty. Businesses have a longer time horizon than politicians—they need to know what the tax rate will be five years from now, and they need confidence that the system will fund the infrastructure and services cities and states require. Because otherwise, their cost of doing business goes up, and their odds of long-term success go down.”
And contrary to what Trump is saying, studies have found that tax cuts for the lower 90 percent of income earners proved a boon to job creation, whereas tax cuts for the top 10 percent had little to no effect. Other than to make them even wealthier.
And I would have no objection at all to Trump’s wealth, if he had earned it.
Any of it.
On the federal side, I think this chart tell the story of budget imbalances:
Republicans generally left a deficit because they are funding the unproductive rich, and Democrats have to clean it up by spurring infrastructure and social support programs.
You wonder how Republicans got their reputation as the Party for ‘business’.
Without the Bush and Trump tax cuts, debt as a percentage of our economy would be declining permanently. The biggest deficit was Trump’s tax cut for the wealthy. The Congressional Budget Office (CBO) estimated that the 2017 law would cost $1.9 trillion over ten years. The law has severely eroded our country’s revenue base. Revenue as a share of GDP has fallen from about 19.5 percent in the years immediately preceding the Bush tax cuts to just 16.3 percent in the years immediately following the Trump tax cuts.
It also delivered no change in earnings to average Americans, for all the good it did to the top 1%.
Corporations didn’t use the tax cut to reward workers or increase productivity. Instead, corporations merely increased their stock buybacks, and gave their top earners another boost. America's largest corporations spent seven times more on stock buybacks and dividends than they paid in taxes after the Trump tax cut.
Workers below the 90th percentile of their firm’s income scale (a group whose incomes were below roughly $114,000 in 2016) saw no change in earnings from the Trump tax cut.
And now Trump is proposing to try it again, with a cut that would cost $4.6 trillion. This would be more than double the original cost. It would cause the federal deficit and debt to soar.
But back in the land of good ideas, America has a superstrong economy boosted by Biden’s job plans and industrial encouragement.
Biden’s economic plan will result in $3.8 trillion in increased revenue. It counts on tax increases for the very wealthy.
And the citizens of the states with the highest taxes will benefit the most.