If there were a handbook produced for state lawmakers entitled "Economic Growth: How Best to Stop It Without Making Voters Think That's What You Want," it would promote high progressive tax rates to care for the poor and high regulations on business to protect people. There's no better way for states to rid themselves of the people responsible for the lion's share of state revenues, both directly through paying their taxes and indirectly through growing the state's economy. That is a lesson that resounds in a new study by the American Legislative Exchange Council written by Dr. Arthur B. Laffer and Stephen Moore.
In their study, "Rich States/Poor States: The ALEC-Laffer State Economic Competitiveness Index," Laffer (yes, the Dr. Laffer of Laffer Curve fame and Reagan's supply-side revolution) and Moore (economist and editorial board member of The Wall Street Journal) analyze the fifty states' economic competitiveness against free-market principles and sixteen factors they identify as affecting a state's competitiveness (many different types of taxes, state debt, the quality of the state's legal system, the state's minimum wage, worker's compensation costs, whether it is a right-to-work state, its recent tax policy changes, etc.).
Laffer and Moore also provide a "State Roadmap to Prosperity" in which they show how relatively low taxes and regulations give people more reasons to work, increasing incomes, investment and employment and bringing more people to the state. Of importance in this politically polarized climate, Laffer and Moore show that the issues aren't partisan. They highlight Democrats for growth and tax cuts in Rhode Island (which recently went from the third to 27th highest income tax in the nation), Arizona, Oklahoma, Virginia, and New Mexico, where Gov. Bill Richardon cut income taxes significantly, declaring "businesses move to states where taxes are falling, not rising."
From Adam Smith on, economics have known that the key to economic growth is trade. Economic theory holds that voluntary trade increases wealth, just by the very act of trading. Economic wealth is not a static, or fixed, amount. When individuals enter a trade, each gives up something they value less for something they value more. By doing so, each item in the trade has attained a higher value; wealth has increased.
Consider the following: Libby, to her chagrin, has inherited a compendium of Soviet agitprop. She meets a fellow, Barack, who is burdened with a first edition of Friedrich A. Hayek's The Road to Serfdom. Well, to Libby and Barack, each book they own is worth absolutely nothing; its worth is solely in whatever they can trade it for to someone else. So they gladly exchange their books. In so doing, they have made both books more valuable to their owners. Wealth has been created, but as with so many things in economics, its creation was not in any way immediately noticeable and evident.
Take that process, multiply it by countless times with all conceivable goods, and overall societal wealth increases. Anything that speeds this process or opens avenues to new and more trades will help grow overall wealth in society even faster. Money is the most obvious example; rather than try to find the perfect bundle of goods to exchange, people began to exchange goods and services for money – the individual receiving money knew it could be used subsequently to exchange for desired goods and services. They would also trade their labor for money.
Because wealth is created faster the more trades take place, it can also be slowed down by throwing up roadblocks and drags on voluntary exchanges. Government regulations raise the cost of doing business, and those costs will be deal-breakers for particular companies; the more burdensome the regulations, the higher the costs of compliance, and the more companies won't be created and trades won't be made. Sales taxes and income taxes (taxes on the trade of labor) also become deal-breakers to prospective trades.
The societal costs in wealth not created is also unmeasurable; however, they can be demonstrated in comparison with the growth in other, like societies without those burdens. Making that demonstration on a state-by-state basis is one of the strengths of Laffer and Moore's report. Why on earth would a state with the natural and cultural amenities of California be losing people (over 1.3 million from 1997 to 2006) in comparison with, say, Nevada (plus a half million in that time)? Because California has the highest "progressive" income tax rate in the nation outside of New York City, and the costs for businesses to comply with California's byzantine menu of regulations is over twice as high as those of other Western states. As Laffer and Moore write, "It takes a lot of public policy folly to persuade people to pack their bags and abandon California's sunshine, 70-degree weather, scenic mountains, and beaches, but lately the politicians in Sacramento have proved themselves up to the task."
Because wealth can be created, it can be destroyed. Trade must be voluntary to benefit both parties and grow wealth; involuntary "trade" (theft or coercion) only benefits the recipient. Recurring involuntary trade gives the repeated victim incentive to reduce his exposure, either by reducing his acquisition of what is taken from him or by getting out of the area. High-crime areas destroy wealth by driving off wealth creators. Just so, governments that use taxes to "redistribute wealth" merely destroy it by driving off the wealth creators.
The difference is, we the people have given government the coercive power to take from us in order to protect our lives, liberties, and property — indeed, in part to fund protection from robbers. When, however, governments do as governments are prone to do, grow themselves beyond their true purposes and become an end unto themselves, then in the eyes of the productive citizens, they begin to resemble the robbers and not the looked-for protection. The closer this resemblance, the faster the exodus of the wealth creators.
That is a process Laffer and Moore call "voting with their feet," and it is something they show occurring from the high-tax, high-regulation Northeast as well as the increasingly statist California. In page after page, they show the devastation to a state's economy that is wrought by the enticing, hopelessly false promises of using confiscatory taxation to protect the poor and disadvantaged. All it does, in the end, is drive off the producers to freer states, leaving behind the poor and disadvantaged and a state budget in deficit, while growth – including growth in state tax revenues – accrue to the freer states.
I hope ALEC will publish successive versions of this report in the years to come. It would greatly underscore the truth of the economic principles Laffer and Moore highlight in "Rich States, Poor States" if they are able to track and demonstrate those effects at work in the states right now.