For example, over the most recent 10-year period, 2001-10, the average of the nine states without income taxes—Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming—had 14% growth in population—versus 9% for all states and only 5.5% for the nine highest income tax states—Oregon, Hawaii, New Jersey, California, New York, Vermont, Maryland, Maine, and Ohio. Job growth in the nine no-income tax states was 5.5%, versus close to zero in the average state and -1.6% in the highest tax states. On balance, no-income tax states have two and one-half times the population growth of the highest income tax states, and yes, the no-income tax states even have higher tax revenue growth than the average of all states and the highest income tax states.

The California/Texas comparison is especially eye-popping. California has one of the highest income tax rates at 10.3%, and Texas has no income tax. Admittedly, one swallow does not a summer make, but it is astonishing that over the 10-year period from 2001 to 2010, Texas gained nearly 870,000 net migrants from other states while California lost over 1.5 million people to other states. Texas’ gains and California’s losses are nowhere more apparent than in the Census results for the 2010 congressional reapportionment: Texas increased its congressional delegation by four seats, and California did not gain one single seat. Yet, the politicians in Sacramento are currently sponsoring a ballot initiative to be voted on this fall that would, retroactive to January 1, 2012, increase the top tax rate from more than 10% to more than 13%—the highest in the nation.

Based in part on these powerful results, which have been replicated by numerous economic studies,1 many states like Kansas, Missouri, and Oklahoma are seriously considering abolishing their income taxes to accelerate growth. And so now the left is fighting back.

Download the full report here.

In her statement, she then urged other policymakers to act “to address the systemic risks posed by money market funds.”

This acknowledgment that any reform must be carried by other regulatory bodies is appropriate. Other regulators have been pushing reform even though Ms. Schapiro’s commission is the only agency that has direct authority over MMFs.

The true agency pushing reform has been the Federal Reserve System, even though the Fed has no direct regulatory authority over MMFs. For the Fed has made it a top priority to impose new and, I might add, destructive regulations on MMFs.

These proposed new rules represent a self-initiated bailout for the Federal Reserve System itself, designed to protect the Fed from the consequences of its own mistakes over the past four years. Because the Fed owns so many long-term bonds at such low yields, any significant rise in market interest rates would result in a large drop in the value of Fed assets, driving the Fed into insolvency.

Download the full editorial by Dr. Arthur Laffer that appeared in Investor’s Business Daily.

Download the full report “The Money Market Mutual Fund Industry: First Do No Harm.”

CONTACT:  Joshua Treviño

(512) 472-2700

 jtrevino@texaspolicy.com

New report debunks narrative on income inequality

Research used to target “the 1 percent” excluded important data to produce growing rich/poor gap

AUSTIN – Claims that the gap is growing between America’s richest and poorest are built on a foundation of flawed research, according to a report published today by the Laffer Center for Supply-Side Economics.

“The principal research supporting claims of dramatic income inequality in America is unsound and misguided,” said Laffer Center Senior Fellow Brian Domitrovic, Ph.D. “This focus on ‘the 1 percent’ takes no account of any absolute increase or decrease in living standards on the part of the lower classes. Studies have shown that in every recent interval of American history, and certainly from 1980 to the present, living standards and real income have risen for virtually everyone.”

The Laffer Center report, “The Left’s Dubious History of Income Inequality,” challenges the income inequality research by French economists Thomas Piketty and Emmanuel Saez that was cited by President Barack Obama in the narrative supporting his first budget proposal. The concepts developed by Piketty and Saez later provided the Occupy Wall Street slogan, “We are the 99 percent.”

Domitrovic criticized the Piketty-Saez research for relying solely on income reported on federal tax returns, which overlooked the true income of the wealthiest Americans.

 “Because Piketty and Saez did not include untaxed benefits in their calculation of income in the post-World War II period, they did a poor job of accounting for the true income of the wealthy during these years,” Dr. Domitrovic said.

 “Piketty and Saez had some of the tools necessary to show that they were understating the rich’s income between the 1940s and 1970s,” Domitrovic elaborated. “But they declined to use them because doing so would debunk their U-shaped pattern of income inequality over the past 100 years – the basis for their current celebrity.”

The report provides a brief review of the history of taxation in America, establishing that higher tax rates on the wealthy result, seemingly counter-intuitively, in the burden of taxation falling on the middle class.

 The report, “The Left’s Dubious History of Income Inequality,” is available for download from the Laffer Center’s website, www.LafferCenter.com.

Brian Domitrovic, Ph.D., is a senior fellow of the Laffer Center for Supply-Side Economics and an associate professor and chairman of the history department at Sam Houston State University.

 The Laffer Center for Supply-Side Economics is a partnership with the Texas Public Policy Foundation dedicated to preserving and promoting the core tenets of supply-side economics.

 Laffer Center website: http://www.laffercenter.com/

Facebook page: www.Facebook.com/TheLafferCenter

Twitter feed: www.Twitter.com/LafferCenter

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Another of the subheadings tipped off a grass-roots political phenomenon that would flower in 2011 and continues to develop in the election year of 2012. This subheading was titled, “Growing Imbalance: Accumulating Wealth and Closing Doors to the Middle Class.” The section that followed laid out an argument now familiar to many:

“For the better part of three decades, a disproportionate share of the Nation’s wealth has been accumulated by the very wealthy. [Yet] instead of using the tax code to lessen these increasing wage disparities, changes in the tax code over the past eight years exacerbated them. … By 2004, the wealthiest 10 percent of households held 70 percent of total wealth, and the combined net worth of the top 1 percent of families was larger than that of the bottom 9 percent. In fact, the top 1 percent took home more than 22 percent of total national income, up from 10 percent in 1980.”

This section of the budget went on to cite research by economists Thomas Piketty and Emmanuel Saez of a few years earlier as the basis of these calculations. It was Piketty and Saez who had first developed the concept of the “top 1%.” Prior to their research, the convention was to measure income shares in “quintiles,” which corresponded to the top 20%.

This econometric esoterica was thus fated not only to make an impact in the scholarly journals. It would find its way into an ideologically informed and rhetorically bloated inaugural presidential budget, and in 2011 it became the motif of an astonishing display of political activism: the “Occupy Wall Street/Main Street” movement of 2011. “We are the 99%,” the slogan of the movement, was a homage to the Piketty-Saez research that the first presidential budget had put in lights two years before.

The feedback loop reached its culmination in Obama’s State of the Union address of January 2012, an address which effectively kicked off the President’s reelection campaign. As the address proclaimed, “No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well while a growing number of Americans barely get by, or we can restore an economy where everyone gets a fair shot.” The means to do this, as the president outlined, was to ensure tax increases on those earning more than $250,000 per year, and a guarantee that the effective tax rate of those making $1 million per year was at least 30%.

The self-referentiality of the whole process was distinctive. Piketty and Saez identified an income phenomenon within the top 1%. The Obama budget picked up the research and laid emphasis upon it. The Occupy Wall Street movement took the research conclusion as their slogan, and as that movement made its mark, the President reintroduced the theme as the crux of his re-election mission. 

The critical question at the center of it all is as follows: are Piketty and Saez correct? If they are not, or if they are being misinterpreted, a house of cards involving America’s political and economic fortune tellers stands to tumble down.

Download the full report here.

Read the full Wall Street Journal editorial here.

Read the full editorial here.

The cost Tennessee has paid for its gift and estate tax in lost economic growth and employment is staggering. Had Tennessee eliminated its gift and estate tax 10 years ago, Tennessee’s economy would have been over 14% larger in 2010 and there would have been 200,000 to 220,000 more jobs in the state. And, the more robust economic growth would have benefited state and local government revenues adding between $7 billion and $7.3 billion to state and local coffers.

Potential gift and estate tax payers expend effort and money to avoid the tax. Many leave the state in anticipation of Tennessee’s death tax taking with them jobs, spending, investments, and entrepreneurial skills. Once gone, they are loath to come back. Potential immigrants to Tennessee are also put off by Tennessee’s extreme gift and estate tax.

The average taxable estate in Tennessee is consistently smaller than the U.S. average. In 2010 the average size of a federal estate filed in Tennessee was almost 25% smaller than the U.S. average federal estate, or $1,350,000 less. And, in Tennessee there were over 20% less federal estates filed per 100,000 population than the U.S. average. People really do leave Tennessee because of Tennessee’s gift and estate tax—and they leave in droves.

The economic damage created by Tennessee’s gift and estate tax can also be estimated by examining the extent that Tennessee’s asset base is reduced. It is important to note upfront that because estates reported to the IRS have declined over time due to changes in federal reporting requirements, and the total value of estates is less than the total value of assets lost, the economic damages calculated based on the lost estates significantly understate the true economic damage. Yet, the economic costs are still staggering. Tennessee’s gift and estate tax has lowered the state’s asset base by at least $16.6 billion to $48.3 billion reducing the size of Tennessee’s economy, as measured by gross state product, by between $6.1 billion to $18.2 billion.

Quite simply, Tennessee’s gift and estate tax is the single greatest reason why wealthy people don’t want to live in Tennessee. Many leave the state and few move into Tennessee. They take all their jobs, entrepreneurship, spending, homes and wealth with them. This is the single greatest detriment to Tennessee’s growth and Tennessee’s ability to raise sufficient tax revenues. If Tennessee’s gift and estate tax were repealed or greatly reduced Tennessee’s state tax revenues would increase, not decrease.

This paper was released jointly with the Beacon Center of Tennessee.

Download the full text.

But are the claims made about Mr. Buffett’s taxes true?  What’s more, would raising taxes on the “mega-rich” significantly help the nation’s budget woes as the President and his friends argue?  The evidence on both is an unequivocal “NO.”

As Dr. Laffer explains, the “mega-rich” do care about marginal tax rates as they make decisions about investments and their tax liability.  Even Mr. Buffett.

In fact, millionaires and billionaires “can afford armies of tax accountants and lawyers, and can alter the timing, location, and composition of their income.  They can always shift their investments into tax-advantaged strategies.”  Mr Buffett’s own practice demonstrates this truth as he shields his income from the government just like the supply-siders claim.

Download the Full Text.

“The political season has barely begun, and yet we already know that class warfare will be President Obama’s key issue in the 2012 general election. It’s even reared its ugly head in the Republican primaries, with the candidates trying to paint front-runner Mitt Romney as a cold-hearted capitalist and Rick Santorum proposing targeted tax breaks for the “working class” manufacturing sector.”

Read the full piece from the Wall Street Journal here.

Listen to the Coffee & Markets interview here.