By David Shakow
In an article to be published in State Tax Notes‘ December 6 issue, I argue generally that claims that high state taxes discourage economic development may be flawed because they look at statistics selectively and fall prey to the fallacy that correlation implies causation. In particular, I consider an article by Arthur Laffer in the Wall Street Journal in October, in which data on personal income per capita do not appear to be consistent with the relevant government-issued data. The Laffer article argued that the introduction of income taxes by various states over the past fifty years has in all cases led to a decrease of per capita income when compared to the United States average per capita income in the relevant period.
Starting with the data on per capita income by state published by the Bureau of Economic Analysis of the U.S. Department of Commerce, I determined that, in fact, seven of the eleven states that have introduced an income tax have had an increase in their per capita income when compared to the per capita income of the United States as a whole. Moreover, while, as Laffer argued, gross state product did decrease for each of those states, the data for gross state product per capita can be read to indicate that the introduction of taxes had no significant effect on a state’s productivity.
For those of our readers who might enjoy playing around with the data, we have posted the underlying spreadsheets on which my article was based, as well as other spreadsheets that can be used to compare various economic statistics by state. However, remember, as the article warns, that correlation does not imply causation.
We will have a link to the article when it is published.