The race to the bottom

Taxes. Those who say more taxes are needed, especially taxes on the rich, use moral plaints about being able to use that money to help the poor and the needy. When it is suggested that states should tax less, they complain that those states are in a race to the bottom to attract the creme of the crop at the expense of the needy. Arthur Laffer and Stephen Moore at the WSJ says “They’re wrong, and New Hampshire is our favorite illustration.”

Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation — much worse than those in New Hampshire. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.

One last point: States aren’t simply competing with each other. As Texas Gov. Rick Perry recently told us, “Our state is competing with Germany, France, Japan and China for business. We’d better have a pro-growth tax system or those American jobs will be out-sourced.” Gov. Perry and Texas have the jobs and prosperity model exactly right. Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year.

There is a race to the bottom. Europeans are ahead of the U.S. but, lately, the U.S. seems to be in a big hurry to catch up. From this WSJ opinion, it appears that the U.S. is still fortunate in that it has states where a comparison and contrast can show the effect of tax policy. Now the only problem is getting people to see what is in front of their eyes.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies — old and new — have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Let the rationalizations begin. That is how the race to the bottom proceeds.

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