More Inaccuracies, Bigger Omissions: Arthur Laffer's Newest Study of Income Tax Repeal Falls Short

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Arthur Laffer’s consulting firm—Arduin, Laffer & Moore Econometrics (ALME)—has released a report purporting to show that North Carolina could usher in an economic boom if it repeals its personal and corporate income taxes and replaces them primarily with a much larger sales tax. Prepared for the Civitas Institute, “More Jobs, Bigger Paychecks” relies on an economic analysis that is fundamentally flawed to the point of making it entirely useless.

Specifically, the report:

 • Fails to control for a large range of important non-tax factors that affect state economic growth. Since many of these factors—such as natural resource advantages and federal military spending—are stacked in favor of states without income taxes, this means that the ALME analysis is incapable of teasing out the specific impact of income tax policy on state economies.

Confuses cause and effect by assuming that declines in personal income in 2008 were due to taxes rather than the Great Recession. The analysis fails to acknowledge that state tax increases—like the one North Carolina enacted in 2009—are often implemented in response to slow revenue growth following a national economic downturn. One practical consequence of this failure is that ALME has assumed the decline in personal income seen in North Carolina in 2009 is due not to the Great Recession, but to increases in the state income tax rate.

Fails to examine the impact of increased sales taxes on the economy. The ALME tax plan proposes to pay for personal and corporate income tax repeal by expanding the sales tax and real estate conveyance fee, and enacting a new business license fee. Two-thirds of the revenue raised through these changes is projected to come from the sales tax, but ALME does not explain what impact it expects a higher sales tax to have on North Carolina’s economy. The other third of the revenue raised is said to come from the real estate conveyance fee and business license fee, but neither of these revenue-raising measures is included in ALME’s analysis.

Makes claims that have been previously discredited by mainstream economists and relies on misleading and cherry-picked data. In addition to its central statistical analysis, the ALME report also repeats claims that it has made in the past regarding the allegedly superior economic performance of states without income taxes. Those claims rely on cherry picking a number of blunt, aggregate economic measures that are closely correlated with population growth, and simply asserting that state income tax policy is the driving force behind differences in population growth among the states. If population trends are controlled for, states with income taxes are doing at least as well, if not better, than their no-tax counterparts in terms of median income growth, growth in economic output per person, and the unemployment rate.

Ignores the importance of taxes in financing public investments that have a far greater positive impact on economic growth than reducing tax rates. In contrast to ALME’s deeply flawed report, a number of more careful, peer-reviewed academic studies have found state income taxes to have little or no effect on state economic growth. The economic theory espoused throughout the ALME study fails to recognize that individuals and businesses alike need the state to continue providing a good education system, well-maintained roads, an efficient legal system, and other public services in order to succeed.

In proposing a policy course that no state has ever taken—repealing the personal and corporate income taxes without a wealth of oil reserves to fall back on—ALME and the Civitas Institute have laid out an untested and potentially disastrous plan without any evidence that it will benefit the state’s economy.