Former John Locke Foundation Headliner Amity Shlaes is working now as director of The 4% Growth Project at the George W. Bush Institute. She discusses in her latest Forbes column a conference that institute will hold next month in New York “that will focus on taxes and growth.”
Some high-tax states, such as Massachusetts, grow fast. But generally those states that grow fast and gain population have lower tax regimes. Whether it’s Florida versus New York or Texas versus California, people and companies seem to gravitate to places where taxes are stable and not likely to change or rise much. Sometimes this becomes a virtuous cycle. For example, North Dakota’s energy boom has brought in revenue, so the state can lower taxes; in turn, the lower rates lure people to work there, and the state then collects more revenue, even though its rates are lower.
But tax cutting has value even at the points on Art Laffer’s curve that don’t yield extra revenue. Tax cuts can force reductions in the size of government. In 2010 a broad-ranging paper showed that government size correlates inversely to growth in national economies. Scholars Andreas Bergh and Magnus Henrekson found a negative correlation between government size and economic growth. When government increases by 10%, annual growth decreases by up to one percentage point. So if the U.S. were to cut its income or dividend tax rates the cut might not take us all the way to a 5% growth rate, but it might get us to at least 3%.
