The Liberty interviewed Dr. Arthur Laffer who has been researching the reasons behind the economic growths of “Blue States” and “Red States” over the span of his lifetime. (This interview was conducted on March 6, 2023)

Interviewer: Hanako Cho

 

Cho: Nowadays, there’s a huge transfer from Red States to Blue States. You’ve studied the factors behind each state’s economic growth for many years, and more recently, you co-authored a paper called “The Seven Deadly Tax the Rich States” with economist Mr. Stephen Moore.

Dr. Laffer: I’ve been focused on this area of research for 45 years now. The focus of my paper is on how much state wealth is lost when heavy taxes on the rich are imposed.

We have 150 million tax returns here in the United States every year. Based on the IRS data, I’ve taken the adjusted gross income (AGI) of all the people who moved out from every single state, let’s say, the in-migration of AGI of 49 states into Tennessee, and the out-migration of AGI from Tennessee to all other 49 states. I take the difference and what you have is the net in-migration of AGI into Tennessee.

I did this for every single state. The seven worst states that have the biggest outflow of AGI to the rest of the nation are New York, California, Illinois, New Jersey, Maryland, Connecticut and Massachusetts. Over the last 10 years, these seven states have lost a total of approximately $283 billion of wealth to other states.

Such wealth has left for the more tax-friendly places like Florida, Texas, Arizona, South Carolina, North Carolina, Nevada and Colorado with low or no income taxes. These states have seen a net inflow of approximately 302 billion dollars over the last 10 years. Not only that, but this number is going up each year.

These seven states are trying to join together to raise taxes on the rich. They figure that if they do it as a group, the rich won’t have as many places to go, and they’ll be more successful in taxing the rich. Well, no one of means wants to go to any one of these states anyway.

 

What’s the Deal With California’s Dreadful ‘Exit Tax’?

Dr. Laffer: The most devious and radical idea comes from the California state legislature’s proposed “exit tax”, which would be the nation’s first ever effort to tax the wealth and income of people even after they flee the state. The tax would impose a tax liabilities of one percent per year on wealthy former California residents for three years, five years or even a decade after they have gone. California Representative Alex Lee, delusionally ignorant of facts, says this wealth tax on the rich could raise $22 billion.

It’s the ultimate form of taxation without representation. And allowing state legislators to raise tax rates on a small minority of the most productive members of society is a clear example of the tyranny of the majority.

 

Why People Move to Florida Right Before Their Deathbed

Cho: In your paper, you share your insight on the “death tax” which is one form of a wealth tax.

Dr. Laffer: In 1976, there was only one state, Nevada, that did not have a state death tax and 49 states that did. Today, there are now only 17 states with a death tax.

The death tax is about as illogical a tax as ever existed.

Today in America, you can earn your income and pay your fair share of taxes and it’s your money. You can spend those proceeds as you will. But if you take those same after-tax savings and bequeath the money to your children or to others, the government will tax you up to 40%. It makes no sense. In addition, the government collects next to nothing from the death tax. Tax revenues from the federal death tax are almost exactly a half of 1% of total tax revenues.

My recent paper gives an interesting example on the death tax. It compares Tennessee as a death tax state before the death tax was abolished, with Florida, a no death tax state.

In 1997, in Tennessee, there were 24 estates filed for every 100,000 people. In that same year, in Florida, there were 57 estates filed per 100,000 people, more than double the rate in Tennessee.

Because Tennessee had a very high death tax, the people in Tennessee would move to Florida just before they died. People move because of the death tax. They move when they feel they’re going to die or in anticipation of death. They move to a death-tax-free-state. Not only do they move, but the size of the estates in Florida was much larger than the size of the estates in Tennessee. Interesting, isn’t it?

We got rid of the death tax when I moved here to Tennessee, and I got in big fights with the governor and with all other people, but we won.

 

How do Property Taxes Make a City Poorer?

Dr. Laffer: In June of 1978, California voters approved Proposition 13, which was a constitutional amendment that limited the effective tax rates on property to not exceed 1% of actual market value. Property taxes in America have been a highly explosive political issue for over a century, and that was a huge political thing all across the nation. And frankly, I got very deeply involved. My name was everywhere.

It’s just amazing how taxes have consequences. Some people argue that cutting tax rates reduces budgets, but that’s just wrong. With property taxes lower, businesses will expand their activities within the state. This expansion will create new jobs, more investment and higher real wages. Sales, incomes and other forms of activity will expand, along with a rise in tax revenue from sales taxes and income taxes.

With higher property tax rates, the government benefits right away but the damage done to the economy is long-lasting and cumulative.

Let me give you an example. Here in Tennessee, our property taxes in general are almost exactly 1% of market price. If you go to Memphis, which is the second largest city in Tennessee, property taxes are about 1.3% or 1.4% of market value. Memphis is the worst-performing part of the state. Businesses are moving out of Memphis coming to the rest of the state. Property values are not going up rapidly as they are in the rest of the state.

Memphis is the poverty trap of Tennessee because their property tax rates are high. Now, when you’re talking to the local officials in Memphis and little cities and counties around Memphis, they would always say, “We’re running out of money.” So, they immediately raise tax rates because that’s what they think is the way to get more money. But of course, what they don’t realize is that by raising the tax rates, the property values go down. Not only do the property values go down, but no new businesses come to those areas. Business in those areas leave. You have a real, big disconnect between what people believe to be true and what actually is true.

Cho: That’s very sad. They have to face lower economic growth as a result.

Dr. Laffer: Yes, they do. Property tax destroys the very neighborhoods that need it the most. As you know, the black population in Memphis is very, very high. It’s also a poor city. When they raise property taxes in this area, it only does damage to the weakest, the lowest echelons of the economic ladder. It’s very sad that it destroys the very people they pretend it’s going to help.

Now, let me tell you what I’m trying to do here in Tennessee. What I’m doing right now is trying to get a piece of legislation that would be passed through the House and the Senate here in the state of Tennessee and signed into law by the governor that would limit property taxes to not exceed 1%. In other words, the maximum effective property tax would be 1%. Also, that property tax could not increase by more than 2% or 3% per year unless that property is sold. That’s what’s being put through the legislature right now. I think I’m going to be successful on this one as well.

Aside from that, I’ve done a lot of things since I moved here. When I moved here, there was a gift tax in the state. I got involved very quickly, and we got rid of that here in Tennessee. I had big fights with the chief of staff, with the governor, and all that, but I won. We then had something called an unearned income tax which taxed things like dividends, interest payments and royalties. It was called the hall tax. I went after that tax as well, and we finally got rid of that tax as well.

We also didn’t have something called “Right-to-Work” here in the state of Tennessee, which means you have the choice of joining a union if you’d like to or not joining it if you don’t want to. It’s your choice. And that was put into the constitution as well.

Also, our income tax, which is nonexistent – we don’t have an income tax here now -, we put the prohibition of an income tax into the constitution of the state of Tennessee, which means it’s really hard for any future politicians to remove or to put in an income tax. It would take them a three- or four-year effort to ever reverse that no-income-tax proposition. We will be the single best tax state in the nation by far.

 

The Effect of Eliminating Income Taxes Versus Reducing Rates

Dr. Laffer: I talk to legislators all the time. They all say, “I want to get rid of the income tax.” Well, no state has ever gotten rid of the income tax except Alaska. The only reason Alaska did it is since they discovered oil, they’ve taxed it so much that they had so much money left over. They could do it. But all the states have said time and time again, “We want to get rid of our income tax,” but they always fail. It’s because they’re sloppy. It’s because they don’t prepare. It’s because they don’t understand the details of this and then lose. That happens every single time. If you want to get rid of your income tax, you’ve got to prepare. You’ve got to do detailed work.

What they don’t realize is, let’s say we’ve got an income tax rate of 5%, if you reduced that income rate from 5% to 4%, you’re going to get “X” benefits from that. If you go from 4% to 3%, you’re going to get a little less than X benefits. If you go from 3% to 2%, you’re going to get a little bit less in additional benefits because the lower the rate, the less benefit you get from cutting it, okay? If you go from 2% to 1%, you get a little bit of benefit, but not as much as the other three cuts.

Now, if you go from 1% to zero, you get 90% of the benefits. All of a sudden, you have this huge benefit from eliminating the tax altogether because then you don’t have to file taxes. You don’t have to hire lawyers and accountants and deferred income specialists and auditors, all of these people. You just don’t even have the tax. So getting rid of that last 1% is so much more valuable than getting rid of any other 1%.

Cho: Florida’s economic growth rate is twice the size of New York. But they are using a much smaller budget every year. Why do you think this is?

Dr. Laffer: Florida’s taxes are much, much lower than New York’s. Florida’s spending per capita is much less than New York. They spend much less. Their growth rate is much higher. Their public service is much better.

New York is just slowly but surely going into this death spiral towards the bottom, a classic example of what I’m trying to explain on the taxes and how they have consequences. Taxes can do the following things: taxes can change the volume of work. If you tax income, you’re going to get less income. It can change the composition of work. Taxes can change the composition of income. It can change the volume of income. It can change the timing of income. If you’re going to raise taxes next year, people will shift their income into this year. But when we’re looking at states, the fourth thing taxes can do is it can change the location of income.

In the 2014 New York Times bestseller I did, An Inquiry into the Nature and Causes of the Wealth of States, I do a direct comparison of California versus Texas in great detail, how much a mile of road costs in Texas versus what it costs in New York, what a prisoner costs in Texas versus what it costs in California. I go through all the details there. You can see exactly how this manifests itself in one state versus another. Even as higher taxes per capita are imposed in California, the state can’t provide good public service at a low cost.

Cho: That’s why a lot of people move away from states like New York with high tax rates into a low-tax state like Florida right?

Dr. Laffer: If you raise taxes in prefecture B and you lower taxes in prefecture A, producers and manufacturers and people are going to move from B to A. New York and Florida are a perfect example.

The tax picture also affects the composition of income in the states. Let me give you an example. In Florida, people who earn income shelter their income a lot less than people in New York shelter their income. They don’t use the same deductions, exemptions, exclusions and tax shelters in Florida. They report their income fair and square within reason. In New York, people look out for all sorts of tax credits and tax things there to change the sheltering of their income. So, not only do they move, but New Yorkers shelter their income much more than do Floridians. Not only do they shelter their incomes more, they choose different professions.

For example, in California, housing prices are really high versus other states because of all the tax sheltering that goes through houses. So, you’ve got the movement of income across states based on taxes. You’ve got the sheltering of incomes within states based on taxes, and you’ve got the changes in the composition of income within states because of taxes. All of those take place.

The other thing that goes on here, and it’s one I don’t like to talk about because it’s sort of unprovable, is corruption. States that have very complicated tax structures tend to be very corrupt. Politicians tend to get payments made to them to help their friends pay less in taxes. Now, the way that corruption works is twofold: one is illegal corruption, and that’s going on everywhere, but then there’s legal corruption where a politician has a friend who gave him a lot of money for his campaign. He puts a provision into the tax bill that allows his friend’s business to get a tax credit or a tax advantage or a tax omission. Now, that’s not strictly illegal, but it’s surely corruption.

So, when you look at this whole picture, what I’m trying to say to you is that The Wall Street Journal’s picture on Florida versus New York is correct, but it’s very babyish. It’s very simplistic. The thing is, the tax code makes it really incredibly complex and confusing and detailed. It’s not just Florida versus New York on people moving. The people who move from New York to Florida have a lot higher incomes than the people who move from Florida to New York. Their welfare in New York is very different than the welfare in Florida. Therefore, you find that a lot of poor people who are eligible for welfare tend to move from Florida to New York. The people who are rich and have high incomes move from New York to Florida.

In the paper I gave you, I showed you the differences in the average adjusted gross income of the people who leave those seven states and the people who come into those seven states. You can see that the average adjusted gross income of the people who leave those seven deadly “tax the rich” states, I call it, have much higher incomes than those people who come in.
 

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Column: There Should Be Merit Pay for Teachers

You’re a teacher. You’ve got tenure. You’re on the budget and you’re fixed. The problem is that when you have no competition, what incentive do you have to do a good job?

What you have is a very strong incentive to raise your pay, not to raise the quality of your work. And that’s exactly what happens. Teachers are paid more in California than they are in any other state. They’re real close with New Jersey. But the highest-paid teachers in the nation are in California. And California is the fourth worst state in the outcomes from education.

Now, Texas has much lower pay for teachers. You try to go to a school and talk to the teachers and say this to them, they’ll say, “No, it’s not true. I love my students. I don’t work for pay. I work because I love my students.” Everyone works for pay. There’s nothing wrong with that as long as the pay is aligned with the quality of the product. But when the pay is not aligned with the quality of the product, you’ll get high pay and low-quality products.

I would like to have merit pay for teachers. Teachers who teach well should be paid more than teachers who don’t teach well. Everyone knows the good teachers. The students know which teachers are the best. Teachers know which teachers are the best. The school administrators know which teachers are the best, and they all agree. So why can’t we just pay them a lot more and give them a big bonus?

Not just a penny more. Teachers who teach well, give them a bonus equal to two months’ pay or something. A big bonus and put their names on a billboard and free parking close to the school entrance and make big signs for them and make them feel very proud of the work they’ve done. All of this is so important to get high-quality work.