Lower tax rates and a stronger economy
Last month, the Arizona Republic reported that Arizona tax collections for April "topped $1 billion for the first time ever, the largest single monthly take in Arizona history and a 34 percent jump over April last year." The report attributed the surge in revenue to the overall strength of the state's economy, including the booming real estate market.
What has made the economy so strong? In large part, it has been good, old-fashioned tax cuts.
In 1990, Arizona had the fifth highest tax burden in the nation, with 11-and-a-half cents of every dollar of state income eaten up by state taxes, according to the nonpartisan Tax Foundation. In the years since then, Arizona has enacted various tax cuts that have reduced that burden so that state taxpayers now have a lighter load than taxpayers in 20 other states.
The lower tax burden makes Arizona a friendlier place to do business. The Tax Foundation's "State Business Tax Climate Index" now ranks Arizona's tax system as the 19th most business-friendly among the states, behind Nevada in 6th place, but well ahead of our other neighbors, California in 38th place and New Mexico in 40th.
It should come as no surprise that, faced with a choice between a high-tax and a low-tax state, businesses will usually choose the latter, bringing new jobs with them. With a lower tax burden, all businesses can hire more people, invest in new equipment, or expand their operations. The businesses and their workers create additional demands for a whole host of goods and services - everything from office supplies, to restaurant sales, to new cars and clothing. It's easy to see how the benefits of a tax-friendly environment can ripple throughout the economy.
And when the economy is thriving, additional revenue flows to government coffers, as illustrated by the surge of revenue to Arizona's treasury in April. In other words, lower tax rates actually result in greater tax collections. It's a concept that Dr. Art Laffer illustrated more than 30 years ago with his famous Laffer Curve.
Dr. Laffer observed the positive impact that lower tax rates have on work, output, and employment - and the tax base - by providing incentives to increase these activities. He also observed that raising tax rates has the opposite economic effect, penalizing participation in the taxed activities.
Think about it: A 100 percent tax rate might look like it will raise a lot of money, but the reality is it probably won't raise a dime. No one will work if he or she can't keep a reasonable share. On the other hand, if someone can work harder, earn more, and keep more after paying a reasonable tax rate, the person will probably make the effort.
This theory has proven accurate time and again. In the 1980s, President Reagan slashed the top personal income tax rate from 70 percent to 28 percent by the time he left office. Federal tax receipts doubled in response, and taxpayers in the top tenth percent of the population actually paid a larger share of the total than they did before.
President Bush's tax cuts of 2003 have had a similar effect. Last year, tax revenues grew 9.2 percent. This year, they are going to grow around six percent and maybe more. And they're expected to continue to grow at that rate for the foreseeable future, because good tax policy unleashes Americans' hard work and creativity. One result is a smaller federal deficit by about $75 billion. Another is that states and cities also share in the revenue windfall.
Unlike President Reagan's tax cuts, though, the Bush tax cuts are set to expire, some as early as 2008. Some in Congress claim we can't "afford" to extend them. The evidence makes clear the opposite: We can't afford not to if we want continued economic growth, more jobs, and better wages.