Myths Die Hard

Andrea Neal’s editorial in the Indianapolis Star yesterday was a reminder that evidence is no match for strongly-held beliefs.

Neal seconded Governor Pence’s ill-considered call for a ten percent reduction in Indiana’s income tax. Even the Republicans in the General Assembly have recognized how harmful such a tax cut would be in a state where cities and towns are already strangling, thanks to the even more ill-considered tax caps Mitch Daniels managed to enshrine in the Indiana constitution.  Neal made a familiar argument: lower taxes will lead to more economic growth and more job creation.

This argument sounds logical. Leave businesses with more cash and they’ll spend it to expand and hire. I remember being persuaded by that theory myself when I first became involved in policy and political life. The problem is, the evidence refutes it.

A recent report by the Institute on Taxation and Economic policy confirms previous research. As the Institute reports,

States that levy personal income taxes, including the states with the highest top rates, have seen more economic growth
per capita and less decline in their median income level over the last ten years than the nine states that do not tax income.
As any economist will confirm, the factors facilitating economic growth and job creation are varied; despite the almost religious belief in the supernatural power of tax policy, most studies suggest that tax levels are only one of a large number of factors that influence business decisions. The availability of an educated workforce, a location near suppliers or large customers, the existence of a market for one’s goods or services, cost of living, and the general quality of life  all play a part.
For many employers, the availability of public transportation so that employees can get to their place of work is extremely important; indeed, decent public transportation would do far more for the Indianapolis economy than a tax cut that further erodes public services and the quality of life.
Think about it: how low would taxes need to be before you’d move your business to Mississippi?


  1. And for an increasing number of employers, it seems, the ability to attract and retain diverse talent is high on the scale. Meaning that the Indiana General Assembly should be looking at more than a couple of Supreme Court decisions when it considers whether an amendment to it’s constitution banning same-sex unions or anything “substantially similar”.

  2. Regarding Daniels; property tax caps – I knew what was coming so waited and sure enough it came. I received my property reassessment statement and it was increased by $5,000 which means, no matter the tax cap, I will pay higher property taxes this year. Being almost 76, deaf and disabled, I can’t wait to see what my exemptions will be – I am sure they will not be higher.

  3. For the last 30 years the R’s have been telling anyone who will listen that we can have everything we want AND lower taxes. How’s that been working? First time EVER we did not raise taxes to pay for a massively expensive war and reconstruction…just borrowed it ALL. (BTW: We now know we got virtually NOTHING of value for the billions we borrowed and spent on reconstruction. Good Job Halliburton!!)How’s that working? Now IN wants to do the same thing. What could possibly go wrong?

  4. The NYT reported today that businesses are sitting on cash, have open positions and are not hiring. Businesses cannot trusted to be rational. Policy that is proposed counter to evidence is just plain stupid.

  5. One reason for lowering taxes is that government tends to piss away whatever money it has. Locally, the mass transit backers plan on railroads to Zionsville and Franklin. It would be cheaper to subsidize taxis so poor people can get to work.

    On a national scale, the government spends as much as it possibly can, including its never-ending wars.

  6. I think there are multiple problems with looking at economic growth as a function of tax policy.

    First of all, and I’ll get it out of the way, I have a strong dislike for tax incentives, tax abatements, etc. Typically areas with tax codes that impact businesses will use exemptions to lure new growth, and then make everybody else foot the bill (actually we use that here so I think it’s safe to say everybody does it.) So oftentimes businesses will grow or relocate under circumstances independent of local taxes because they don’t have to pay them. A good example of this is our failed attempt to lure the CME with lots of tax breaks. Chicago kept them there with, yes, even more tax breaks. I understand the economic logic behind this tactic, but again you HAVE to raise taxes because your base shrinks. And it’s incredibly rare to hear about local government lowering taxes.

    Ideally there is a “sweet spot,” where taxes are high enough to meet the demands of local government without disproportionately taxing it’s base. Unfortunately, with the proliferation of sealed and no-bid contracts this is a fudgy number. TIFS are a big part of the problem, too, but there are so few people that follow local budgets I’m sure there are a lot of things I’m missing. I’ve spoken with several people who have submitted contract bids through municipalities and they’ve said it’s usually a slow-motion train wreck.

  7. The bigger question is, why does the government think it is entitled to take your money by force to advance any agenda, no matter how “moral” it’s claimed to be?

  8. “Insanity: doing the same thing over and over and expecting different results.” Albert Einstein

Comments are closed.