Riedl Myth 6

Continuing the look at Brian Riedl’s ten myths

For those keeping score at home, here at Angry Bear we’ve already posted in detail on Myths 1 through 5…
PGL’s post on Riedl Myth 1
My post on Riedl Myth 1.
Alkali19’s post on Myths 2 and 4
My post on Riedl Myth 3
My post on Riedl Myth 5

Also, reader NS has given us an overview of the Riedl approach.

Moving on…

“Myth #6: Raising tax rates is the best way to raise revenue.
Fact: Tax revenues correlate with economic growth, not tax rates.”

Riedl is right about this. But I’m not sure we agree on what this actually means. Riedl goes on:

“Since revenues move with GDP, the common-sense way to increase tax revenues is to expand the GDP. This means that pro-growth policies such as low marginal tax rates (especially on work, savings, and investment), restrained federal spending, minimal regulation, and free trade would raise more tax revenues than would be raised by self-defeating tax increases.”

One minor quibble – presumably the idea is to grow real GDP per capita, not GDP, and I assume Riedl would agree. But I have a problem with the idea that low marginal tax rates are necessarily “pro-growth.” Consider… there are 50 states. Residents of all of them live under the same Federal Tax System, but different state tax systems. Even with each state, tax burdens change with time. Now, we always read about how some state or other that cut taxes has been growing rapidly for the last ten years or so. But… there are some states that historically – for many decades – have had historically high tax burdens. One can name them – New York, Taxachussetts, California, and so forth. And there are some states that have historically – for many decades – had low tax burdens. Its also easy to compile that list – Tennessee, Mississippi, Alabama, etc. And through all this time, which states have been driving this country? Is the end goal to make us more like Alabama than Massachusetts?

Now, a conservative might respond – well, there are historical reasons for that inequity. Sure, but the historical reasons include the infrastructure built up by the taxes that have been paid in Massachusetts and have not been paid in Alabama. And besides, this has been going on for a long time – how long does it take for people to vote with their feet and for people and businesses to migrate from the high tax hellholes to the low tax nirvanas – ten years? Twenty? Fifty? One hundred? The difference between Alabama and Massachusetts has been around for a very long time.

That is not to say that simply raising taxes is the way to go. As with everything else, the question is one of balance. Cut taxes too much, shrink government too much, and you don’t have enough infrastructure. Raise taxes too much, increase government too much, and you stagnate the private sector. The question is – what is too high and what is too low. I’ve covered some of that at various times and it may come up again in the context of the other Riedl myths.