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Lower Taxes and Economic Growth: Response to a Flawed Analysis

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Document date: April 20, 2007
Released online: June 11, 2007
Lower Taxes and Economic Growth: Response to a Flawed Analysis

The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.

The text below is an excerpt from the complete document. Read the full report in PDF format.


Abstract

When the Speaker and other leaders of Florida's House of Representatives released their plan to roll back property taxes and place a tight growth limit on state and local revenues, they included a report in their release by the firm Arduin, Laffer and Moore that claims lower taxes will lead to higher economic growth. We examine and point out the flaws in this analysis and show the authors' fundamental result is due to how they constructed their data and an elementary statistical mistake.


Introduction

When the Speaker and other leaders of Florida’s House of Representatives released their plan to roll back property taxes and place a tight growth limit on state and local revenues, they included a report in their release by the firm of Arduin, Laffer & Moore that claims lower taxes will lead to higher economic growth. This report takes an extremely limited and simplistic view of what makes a state grow and the incomes of its residents increase. It looks only at taxes, and ignores all other factors. Yet businesses well understand that the other side of the equation — the public K-12 and higher education programs that provide an educated and productive workforce; roads and infrastructure; health care and environmental preservation and protection; public safety; and the quality of life that taxes buy — are equally important in determining the growth of a state and the decisions business leaders make on where to locate, grow and expand their businesses.

Even on the issue of taxes, there are many problems with this report and its use of data.

  • The authors committed an elementary statistical mistake; they constructed an equation that used personal income on both sides in a way that guaranteed a negative relationship between taxes and income — not because of any real world relationship but because of how they constructed their measure of tax burden.
  • The authors used the equation to imply causation, even though there is no way to determine the direction of causation in the type of statistical analysis they conducted; tax levels could be a result of economic growth rather than economic growth being a function of tax levels.
  • The report ignored the relationship of public services and economic growth, even though mainstream economic literature finds that state expenditures on education, infrastructure, highways, and other services arguably matter as much or more than taxes in determining economic growth rates.
  • The report used a comparison of the highest and lowest tax states to bolster their claims of the affect of taxes on economic growth, but such comparisons are fraught with pitfalls and easily manipulated. This critique shows that similar data could be used to reach very different conclusions.

Because of these and other flaws in their analysis, the report fails to prove that lower property taxes — or lower taxes generally — would improve Florida’s economy.

(End of excerpt. The complete report is available in PDF format.)



Topics/Tags: | Economy/Taxes


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