Income, taxes & the economy

A recent WSJ article by Arthur Laffer and Stephen Moore, based on the latest income and poverty data from the US Census Bureau, refutes the claim
by the Obama camp that only the rich have benefited from the economic policies started by Reagan.

“When all sources of income are included…and taxes paid are deducted,” they report, “households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005.” And, since the average number of people per household has declined, these figures understate how well individuals in this group have done. (These numbers are based on real income, which means they are inflation-adjusted to reflect changes in purchasing power.)

Laffer and Moore also address the subject of income mobility. We often hear about “the poor” as if they are the same individuals every year. But 2/3rds of those in the lowest tax bracket in 1987 had moved up to higher brackets ten years later. Many of the poor are people who have recently entered the work force or have retired. If your home and car are paid for, you can live comfortably on an income that qualifies you as poor under government guidelines. In fact, the Census Bureau data shows that only 3% are chronically poor, meaning in poverty for three years or more.

One advantage of our Federal system is that we can learn from seeing how different policies in different states yield different results. This can instruct us on what policies should be pursued on a National level. Another WSJ article, this one by Phil Gramm and Mike Solon, examined the latest Competitive Index issued by the American Legislative Exchange Council.

Quoting from the report, “generally speaking, states that spend less, especially on income transfer programs, and states that tax less, particularly on productive activities such as working and investing, experience higher (economic) growth rates than states that tax and spend more.” Imagine that!

The three most successful states between 1996 and 2006, Texas, Florida and Arizona, gained 3.7 million new jobs while the three least successful, Illinois, Ohio and Michigan, lost 250,000 jobs. Also, real per capita income growth in the top group was almost double that of the lowest. It’s interesting to note that the top 3 are all “right-to-work” states, while none of the lowest 3 are. Finally, the laggards all have significantly higher minimum wage laws.

This analysis is important to consider when listening to the policies espoused
by the candidates. Results speak louder than populist pandering.