What would happen if you no longer had to pay income taxes?
Retired financial executive Rex Sinquefield and economist Art Laffer believe it would lead to economic growth and wealth.
“Sometimes when you lower taxes, you get less money. But sometimes you create enough economic activity to actually get more revenues,” Laffer told “St. Louis on the Air” host Don Marsh on Tuesday. “If you start lowering taxes from very high levels, you can actually sometimes actually increase revenues. Not all the time, but sometimes that happens.”
In 2014, Sinquefield and Laffer teamed up with two others to write a book, “An Inquiry into the Nature and Causes of the Wealth of States” explaining their theories.
“We look at those states that introduced an income tax and what happened to them,” Laffer said of the book. “They all were much worse off as a result of increasing the income tax, putting it in. We looked at the zero-tax states versus the highest tax rate states. The zero-tax rate states just kicked the bejabbers out of the highest tax rate states. We then look at the flow of people moving: where they move from, where they move to. They moved from the high-tax states to the low-tax states. When you look at all of this stuff and put it all together, it’s pretty powerful that tax rates really make a difference where economic activity goes and where people go.”
Laffer is a former economic adviser to President Ronald Reagan, and is known for the Laffer curve, a controversial representation of the relationship between taxes and government revenue. Sinquefield has been a major donor to Republican candidates in Missouri and across the nation, and founded the Chess Club and Scholastic Center of St. Louis.
Nine states now have no income tax. In May 2012, Kansas Gov. Sam Brownback, a Republican, advised by Laffer, signed one of the state’s largest tax cuts into law in what he has called a “real live experiment.” Based on a model published by the American Legislative Exchange Council, a special interest group backed by conservative billionaire brothers Charles and David Koch, income taxes were eliminated for nearly 200,000 Kansas businesses, and individual income tax rates were cut starting in 2013.
But the experiment is not turning out as many had hoped. The plan that was supposed to drive economic growth, create jobs and stabilize Kansas’ budget has not. Instead, the state is reporting a revenue shortfall of more than $300 million, the poverty rate has increased and the economy expanded only 2.3 percent over the past two years.
But it’s not over yet, Sinquefield said.
“We’ll have to see what actually happens,” he said Tuesday. “It was an amazing thing what they actually did there, to cut taxes the way they did. To cut taxes on business, I think was a stroke of genius. The story’s not over. These things don’t happen overnight. You have to wait a few years for these effects to kick in.”
The tax plan is solid, Sinquefield said. The budget shortfall “has very little to do with taxes, per se. It has a lot to do with the misestimation of revenues.”
Laffer agreed, saying changes to taxes on unearned income that took effect nationally in 2013 meant that 40 states misestimated their tax revenues for that year. Another state change, increasing the amount Kansas spends on schools, also affects the gap, he says.
Whether the plan will eventually work remains to be seen. In the meantime, the Kansas experiment has spooked other governors.
“They’re blaming it on something that had nothing to do with the tax cuts whatsoever,” Laffer said. “But you know, it is scary. And these (politicians) are not the central brigade of bold people.”
Helping The Wealthy … And The Poor?
Some have criticized Sinquefield’s and Laffer’s theories for being wealth-friendly. Sinquefield doesn’t deny it.
“They’re friendly to the job creators and the investment class,” he said. “The people who create the jobs are the people who make the investments, the people who run the businesses. If you punish them too much, they’re going to stop doing that, or, worse yet, they may leave. If you don’t have the jobs, you’ll never have the prosperity.”
And helping the “job creators” does help the poor, Laffer said.
“What it does is it brings the jobs into the state,” he said. “You have two locations: A and B. You raise taxes in A and you lower them in B. Producers and manufacturers are going to move from A to B. Jobs flow. And those states that cut the tax rates do a lot better, and so do the poor in those states. The minorities, the disenfranchised, all do much better in states that lower taxes (rather) than raise them.”
So far, that influx of jobs has not occurred in the Kansas experiment.
Other critics have said that eliminating income tax also will eliminate government-backed services. But the states that do not collect income tax can provide more services, Sinquefield said, because they will grow faster than states with income taxes.
“When the state grows, the tax take they’re getting from property taxes and sales taxes is going to be multiplied by a gross state product that’s rising rapidly,” he said. “That’s how they get more government revenue. That’s how they provide more social services than the high tax states.”
All Or Nothing Tax Policy
Some economists and tax experts have accused Laffer of misappropriating and manipulating statistics to fit with his theory.
“That’s not true,” Laffer said, laughing. “I don’t know what to say to you. When you look at all 50 states for the last 55 years and look at all of the data for each state, I don’t know how that’s fudging. Maybe I should have dropped a couple to get them their results.”
The last chapter of “Wealth of States” is dedicated to what Laffer called “silly criticisms,” such as disagreements about how and where data was collected, and how it is presented.
“Any time one of these guys wants to have a debate with Rex or me or Travis (Brown) — we’re all three the authors of the book — we’re on for it,” Laffer said. “But they don’t ever do it for one simple reason: They don’t have the wherewithal or the ammunition to really shoot down all of the evidence we present. It’s just truckloads of it, and every which way you slice it, you dice it, you fry it, you boil it, you do everything, and it always comes out whenever you pay people not to work and tax people when they do work, you get less work.”
On The Move
In their analysis, Sinquefield and Laffer examined how many people move from one state to another each year. People are moving from the “worst states,” Laffer said, citing high tax rates in Michigan, Ohio, California and Illinois, and moving to states with no income tax: Texas, Tennessee and Florida, he said.
“The only ones moving into California are, well, the low-wage workers — let’s put it that way,” he said, laughing. “The people who are going to be unemployed and getting welfare.”
Most of those who are moving from one state to another are wealthy, Laffer said. “People who pay taxes care about the amount that they pay. They also find tax shelters; they hire lawyers (and) accountants. They do all sorts of things to get around taxes.”
Producer’s note: During this segment, a caller asked Rex Sinquefield if he was a St. Louis Public Radio donor. “St. Louis on the Air” does not schedule guests based on their donations. Sinquefield said that he was a donor, but after examining St. Louis Public Radio records, it appears neither Sinquefield nor his wife are donors.
“St. Louis on the Air” discusses issues and concerns facing the St. Louis area. The show is produced by Mary Edwards and Alex Heuer and hosted by veteran journalist Don Marsh. Follow us on Twitter: @STLonAir.