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logo    Does Taxation Favorable to Business Inhibit Prosperity?


The Tax Foundation is a research organization based in Washington, DC whose mission "is to educate taxpayers about tax policy and the total tax burden borne by Americans at all levels of government." It was founded, in 1937, when "a small group of business executives gathered in New York City to discuss how they could monitor fiscal activities at all levels of government and convey the information to the general public. They decided to launch an organization which, through research and analysis, could inform and educate Americans using objective, reliable data on government finance. . . . In its six decades, the Tax Foundation has earned a reputation for its independence in gathering data and publishing information on the public sector in an objective, unbiased fashion. [Quoted from the Foundations Web Page]"

There is, of course, good reason to view this statement as mere self-promotion, because if anyone reads the commentaries posted on the foundation's web site, s/he will come away with a clear sense of a rightish inclination. Furthermore, the posted biography of its director says that "Mr. Hodge was Director of Tax and Budget Policy at Citizens for a Sound Economy.  . . .  spent ten years at The Heritage Foundation, . . . [and] helped found the Heartland Institutenone of which has a reputation for objectivity."

Mr. Hodge also is not a highly trained economist, having earned merely a bachelor's degree in political economy from the University of Illinois at Chicago. Since the foundation does not post biographies of its staff, the extent of their educations and political inclinations is difficult to determine except by inference from the commentaries they have written.

The foundation also claims that it provides Americans with a better understanding of their tax system and the effects of tax policy. Whether it provides Americans with a better understanding of their tax system depends, I suppose, on how many Americans read its publications. But at least one of its publications fails entirely to expose the effects of the tax systems it analyzes.

Recently I came across a reference to the foundation's State Business Tax Climate Index that aroused my curiosity, so I visited the web site (www.taxfoundation.org) and downloaded the study. After reading it, I was surprised that the study contained no mention of the effects of business-friendly tax policies on the economies of the states that enacted them. So I decided to see how such policies correlate with per-capita income by state.

Although the study I downloaded was for the year 2004, it fortunately also contained the rankings for 2003, the latest year for which I could find per-capita income data. I took the 2003 data and did a comparison using Microsoft Excel, and the result was shocking. Not only do the data not support the view that business-friendly tax policies improve the economic well-being of the citizens of the states that adopt such policies, it seems to contradict that view. The graph shows that, generally speaking, the states with the least friendly business tax policies enjoyed the highest per-capita incomes and that the states with the most friendly business tax policies had the lowest per-capita incomes. Thus graphs of the rankings have an inverse relationship to the graph of per-capita income. (If you would like to see the Excel document with the data and graphs, let me know, and I will e-mail it to you.)

After making this discovery, I sent the foundation the following message:

"I read your study, Study Reveals Which States Have Business-Friendly Tax Climates, Which Don't , and immediately wondered how these rankings compare to each state's economic prosperity. Law makers at state and local levels imply with their words and actions that business friendly tax climates contribute to an area's prosperity. That has always seemed to me to be dubious, since I am of the opinion that business follows the money, as the aphorism goes, and by money I mean consumer purchasing power.

In justification of this belief, I have always cited examples from the Gold Rush. Businesses flocked to discovery sites, no incentives were required to get them to do that, and they left when the gold ran out.

So, since my 2005 almanac contains only 2003 state by state per capita income figures, I took your 2003 ratings and compared them to per capita income by state. The result was revealing, since the relationship was inverse rather than direct. Can one then draw the conclusion that business friendly taxation actually inhibits prosperity? If so, somebody should tell all of America's law makers about it.

Having discovered this tidbit, I then decided to run the same data against the data in your second chart. Here is a summary of my results (keeping in mind that your data were for 2004 while my per capita income data were for 2003):

Unemployment Insurance Index        to            Per Capita Income                Direct but not synchronous

Fiscal Balance Index                            to            Per Capita Income                Direct but not synchronous

Overall Rank                                         to            Per Capita Income                Inverse

Individual Income Tax Index               to             Per Capita Income                Inverse

Corporate Income Tax Index               to             Per Capita Income                Inverse

Sales & Gross Receipts Tax Index     to            Per Capita Income                Inverse

This indicates to me that there is no relationship between tax policy of any kind and prosperity measured in terms of per capita income. So I wonder why you haven;t told the world about this?

Surely, someone in your organization must have had the same curiosity that I had. If not, you guys are in deep trouble.

So tell me, whats going on?"

When a week went by without a reply, I sent another message:

 "I'm surprised that no one from your organization has replied to this message which I sent last week. After all, the results I describe, at least by implication, impugn your organization's integrity, and I would imagine that you would want to defend yourselves. But perhaps you realize that there is no defense and your silence is an admission of fault. It can certainly be construed as that, can't it?"

No one at the foundation has ever replied.

So what conclusions can be drawn? Well, the fact that the foundation has not seen fit to show the relationship of the rankings to per-capita income implies that the data on income was deliberately excluded because it serves as a counterexample to the foundation;s position. And thus, this omission makes a mockery of the foundation's claim to being objective and unbiased.

So this data convinces me that the Tax Foundation is not only not unbiased and objective, it even fails in its mission to convey truthful information on taxes and their effects to the American public. And in that sense, the foundation is neither a research nor an educational foundation. It is merely a fraud issuing propaganda under the guise of a research and educational entity.

That the relationship between tax policy and per-capita income is in general inverse is an important fact that needs to be publicized. The American people need to know it, and they need to make it known to their lawmakers too. (3/5/2005)