Over the years, there has been substantial empirical
research, testing economic theories of the effects of taxation on economic
growth. And, though earlier work said otherwise, there is now a growing body of
empirical research that suggests that high and rising tax burdens--especially
taxes on personal income--do significantly inhibit state economic growth.
Unfortunately, few of these studies have examined the relative effect of sales
taxes on economic growth. (This paucity of research likely stems, in part, from
the breadth of theoretical agreement as to what those relative effects are.)
One of the earliest studies that found the personal income
tax to be a drag on economic growth was done in 1981 by Professor Richard Vedder
of Ohio University. Vedder compared the tax policies in the 16 states that saw
the fastest growth in income from 1970 to 1979 with those in the states that saw
the slowest growth in income. He found that the low-growth states had 1970 state
and local personal income tax burdens (expressed as a share of personal income)
that were more than double the income tax burdens in the high-growth states.
Furthermore, from 1970 to 1979 the income tax burden went up one and two-third
times as much in the low-growth states as in the high-growth states. Vedder
surmised, "Income taxes levied on individuals and corporations are particularly
detrimental to growth, more so than consumption-based taxes or user charges that
do not reduce the incentives to work or form capital."
A 1987 study by the Iowa Tax Education Foundation (ITEF)
attempted to determine why lowans were fleeing the state in record numbers. (It
was widely reported that some 80,000 residents left the state between 1980 and
1987.) By surveying hundreds of former lowans, ITEF found that the state's
inordinately high personal income tax rates (their 1980 top marginal rate of 13%
remained in place until 1988 when it was lowered to 10%) were a major factor in
the decision to leave the state.
A 1992 study by Thomas Dye examined the growth rates of
personal income in the eight most recent states to adopt a personal income tax
(excluding Connecticut which did so in 1991). Dye found that six of the eight
states suffered a significant slowdown in the rate of growth of personal income
after enactment of the tax. (Additionally, six experienced a sharp increase in
state government spending after enactment.)