April 14, 2014
RALEIGH — The past quarter-century of academic scholarship suggests state and local officials can promote economic growth by keeping overall tax and regulatory burdens as low as possible, investing effectively in public safety and the courts, and increasing productivity of spending on infrastructure and education.
John Locke Foundation President John Hood highlights those three recommendations in a new Spotlight report. It’s based on Hood’s analysis of 681 peer-reviewed academic journal articles published since 1990.
Hood will share details from his report during a 2 p.m. news conference in Raleigh.
“As it happens, these implications of academic research on economic growth closely track with recent public policies adopted in North Carolina,” Hood said. “State lawmakers and the McCrory administration have adopted a Flat Tax, reduced the overall tax burden for most households and businesses, adopted regulatory reforms, and instituted changes in highway funding and school management that promise to increase the productivity of public spending.”
“Judging from the available empirical evidence, North Carolina’s new policy mix is likely to result in stronger economic growth in the coming years,” he added.
Hood’s work addresses one of the key points of contention in recent North Carolina public policy debates: the impact of state fiscal policy on economic growth.
Fiscal liberals have argued that higher taxes fund public services that boost economic performance. Fiscal conservatives argue instead that higher taxes cause more harm than good by discouraging work, savings, and investment, Hood said.
“Obviously, this disagreement reflects a fundamental difference in political philosophy that may make each side impervious to persuasion by the other,” Hood said. “But the claims made by the two sides are, in fact, empirically testable.”
Surveying 25 years of scholarly studies, Hood reaches a clear conclusion. “The policy preferences of fiscal conservatives have strong empirical support,” he said. “Most studies find that lower levels of taxes and spending, less-intrusive regulation, and lower energy prices correlate with stronger economic performance.”
Most studies also find that the quantity and quality of infrastructure such as roads and bridges are linked to economic performance. The same is true for the level of educational attainment, Hood said. “That doesn’t necessarily mean that raising taxes to fund more spending on infrastructure and education will prove to be a good investment, since the relationship between government spending and outcomes is not particularly strong.”
Among the 115 studies that focused on state and local tax burdens, 63 percent showed “tax burdens were negatively associated with economic performance,” Hood said. Just three of the 115 studies showed a positive link between taxes and economic performance.
Most studies also showed negative associations between economic performance and specific tax policies: property taxes (61 percent), sales taxes (65 percent), corporate-income or other business taxes (67 percent), and marginal income tax rates (70 percent).
The news was not good for those who believe government can promote economic growth by offering tax credits or other targeted tax incentives, Hood said. “More than two-thirds of the studies found no link between tax incentives and economic performance.”
The data cast doubt on a popular argument among fiscal liberals, Hood said. They contend that cutting taxes means cutting spending on public services that also have the potential to boost economic growth.
“According to the preponderance of academic research published over the past quarter century, most states and localities already have exceeded the point at which additional government spending would deliver more economic benefits than costs,” he said. “In the 61 studies that examined overall spending levels, measured either as expenditures per capita or expenditures as a share of income, higher spending was associated with higher economic growth in only 15 percent of the cases. A plurality of studies found no relationship between spending and economic performance, while more than a third found a negative relationship.”
It’s important to look beyond the overall level of government spending, Hood said. For instance, public assistance programs “are strongly and negatively associated with economic performance.”
“Those who argue that using Medicaid, welfare, or other transfer programs to redistribute income can serve as an effective economic stimulus are clearly incorrect, at least when transfers are funded with state or local revenue,” Hood said. “Public assistance programs may be justified on other grounds, but they do not fit the definition of ‘public investment.'”
In most other categories, the relationship between government spending and economic growth is “muddled,” with one exception, Hood said. “Most studies find a positive correlation between spending on public safety — police protection, fire protection, corrections, and the court system — and economic performance.”
Of the 160 studies addressing regulation, more than two-thirds showed that higher levels of regulation were associated with lower levels of economic performance. Hood also found that 76 percent of peer-reviewed studies on state economic freedom indexes found a “positive, statistically significant association” between a high ranking in economic freedom and state economic performance.
The research supports arguments in favor of recent North Carolina reforms, Hood said. “State policy is far from the most important factor influencing economic growth — market conditions and federal policy play significant roles,” he said. “But when it comes to factors over which state policymakers can exercise direct control, state lawmakers and the McCrory administration are pursuing policies consistent with a significant majority of findings in recent academic scholarship.”
John Hood’s Spotlight report, “Lower Taxes, Higher Growth: Scholarly Research Reveals Economic Benefits of Fiscal Restraint,” is available at the JLF website. For more information, please contact Hood at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].