A year ago
Gov. George Pataki asked me to chair a commission on tax reform
that would improve New York state’s outlook for investment,
job creation and economic prosperity. After numerous meetings,
a review of the existing tax literature, and lengthy deliberation,
we have come up with a statement of principles and a series of
policy recommendations to promote an investment-friendly state
tax structure that could, if implemented, restore New York to
a preeminent economic position.
First and
foremost, we concluded that there is a clear relationship between
state tax burdens and state economic health. States with high
and rising tax burdens are more likely to suffer economic decline;
those with low and falling tax burdens are more likely to enjoy
strong economic growth. Academic studies, as well as real-world
experience, show clearly that low-tax states consistently outperform
high-tax states.
Economic
behavior, whether measured in terms of employment, work effort,
saving, investment, risk-taking, entrepreneurship, or capital
formation, is highly responsive to changes in marginal tax-rates.
In other words, incentives matter. The economic power of lower
tax-rate incentives has been proven at national and state levels.
It is also borne out by the results of lower tax-rate systems
put in place internationally. Allowing people to keep more of
the extra dollar earned or the extra dollar invested by providing
new incentive rewards is a tried and true prescription for economic
growth. Raising after-tax rewards for work, investment and risk-taking
is the surest path to long-term prosperity and competitiveness
for the state of New York.
But there
is a bigger picture here.
It is absolutely
essential that New York be more competitive in the global race
for capital. New York competes regionally, nationally and internationally.
What is overlooked, however, is the state’s need for new
capital and new capital formation. New jobs require new businesses,
and new business formation requires new capital sources. Nothing
will make New York more prosperous than improving its economic
climate to make the state a more hospitable place for the treatment
of smart money and smart people. We compete daily with low-tax
states elsewhere in the U.S. and with newly attractive destinations
for capital in places like Russia, Eastern Europe, China and India.
Smart money and smart people are highly mobile. In the world race
for capital, they go to where the return on capital is highest.
In the 21st
century information economy, where capital is so vital in the
creation of new technologies and the everyday application of these
breakthroughs in the home and workplace, an expanded and well-trained
workforce must be equipped with the low tax-rate benefits of easy
capital access and large-scale capital inflows. For these important
reasons the onerous and burdensome multiple taxation of capital
in New York must be remedied and ameliorated.
So the commission
recommended elimination of the state tax on capital gains and
investor dividends. The multiple taxation of capital is a huge
deterrent to growth. Eliminating these tax penalties on investment
capital would set New York apart as the only state with an income
tax that fully exempts capital. Removing the double and triple
taxation of investment, which has already been taxed once as wage
and salary income and again as corporate net income, would be
a powerful stimulant for entrepreneurship and risk-taking. Similarly,
we recommended the elimination of the corporate capital gains
tax.
In addition,
we recommended complete abolition of the state’s estate
tax that penalizes family-owned and closely held businesses. This
tax has accelerated a growing brain-drain and capital flight to
Florida, South Carolina, and elsewhere. In a 2004 National Bureau
of Economic Research paper, economists Jon Bakija of Williams
College and Joel Slemrod of the University of Michigan, concluded
that a 1% differential in estate tax rates was associated with
a 4% reduction in the number of residents in a given state.
Our commission
decided that waging class war against the wealthy is nonsensical;
it merely wages war against the state’s non-rich working
people who are deprived of scarce and valuable capital that is
so necessary to creating new technologies, new businesses, new
equipment, new jobs, and new job training.
On income
taxes, we proposed a 5% solution for individuals and companies,
down from the 6.85% tax rate on personal income and the 7.5% tax
rate on corporate income. Additionally, we proposed to reduce
the number of income tax brackets from five to three, along with
a widening of brackets, as well as inflation-indexing to prevent
tax-bracket creep. Complex supplemental taxes would be eliminated.
And for businesses, all new investment would be cash-expensed
to reduce complexity and lower the cost of capital. In all these
cases, we adhered to a clear economic growth principle: tax something
less and you get more of it. By raising after-tax rewards across-the-board
for the entire state tax system, we believe that New York will
generate significantly higher living standards and more rapid
economic growth in the years ahead.
This complete
restructuring will provide tax relief to taxpayers in every income
class and would set New York apart from other states as the place
for uninhibited growth and investment opportunities. In-migration
will replace the high-tax population drain. Instead of voting
against New York, people will vote with their feet and their money
for New York.
New Yorkers
have seen these economic growth tax principles work successfully
in the past. When President Reagan and Gov. Hugh Carey lowered
tax rates nationwide and statewide in the ’80s, New York
shared in the U.S. economic boom. Gov. Pataki’s tax-rate
reduction plan in the ’90s produced new jobs at a pace equal
to or better than the U.S. average. President Bush’s 2003
tax cuts on capital gains and investor dividends ignited New York’s
financial service and related industries, where employment, incomes,
and tax revenues all soared in the aftermath of lower tax rates.
But for all this progress, New York’s overall tax burden
remains high. The Tax Foundation’s state business tax climate
index in 2004 rated New York 49th. A huge tax hike in 2003 passed
by the state legislature over the governor’s veto represented
a body blow to current and future economic performance. This is
why across-the-board tax rate relief is so vital to the economic
future of the state. Economic rewards will replace penalties for
those who live and work here.
Lawrence
Kudlow is a former Reagan economic advisor, a syndicated columnist,
and the co-host of CNBC's Kudlow
& Company. Visit
his blog, Kudlow's Money
Politics.
Copyright
2006 Wall Street Journal
