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1 Lyman Stone, Taxes and Economic Outcomes: A Wonk's Response to Governing Magazine 1 (2013)

handle is hein.taxfoundation/taxfaaoa0001 and id is 1 raw text is: TA X (;- ro FOUNDATION October 25, 2013 No. 399 Taxes and Economic Outcomes: A Wonk's Response to Governing Magazine By Lyman Stone Recently, Governing Magazine ran a blog post analyzing our 2014 State Business Tax Climate Index and its relationship to key economic outcomes like wages and employment-to-population ratios.' We were glad to see a major publication taking up the task of exploring the vital relationship between taxes and economic outcomes, as the well-documented negative effects of taxes on economic growth are extremely important.2 However, Governing's analysis, which suggests that taxes are insignificant to economic outcomes, is flawed on several grounds. It looks at a small sample size across an insufficient timespan, ignores the basic mathematical characteristics of Index scores, fails to control for interrelated economic and policy effects, does not control for other important variables, and misunderstands the kind of effect taxes have on the economy. Governing's analysis uses a series of univariate regressions, which aim to discern if two variables have a straightforward linear association. Put simply, these regressions ask, If one variable goes up, does the other variable generally go up or down? Regression models can be modified to find more complex and non-linear relationships or to account for more variables, but those used by Governing Magazine did not include such modifications. The State Business Tax Climate Index assesses variables that matter for economic growth. There is ample evidence for this, both on an a priori basis from economic theory and on an empirical basis from rigorous, fair comparisons. If those arguments are not enough, then policymakers can also look at surveys of businesses and hear from the taxpayers themselves: high, distortionary taxes hurt. Time Period Selection and Sample Sizes Governing uses 2014 Index scores as independent variables to predict the most recent state-level employment-to-population ratios and median incomes. They found that there was essentially no relationship between 2014 Index scores and these variables on a single-year, cross-sectional basis. But tax 1 Mike Maciag, Analysis: Do Business-Friendly Tax Climates Yield The Most Jobs?, GOVERNING.COM BY THE NUMBERS BLOG, Oct. 10, 2013, http://v-vw.governing.com/blogs/by-the-numbers/state-business-tax-climates-jobs-data-analysis.html. 2 William McBride, What Is the Evidence on Taxes and Growth?, TAX FOUNDATION SPECIAL REPORT No. 256 (Dec. 18, 2012),