Tax Myths Debunked

Abstract

The U.S. economy has recently suffered its deepest and most prolonged recession since the Great Depression. The fundamental causes of the recession and the slow recovery are the result of two decades of poorly conceived housing credit and other policies and the adoption of long-ago discarded Keynesian policies. The latter policies have failed to rejuvenate the economy and have left behind a massive accumulation of national debt. This accumulation has significantly constrained the policy options of the Federal Reserve, Congress and state and local governments.

State fiscal policy reform therefore needs to include policies that will support economic growth and break with the long tradition of high levels of taxation, government spending and intervention at the state level. The states must do this alone because the federal government will be in no position to provide financial assistance.

In this setting, defenders of the status quo and advocates for the so-called “progressive” reforms of higher taxes and greater government involvement have sought to discredit legitimate and research-based state fiscal policy reforms. The purpose of this paper is to set the record straight regarding recent pro-growth reform proposals, as well as illustrate the theoretical and empirical mythology that is used to discredit reform efforts.

After first providing an introduction and background to the current challenges that states face in reforming tax and spending strategies, the study provides an analysis of reform proposals that will reduce tax system impediments to economic growth.

Numerous scholarly articles and papers are referenced throughout this report, and detailed citations are available in the report’s bibliography.