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Poverty, taxation, government and the economy
Posted by: McQ on Friday, December 15, 2006

The Goldwater Institute just did a very interesting study (pdf) concerning poverty, taxes and government spending. It's conclusions seem to validate classical liberal economic theory concerning the best way to address poverty.

It measured overall poverty and childhood poverty in all 50 states and any reduction or gains within those two categories when compared to the national average between 1990 and 2000. Their findings:
The 10 states with the lowest per capita spending enjoyed a sizable reduction in overall poverty rates, approaching twice the national average. However, the top 10 big spenders not only failed to reduce poverty rates, but they actually suffered an increase in poverty rates of 7.3 percent.
And:
[L]ow-spending states experienced substantial declines in childhood poverty rates. Meanwhile, the highest spending states suffered an actual increase in childhood poverty.
As noted in the study, there are essentially two schools of thought concerning the best way to combat poverty. One side is of the opinion that government is the best vehicle to do so (through taxation and spending) and the other is of the opinion that a vibrant and growing economy is the best defense against poverty.

The first school of thought explains itself much like this:
For example, the Children’s Action Alliance, an Arizona group focusing on state-led antipoverty measures, opined, “Some argue that raising taxes is the worst thing you can do to a state economy, but established economic thought runs counter to this assertion. Tax dollars circulate through the economy to buy goods and services and to pay salaries. Economists as early as John Maynard Keynes have recognized the important contribution of government spending to the economy.”
Just the mention of Keynes should have you questioning the premise. Of course not mentioned by those who favor such governmental intervention through high taxation and spending is that businesses normally won't tolerate high tax areas and will seek out lower tax areas. That of course has a detrimental effect on the best anti-poverty engine there is: a growing economy.

As an example of the point, consider this: What if we were taxed to the point that our economic growth had been impeded by a mere 1% a year between 1870 and 1990?
George Mason University economist Tyler Cowen, for example, notes that had the United States grown one percentage point less per year between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990.
That's a pretty significant argument for the power of the economy to lift people out of poverty. Cowan also highlights the compounding power of economic growth:
Cowen also notes the compound power of economic growth by calculating that at an annual growth rate of 5 percent, it takes just over 80 years for a country to move from a per capita income of $500 to a per capita income of $25,000 in constant dollars. At a growth rate of 1 percent, such an improvement takes 393 years.
One of the states which is leading the reductions in poverty is Mississippi. That may surprise some as Mississippi and many of the southern states have had a legacy of poverty and below average per capita income growth. Given Cowen's point about the importance of economic growth (and the comparison of the US and Mexico), the study gives us another example:
Per capita income varies widely by state in the United States. In 2005, Connecticut had the highest per capita income at $51,390, while Mississippi had the lowest at $27,404. Five of the bottom 10 states in per capita income are Southern states. This largely represents a legacy of the century of economic stagnation following the Civil War.

Southern states clung stubbornly to a status quo in economics and politics, which slowly transformed it from being one of the wealthiest regions in the world before the Civil War to having a per capita income around half the national average by the early 1940s.

In substitution of slavery, the South established sharecropping and Jim Crow laws. Rather than embracing the industrial revolution, Southerners maintained an agrarian economy. By the early 1940s, the Southern states were growing more cotton than ever. Other regions, however, had embraced dynamic economic change, including industrialization and immigration, and were racing past the
antiquated economies of the South.
The result was a richer economy in most northern (and western) states and higher per capita incomes.

Recently, however, the south has seen an economic resurgence and a rise in its per capita income. And almost all of its states have seen significant deceases in overall poverty and childhood poverty with Mississippi leading the way with -21% and -20.1% respectively.

Why? The study concludes it comes, in large part, from a policy of low taxation and low per capita spending which encourages economic growth.
Government spending ultimately derives from taxes. The American federal system presents a variety of choices for individuals and businesses in terms of where they wish to live and do business. States with relatively high tax rates suffer greatly from the process of emigration: that is, people and businesses leave high-tax states for low-tax states.
And thus state economies can suffer or thrive, in part, based on this simple formulation. When businesses thrive they hire, and the best way to lift anyone out of poverty is through employment. Raising the per capita income through economic growth is by far the best and most efficient way to combat poverty.

Obviously the states which spend more per capita must tax more per capita as well. The study points out that the 10 highest spending states saw a 7.3% increase in the level of poverty in those states while the 10 who spent the least per capita saw an average of a 11.2% decrease in the level of poverty in their states.

Why? Again, consider the impact on business which high taxes bring. They effect hiring decisions, and, if they get high enough, decisions about relocating the business to lower tax areas.

A good example can be found with immigrants:
With regard to immigration, some states with very large increases in the percentage of the population born in a foreign country also experienced large decreases in poverty rates during the 1990s.
Why? Consider the tale of 3 states:
For example, both Arizona and Texas more than doubled their number of foreign-born residents during the 1990s but experienced poverty declines well above the national average. Texas gained more than 1.3 million foreign-born residents during the 1990s, and scored a B+ and A on the rankings of general and childhood poverty reduction, respectively. New York scored an “F” in both categories after gaining fewer than a million foreign-born residents.
The reason Texas and Arizona saw reductions in poverty while New York's increased is linked to their economies and the impact of governmental decisions on real growth:
Despite the fact that immigrants often come to the United States poor, there is no reason to assume that they will largely stay poor in a vibrant economy. Immigrants, both legal and illegal, often come to the United States in search of economic opportunity. In a healthy state economy producing large numbers of jobs, there is nothing inevitable about even the most penniless immigrant remaining in poverty long.

A state with the combination of being a traditional immigration destination and experiencing stagnant economic growth, however, will be almost certain to see its poverty rates rise. Both California and New York fall into this unfortunate category.

These states have been gateways for decades as immigrants have accessed social and family networks in each of these states. What changed for the worse in these states during the 1990s was not immigration but rather their inability to economically assimilate immigrants through job creation.
In high spending states, like those discussed, the growth of per capita income increased on average only 3.2% in the years between 1990 and 2000 while the low spending states saw an average increase of 14.1% in per capita income.

All in all an interesting take on the question of poverty and government's role, or non-role. Given the numbers, it seems that if government plays a role at all it should be one of encouraging economic growth by keeping taxes and government spending to a minimum.
 
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The Goldwater Institute . . . seem[s] to validate classical liberal economic theory concerning the best way to address poverty.
Now THERE’S a surprise. ;-)

It seems like the counter-argument could be that the states with stagnant economies and more poor have larger government because they have stagnant economies and more poor, not the other way around. In other words, while I tend to agree that the reason San Francisco has such a huge number of homeless is that it has such liberal homeless policies, it is admittedly something of a chicken/egg argument.
 
Written By: Sean
URL: http://www.myelectionanalysis.com
What a load of bollocks. The paper even states that the improvement in Texas was the result not of economic policy but of a collapse in the commercial real-estate market plus high-tech growth, but neither of those confounding factors are considered when jumping to a conclusion.

Worse, it does not even try to account for choice and mobility. Amazing as it might seem to some, most people make decisions based on self-interest rather than ideological fit. Where would you want to live if you were poor? In a state where the prevailing view is that you should get help, or one where it’s that you should rot? Where do immigrants or the "temporarily poor" in or just out of college tend to cluster? To what extent did the states that fared well in AuH2O’s estimation do so not independently but at the expense of others?
 
Written By: Platypus
URL: http://pl.atyp.us
To what extent did the states that fared well in AuH2O’s estimation do so not independently but at the expense of others?

What is THAT supposed to mean, that SC ought to have given it’s Mercedes-Benz plant to New York? Or because it’s labour costs were lower per unit of production that somehow SC "stole" jobs from NY?
 
Written By: Joe
URL: http://
What is THAT supposed to mean,
That being a leftist, Platypus cannot conceive of anyone or thing benefitting in any way except at the unjust expense of someone or something else. As corollary, platypus believes government should then fix the injustice.

The pie never grows fast enough that a lot of government won’t do a better job of cutting the pieces.

Yours, TDP, ml, msl, & pfpp
 
Written By: Tom Perkins
URL: http://
The paper even states that the improvement in Texas was the result not of economic policy but of a collapse in the commercial real-estate market plus high-tech growth, but neither of those confounding factors are considered when jumping to a conclusion.
And growth just happens to occur in low tax and enterprise friendly states such as Texas by accident?

Where would you want to live if you were poor? In a state where the prevailing view is that you should get help, or one where it’s that you should rot? Where do immigrants or the "temporarily poor" in or just out of college tend to cluster?
That’s right. Texas has less of an issue with immigrants and just out of college students than other states. Are you kidding? Do you know anything about Texas? At least where it is located? Texas is poor immigrant central. Texas is experiencing net in migration of college graduates as well. Why? A great job market and reasonable cost of living.

It seems like the counter-argument could be that the states with stagnant economies and more poor have larger government because they have stagnant economies and more poor, not the other way around.
Even if that were true it wouldn’t be a counterargument. More on point, Missisippi, Texas and other southern states have more poverty but are shrinking it. High tax states typically have lower poverty rates but are growing them. Therefore the argument that poverty is leading to the high tax rates doesn’t follow because Texas and Mississippi have more, and had even more, poverty in the past.
 
Written By: Lance
URL: http://asecondhandconjecture.com
I touched on the cyclic effect of taxation and and economic growth in my recent article The Economic War - Danger Ahead.

The basic principal is this:

If you leave money in the hands of those that earn it, they will have a tendency to spend more. This bolsters the economy which leads to job creation and economic growth. As I explained im my article, by generating an robust economy with more people spending, you actually can generated more state of federal income.

If you give the government a dollar in taxes, that dollar will be spent once every bugetary year. If you leave the dollar in the hands of the wage earner, it has the potential to be spent 12 to 18 times in that same year.

"That dollar will pay for a product (sales tax), which allows someone to run a business (employment tax, payroll tax), which in turn allows someone else to have a job (income tax), which requires some one to get to work (transportation taxes, fuel taxes, toll roads, vehicle taxes and registration), et al infinium. The process is cyclic, the more money people have, the more they spend. The more people spend, the better the economy does. The better the economy is doing, the more jobs are created. The more jobs there are, the more people have money and pay taxes."

Once you start raising peoples taxes, the tendency is for them to start saving and hold back on their spending. This stifles economic growth reverses the above mentioned cycle. People spend less, business don’t do as well and begin laying off employees. This causes less income tax to be collected and creates the additional burden of paying out unemployment benefits. It also reduces taxes collected on travel and luxury goods, since people who are being conservative with their cash flow tend not to purchase luxury goods or travel as much.


These are proven economic models.
 
Written By: Concerned Citizen
URL: http://www.judgingtruth.com
Next you will be telling me that if you subsidize something you get more of it and if you penalize something you get less of it! Please, stop using facts, you are scaring me.
 
Written By: kyle N
URL: http://impudent.blognation.us/blog
Inadvertently, Platypus makes a good point. What if the decline in poverty is solely due to poor people moving to CA or other states with more liberal welfare systems ? The real question is, whether thats a good thing or not ? I think it is a win-win situation.
 
Written By: Azer
URL: http://
What if the decline in poverty is solely due to poor people moving[...]
Where did they get the money to move?
 
Written By: Mark A. Flacy
URL: http://
For example, both Arizona and Texas more than doubled their number of foreign-born residents during the 1990s but experienced poverty declines well above the national average. Texas gained more than 1.3 million foreign-born residents during the 1990s, and scored a B+ and A on the rankings of general and childhood poverty reduction, respectively. New York scored an “F” in both categories after gaining fewer than a million foreign-born residents

I would like to know what percentage of growth and decline in populations and poverty were actually observed in these states. I would suspect the conclusions would be even more impressively in favor of lower taxes contributing to lower levels of poverty.

And the numbers of immigrants "on the books" is nowhere near the number of immigrants here illegally. Texas and Arizona’s situation becomes even more impressive in this light.
 
Written By: Mark Cancemi
URL: http://
Interpreting economic date can be like picking out the right Bible verses to back up your point.

I’m sure the number of poor decreased in Oklahoma when ’Okies’ piled into their beat-up pick-ups to head west in search of jobs.

I’m sure the number of homeless on L.A.’s skid row increase because hostpitals from other counties dump indigent patients there.

There are a lot of inter state,inter community and even inter policy dynamics at work. It should be about finding the best mix to address this, or any other problem.

Oversimplifying detracts from the evaluation of economic policies. It’s certainly of no help to the poor.

 
Written By: Laime
URL: http://
For those that don’t believe this here is an example. The area I grew up in used to be home to alot of textile mills. Most of them have closed the doors and moved elsewhere probably overseas. One of the ones still operating sits right outside the city limits. When the city recently decided to expand the city limits to increase tax revenue the mill told them that they were to become part of the city limits then they too would shut the door and move elsewhere.

The results? When the city limits were redrawn it extended beyond the mill but a nice little circle was drawn around the mill leaving them outside the city limits.
 
Written By: Mac
URL: http://
Oversimplifying detracts from the evaluation of economic policies. It’s certainly of no help to the poor.
Well other than a lot of platitudes and cliches, what specifically have you got to add to this conversation?
 
Written By: McQ
URL: http://www.qando.net/blog
Oversimplifying detracts from the evaluation of economic policies. It’s certainly of no help to the poor.
Good Lord man, as a CONSERVATIVE Republican it’s not in me to help the poor! EVERYONE knows that...I prefer to dine on them and buy their nubile daughters...such naivete from Laime.
 
Written By: Joe
URL: http://
what specifically have you got to add to this conversation?

Refer to what I said earlier.

For example, it hospitals from neighboring areas dump their indigent patienhs in LA’s skid row, that only means they are being moved from one district to another, even forcibly. It doesn’t make them disappear.

The resulting decrease of homeless in the surrounding areas would not reflect their taxation or other economic policies but their dumping policies.

I applaud the fact that there are people embracing the ’cliches and platitudes’ of caring for the helpless.
 
Written By: Laime
URL: http://
Refer to what I said earlier.

For example, it hospitals from neighboring areas dump their indigent patienhs in LA’s skid row, that only means they are being moved from one district to another, even forcibly. It doesn’t make them disappear.
You say it, but you don’t really know for certain it’s happening, and you cite no evidence of such. So, it’s just a meaningless platitude.

Just what counties dump their homeless into L.A. County?
 
Written By: Steverino
URL: http://steverino.journalspace.com/
"...I prefer to dine on them and buy their nubile daughters..."

You actually PAY for them?? D*m spendthrift liberal!
 
Written By: timactual
URL: http://
And growth just happens to occur in low tax and enterprise friendly states such as Texas by accident?

and Ireland, and Eastern Europe, and the Baltic States, and Hong Kong, and Taiwan, Korea, and Singapore...one could even argue China is a low tax enterprise friendly state.

More and more I am buying into the idea that we should worry more about growing the economy than slashing government spending. Though I also prefer the small government idea, it’s hard to really implement it nowadays (politically.)

Also, not all government spending is bad for growth - a key new freeway, better ports, schools, etc. could all help growth.
 
Written By: Harun
URL: http://

 
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