Is Economic Equality Better in States With Low Income Taxes?

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Politicians regularly defend state income taxes as a way to improve economic equality, stating that high income tax rates create a fairer society by using tax money from wealthy Americans to give more to the middle class. However, the data does not back up these arguments.

States with high income tax rates often exhibit less equality than low-tax states. California, which charges the highest income tax rates in the nation (a top rate of 13.3 percent), also has one of the highest poverty rates: A shocking 34 percent of the country’s welfare population lives there, according to “Wealth of States” (p. 227). On the opposite end, Texas and Nevada, which charge no income tax, have created a much better economy for their middle-class citizens. Here are a few reasons states with zero or low income taxes offer better economic equality.

They Attract More Middle-Class Jobs

High state income tax rates can kill businesses, especially those that hire middle-class workers. Manufacturers and factory owners are fighting to stay alive as they compete with China and the rest of the world. That’s why many companies can’t survive in high-tax states and decide to leave. New York and Michigan, for example, have lost nearly their entire manufacturing industries as companies in this sector move to low-tax states such as Texas and South Carolina.

Only the most lucrative industries, including Silicon Valley and Wall Street, can still afford high tax rates, which has left high-tax states with a sharp divide between the rich and the poor—the opposite of economy equality. This trend looks like it will continue; low-tax states are consistently ranked the best places to do business. Any company that has a choice will probably in one of these areas.

They Create a More Affordable Cost of Living

Another reason low-tax states have better economic equality is that low tax rates help make the cost of living more affordable. When income taxes are high, businesses need to charge more because they pass this cost to consumers. As a result, the same paycheck in Tennessee goes a lot further than in California.

Additionally, many low-tax states, such as Texas, are doing a better job of keeping housing costs under control. These governments often have fewer restrictions on developers who want to build new properties, so the supply of housing is able to keep up with population growth, helping prices remain stable. Government red tape in New York and California makes it difficult for developers to build new properties, and there simply aren’t enough houses. As a result, the cost of housing in these states has risen far out of reach for all but wealthy workers and those who qualify for government assistance.

They Offer More Services for the Middle Class

Low-tax states often offer more services for the middle class, while high-tax states tend to offer more services for the poor. According to “Wealth of States,” Texas has more teachers, police officers, and firefighters per person than California. However, California has more welfare workers per person than Texas (p. 234).

Wealthy families can survive with less government support because they’re able to pay for more on their own, for example private schooling for their kids. Middle-class workers can’t pay for as much, however, so they move to states that offer better public services.

If high-tax states truly want to create a more equal society, they’re heading in the wrong direction. Only by following the example of low-income-tax states will the country be able to create better economic equality.