Sure, Cut Taxes But Streamline Government

Prop 13 redux? Tax-cut fever is beginning to sweep the country again. This time, the action is on the East Coast, led by New Jersey and New York--that's right, the King Kong of taxes, New York State!

But lest the ghosts of Arthur Laffer's supply-side 1980s cohorts start chortling once again, this round of cuts is quite different from Reagan's. The Laffer Curve promised a free lunch: $1 of additional government revenue for every $1 of taxes cut. Instead, it delivered budget deficits to the moon.

New Jersey Republican Governor Christine Todd Whitman and New York Democratic Governor Mario Cuomo promise something different. Jobs. Jobs. Jobs. This time, the promise of tax cuts can be realized. There is serious economic analysis to support the current round of cuts: States with low taxes clearly perform better than states with high taxes.

A new BUSINESS WEEK study shows that, since 1985, job growth in low-tax states has been 65% higher than in high-tax states. Where the combined state and local taxes exceeded 12% of personal income, the private-sector job growth amounted to about 13% on average. But where the combined burden was less than 10%, job growth hit 22%.

New York, with the heaviest tax burden of any state save Alaska, had an actual decline of 1.9% in jobs. In contrast, low-tax Arkansas, with Bill Clinton then in office as governor, had a 24.3% leap in private-sector jobs.

There is a trade-off. While cutting taxes generates jobs, it also lowers the tax haul. Faster growth does not compensate for lost government revenues. That means there is less money for education, crime prevention, and health.

That is precisely why politicians must take a second step. After cutting personal and business taxes, they must reinvent the delivery of government services to lower their costs. That means privatizing public services, deregulating, and cutting bureaucracy to save money to sustain critical social services.

So it's a two-step dance: First, cut taxes. Then, streamline government services. Politicians who learn it will be blessed by voters for years to come.

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