GUEST COLUMN

Cutting taxes, not spending more, is key to Ohio’s economic growth

4/27/2014

New evidence from the U.S. Bureau of Labor Statistics shows that Ohio is one of the nation’s leading states in recent job creation. Yet a large number of commentators are lecturing Gov. John Kasich about his allegedly anti-growth fiscal policies.

In a recent editorial, The Blade opined that “evidence ... clearly points to investment as the more effective way to nurture business growth.” The newspaper said that Mr. Kasich “continues to pursue a backward policy that promotes tax cuts at the expense of vital investments in Ohio’s future.”

I think the critics have it wrong on all fronts. By “investment,” they mean greater government spending, usually with an emphasis on education.

They suggest that higher levels of government educational spending lead to more economic growth than tax reductions. Evidence published in the top peer-reviewed economics journals suggests otherwise.

I quickly found five studies since 2008 in premier journals such as the American Economic Review and National Tax Journal, showing that tax reductions have strong positive economic effects. From 2010 to 2013, nearly 854,000 native-born Americans moved from states with income taxes to states without them, such as Texas, Florida, and Wyoming.

Governor Kasich’s proposals are a step toward reducing the drain on human resources that occurs when productive Ohioans move to places where the price of government services is lower, letting them keep more of what they earn.

Another argument is that more spending on higher education is critical to growth. It is true that college-educated workers are more productive than others.

But is also true that incomes since 2006 have risen less nationally for college graduates than for those with high school diplomas. Large numbers of recent college graduates have ended up as baristas, taxi drivers, and workers in big-box retail stores.

Arguably, we have overinvested in higher education. As of 2010, 115,120 janitors in America had bachelor’s degrees.

Higher education is riddled with inefficiency; I know that firsthand as a university professor. When I do statistical analyses, I find no positive relationship between state higher-education appropriations and economic growth. Indeed, a case can be made that more appropriations lower growth.

Particularly outrageous is the suggestion that spending reductions in the Ohio College Opportunity Grant program are denying college access to many potentially productive and deserving Ohioans. This program was severely reduced during the administration of former Gov. Ted Strickland, for excellent reasons.

Community college students can get federal Pell grants that typically cover their full tuition. Why use state funds to pay for something the feds already provide? The state college grant still helps lower-income students pay tuition beyond Pell grant limits at more expensive state universities.

Moreover, there is pretty good evidence that government-provided tuition assistance has enabled universities to raise their fees to capture added public dollars. This helps universities pay for the hordes of new bureaucrats they have hired in recent decades.

Tuition caps are an attempt to stop this, but universities often evade them by reducing the quality of what they offer — using more cheap and inexperienced adjunct faculty, having larger classes — or by tacking on new noninstructional fees. I am waiting to have to pay to use the toilet at my university; it is only a matter of time.

Finally, it is worth noting that the underlying assumption of the critics about Governor Kasich’s latest budget proposals — that taxes are being reduced — is not very valid. Mr. Kasich proposes that income tax cuts be largely offset by other tax increases.

It is probably true that proposed increases in consumption and severance taxes are likely to have few anti-growth effects. But the evidence is clear that income taxes are particularly debilitating in their effects on growth. Indeed, if I were to criticize the governor’s proposal, it would be to argue that even more aggressive reductions are desirable.

Any time we “invest” in anything, we reduce resources that are available elsewhere. The competitive free enterprise system is disciplined by markets. On average, it uses resources better and more efficiently than governments, which are monopolies run by politicians. That is a lesson well worth learning.

Richard Vedder is distinguished professor of economics emeritus at Ohio University and director of the Center for College Affordability and Productivity.