Recently, Art Laffer, an economist who gained prominence while serving on Reagan's Economic Policy Advisory Board, released an analysis of the so-called Marketplace Fairness Act. The Act would, for the first time since the Articles of Confederation, unleash the states to once again tax outside of their borders and force audits on those who are not residents. In a phrase, the Act would allow taxation without representation.
Mr. Laffer has received much criticism for the results of the study, and there are many arguments to be made, but one need look no further than his assumptions to demonstrate that the study’s results are irrelevant. According to Laffer, "I am assuming these states use their funds correctly, and if they do and if every state did, it would add to national growth dramatically. This is just economic efficiency, pure and simple. If you use a better tax structure, you're going to be able to get better growth, employment, output, production, and tax revenues than if you use a poorer tax structure. And the better tax structure here would include all sales, not just those sales that are in brick-and-mortar operations within a state."
If wishes were horses then beggars would ride.
To reach his conclusion one must assume “states use their funds correctly.” That’s two gigantic assumptions: 1) that states would reduce their income taxes as they increased sales tax receipts, and 2) that the revenue would be used responsibly to reduce debt and balance budgets. What a curve ball!
State after state has shown year after year a wide variety of mismanagement and outright failure to use their funds correctly. Routinely front page news debunks the notion that states will use their funds correctly.
Oh, but some states might do the right thing? Note that according to Laffer every state would need to do the right thing.
As University of Chicago economist Gary Becker has said, “Still, intuitive assumptions about behavior is only the starting point of systematic analysis, for alone they do not yield many interesting implications.” And intuition should actually lead one away from the conclusion that those who favor the Marketplace Fairness Act are trying to draw. Or in the words of science and philosophy, the study’s assumptions eradicate the validity of its conclusions.
Let there be no doubt that Art Laffer has earned respect and admiration from the supply side crowd, and his assumptions demonstrate a shared belief and desire for government to reduce taxes producing jobs and economic growth. But passing a law that radically expands the scope of government and then to sit back and hope that all states will do the right thing is a set up to be thrown a real economic curve ball.