In their book, Taxing the Poor, Newman and O'Brien test a two-fold hypothesis. First, as the "good Liberals" they are, they test the idea that higher taxes are required to build infrastructure and maintain community functioning, using variables such as individual-level health outcomes. Second, counter to expectations, they assert that we need to severely limit welfare spending in the South, especially the working poor. Their surprising argument is that federal programs like WIC, food stamps, and the Earned Income Tax Credit, primarily distributed to the working poor, actually become welfare to corporations. They build the case that when the federal safety net provides benefits to the working poor, it incentivizes and allows corporations to continue paying their employees wages that are below minimal living standards. Currently, a full-time worker at minimum wage would earn less than $15,000 a year, most of whom do not obtain any benefits, like sick-days or health insurance.
Their case is built on reconstructing a history of taxation in the various U.S. regions. The North, historically, has higher corporate and property taxes, which are state-level taxes, and get used for state-level projects. The South, on the other hand, had a successful series of tax revolts, especially after freed Blacks started going to school, using public resources that required the formerly “whites-only” usage to extend to a broader base. These new public resource consumers, in this case, typically did not own property, so it was argued that they were not paying for these resources, like education, roads, and fire and police protection. These Southern-based populist anti-tax revolts were driven primarily by property owners, who legislatively shifted state tax revenues from property and business to general sales tax, with the idea that all citizens end up paying into the system based on use and value—except property. Two states, Mississippi and Alabama, even continue to tax food. “Regressive” tax patterns like this ignore the fact that if you are at or below the poverty line, a 5-10% sales tax ends up being a far larger percent of your income than if you are middle or upper class, especially when they are necessity purchases, like food.
Most of these same stats also have very low corporate tax rates. The political argument is that lower corporate tax rates will attract businesses, which create jobs, thus creating a strong economy. Newman and O'Brien's data indicate that while this is true--unemployment has historically been lower in the South than in the North--the South still consumes far more Federal welfare resources per capita than any other region of the country. This paradoxical situation is explained by the fact that the jobs found in the South are far more likely to be low-paying service-level jobs, and therefore are not making enough to sustain a family. Indeed, their data indicates that those states in the South with the lowest property and corporate taxes also have the highest populations who qualify for food and housing assistance because of low wages.
In the charts above, I recreate Newman and O’Brien’s findings, using current data, not only providing support for their thesis, but finding that these regional differences still exist. The first graph compares corporate tax rates in each state versus the percent of children in that state with no insurance. The other two graphs compare property taxes versus the percent of the population of that state who qualify to receive the Federal Earned Income Tax Credit (i.e., those people who worked in a given year, but did not earn enough to get them above the poverty line, thus qualifying for a "tax credit"), and the percent of the population who qualify for the Federal Women, Infant and Children program. The straight black line is the “trend line” (using a least squares estimate). In each of these three cases, there is a directional trend--the lower the state corporate and property tax rates, the higher that state's requirement for federal aid to support a low-wage population
The table below the graphs shows three regions--Northeast, Midwest, and the South, documenting several tax and social-economic indicators. These relationships document a similar pattern as the graphs, but show more variables, such as the percent of the population who qualify for food stamps, the general population with no insurance, per capita income, and economic growth for 2012. In each case, a clear progression is evidenced: the Northeastern states are doing better on all of these social-economic outcome measures, the South is doing the worst, and the Midwest is in the middle. The theoretical link between these outcome measures and state tax rates, both corporate and property, is Newman and O'Brien's thesis that these state revenue sources allow states to take care of its population, without having to rely on federal aid—this data supports Newman and O’Brien’s original findings.
A related argument, is the relationship between taxation and economic growth. The neoliberal hypothesis is that higher tax rates lead to lower growth, since higher taxes limit the "job creators" ability to re-invest in their business, and similarly disincentivizing external investors. They propose that higher taxes are also related to lower worker wages, and higher prices, when business owners pass their losses on to their employees and the buying public. Each of these is proposed to limit economic growth. However, contrary to this prediction, higher tax rates in the Northeast are related to stronger economic growth, as measured by both GDP expansion and per capita income, compared to lower tax rates in the South which are related to lower economic growth. This pattern is evidenced in international data as well (Brady, 2010, Rich Democracies, Poor People).
Finally, given that our federal tax revenues are as low as they have been in 60 years (see my analysis here: http://fallcreekrenovation.blogspot.com/2011/08/does-half-population-pay-nothing-in.html), does that mean all taxation is decreasing? Not at all--in fact what states have discovered is that as the national outcry against federal taxes becomes louder, national politicians respond by cutting federal budgets, leading to lower state subsidies—budgets requires for public goods such as roads, health, welfare, education and public safety. Given that these kinds of expenditures have a limited ability to be reduced and still allow for efficient public markets, states and cities have had to increase their budgets concordantly. The table below shows this trajectory. The blue-line, federal spending, has decreased substantially since 1952. However, the yellow line, representing state and local spending, has had to increase to keep up with federal losses.
Newman and O'Brien's argument is, on the surface, a typical "leftist" argument that there is nothing wrong with higher tax rates than what we currently have, and especially they argue for "progressive" tax systems that require the wealthy to put more back into the system than the poor. However, their secondary argument, is that businesses and property owners have a role in providing for the public good and the welfare of both their workers and the community in which they reside. The Southern pattern of attracting businesses by minimizing their tax rates is great for business profits, but it does little to provide funds for community infrastructure. Similarly, the data indicates that businesses that are willing to migrate to these low-tax states are often the same businesses who fail to provide a living wage or healthcare for their employees. This double-strike against communities becomes evident in the greater reliance on federal aid to supplement the wages that the businesses should be paying, and the health insurance that these businesses are not providing. In the end, while the expected "leftist" argument in the book might be that we need to strengthen the federal welfare system, the authors instead seem to argue that these resources should be provided at the local/state level, by requiring greater investment by corporations that do business in a given state, and property owners who enjoy the services of these low-paid workers.