Oklahoma economists give Laffer a failing grade

The push to eliminate Oklahoma’s personal income tax relies heavily for intellectual support on a study done for the Oklahoma Council of Public Affairs by economist Arthur Laffer and his colleagues at Aduin, Laffer & Moore econometrics. Last month we reported on a pair of studies from the Institute on Taxation and Economic Policy, a leading national tax policy think-tank, that revealed fundamental flaws with the Laffer/OCPA report.

Now three leading Oklahoma economists – Dr. Kent Olson, Professor of Economics Emeritus  at Oklahoma State University, Dr. Jonathan Willner, Professor and Chair of the Department of Economics and Finance at Oklahoma City University, and Dr. Cynthia Rogers, Associate Professor of Economics at University of Oklahoma –  have released their own reviews of the Laffer/OCPA report. Each has found serious errors and shortcomings in the OCPA/Laffer analysis and each cautions strongly against using it as the basis for public policy decisions.

Dr. Kent Olson, in a paper titled, “The Voodoo Economics of Phasing out Oklahoma’s Personal Income Tax,” focuses on a regression equation that yields Laffer’s predictions of spectacular economic growth rates from eliminating the income tax. Carefully replicating the data and assumptions built into Laffer’s equation, Olson uncovers multiple errors that lead to mistaken conclusions. Olson writes that the design of Laffer’s key equation and his use of data:

… produces biased and greatly exaggerated estimates of the effects on personal income and non-personal-income tax revenues from phasing out Oklahoma’s personal income tax. In this author’s view, it fails totally to provide adequate justification for such an important change in Oklahoma’s tax structure.

Dr. Jonathan Willner, in a piece titled, “Putting Real Economics into an Economic Assessment of the Oklahoma State Income Tax,” focuses on inconsistencies in Laffer’s selection of key data and failure to consider a full range of explanatory variables, that serve to render “the entire report valueless.” After sampling some of the problems with the study, Willner concludes:

Between data inconsistencies, omitting things that matter, and not asking about relevant impacts, the Arduin, Laffer and Moore assessment of the impact of eliminating the Oklahoma Income Tax does not constitute economic analysis in any real sense. As a consequence, its suggestions should be ignored as economics.

Finally, a similar assessment is reached by Dr. Cynthia Rogers in her paper, “The Flawed Case for Eliminating Personal Income Taxation in Oklahoma.” Dr. Rogers emphasizes that the Laffer study mistakes correlation for causation, selects flawed data, and fails to consider important variables that are likely to influence economic growth and tax policy. She states that:

… the analysis does not meet professional standards for economic studies of this sort, which require comprehensive robustness checks to test for the influence of outliers, specification of variables, time periods selected, and non-linear effects.

Rogers,  who has published extensively on state tax policy and economic growth, concludes that “neither the OCPA report nor existing academic research supports the claim that eliminating Oklahoma’s income tax will lead to enhanced growth in the state economy.”

Along with the ITEP reports and findings from Professor William T. Terrell of Wichita State University, these pieces reflect a broad consensus among economists that the Laffer/OCPA study is riddled with errors and problems that undermine its findings and conclusions. We hope that Oklahoma legislators take these assessments from national and Oklahoma economists seriously and conclude that decisions based on bad economics can only yield bad policy.

On April 5th, Drs. Olson, Willner and Rogers, along with several of their peers from the economics and economic development field, will be participating in a public forum at the Oklahoma History Center, “Abolishing the Income Tax: Silver Bullet or Fool’s Gold?”  Click here for more information and to register for this free event.