Free-Market Principles of Fiscal Policy

1. Above all: Keep taxes low. High taxes (relative to other countries and the states) have a profoundly negative effect on economic growth.
2. Don’t penalize earnings and investment. Taxes on earnings and investment income are particularly harmful to economic growth. Income taxes have a large negative effect on economic growth.
3. Avoid “sin” and excise taxes. Taxes on specific goods and services are often unfair, unreliable, and regressive.
4. Create a transparent and accountable budget. The sole purpose of collecting taxes is to finance the core functions of state government. But few states have budget processes in place that enable legislators to identify those functions and measure the performance of state agencies.
5. Privatize public services. Privatization is a proven way to reduce government spending while preserving or improving the quality of core public services.
6. Avoid corporate subsidies. Subsidies to corporations and selective tax abatement are questionable politics and bad economics. Such assistance is unnecessary if general taxes are kept uniform.
7. Cap taxes and expenditures. A tax and expenditure limit (TEL) protects elected officials from public pressure to spend surplus tax revenues during good times. During bad economic times, the beneficiaries of new programs oppose in cuts. It is a recipe for inefficient government growth, fiscal crises, and tax increases.
8. Fund students, not schools. Free and universal K-12 education is generally agreed to be one of the core functions of state government, but international and historical standards, public schools int the U.S. are costly and yield poor results. Cities and states that are experimenting with school choice have seen achievement gains.
9. Reform Medicaid programs. Next to education, Medicaid is the largest single expense in most state budgets. Costs are rising at double-digit rates in many states, while fraud and abuse take an alarming share of every dollar spent.
10. Protect state employees from politics. Workers should be free to choose or decline union membership, and state and local governments should be prohibited from deducting funds used for political purposes from the paychecks of public workers.