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It is a truth universally acknowledged that lower taxes and smaller government lead to economic growth, while higher taxes and bigger government hold the economy back. And like many truths that are universally acknowledged, it is frequently contradicted by easily observable facts and that makes no difference. Economics especially seems to be full of these ironclad universal rules that only hold true some of the time, in elegantly controlled micro-economic examples. The rest of the time these "truths" are obviously not true, and no one would be fool enough to behave as if they were true except when it's time to set crucial government policy. Then, anyone who argues against the Universally Acknowledged Truth is just "not facing facts."
Now, since many of our lawmakers, policy wonks, and media pundits still believe in the fact that low taxes make stronger economies, and that this fact is true in virtually all cases, let me propose a small thought experiment that I will call "New Hampshire."
New Hampshire, of course, has no broad-based taxes of any kind: no state income tax, no sales tax, and no politicians with a prayer at state-wide office unless they take "The Pledge." What Pledge? The Pledge not to have any sales or income taxes, ever, you pinko. This basically means that New Hampshire is Galt's Granite Gulch, and libertarianism is a major part of the state's political culture. (Maybe twenty years ago I was in a bookstore a couple of blocks from the Capitol Building in Concord, and my first thought was: That's more Ayn Rand than I've ever seen in once place.) And of course everyone knows, deep in the granite of their bones, that having almost no state taxes is good for the economy.
New Hampshire's southern border is with Massachusetts or, as we called it in the 1980s, "Tax-a-chusetts," which has state income tax AND state sales tax AND all kinds of other state licenses and fees: like Cuba with cranberry sauce, really. You may remember this from the Bush/Dukakis election of 1988, when The Elder Bush pointed out to America what kind of punitive socialist redistributionist joint Dukakis was running, and everyone agreed that we'd all be crazy to want any part of that. New Hampshire's taxes are of course lower than those of its other neighbors (Maine, Vermont, Canada, and the Atlantic Ocean) but the contrast with Massachusetts is especially sharp, especially since the vast majority of New Hampshire's population lives in the southern part of the state, close to the Massachusetts border.
Naturally, New Hampshire's low-tax, small government environment should long ago have left Massachusetts' creaky outmoded welfare state in the economic dust. But reality, evidently, lacks common sense. Because New Hampshire's economy is much, much smaller than Massachusetts' is, and isn't gaining on it. Low-tax Libertarian Wonderland is poor. Taxachusetts prospers.
Really, my experience growing up wasn't so much that New Hampshire had an economy as that it was allowed to borrow Massachusetts' economy on weekends. Massachusetts was the main economic engine, and southern New Hampshire basically an adjunct to that economy. A huge percentage of southern New Hampshire's population actually work in Massachusetts or else serve clients and customers from Massachusetts; one way or another, the income comes from south of the state line. The big economic strategy is to put a big mall, sales tax free, right across the state line in order to lure Massachusetts shoppers. That's really it. When I was fourteen, I thought it was clever to respond to the slogan "Make It in Massachusetts" with "Spend It in New Hampshire." My excuse for that was that I was fourteen. What's unfortunate is that my shallow 9th-grade jeer was actually the plan at the top levels, and still is. New Hampshire's main approach is to try to drain off what it can from the bigger and more productive economy to the south.
Now, some of the economic differences are surely about size and about pre-existing development. Boston wasn't created overnight, and you don't create an equally attractive and economically developed city just by cutting taxes in Nashua and waiting. The universally acknowledged truth that lowering taxes and "getting out of business's way" is the optimal plan simply denies reality; getting out of the way of businesses that don't exist isn't even a plan. But even if you control for size and existing development, taxless New Hampshire isn't pulling away from high-tax Massachusetts, and it isn't just Boston that New Hampshire can't compete with. Portsmouth, NH may not be able to slug it out with Boston, by can't it outshine Newburyport, MA? Manchester, Nashua and Concord should be more economically vibrant than Worcester, Springfield, or Lowell. But they aren't so much. Even the inglorious mill towns in northeastern Massachusetts, declining places whose factories closed in the 1960s, are still economically more powerful than their Granite State neighbors, the center around which New Hampshire border towns orbit. And the high-tech businesses along Route 128 in the Boston suburbs somehow stay where they are, instead of migrating an hour up the interstate.
When I lived in New Hampshire we all simultaneously believed the Universally Acknowledged Truth about low taxes and acted as if precisely the reverse were true (because it is). If you'd asked us, we would have told you that New Hampshire was clearly whipping Massachusetts, because living tax free was so much better than being one of those poor overtaxed socialist drones. But we also acknowledged in virtually everything we did that the real source of the money and economic energy was overtaxed socialist Massachusetts. That was clearly where everything was going on, and where our own economic lives were made possible. After all, that's where the jobs were.
New Hampshire libertarianism only makes sense if many of the people talking about the free market and economic opportunity actually want exactly the opposite of what they claim. New Hampshire and its tax laws make a lot of sense if you actually want to keep it economically underdeveloped. If what you value about the place is that it is rural, and generally inexpensive, then making sure that it doesn't develop either much of an economy or much of a public infrastructure becomes a comprehensible goal. When people say "Low taxes are good for the economy," they mean precisely the opposite; they want to keep one side of the border a relative backwater. They're not lying. They're simply expressing an ideology, a Universally Acknowledged Truth that they experience as always true, especially when it is not.
If you dislike cities and crowds and other signs of economic progress, a nice libertarian enclave is just the place for you, and when you say "a good economy" you really mean lots of undeveloped land and not many jobs. Of course, if you put your libertarian enclave too far from an economically developed area, you won't be able to make a living yourself, so it's ideal for libertarians to commute.
Most American libertarianism is like this, in one way or another: economically dependent upon the very things that it claims are holding the economy back. Libertarianism is essentially the pretense that your suburb would be better off on its own. Of course, without the big dirty leftist city the suburb wouldn't exist at all. Libertarianism isn't really a philosophy. It's a theme park.