I continue to marvel at narratives that sell despite countering common sense. Take for example, supply-side (some call it trickle-down) economics. The basic theory is that marginal tax rates and less government regulation will help business expand and create more jobs. The Laffer Curve, named after Arthur Laffer, is a central theory of this philosophy and posits that lowering tax rates generates more economic activity eventually leading to more tax revenue. Proponents of this philosophy include the Koch-brothers-financed American Legislative Exchange Council (ALEC), Americans for Prosperity, and the Wall Street Journal’s editorial board. They claim that the nine states without personal income taxes are outperforming the rest of the states and that their success can be easily replicated in those states that abandon their income tax. The non-partisan Institute on Taxation and Economic Policy (ITEP) however, says that Laffer focused on “blunt aggregate measure of economic growth” to support his contention. The truth says ITEP, is that states with personal income tax, even those with the highest rates, are experiencing as good, or better, economic conditions than those without. Still, there are plenty of examples of governors who insist on leading their states down the proverbial rabbit hole.
When Governor Sam Brownback took the reins in Kansas, he dropped the top income-tax rate by 25%, lowered sales taxes and created a huge exemption for business owners filing taxes as individuals. Brownback claimed the tax plan was a “real live experiment” in supply-side economics, one that would spur investment, create jobs and bolster the state’s coffers through faster growth. He followed this course despite warnings from Traditional Republicans for Common Sense, a group of 55 former Kansas GOP legislators who opposed the tax cuts, saying they would “create a $2.7 billion deficit within five years.” Now, five years after doubling down, his state lags in job creation, tax revenue is far short of expectations and bond and credit ratings have been downgraded. Rating agencies claimed the tax breaks were unsustainable and that the promised economic growth would be elusive.
In Oklahoma, Governor Mary Fallin and the GOP-led Legislature enacted a quarter-point reduction in the top income tax rate two years ago and corporate tax breaks when oil crude prices were riding high. Now they are in a slump and it is driving up unemployment and forcing major layoffs. Representative Scott Inman, (D) said: “We didn’t create the proper tax structure to protect us from this type of boom-and-bust cycle.” Likewise, Oklahoma’s Republican Treasurer Ken Miller, who advocates for revenue-neutral tax cuts, blamed his GOP colleagues for the “self-inflicted” crisis. Miller said: “Common sense dictates that until the state proves it can live within its means, it really should stop reducing them, yet some ‘thinkers’ continue to advocate eliminating the state income tax – even arguing that the state’s largest funding source and be vanished without a replacement and still fund needed teacher pay raises.”
In Wisconsin, Governor Walker enacted several permanent tax cuts just as the national recession ended and state revenues began to climb. His speech this year to ALEC was all about how his “big, bold reforms took the power out of the hands of big government special interests.” What he didn’t say is that his reforms produced only about half of the jobs he promised and resulted in delayed debt payments and deep cuts to education to balance the budget. Despite his real track record, Walker continues to promote the Laffer Curve economics, renaming it “Kohl’s Curve” to sell the idea of deep discounts (tax cuts) and the volume (business expansion and jobs) it drives. In contrast, Minnesota’s Democratic Governor Mark Dayton, who took office at the same time, raised taxes on upper income earners, closed corporate tax loopholes and invested in education and infrastructure. Now, according to U.S. News and World Report, Minnesota has outperformed Wisconsin on job creation, has lower unemployment and is a higher ranked place to live.
In North Carolina, with all three branches of government now securely under GOP control, money saved from cutting safety net programs wasn’t reinvested into education, job training or infrastructure, but given to the wealthy and corporations in the form of tax breaks. In September, the NC legislature signed a budget into law that provides $400 million in income tax cuts to be offset by taxes on repair, installation and maintenance services. Alexandra Sirota, who studies tax policy for the NC Justice Center said the affect of the lower taxes “is a huge revenue loser” and that “the revenue losses aren’t fully accounted for in the next few years.” The NC Policy Watch has identified five reasons why NC’s tax cut plan is bad for the state and they all boil down to the fact that it will lose revenue, support corporations over citizens, and won’t improve the state’s economy.
Arizona’s Governor Ducey is following North Carolina’s lead in following the ALEC playbook with his plan to eliminate state income tax despite schools struggling to recover hundreds of millions in state aid they lost during the recession. During his gubernatorial campaign, he promised not to postpone a $225 million corporate tax cut to be phased in over three years. To the Arizona Tax Research Association, Ducey bragged about signing legislation to index the state’s income tax brackets ensuring salary increases that don’t outpace inflation don’t bump earners into higher tax brackets. Ducey claimed it was “an important first step in our mission to reduce income taxes in the State of Arizona every year.”
Most of these states are awash in red ink, and they aren’t the only ones. GOP governors of at least a dozen states are facing deficits of hundreds of millions or even billions which, despite campaigning on fiscal responsibility, is forcing them to slash spending, increase financial burdens on the poor and get creative in spinning their state’s status. At the root of it all are ALEC’s questionable economic and fiscal assumptions and faulty analysis. Specifically, these policies include deep cuts in income taxes, particularly for affluent households and corporations; a repeal of state income and estate taxes; and a shift in state revenues from graduated-rate income taxes to sales taxes that are much higher than what exist today. They also include the end of various state-based tax credits for low-income working families; a Taxpayer Bill of Rights (TABOR) that would impose rigid constitutional limits on state revenues and spending; requirements that state legislatures garner two-thirds or other “super-majority” votes to raise any taxes or fees; and other mechanisms to reduce the funds available to finance public services. ALEC also pushes the repeal of state personal and corporate income taxes, which typically provide one-third to one-half of a state’s funding for schools, health care and other services. Oil-rich Alaska is the only state to repeal its income tax thus far, but in 2012, Oklahoma, Kansas, and Missouri saw major efforts to do so, and Louisiana, Nebraska, North Carolina and South Carolina are looking at doing the same. Finally, ALEC and its supporters fail to acknowledge that public services such as education or infrastructure are important to a state’s long-term prosperity. Rather, they, like conservative Heritage Foundation chief economist Stephen Moore, give credit to the Laffer Curve strategy for the strong, long period of prosperity achieved by GOP hero Ronald Reagan. Economist Paul Krugman though, says the rapid growth during the Reagan years was driven more by conventional Keynesian deficit spending than by tax rate reductions.
The truth might be somewhere in between, but it cannot be argued that the middle class has been squeezed in the process. Since Reagan took office in 1981, the lower class has increased by three percent, the middle has shrunk by 9% and the upper class has grown by four percent. In that 70% of the U.S. economy comes from personal consumption, more wealth in fewer hands at the top keeps growth weak.
That’s one reason why Thomas Piketty in his 2014 best-selling tome “Capital in the Twenty-First Century”, advocates a return to the good old days of 70 percent tax rates on the rich. Likewise, a paper by MIT Professor Emeritus of Economics Peter Diamond and Professor of Economics at UC Berkley Professor Emmanuel Saez concluded the revenue maximizing federal income tax rate for top earners is 76%. Even Pope Francis joined the fray by writing that supply-side theories are unconfirmed by facts and rely on “a crude and naïve trust in the goodness of those wielding economic power and in the socialized workings of the prevailing economic system.” One might even be prompted to ask if congressional majority Republicans were “spin doctoring” when they fired Former Congressional Budget Office chief Douglas Elmendorf, last for scoring federal spending cuts as negatively affecting future budgets versus as stimulating the economy. They evidently wanted someone who would better implement “dynamic scoring”, a tool that would produce a more favorable analysis of their tax reform legislation.
GOP refusal to keep an “honest broker” as the head of the CBO is telling, as is the fact that although ALEC touts that state corporate tax cuts are critical to encouraging business and boosting the economy, mainstream economic research shows that state taxes average less than one percent of a business’ total costs. Extensive economic research indicates that tax-funded public services like education, health, transportation, and public safety are more important for attracting businesses and jobs. In fact, Paul O’Neill, former CEO of Alcoa and President George W. Bush’s first Secretary of Treasury said: “[As a businessman] I never made an investment decision based on the Tax Code…[I]f you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see that they are going to be able to earn the cost of capital out of their own intelligence and organization of resources.” Robert Ady, of Ady International has assisted in countless business site locations. He says that “subsidies cannot make a bad place good.” Good places are competitive because their long-term business basics (labor, materials, marketing, overhead, and transportation) are solid. As Greg LeRoy, founder and director of Good Jobs First, said in his book The Great American Jobs Scam, “any subsidies are icing on the cake, but the cake is already baked.”
In this, as with any debate, it is possible to find a source to support any point of view. For me it is really this simple…does it make sense that you would tax the poor more to provide tax relief for the rich? Does it make sense that corporations are lured to locate in a state so they can pay even less than the under one percent they generally pay in corporate taxes? Or, does it make more sense that corporations are savvy and look at a variety of indicators to determine where to locate such as the quality of local schools, availability of a quality workforce, or a solid infrastructure? One doesn’t need to be a genius to understand basic economic concepts, all it really takes is a little common sense. A strong middle class is the best path to prosperity for our communities and our nation and economic policies that support its growth are the solution. Our tax policies should incentivize the behavior we need for the health of our communities, states and nation, not for the enrichment of a few. Finally, business definitely has a critical role to play, but so does government. It should ensure we are provided the basic essentials of safety, security, infrastructure and education and our tax policies should ensure sufficient revenue to do that properly.
No one party has the right answer here and there is no one right solution. It takes a smart application of available tools, wise employment of lessons learned and yes, a whole lot of common sense. Alas, as Voltaire is credited with saying in the early 1700’s: “Common sense is not so common.”