Tax Cuts Have Consequences


It’s actually possible to have self-funding tax cuts, where a tax cut will increase rather than decrease the income of a city, state or nation. It’s analogous to the practice of chain stores to charge different prices for the same item at different stores in order to find the most profitable level of sales, the point where the profitability for each item and the volume of sales reach a maximum. The Laffer Curve does take this into account, that taxes can be too low as well as too high, although that tends to be ignored. To listen to some conservatives, there’s an inverse relationship between tax rates an income, so that as taxes approach zero, income increases exponentially.

It doesn’t work that way, and even if it did, there are other things to take into account. The Great Kansas Experiment in Cutting Taxes promoted by Gov. Sam Brownback (R) probably proves that – not that the Republicans are paying attention. In 2012, with the guidance of the American Legislative Exchange Council (ALEC), Kansas enacted dramatic cuts in both income taxes and spending. His program was a Republican wish list, with lower income taxes, job cuts for state workers, reduced school funding, fewer people approved for welfare assistance, and while they were at it, tighter abortion rules and looser gun controls. Governor Brownback assured everybody that this program would lead to increased economic growth, create new jobs, and stabilize the budget. It hasn’t worked. The Wichita Eagle did a careful review of Gov. Brownback’s promises and the results, and there’s some degree of complexity, but not much. The Center on Budget and Policy Priorities has a bullet list that includes:

• The large revenue losses extended and deepened the recession’s damage to schools and other state services.

• Kansas’ tax cuts haven’t boosted its economy.

• There’s little evidence to suggest that Kansas’ tax cuts will improve its economy in the future.

Also, Moody’s reduced Kansas’ credit rating and the Kansas Supreme Court ruled that some of the state cuts to education (aimed at poorer districts) were unconstitutional and have to be restored. None of this should come as a surprise. Republicans speak of taxes as if they’re a special kind of expense, unrelated to other expenses. They’re really just an everyday add-on to the cost of living. A tax cut isn’t that different from an end of season sale. If the store didn’t sell its full inventory of t-shirts at $20 each, maybe they’ll go at $10. The key here is that you have to have something that people want to buy. Cut taxes in San Francisco and people would rush to move there as soon as it dropped to their price levels. According to Kiplinger it’s also the third most expensive place to live in the United States, beaten only by Honolulu and New York. But people also want to live in Honolulu and New York. The cheapest city Kiplinger could find is Harlington, Texas, but low prices haven’t led to an influx of business and tourism. There are many wonderful places to live outside of major metropolitan areas: college towns, places with outdoor recreation, lakes, woodlands, cultural centers – but they all have attractions that go beyond low taxes.

There’s just a bit more. On June 29, Paul Krugman (New York Times columnist, professor of economics at Princeton, etc.) wrote a column titled “Charlatans, Cranks and Kansas.” He attributed the intellectual underpinning of the Kansas fiasco to Stephen Moore of the Heritage Foundation, among others. The Columbia Journalism Review carried the details. Prof. Krugman’s column was published in the Kansas City Star. After the Star published the column, the editorial page editor was contacted by Mr. Moore, who wanted to publish a response. The response was published, but then Yael Abouhalkah of the Star discovered that Mr. Moore had used statistics from the wrong five-year period to make his case, and then it turned out that even the statistics used were seriously inaccurate. Both CJR and Prof Krugman tell more of the story, but skip to the Heritage Foundation, founded in 1973 and one of the top 10 think tanks in the United States. A think tank traditionally analyzes data, reaches conclusions, and makes the information available to politicians and journalists for use in formulating policy and policy recommendations. Heritage’s mission was to “formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense”. In 2013, the Foundation hired former Sen. Jim DeMint (R-S.C.) as its president. As senator, Mr. DeMint was against Obamacare, abortion and stem cell research, but in favor of school prayer. He was a leader of the Tea Party. Under his leadership, the Heritage Foundation has gone from being a think-tank to being an overt right-wing political operation.

When Prof. Krugman wrote his review of the dueling columns episode, he concluded, “... there are quite a few politically conservative but technically competent economists out there, and Heritage clearly has the resources to hire them if it chooses. But it doesn’t — I suspect because it’s afraid that they might stray off the reservation. Competence has a well-known liberal bias.”

Sam Uretsky is a writer and pharmacist living on Long Island, N.Y. Email

From The Progressive Populist, September 1, 2014

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