The idea that lowering the taxes of businessmen and people with lots of money will cause an economic boom that will soak up unemployment and flood the government with revenues is the cat with 99 lives. The notion is simple, pleasing and wrong, but every demonstrated failure reinforces convictions that it is the right thing to do.
Ronald Reagan tried it in 1981 and seemed so chagrined by the results that he spent the next six years raising taxes to fix the damage. George W. Bush gave the idea its biggest test and most catastrophic failure by cutting taxes the most and posting the worst jobs and economic record of all modern presidents. Since 2010, one state’s governor and legislature after another have slashed taxes sharply to get a leg up on sister states, but each experiment failed, a couple spectacularly.
Now it’s Arkansas’s turn. The legislature last year scheduled tax cuts for high incomes and corporations that will hammer the state budget the next several years for economic benefits that are yet to be seen. This year, the two major-party candidates for governor, Mike Ross and Asa Hutchinson, are outdoing each other with promises of income tax cuts and corporate tax exemptions.
A good libertarian can make the case, plausible to some, that lower taxes for the well-to-do and businesses are fair and will shrink a state government that shouldn’t be doing much. But that is not what Ross and Hutchinson argue. They are cutting the taxes of the “job creators” so that they will provide an economic jolt for working people and for the government.
Hutchinson’s plan is the most draconian. He would lower the top tax rates, cost the treasury some $100 million a year but give no tax cut to the poorest wage-earners, who he says pay so little that they don’t need a tax cut. Ross would phase in rate and bracket changes and calibrate them to natural revenue growth, which suggests that if things don’t work out as he plans he might forestall cuts. But he would excuse manufacturers from paying sales taxes on replacement parts, a giveaway that Hutchinson rightly ridicules.
The theory, propounded by many economists but notably by Arthur Laffer of the Laffer Curve — he once sketched it on a napkin for Dick Cheney and Donald Rumsfeld — is that the tax savings will induce the wealthy to save and invest and thus create jobs and produce more government revenue that will more than replenish the lost taxes.
If Hutchinson and Ross get around to applying much math, they will worry about the consequences if the theory breaks down.
If there is no spurt of growth, what happens when another $150 million of revenue loss occurs in 2016 as the existing tax cuts for unearned income phase in if lawmakers enact the new governor’s tax cuts and perhaps some of their own? How will they meet the mammoth costs of prison expansion as the convict population soars past 20,000, keep up with the constitutional mandate to furnish a suitable education for all children or bail out the school health insurance program when it collapses from inattention? How will they counter the huge increase in state spending on medical care for indigents if Republican legislators (and presumably Hutchinson) end state participation in Obamacare’s Medicaid option and expenses are shifted back to the state?
Sure, Arkansas has enjoyed a surplus every year, but that has largely been the result of Obamacare’s absorption of a large share of existing Medicaid costs and Obama’s 2009 stimulus program, which saved the state treasury some $825 million in medical expenses over four years.
But the math from a few sister states that have gone through the process ought to be the most chilling.
Take Kansas, where Gov. Sam Brownback pushed through the Republican legislature income tax cuts that he said would give Kansas a big advantage over other states. No Kansas businessman pays a dime of taxes on profits he reports on his individual return.
“Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy,” Brownback said two years ago. “It will pave the way to the creation of tens of thousands of new jobs, bring tens of thousands of people to Kansas, and help make our state the best place in America to start and grow a small business.”
It didn’t happen. While the national job market has been improving in the past six months, it’s stagnant in Kansas. The state has been below the national average in job growth under Brownback. Average earnings and the registration of new businesses are down. Since the growth didn’t occur and revenues didn’t rise (revenues this year fell $338 million below the forecast) the state has spent its once-admired rainy-day reserve and slashed support for schools and other services. Three months ago, citing the tax cuts and low confidence in the state’s financial management, Moody’s lowered Kansas’ debt rating. Give us a few more years to make it work, Brownback says.
North Carolina and Wisconsin, where conservative governors and legislatures made deep income-tax cuts for the wealthy and corporations, also are trailing nearby states that they were supposed to leave in the dust. Wisconsin ranked 35th in job growth in the three years since the tax cuts and is last among neighboring states. North Carolina, which cut its tax rates on high incomes below those of nearby states, is waiting for the big gust but the winds are still. But neither those experiences nor the research showing such tax cuts are ineffective mean anything.
“You will find,” Adlai Stevenson said, “that the truth is unpopular and the contest between agreeable fancy and disagreeable fact is unequal.”