Two years ago Kansas embarked on a remarkable fiscal experiment: It sharply slashed income taxes without any clear idea of what would replace the lost revenue. Kansas Governor Sam Brownback proposed the legislation — in percentage terms, the largest tax cut in one year any state has ever enacted — in close consultation with the economist Arthur Laffer. And Brownback predicted that the cuts would jump-start an economic boom — “Look out, Texas,” he proclaimed.
However, Kansas is not booming: In fact, its economy is lagging both neighboring states and the US as a whole. Meanwhile, the state’s budget has plunged deep into deficit, provoking a Moody’s downgrade of its debt.
There is an important lesson here, but it is not what you think. Yes, the Kansas debacle shows that tax cuts do not have magical powers, but we already knew that. The real lesson from Kansas is the enduring power of bad ideas, as long as those ideas serve the interests of the right people.
OLD HABITS
Why, after all, should anyone believe at this late date in supply-side economics, which claims that tax cuts boost the economy so much that they largely if not entirely pay for themselves? The doctrine crashed and burned two decades ago, when just about everyone on the right — after claiming, speciously, that the economy’s performance under former US president Ronald Reagan validated their doctrine — went on to predict that former US president Bill Clinton’s tax hike on the wealthy would cause a recession if not an outright depression. What actually happened was a spectacular economic expansion.
Nor is it just liberals who have long considered supply-side economics and those promoting it to have been discredited by experience. In 1998, in the first edition of his best-selling economics textbook, Harvard University’s Gregory Mankiw — very much a Republican, and later chairman of former US president George W. Bush’s Council of Economic Advisers — famously wrote about the damage done by “charlatans and cranks.” In particular, he highlighted the role of “a small group of economists” who “advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue.” Chief among that “small group” was none other than Art Laffer.
BAD TO WORSE
And it is not as if supply-siders later redeemed themselves. On the contrary, they have been as ludicrously wrong in recent years as they were in the 1990s. For example, five years have passed since Laffer warned Americans that “we can expect rapidly rising prices and much, much higher interest rates over the next four or five years.” Just about everyone in his camp agreed. However, what we got instead was low inflation and record-low interest rates.
So how did the charlatans and cranks end up dictating policy in Kansas, and to a more limited extent in other states? Follow the money.
For the Brownback tax cuts did not emerge out of thin air. They closely followed a blueprint laid out by the American Legislative Exchange Council (ALEC), which has also supported a series of economic studies purporting to show that tax cuts for corporations and the wealthy will promote rapid economic growth. The studies are embarrassingly bad and the council’s Board of Scholars — which includes Laffer and Stephen Moore of the Heritage Foundation — does not exactly shout credibility. However, it is good enough for antigovernment work.
And what is ALEC? It is a secretive group, financed by major corporations, that drafts model legislation for conservative state-level politicians. Ed Pilkington of the Guardian, who acquired a number of leaked ALEC documents, describes it as “almost a dating service between politicians at the state level, local elected politicians, and many of America’s biggest companies.” And most of ALEC’s efforts are directed, not surprisingly, at privatization, deregulation, and tax cuts for corporations and the wealthy.
And I do mean for the wealthy. While ALEC supports big income-tax cuts, it calls for increases in the sales tax — which fall most heavily on lower-income households — and reductions in tax-based support for working households. So its agenda involves cutting taxes at the top, while actually increasing taxes at the bottom, as well as cutting social services.
But how can you justify enriching the already wealthy while making life harder for those struggling to get by? The answer is, you need an economic theory claiming that such a policy is the key to prosperity for all. So supply-side economics fills a need backed by lots of money, and the fact that it keeps failing does not matter.
And the Kansas debacle will not matter either. Oh, it will briefly give states considering similar policies pause. However, the effect will not last long, because faith in tax-cut magic is not about evidence; it is about finding reasons to give powerful interests what they want.
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