J.C. Moore Online

Current Events from a Science Perspective

“The Largest Tax Hike in Kansas History: Now What?” That was a title of the talk given by Jonathan Williams, from the American Legislative Exchange Council (ALEC), when he spoke to the Wichita Pachyderm Club on July 28.

When the title of the talk is misleading, then what?

In 2012, Kansas Gov. Brownback tried Laffer’s theory by cutting the income tax rates and exempting 330,000 businesses from paying taxes on pass-through income, called the LLC loophole. Because of the decline in tax income, Kansas cut school funding, deferred payments to the states pension fund, and borrowed heavily from the highway fund. To fill the budget holes, the legislature in 2015 increased sales taxes and cut state income tax deductions. The state’s major newspapers labeled that tax increase as a largest in state history.

After Gov. Brownback’s experiment with Arthur Laffer’s trickle-down theory left the state’s finances in shambles, the 2017 Legislature restored the taxes to their 2012 level and overrode Gov. Brownback’s veto of the budget. Mr. Williams claimed that was the largest tax increase in Kansas history. Is restoring taxes to a previous level actually a tax increase? When someone in the audience pointed out to him that Kansas’ major newspapers labeled the 2015 sales tax increase as a largest in state history, he disparagingly commented, “First of all, I don’t put a lot of stock in the state’s newspapers.”  He should.

The failure of Gov. Brownback’s tax experiment has been of great concern to ALEC, who represents the interests of Corporation and the wealthy. Laffer’s trickle-down theory has been one of ALEC’s main justifications for cutting state taxes in ways that benefit corporations and the wealthy. ALEC had hoped to persuade more states, and even the federal government, to  try Laffer’s tax cuts. Did he not realize that Kansas just tried cutting taxes, with disastrous effects?

According to Mr. Duane Goossen, a previous Kansas state treasurer, “ After five years of the Brownback experiment in Kansas, we know the real result. Kansas has an anemic economy and one of the lowest rates of job growth in the nation. A dramatic drop in revenue broke the state budget, wiped out reserves, significantly boosted state debt, and put public education at risk. And that part about everyone benefiting — well, it turns out that the bulk of the benefits went to the wealthiest Kansans while the tax bill to low-income Kansans went up.”

Mr. Williams apparently wanted to convince us that states with low taxes experience revenue growth, job growth, and a growing economy. To that end, Mr. Williams referred to Laffer’s research which claimed  that the nine states that have no income tax had the highest rates of job creation. But most of the growth was in Texas and in a carefully chosen time period when job growth was strong because of oil revenues and population growth.  Besides carefully picking his data, Laffer also ignored other economic indicators – and didn’t do a comparison with high tax states. If Laffer were correct, the nine States  with the highest income taxes should have failing economies. However, that is not the case, as shown below:

The nine states with high income taxes had higher economic growth , a much smaller decline in household income, and almost exactly the same unemployment rate. Laffer’s research was biased and would never stand up to peer review, yet many states have used it as a justification for income tax cuts for the wealthy.

When Gov. Brownback’s experiment was failing, he paid Arthur Laffer $75,000 in consultation fees to help him find what went wrong. Mr. Laffer’s advice was to just keep on with the experiment. Kansas did, and the budget deficit just got worse. It was also Mr. Williams’ opinion that we had not tried the tax cut experiment long enough.  But did we need to? Laffer convinced Reagan to cut taxes, and much of our current national debt can be traced back to then, as in the graph below.

While the link between tax cuts, economic growth, and revenue growth is tenuous, there is certainly a link between tax cuts and public debt. Kansas proved that.

We all have different ideas about what is a fair tax policy and a fair distribution of wealth.  Below are some pictures and graphs  which  show that conventional wisdom may not give us a clear picture of the facts – and that we may need to reconsider what is actually fair.

State Taxes: Last year, Oklahoma cut  state taxes and is considering another tax cut. The graph below is the data for Oklahoma from the Institute on Taxation and Economic Policy .  It shows that those in the lowest income group pay the highest percentage  of their income in taxes.  The 2012 Oklahoma tax cuts skewed the distribution even more, as 75% of the tax cuts went to the top 20%  in income.  You may look  up the data for your state at the link above. The tax cuts in Oklahoma, and perhaps in your state, were justified by using Laffer’s economic theory, though the theory apparently fails in practice.

Distribution of Wealth:  The graph  below compares what people consider the ideal distribution of wealth, with how they think wealth is distributed. Both are very different from the actual distribution of wealth. Taxation and spending policies have greatly contributed to this distribution of wealth.

National Debt:  Taxation and spending policies greatly affect our national debt. The graph  below, from the CBO, shows how the surplus projected in 2001, the top red line, was decreased by the weakening economy, tax cuts, and spending decisions. The stimulus accounted for  6% of the decrease and Obama’s policies for 8%.

Tax Rates: This chart gives some historical perspective on the top marginal tax rates. Those in the top  income bracket     have been enjoying the lowest tax rates since World War II.

Spending:  The conventional wisdom is that our current deficit is because of  increasing government spending. That is not borne out by the data.

The Deficit: Though there have been many claims about our growing deficit,  the deficit has actually been shrinking as a share of the GDP.

Ancient Wisdom: Aristotle thought that nature, and even politics, could best be understood by observations and reason. In the fifth century BC, Aristotle compared the democracy in Athens with other forms of government and warned against a major flaw in democracy. If the poor gain too much power, they will vote too many benefits for themselves and will deplete the treasury.  If the rich gain too much power,  they will use that power to further enrich themselves, leaving too many of the citizen’s poor. Aristotle thought democracy was only a viable form of government if there was a strong middle class.

Economics is not the only issue in most elections, and many people vote for a candidate based on social issues, sometimes without considering that  the candidate may make decisions against their best economic interests. Perhaps it’s time we put divisive  social issues aside for awhile, and work on restoring the economic balance in our society. Our education system, our infrastructure, our health, and our economic well-being all depend heavily on our taxation and spending policies. Although economic imbalance may be becoming a threat to our democracy, that can be changed if we will become informed and

(C) 2013 J.C. Moore