Columns » Ernest Dumas

Setting the Dem-Gaz straight


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For every complex human problem there is an answer that is simple, attractive — and wrong. When H. L. Mencken made that observation he might have had Arkansas in mind because he often did when he was most cynical.

Back when Mencken was celebrating Arkansas as the land of ignorance, Arkansas had the nation's lowest taxes. Actually, its leaders could boast of its spectacularly low taxes and the country's best business climate from statehood in 1836 until a quarter-century after World War II. You know where it got us. Last place in nearly everything.

Our taxes were so much lower than those of all the other states that the federal government in 1934 ended federal aid for food relief and education in this one state until it levied taxes to help the feds feed half the population that was starving. The federal government had been paying Arkansas teachers their pittance because the state could not. Fearing riots, the legislature and Gov. Futrell put a penny sales tax on some foodstuffs and taxed liquor and beer.

You might think that our own example across 140 years would put the idea to rest, but the fable that low or nonexistent taxes are the secret to prosperity and happiness endures. The 2014 governor's race got underway with the three Republican candidates promising to slash income taxes and maybe even do away with them. When the Democratic candidate, Mike Ross, said he was not going to cut taxes if it impaired services like schools, colleges, prisons and medical services, the four programs that consume three-fourths of the state's general taxes, he was hammered not only by the Republicans but by the statewide newspaper.

One more time: The history of tax cuts and increases do not support their theory — not in the United States, not in Arkansas. One example should suffice. Republican presidents and congresses slashed taxes four times in the 1920s. What came next?

That fine Republican Winthrop Rockefeller saw the flaw in the theory. Arkansas would forever trail the rest of the country, he said, as long as it did not invest in good schools and colleges, public health institutions and services, highways and other programs that improved people's lives and opportunities and made the state appealing to investors. He tried in 1969 and 1970 to raise tax revenues by 50 percent, including a top income tax rate of 12 percent on himself and a half-dozen other very rich men, but the Democratic legislature slapped him down. Over the next dozen years, governors took his message to heart and raised a few taxes, including the income tax. Sure enough, Arkansas improved its ranking among the states on nearly every measure of well-being.

But that's not the story the Democrat-Gazette editorial told to bolster the new Republican economic strategy. It is well established, the paper said, that cutting taxes increases government revenues. Common sense tells you no, but the paper said that was the history, at least "since John F. Kennedy lowered the capital gains tax and reaped higher revenues." Then it said Ronald Reagan, Bill Clinton and George W. Bush all did the same thing with the same result — a surge in revenues.

Kennedy didn't cut any taxes. He proposed a reform of the tax code in January 1963 but he couldn't pass it. Part of it was enacted three months after his death. It didn't change the tax treatment of capital gains.

Reagan cut income taxes in 1981, including a new low rate of 20 percent on capital gains. The country fell into the deepest recession since the 1930s, unemployment hit double digits for 10 straight months, revenues flattened for four years and deficits soared to the highest in history. In 1986, his overhaul of the tax code lowered the top rate on salaried income, raised —yes, raised — the rate on capital gains and generally raised taxes. Revenues improved, deficits fell.

Clinton lowered the capital gains rate in the midst of a roaring economy. George W. Bush cut the tax rate on regular income and capital gains. What followed were massive deficits and the worst jobs-and-growth decade since World War II.

And Arkansas? In 1999, when Mike Huckabee exempted 30 percent of capital gains from taxes, did it cause a rush in state revenues? Income tax receipts had grown at a rate of 8.1 percent a year the three years before the tax cut but grew at only 2.4 percent the next three years. Then Huckabee pleaded with the legislature to raise income taxes for two years so that he could pay the bills. It did and he did.

That's the history. Everyone is entitled to his theory, but not to his own facts.


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