The policy debate over cutting taxes, so old now that it has become tiresome, has reached the point of absurdity in this legislative session, but the politics of tax cutting, while just as silly as the policy, is more fascinating than ever.
How do lawmakers think they can get by with thumbing their noses at the vast majority of their voters by passing laws that serve the interest of only a handful of the richest constituents?
The answer is that everyone else is too busy with the travails of living to notice or else is inured to expecting no better from their government and pay it scant attention.
Put that thought aside for a moment while we talk about the policy arguments on tax cutting. Republicans came to the 2013 legislative session, the first in more than 125 years in which they hold a majority, firmly dedicated to cutting taxes because they say it will unshackle the job creators — rich people — who will set out to grow the wimpy Arkansas economy.
Specifically, the legislature is going to help the job creators by giving manufacturers more exemptions from taxes, widening the top tax brackets on individual income taxes, lowering the top marginal rate and then dramatically reducing the income taxes on profits that people make from trading stocks, businesses and other property — capital gains. People who make their living that way will pay taxes at the rate of less than a third of what a wage earner pays. The capital-gains bill is the legislative program of House Speaker Davy Carter, who is expected to run for governor in 2014. Next year, the only people who would get Carter's tax cut are people with more than $5 million in gains.
Some platform on which to seek high office! But put that thought aside momentarily, too.
The idea that cutting the taxes of high earners stimulates the economy and creates jobs was put to the test in the 1980s with Ronald Reagan's embrace of supply-side economics. Whether Reagan disproved the idea or proved nothing is a matter of debate, but the fact is that his giant tax cuts for the well-to-do were followed by the deepest recession (still) since the 1930s. Unemployment rocketed to 10.8 percent and stayed in double digits for much of a year. When he raised taxes on the specific job creators — those with significant capital gains — in 1986 hiring picked up. Go figure.
The story of raising and cutting taxes is that leaving more money in the pockets of low- and middle-income wage earners does create jobs because they go out and spend it on goods and services, which creates demands for businesses, which in turn hire people to meet the demand. But putting more money into the pockets of people who have no trouble buying whatever they need doesn't create demand.
A number of newly minted Republican governors are proposing big tax cuts to generate business and job growth. The extreme is Kansas Gov. Sam Brownback, who wants to end Kansas' income tax and rely on consumer taxes, which land more heavily on low- and middle-income people. He thinks industry will flock to Kansas if it has no income tax.
Here in Arkansas, we know the history, and it is perverse for supply-siders. Income tax increases — in personal rates in 1971 and in corporate rates in 1991 — were followed by growth spurts. A capital gains tax cut in 1999 effective in 2000 was followed by an economic slump. Nationally, the big Bush tax cuts for high incomes and corporations in 2001, 2002 and 2003 were followed by the worst jobs economy since the 1930s.
The Center for Budget and Policy Priorities last month looked at the state tax-cutting spree of the 1990s and another in the last decade to see if state tax cutting affected business growth and hiring.
The five states that enacted the deepest tax cuts in the middle and late '90s saw job growth of less than 0.3 percent a year on average during the economic cycle that followed, compared with 1 percent for all the other states. Of the six states that cut income taxes sharply between 2002 and 2007, when the recession hit, three grew more slowly than the rest of the country. The other three had somewhat more robust growth, but they were oil states that benefited from skyrocketing oil prices and their own high severance taxes. Eight major economic studies in academic journals since 2000 looked at whether income tax differences affected their growth. Six found no measurable effect and one was internally inconsistent.
Here is the real point to the policy debate and the political equation: While the average worker won't know that he's being stiffed — all he will hear is that Republicans and their man Davy Carter "cut taxes" — you can be sure that the one tenth of one percent who realize more than $5 million in gains next year will know, and remember. They bankroll political campaigns.