Red state tax "reform" and "economic growth"
by Linda Beale
Red state tax “reform” and “economic growth”
As most tax practitioners and academics know, Professor Paul Caron maintains a “tax prof blog” that provides timely links to most things tax in major papers, blogs, journals, conferences and the like, as well as announcements and releases from theIRS, Treasury and Congress related to tax. Paul does not usually provide much analysis or opinion, but rather an excerpt or two and a title.
So a recent blog post was titled “WSJ: States Embrace Tax Reform to Drive Economic Growth“.
This is not an atypical way of titling items on tax prof blog. The observant reader will notice a slight bias in the title. The Wall Street Journal article is actually titled “The State Tax Reformers: more governors look to repeal their income taxes” (Jan 29 2013 updated). The article summarizes states that are lowering or eliminating their income tax (sometimes including their corporate income taxes) and sometimes replacing it with a broad sales tax–for example, in the Republican strongholds of Nebraska and Louisiana. The Journal article then goes on to opine (and it is indeed opinion) that “this swap makes sense” because “income taxes generally do more economic harm because they are a direct penalty on saving, investment and labor that create new wealth” whereas “sales taxes … hit consumption, which is the result of that wealth creation.” This is the typical “free market” pitch favoring capital income (and the rich) over labor income (and everybody else).
Of course, the Journal then proceeds to quote Art Laffer for the right-wing corporatist ALEC in an article claiming that a majority of new jobs are created in states without an income tax because of their lack of an income tax.
[Aside: Laffer is (in)famous as the ‘free market’ economist who described his view of the maximum tax rate by drawing a bell curve on a napkin. The Laffer Curve is more ideology than theory, as I explain in an earlier post: CFP’s Laffer Curve Video, ataxingmatter (Feb. 2008). ]
Not surprisingly, Caron’s title suggests that the “real” policy reason for the shift is a “real” desire to create jobs.
I have significant doubts. Most of the anti-income tax proponents are pro-Big Business and pro-wealth. A shift from an income tax to a consumption/sales tax is a move from a somewhat (often minimally) progressive tax system to an explicitly regressive tax system. Such a move favors those with capital assets and mainly capital income. Claims (like that made by the Civitas Institute cited in the Journal article) that shifting from income tax to sales tax will result in “average annual personal income growth” mean almost nothing since averaging income growth across a population doesn’t really tell you whether almost all of it goes to the wealthy or not–if that growth goes to those already in the wealthy distribution, then inequality increases and in fact most everybody else is worse off, in spite of the “average” growth.
The Journal acknowledges the regressive nature of a sales tax swap, but suggests that exemptions of necessities (e.g., food, medicine, utilities) and rebates for low-income families will suffice. I also find that doubtful–the very low absolute benefit to the poor of the exemptions and/or rebates, while important, is substantially less than the very real high absolute benefit to the wealthy of the switch to a consumption rather than income tax. Accordingly, the so-called “reform” will inevitably increase an already devastingly problematic inequality that has resulted in lower quality of life for most Americans on many different areas from literacy to access to health care to teenage pregnancy to death rates and all the many other factors in which Americans enjoy a lower level of quality of life than most other OECD nations.
Not, in other words, a good idea. As noted in Nick Carnes (who teaches at Duke University), A Tax-Reform Plan that Rewards the Wealthy and Stalls the State, NewsObserver.com (Jan 24, 2013, modified Jan. 25, 2013), these proposals are being pushed by right-wing propaganda tanks, including a “wealthy conservative foundation [that] has paid [Arthur] Laffer to write another report and to fly to our state to promote it.” Id.
The goups behind these proposals have their one-size-fits-all state-level strategy down to a science, but they don’t have a handle on the actual science of state tax reform. It’s easy to see why their ideas are appealing. Who wouldn’t like to grow our economy and lower taxes without cutting vital services like schools and public safety?
However, independent economists in every state where the Laffer plan has been introduced – including North Carolina – have found serious problems with the evidence its proponents have used to back it up. No matter how low the tax rate is, businesses and wealthy people won’t relocate to a state where the schools are bad, the streets are unsafe and the infrastructure is crumbling – things that all tend to happen when taxes are cut to the levels that the Laffer plan outlines. Id.
The Carnes article goes on to note that “Kansas, which earlier passed the Laffer bill, is now projecting $800 million annual budget deficits and has extended an emergency sales tax that should have expired years ago” while state agencies are facing a 10% across the board cut, with education expected to lose a billion dollars in state funding over the next five years. Yet no businesses have flocked to Kansas because of the legislation. Id.
And guess what. It is the wealthy who would benefit if North Carolina were to carry through with enacting its own form of the “Laffer bill”. Carnes notes that families earning $24,000 a year would pay $500 MORE in taxes under the Laffer plan, whereas wealthy families with incomes of more than $900,000 a year would pay $42,000 LESS in taxes. Id. Shifting the tax burden from the wealthy who can easily bear it to the low-income who cannot, while at the same time cutting government support for essential public services that build a shared community is a disaster in the making.
The Wall Street Journal isn’t flummoxed by such facts (which it doesn’t even acknowledge). The Journal article suggests that the idea (set forth in some Big Oil/Fracking states) of replacing income taxes with revenues from oil and gas extraction would be good (and maybe better than regressive sales taxes) because “it would make everyone a stakeholder” in increased drilling and fracking, thus “help[ing] to build a politicial constituency for more mining and drilling.” Note the presupposition that supporting “more mining and more drilling” is inherently a public good! (One assumes that the Journal staff think this because Big Oil/Big Gas is Big Business, and the Journal is ALWAYS in favor of whatever Big Business wants.)
That idea strikes me as truly worrisome–we have a climate-change problem, and trying to “buy” votes to support environmental degradation at whatever cost through the swap of income taxes for some (probably minimal) increased royalties (probably also accompanied by less in the way of services, especially for the poor or for public goods like public education) is not a good idea. Yes, probably those very people who are the poorest and most harmed by environmental degradation would tend to be able to be bought off by that swap–they would not realize that the wealthy are again getting the mountain of the share of the benefit, and they are bearing most of the burden in terms of the long-term costs of the environmental degradation as well as the long-term costs of lower public revenues spent on programs especially important to them because of their lack of a cushion of wealth (schools, public parks, fire/police, health care, etc.).
Interestingly, the Journal article notes that Alaska got rid of its income tax in the 1980s and suggests that’s been a good deal. Of course, Alaska also gets more back from the Federal government than it gives in Federal taxes–ie, Alaskans have replaced their income tax revenues with federal handouts.
The Journal calls these plans for revamping state laws to provide substantial benefits to wealthy individuals and corporations a “rare bright spot in the current high-tax era.” That is garbage from both sides. We do not live in a “high-tax era.” IN fact, we live in a low-tax era and we are already paying for that with the significant drop in state support for higher education, state support for parks and other public amenities (police and fire protection, protections for workers, fair and easy access to voting, etc.), and state support for K-12 education as well as the failure of the federal government to fund the kinds of infrastructure and education and basic research projects that could make the difference between a continuing great economy and the continuing muddle we are in after the Bush recession.
All of those costs are borne more substantially by those in the lower-income brackets. With the proposed “reforms”, the wealthy will be sailing through with even more wealth, able to shut out even more effectively any association with the “lower class” elements and giving even less to support schools, colleges, unemployment benefits, etc. Meanwhile, the poor and near-poor will get much, much less (when they didn’t owe much in taxes anyway). Not a bright spot at all. More like class warfare.
The real reason behind these shifts is to benefit the major members of the Republican base–i.e., Big Business and the wealthy. It has little to do with jobs… That’s just a handy obfuscating claim to make about policy moves that substantially shift the benefits of the economic system to the rich and the burdens of the economic system to everyone else. This is just another element of the class warfare that has been waged for the last few decades to allocate gains to the wealthy.
cross posted with ataxingmatter
This idea that replacing income or corporate income taxes with consumption taxes is not some evil doing dreamed up by Republithugs.
It is, rather, absolutely straightforward economics of taxation.
See here for a nice chart from the OECD making the point.
All taxes have deadweight costs. Capital and corporate taxation has higher deadweight costs than consumption taxation (and land taxation is even better in this sense).
Yes, we do indeed need to get some tax money to pay for government. But we’d obviously like to do it in the manner which reduces economic growth the least. Which means consumption taxation in preference to capital and corporate such.
Today’s Greensboro, NC paper had a long piece by John Hood, of the John Locke Foundation in Raleigh, pushing this idea, among others. Perhaps Tim or someone can explain something to me. We often hear it said that “if you want less of something, tax it”. This is used as a reason not to tax income, since we supposedly all want more of it. But if 70% of the economy is consumer spending, i.e., consumption, where are the customers for all these future businesses going to come from, if everyone is saving their money? Supposedly, savings and investment are the two “legs” on which businesses are built, I get that, but if businesses have no customers, who’s going to start a business? The whole thing strikes me as totally disingenuous, and merely a way to paper of the real intent, which is, as Beverly says, to enrich the already rich.
So, what am I missing here?
Another downside I see to a consumption tax is a growing underground economy, where no taxes are collected at all.
Sigh . . .
Eliminating income taxes the same as RTW laws do little to nothing to get people and companies to relocate to states without income taxes and RTW. As Linda points out clearly, there are other factors which come into play such as demomgraphics, location, schools, off-shoring, etc which pay a far bigger role in attracting people and businesses.
Governor Snyder of Michigan cited Ohio as attracting more business than Michigan and named the companies. Once asked if RTW laws played a part in geeing the companies to “expand” there, the answer was no. Furthermore, the companies were already in Ohio which does not qualify them as new to Ohio. The RTW law in Ohio has been in existance since December 2012.
Looking at the last state to favor business with RTW laws 25 years ago, Oklahoma has seen a downward trend in companies and jobs created there and for the very same reasons I suggested above. The downward trend started about the same time as it was passed.
Taxes and RTW laws have little to say about what comes to a state.
Hi, Sandi. Wish I could take credit for Linda’s terrific post, but I can’t.
Wish I had even just a tiny, teensy bit of Linda’s knowledge and understanding of tax law and tax policy proposals, but …. Oh, well. Such is life.
Apres moi, le deluge.
Worstall reminds me of a stroke victim who afterwards could only shave one side of his face because his brain could not recognize the other side.
He asserts points in his catechism without apparently even having noticed anything Linda said that suggests his revealed Truth might not be.
Beverly and Linda,
I apologize for citing the wrong author! I can only blame it on not enough morning coffee before posting.
And Tim, if your post on taxes and RTW laws was aimed at my question, I think it failed to clarify anything I asked.
BTW, North Carolina has been a RTW state as long as I’ve been here, which is 40+ years. That hasn’t kept us from losing tens of thousands of jobs over the past decade, mostly off-shore. And the jobs that are here are more and more likely to be low-wage. Some in our business community even like to tout our “low wage state advantage”. To which many of us say, “higher wages lead to workers trading up on housing, buying a car more frequently, etc., creating income for other segments of the economy; the old “everybody does better when everybody does better”, but all these businessmen see is labor costs, and want to eliminate it as much as possible. So,spiraling down we go……………..
Good grief – I really must get my glasses changed. Sorry, Bill, for attributing to Tim your response TO him. Jeez. (hanging head in shame as I slink out of the room………..)
“Eliminating income taxes the same as RTW laws do little to nothing to get people and companies to relocate to states without income taxes and RTW.”
Bill, sorry, but where do I mention RTW?
I’m commenting purely and simply on the deadweight costs of various forms of taxation. And I’m quoting the OECD while doing so. I could have quoted any number of Nobel Laureates on the same point: for example Sir James Mirrlees, who actually got his Nobel for the study of tax systems.
The taxation of capital and corporate profits has higher deadweight costs than the taxation of consumption and or property. This is simply a fact about our universe.
It’s actually very easy indeed to see this in Europe. Google, Facebook and Apple all sell across the EU from Ireland. Ireland has the lowest corporation tax rate inside the EU. The two facts are not unconnected you know.