FOR those interested in economics, we’ve entered a fascinating period of real-world tests for competing philosophies.
One is on the national level. Oil prices are down some 50 percent in six months, which means average Americans suddenly have more money to spend. With a typical family’s savings estimated at $700 to $1,000 a year from cheaper gas alone, the price drop is akin to a significant middle-class tax cut, but without the lost federal revenue.
If the economy experiences a sizable boost as a result, it will strongly suggest that putting more purchasing power in the hands of the average person is the best way to spur economic growth.
The other comes in Kansas, where Republican Governor Sam Brownback has pushed through an elimination of all taxes on business profits reported as individual income and cut the top income-tax rate by 25 percent, with the goal of making the Sunflower State a regional mecca for business. But those tax cuts haven’t resulted in the hoped-for increase in jobs, and certainly not in a surge of economic activity large enough to substantially offset the lost revenue.
The lesson, once again, is that tax cuts don’t pay for themselves.
Those de facto experiments come against the backdrop of President Obama’s State of the Union call for increasing the tax take from the top earners to finance tax breaks for the middle class.
Now, redistribution of income is anathema to today’s GOP. Republican economic theorists focus on the supply side of the economic equation, arguing that increasing capital formation and spurring more business investment is a far better prescription for economic growth.
Hiking taxes on top earners will retard that activity, say supply-siders. Typical of that view is the Heritage Foundation’s 2010 prediction that raising taxes on high earners, as Obama wanted, “would have serious, adverse consequences for economic activity, and sharply lower the rate of economic growth.”
Conservatives made similar arguments, of course, about Bill Clinton’s 1993 tax hike.
Neither tax hike derailed the economy. Under Clinton, the national economy soon boomed. Under Obama, GDP growth for 2013 — the year a tax hike on high-earners took effect — was one-tenth of one percent less than the previous year. (Even that small decline isn’t necessarily attributable to that tax hike.) The full 2014 data isn’t yet in, but in the third quarter, GDP grew at an annualized rate of 5 percent.
Each party’s preferred approach carries its own difficulties.
A tax cut is most effective when permanent, but Democrats are reluctant to reduce taxes permanently because that increases the deficit, which then creates pressure to cut spending on causes they support. They are, however, willing to increase taxes somewhat on top earners to fund tax relief for middle and lower earners. Thus Obama’s State of the Union proposal.
For supply-side Republicans, the pay-for problem is far more complicated. For starters, the GOP is in thrall to “no new taxes” ideology. Secondly, reducing the top income tax rate is a priority of its economic theory. One could offset tax cuts with budget cuts, of course, but cutting programs for the poor to pay for tax cuts for the wealthy is a tough political sell.
For several decades now, supply-siders have tried to finesse the trade-off by claiming — or, more recently, by suggesting without asserting flat-out — that tax cuts will pay for themselves. That is, that they will generate so much economic growth that the government will collect as much revenue as it would have absent the tax cuts.
But after the Ronald Reagan and George W. Bush years, that claim has fallen into disrepute. And now comes Brownback’s unsuccessful supply-side experiment in Kansas. Acknowledging failure by deed if not in word, the governor recently proposed sharp increases in alcohol and tobacco levies to help close the deficits created by his business and income tax cuts.
Undaunted by real-world revenue realities, however, the GOP-controlled House recently passed a rule change that would require the Congressional Budget Office and the Joint Committee on Taxation to use “dynamic scoring” models — that is, to indulge in the magical thinking that tax cuts can largely pay for themselves.
At this stage in the long-running economic debate, Democrats have reason to be happy. But don’t expect Republicans to concede any points. Not outright, anyway. Old theories die hard — even in the face of multiple failures.