In the Heartland, Supply-Side is Yellow Brick Road

Arthur Laffer's supply-side magic hits Kansas, Oklahoma, and Missouri, forcing a legislative limbo to see which state's income tax rate can drop the lowest.

  • Share
  • Read Later
Thad Allton/ASSOCIATED PRESS

Arthur Laffer testifies before the Kansas House Tax committee at the statehouse, Thursday, Jan. 19, 2012 in Topeka, Kansas.

In the statehouses of Kansas, Oklahoma, and Missouri, they’re playing legislative limbo these days: how low can you go, when it comes to cutting income taxes? With its economy humming and unemployment rate low, Oklahoma is on course to cut the state rate to 5 percent or less—a proposal endorsed by the leaders of both House and Senate in Oklahoma City, as well as by Gov. Mary Fallin.

A few hours to the north, Gov. Sam Brownback of Kansas is pushing for a second round of tax cuts, even though last year’s cut to 4.9 percent has left lawmakers in Topeka staring at a hole in their budget. Brownback would fill the hole by eliminating most tax deductions for individuals—even the normally untouchable home mortgage deduction.

Given that many small business owners take their corporate earnings as personal income, these lower rates are intended as bait to lure employers to relocate. So neighboring Missouri is reluctantly following suit. The state Senate in Jefferson City has approved a gradual income tax rate reduction from 6 percent to 5.25 percent, to be paid for partially by increased sales and tobacco taxes.“Missouri is lagging behind,” Kansas City Republican Sen. Will Kraus warned his colleagues.

Folks with a sense of history might see this as just the latest twist in a saga of cross-border rivalry and conflict that pre-dates the Civil War. The Kansas City metro area straddles the lines separating Kansas and Missouri, and relocating a business from one state to the other can be as easy as driving a moving van across State Line Road.  In recent years, Kansas has used generous tax incentives to lure such businesses as JPMorgan Retirement Plan Services and the AMC movie theater chain from the Missouri side of the line.

The income tax reductions are aimed at smaller fry, the mom-and-pop service providers and the family-owned factories that make up an important share of the mid-American economy. A recent report on economic trends in Oklahoma found, for example, that more than 20percent of the state’s economy consists of manufacturing and professional and business services. An unknown, but substantial, share of such businesses pay taxes on their earnings at the personal income tax rate—as do many privately owned banks, law firms, car dealerships, restaurants, and so on.

Critics of the tax-cut limbo dance argue that rate reductions for the ownership class are coming at the expense of funding for public schools, universities, hospitals, and other services—or they are being offset by sales and so-called “sin” taxes that fall heavily on lower-income brackets.

But the prevailing spirit in the heartland these days belongs to economist Arthur Laffer, known in some quarters as the father of supply-side theory. Laffer’s argument, influential since the days of Ronald Reagan, holds that lower income tax rates lead eventually to higher government revenues, because what is lost by cutting rates is more than made up for by the resulting burst of economic activity. One of the driving forces behind the Missouri rate reductions, St. Louis billionaire Rex Sinquefield, studied under Laffer at the University of Chicago years ago; more recently,Brownback of Kansas hired Laffer to help him design his tax policy.

In that sense, what’s going on in these states may be a laboratory for ideas pressed by Republicans in Washington. The blueprint offered this week by House Budget Committee Chairman Paul Ryan of Wisconsin calls for lower tax rates and fewer deductions, with the Lafferesque promise that these steps will ultimately produce new revenue to close the deficit, thanks to robust economic growth.

Not every Republican is ready to gamble everything on the theory. In Kansas, the chairman of the House committee on taxation, Richard Carlson, wants to make additional income tax cuts contingent on growth in state revenues. Future reductions would only take effect under Carlson’s proposal if the coffers in Topeka grow by at least two percent per year. Just because you believe in the magic of supply side, he seems to say, doesn’t mean you ought to bet the farm.

The Wizard Of Oz

Getty Images

The Wizard of Oz

40 comments
Neosaigo
Neosaigo

Oklahoma's real plan is that they cut taxes for the supply side, and then ask for more federal tax dollars generated by blue states.

People who takes more federal dollars than they pay in taxes don't get to experiment with supply side economics.  Since that is like saying you are going to spend more money on your girlfriend so you can get laid more because you can just ask your parents for more money to make up the difference.

If you want to experiment with supply side economics, why don't you first pay for your own road and bridges first?

Ohiolib
Ohiolib

Laffer’s argument, influential since the days of Ronald Reagan, holds that lower income tax rates lead eventually to higher government revenues, because what is lost by cutting rates is more than made up for by the resulting burst of economic activity.

-

No, time, that is NOT what Laffer said. Laffer said that lower rates MAY lead to higher revenue, depending on what the rates where before and after the change. 

http://www.google.com/imgres?imgurl=http://i.investopedia.com/inv/dictionary/terms/laffercurve.gif&imgrefurl=http://www.investopedia.com/terms/l/laffercurve.asp&h=202&w=250&sz=6&tbnid=NW1NNapPzLAfpM:&tbnh=82&tbnw=101&zoom=1&usg=__J_NwblhmqW6dBrhQpT3DxCQtjnM=&docid=y0l2t9ndI01GbM&sa=X&ei=gy1CUbnLOvG64AOmkYGQDQ&ved=0CEkQ9QEwAw&dur=239

Seriously, I learned this in HS. No wonder we have such clueless fools floating around this country.

shaysite
shaysite

Well if Laffer is believed to be correct, why don't cut all taxes to zero to get infinite revenue?

roknsteve
roknsteve

Republican magic act: Cut all state taxes and then bill the federal govt. for the shortfall.  Next republican magic act: Free stuff for corporations.

AlistairCookie
AlistairCookie

I am reminded of the Underwear Knome episode of South Park.  They had a three step plan for success:

1) Step one, collect underwear.

2) Step two, ???

3) Step three, profit!

So here, we have:

1) Cut taxes, and thereby decrease revenue

2) Laffer curve magic 

3) More revenue!

Less revenue does not magically turn into more revenue.  Rex Sinquefield is unpopular here, except amongst the chattering upper class Republicans, and his proposal to abolish the state income tax in favor of a VAT was shot down.  See, when your major metropolitan areas border other states major metropolitan areas, it's really easy to hop down the highway, or across the street as the case may be, to escape astronomical sales taxes.  And to use Amazon.  Also, sales taxes in the STL area already vary from municipality to municipality, but are all relatively high already.  6.xx% is about the lowest I can think of, and over in the more affluent areas it's well over 9%--maybe even higher.  So, if you eliminate the already paltry state income tax, and raise sales tax to compensate, those who can most afford to pay it will drive a bit or use online ordering to avoid it, and those least able to pay it are also least able to avoid it, so get stuck with a higher tax burden.  Voila!  The living definition of a punishing, regressive tax system.  But I suppose that's liberally biased logic or something. 

This isn't tough logic here though.  The tortured logic comes from using magic to turn less revenue into more revenue.  The Laffer curve demonstrably does not work when you are splitting hairs and cutting single digit tax rates even more.  It has a *chance* of working if you are cutting a 95% tax rate.  (It only truly works if the tax rate is 100%.  At a tax rate of 100% or 0%, revenue will be 0.  The farther you go from 100% taxes, the curve doesn't work.  We are not even remotely close.)  

But then again, when all you have is a hammer, everything looks like a nail.

grape_crush
grape_crush

Looking at that picture of Laffer, the first thing I think is...jazz hands.

> Just because you believe in the magic of supply side, he seems to say, doesn’t mean you ought to bet the farm.

That's actually a smart thing to do, hedging against the probable failure of applying supply-side economic theory to the real world.

> ...the Lafferesque promise that these steps will ultimately produce new revenue to close the deficit, thanks to robust economic growth.

The evidence of three decades' worth of implementation doesn't support that promise. So why are we still treating the idea of trickle-down economics as a 'truth'?

"A true party of business would end our investment in the false promise of supply-side economics. However, a party with a goal of reducing the scale of programs such as Social Security and Medicare along with delivering tax cuts to wealthy political backers would use arguments about the economic effects of tax cuts to disguise its true intentions. Which description fits best? Many Republicans still claim that tax cuts for the wealthy enhance economic growth despite the evidence to the contrary, but it’s rare to hear a Republican admit that these supply-side policies have failed."




Robbert5
Robbert5

Let the run to the bottom begin!

MrObvious
MrObvious

The side effect from all that tax cuttin' is of course that the rest of the union pays for it, one way or another.

gysgt213
gysgt213

"Critics of the tax-cut limbo dance argue that rate reductions for the ownership class are coming at the expense of funding for public schools, universities, hospitals, and other services—or they are being offset by sales and so-called “sin” taxes that fall heavily on lower-income brackets."

David:  You do realize that this is verifiable?   Its either true or not that schools and other services suffer due to tax cuts.  When you write "critics argue" you give the impression that there is absolutely no way to tell if this is true or not.  But some unknown people are saying it.  




KevinGroenhagen
KevinGroenhagen

Isn't Swampland original! An article concerning Kansas with "Wizard of Oz" references. I've never seen that before. Only a well-trained journalist would be lever enough to do that.

PaulDirks
PaulDirks

It's probably worth noting that when a company relocates from one location to another, the net job creation is usually less than zero.


bobell
bobell

It's solidly established that at the national level tax cuts do not produce sufficient tax revenue from increased economic activity to offset the loss of revenue resulting from the reduced rates.  If the Laffer curve works, it's only at rates far higher than any we've seen in the last half-century.  The idea, which George W. Bush apparently took seriously, that his tax cuts produced greater revenue  than they lost had been debunked well before the economic collapse late in his second term.

But if all you're trying to do is boost economic activity in a more localized area where taxes vary across boundaries, you will probably succeed by cutting taxes. The question remains whether the forgone revenue to the government is justified by the increased economic activity. If there are studies addressing that issue, I couldn't find them with some quick googling. But my guess is that this is a case of spending dollars to get back pennies. Not that any dose of cold reality is going to change things.

bobcn
bobcn

@Ohiolib

This leads to an interesting corollary.  Let's call it The Laffer Corollary (copyright BobCn).

 If taxes are too high then, according to Arthur Laffer,  lowering them will lead to increased revenues.  However, we've lowered taxes and seen revenues shrink.  Consequently,  according to The Laffer Corollary, we're on the wrong side of the Laffer curve and therefore must raise taxes to get to the optimal tax/revenue point at the top of the curve.  This is also according to Arthur Laffer (from his curve).  He just doesn't find talking about it conducive to invites to Fox.

shaysite
shaysite

@Ohiolib I think he was just hedging in an effort to forestall criticism of his crack brained ideas. If he thought he could get away with it, I bet Laffer would say that lower taxes always lead to higher total revenue. After all, that's exactly how high elected officials in the Republican Party use Laffer. And has he ever gone on record denouncing GOP misuse of his ideas?! 

I think he's an academic fraud, nothing but a shill for the GOP. 

grape_crush
grape_crush

@shaysite > ....cut all taxes to zero to get infinite revenue?

The reverse is just as ludicrous - 100% taxation would ultimately bring in no revenue.


Ohiolib
Ohiolib

Actually, Laffer said that zero rates will return zero revenue. It's the flying monkeys on the right that (intentionally or not) misrepresent Laffer's view. You can try to argue with them, but they'll just fling feces and making hooting noises. 

MrObvious
MrObvious

@deconstructiva 


When I was younger I thought it was named that way 'cause how it tickled the funny bone thinking about all the idjuts that believed in it.

bobell
bobell

@PaulDirks But think of all the jobs it creates with moving companies ...

bobcn
bobcn

@bobell

''If the Laffer curve works, it's only at rates far higher than any we've seen in the last half-century. "

Exactly.  What most supply-siders keep forgetting is that the Laffer Curve has two sides -- not just one.  

Laffer's hypothesis was that when taxes are too high lowering them will raise revenue.  Up to a point.  If you continue lowering taxes beyond that point revenues will (according to Laffer). plummet.

MrObvious
MrObvious

@bobell 

Given the increased rate of low paying jobs as result of moving companies from state to state and the increase in working poor which means more food stamps, housing subsidies etc, the burden on society is that you shift the cost towards local, state and federal government instead.


KevinGroenhagen
KevinGroenhagen

@bobell"It's solidly established that at the national level tax cuts do not produce sufficient tax revenue from increased economic activity to offset the loss of revenue resulting from the reduced rates.  If the Laffer curve works, it's only at rates far higher than any we've seen in the last half-century.  The idea, which George W. Bush apparently took seriously, that his tax cuts produced greater revenue  than they lost had been debunked well before the economic collapse late in his second term."

 Complete falsehoods. Revenues grew 117 percent under Reagan. The problem is that spending grew 138 percent. Under Bush, the tax cuts were followed by a record high in tax revenues. We actually had a primary budget surplus in FY 2007, which is a far cry from the trillion-dollar deficits the Democrats and Obama have given us.

MrBenGhazi
MrBenGhazi

@Paul,nnto "Their fair share" is a concept that only exists in comment boards like these. There is no law that says a state should receive federal aid in accordance to its population, or economy, or for any other broad categorical reason. It comes down to politics.  Vote in better politicians and perhaps your state will get more than its "fair share."

forgottenlord
forgottenlord

@bobcn

During the Presidential race, I was running numbers and came to the conclusion that if you compared Romney's 20% cut vs Kennedy's 20% cut, Kennedy's cut had a "Revenue Replacement Capacity" (AKA: the ability to generate new revenues for the government based upon the growth that occurs from the change) in the range of 15X what Romney's cut did.  Why?  Romney's cut increased the resources for the rich by a third (and a lot less for the poor) - Kennedy's tripled the resources for the rich.  If we assume the full value of money is reinvested (200% vs 30%), and provides proportional growth and then tax it at the new rates (70 vs 28), you end up with 140 vs 8.4.  Now, 140 nor 8.4 has really any direct correlation to actual activity, but they can be compared as proportional ability to increase revenues - and Kennedy's clearly has the capacity to increase more.

But one thing that is vitally important to understand is the impact of the final tax rate when you're done.  When your tax rate is 6%, for every dollar you give back to the investors, they, literally, have to raise 17 dollars in new profits for you to make your money back.

shaysite
shaysite

@grape_crush @shaysite Yes all of Laffer's ideas are ludicrous and would be laughable were it not for all the suffering they've caused.

shaysite
shaysite

@Ohiolib See my comment above in regard to Laffer being a shill for the GOP.

I don't believe that he's anything but a political hack disguised as an academic.

Purveyors of terrible ideas often attempt to disguise them to make them appear more reasonable.

HudsonValleyTim
HudsonValleyTim

@KevinGroenhagen @bobell You may also consider what is happening in Ireland, where they cut their corporate tax rate to the bone and succeeded in luring-in a great many companies (I worked for one of them - Pfizer).  The problem is, in part, that they sold the farm.  They aren't earning enough tax revenue from these companies to offset the cost of services that are required to keep these fatcats happy.  You can only sell at a loss for so-long before you can no-longer afford to stay in business.  Ireland's sorry economic picture tells the tale, and as referenced elsewhere on this thread, it's the healty economies that are left with the decision to bail them out or not.

bobell
bobell

@KevinGroenhagen You're arguing against things I didn't say.  The comparison I drew was not between revenue increases and spending increases. It was between tax revenue before rate cuts and tax revenue after.  Even if tax revenues hit all-time highs after rate cuts, that doesn't mean thar the revenues wouldn't have been even higher without the cuts.  And one of the reason revenues grew under Reagan -- leaving aside inflation and population growth -- was that Reagan raised taxes in the years after his cuts.

Here's a quotation from one of the people who served as Chief Economist under Dubya: "We all agree that the ultimate reduction in tax revenues can be less than this first order effect, because lower tax rates encourage greater economic activity and thus expand the tax base. No thoughtful person believes that this possible offset more than compensated for the first effect for these tax cuts. Not a single one." See http://en.wikipedia.org/wiki/Supply-side_economics  Scroll down about 2/3 of the way.

Paul,nnto
Paul,nnto

I'm not looking for Minnesota to get more. 

I'm looking for anti-tax states (let's call them "takers")to suckle a bit less off the federal teat.

JohnDavidDeatherage
JohnDavidDeatherage

@ZacPetit @Paul,nnto That fairly summarizes our problems today.  Politicians get elected by bringing benefits back to their voters.  There is no incentive for financial restraint.  Spend more abd bring more back to your State or district.  Put off the consequences of debt and deficit spending to another day and hope that day never comes....

shaysite
shaysite

@Ohiolib Deferring to Antonin Scalia's legal reasoning is also a waste of time for the same reason.

And you make anything seem at least a little more respectable, just by adding a few qualifiers. But of course that doesn't make the idea any better.

bobell
bobell

@KevinGroenhagen If you can refer me to a book explaining how Reagan reduced the federal deficit, I'll be happy to read it.

KevinGroenhagen
KevinGroenhagen

@bobell I suggest you read "Seven Fat Years" by Robert Bartley. You're obviously ignorant about tax policy during the Reagan years.