Across the Wide Missouri: No, the Laffer curve does not apply to state-level public finances in the United States. Jobs aren’t fleeing Missouri for Kansas. Cutting taxes on the state level does not induce a large enough surge of economic activity via sucking up jobs and businesses from neighboring states to actually raise tax revenues:
Invictus: We Know What’s the Matter With Kansas: “When pushing his tax cuts for Kansas in July 2012… Sam Brownback wrote…
…“Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy.” Art Laffer and Stephen Moore wrote that “many states like Kansas, Missouri, and Oklahoma are seriously considering abolishing their income taxes to accelerate growth,” and that they “have advised Oklahoma, Kansas, and other states to cut their income tax rates if they want the most effective immediate and lasting boost to their states’ economies.”
So, how’s it going? Census released its 2014 Annual Survey of State Government Tax Collections today, which was not a good day if you’re Sam Brownback, Art Laffer, or Stephen Moore. Kansas turned in the third worst performance in the US — its tax revenues dropped 3.8%. Below is the chart of total tax revenues for Kansas for the last 20+ years. As noted, Brownback made his comment in 2012 (highlighted on the chart). Tax revenues then slowed significantly in 2013, and turned decidedly negative in 2014…. Perhaps there will be some… excuse. However… the Brownback tax experiment is looking like somewhat of a failure.
In fact, it does not induce any surge of activity via sucking up jobs and workers at all:
Allison Long: In Kansas City Area, Jobs Aren’t Fleeing Missouri After Kansas Tax Cuts: “If the Cerner Corp.’s new Trails Campus takes off as planned…
…the Missouri side of the state line could gain 16,000 jobs over the next decade. The Kansas City metropolitan area is ground zero for measuring the impact of Kansas Gov. Sam Brownback’s income tax cuts on job creation. It is an article of faith among Brownback and his supporters that slicing taxes for [rich]selected Kansans will convince people and companies to jump the state line and work in Kansas. Rex Sinquefield… Stephen Moore; and Dave Trabert… [who] said, ‘You can observe firsthand businesses that have moved across the state border into Kansas in the Kansas City area.’
But is that really happening at a measurable amount?… The Kansas side… has lost its longtime advantage in employment growth over Missouri since the tax cuts took effect in January 2013…. From January 2014 to January 2015, employment on the Missouri side of the state line rose 3.7 percent vs. 2.6 percent on the Kansas side… when — if Brownback’s theory were working — more companies, firms and individuals likely would be expected to take advantage of the tax cuts and roll into Kansas…. The Kansas side of the metropolitan area added fewer jobs after the tax cuts took effect than it did during the first two years of Brownback’s term before the cuts were in place…. Employment growth on the Missouri side the last two years has been more than three times higher than its job gains the previous two years….
The takeaway for now is a rebuke to Brownback and his backers. The tax cuts have not spurred magical job growth on the Kansas side of the state line in the last two years… [and] have produced huge revenue shortfalls…. With all this turmoil and potential declines in public services in Kansas, the Missouri side of the state line could be looking a lot more attractive to employers and employees.
But why not? Businessmen do take a look at lowered taxes on the Kansas side of State Line Road, and think how much richer they would be if they located west. Don’t they?
They do. But they also look at lots of other things. And those I have talked to focus on the fact that the Kansas Republican Party has made an awful lot of inconsistent promises, and does not seem to have any plan or any recognition that it will have to break some of them. Such unrealism on the part of an entire state government makes businesses cautious and hesitant about putting more assets into a situation. Better go for Denver, or the Missouri side of the river.
Paul Krugman: The Laffer Swerve: “Jim Tankersley has a good article on Arthur Laffer’s never-stronger influence…
…on the Republican party, with just one seriously misleading statement:
Laffer’s ideas have also grown out of fashion with much of the mainstream economic community. There is an entire branch of economic literature that uses detailed equations to show cutting top tax rates does not spark additional growth.
No, Laffer hasn’t ‘grown out of fashion’ with mainstream economics — he was never in fashion. There was never any evidence to support strong supply-side claims about the marvels of tax cuts and the horrors of tax increases; even freshwater macroeconomists, despite their willingness to believe foolish things, never went down that road.
And nothing in the experience of the past 35 years has made Lafferism any more credible. Since the 1970s there have been four big changes in the effective tax rate on the top 1 percent: the Reagan cut, the Clinton hike, the Bush cut, and the Obama hike. Republicans are fixated on the boom that followed the 1981 tax cut (which had much more to do with monetary policy, but never mind). But they predicted dire effects from the Clinton hike; instead we had a boom that eclipsed Reagan’s. They predicted wonderful things from the Bush tax cuts; instead we got an unimpressive expansion followed by a devastating crash. And they predicted terrible things from the tax rise after Obama’s reelection; instead we got the best job growth since 1999.
And when I say ‘they predicted’, I especially mean Laffer himself, who has a truly extraordinary record of being wrong at crucial turning points. As Bruce Bartlett pointed out a few years ago, Laffer was even wrong during the Reagan years: he predicted that the Reagan tax hikes of 1982, which partially reversed earlier cuts, would cripple the economy; ‘morning in America’ promptly followed. Oh, and let’s not forget his 2009 warnings about soaring interest rates and inflation.
The question you should ask, then, is why this always-wrong economic doctrine now has a stronger grip on the GOP than ever before.
It wasn’t always thus. George W. Bush’s inner circle clearly had little use for the likes of Laffer; they engaged in a lot of deceptive advertising about the economy (and a few other things), but they never made extravagant supply-side claims — and remember that Greg ‘charlatans and cranks’ Mankiw served as chairman of the Council of Economic Advisers. But since 2009 the GOP has swerved hard right into fantasy land — and it has done so despite a remarkable string of dead-wrong predictions by the people peddling that fantasy.
Tankersley quotes me as saying that it’s about wanting economists who tell them what they want to hear, which is self-evidently true. But that kind of wishful thinking is always around. What seems to have happened to American conservatives is that they have lost all the checks and balances that used to limit that kind of solipsism. And of course it’s not just economic policy.
What do we do in the face of a major party gone mad?
Originally published at www.bradford-delong.com.