In The Grip Of Tax Cut Obsession

The Beast Must Be Fed

A friend pointed us to a recent article about tax cuts that have been enacted in Kansas. In the article it is argued (incongruously) that tax cuts seem to have harmed the economy, or at last seem not to have helped it.

As our friend inter alia remarked to this:

“People in CA and on the eastern seaboard take it for granted that states charge a high income tax, typically around 10%, and there is very little graduation (i.e., you hit the top rate on very low income, typically under $10K). By contrast, a few fortunate states such as Texas somehow manage to get by with zero income tax. This is a huge draw. I can't tell you how many easterners and Californians I have met over the years who are truly shocked that a major state like Texas, second most populous in the country and home to a bustling economy, doesn't penalize its residents for the offense of earning money.”

“That backdrop brings us to this article, a typical castigation by the tax-loving media in response to efforts by the Kansas governor to reduce Kansans' tax burden.”

(emphasis added)

Indeed, the article is just one jeremiad among dozens of similar ones found in the media every month. A great many journalists seem to be united in the erroneous belief that the more of their hard-earned money citizens are forced to fork over to bureaucrats and politicians, the better it is. Incidentally, Paul Krugman has also held up Kansas on several occasions as an example for the evils allegedly associated with tax cuts.

As far as we can tell, the main reason for this is that there is such a paucity of examples of things not getting better in every respect after taxes have been cut, that when the occasional exception to the rule comes along the statist crowd pounces on it like a man lost in the desert who unexpectedly happens upon an oasis brimming with fresh water.

See here, the etatistes cry, the economy of Kansas hasn't improved since taxes were cut! Proof positive that tax cuts are economically harmful, always and everywhere! Cutting taxes is nothing but an unjustified Republican obsession. There is no mileage in people being able to keep more of their money! Actually, there is very little to support this conclusion, which must of course be rejected  on theoretical grounds anyway. The article states:

“The traditional champions of tax cuts, conservative Republicans, haven’t occupied the White House since 2008, when Barack Obama was elected as president. In many “red” states, however, Republicans are in charge. And they are making policy along rigid conservative lines.

Kansas may be foremost among them. Its governor Sam Brownback, a former US congressman and senator, led an aggressive effort to cut taxes soon after winning office. The idea is that tax cuts would reinvigorate job growth and bolster the state’s economy, replenishing state coffers along the way.

It hasn’t worked out all that well. Kansas’s job picture has improved since 2011 when Brownback took office. But rates of job growth have been slower than the country as a whole and compared with nearby states like Nebraska and Missouri. Meanwhile, and predictably, revenues have fallen faster than spending, forcing the state to dip into reserves.

Moody’s downgraded its debt rating on Kansas in April, citing “sluggish economic recovery and a structurally imbalanced budget.” S&P followed, axing Kansas’ debt rating today. S&P analysts say that “substantial shortfalls in individual income taxes” will likely eat into the state’s cash cushion at a very low 0.6% of expenditures, far too thin for a period of economic expansion.”

(emphasis added)

The following chart accompanies this assessment:

Kansas general fund receipts and rate of change

Leaving aside the questionable implication that statements by Moody's should be considered as authoritative, no other charts were supplied – only this one, which allegedly “proves” the poor state of the tax revenue situation in Kansas.

As far as we can tell however, “general fund receipts” in Kansas seem to be in a quite persistent long term uptrend, which is only occasionally interrupted. Certainly there seems to be nothing here to get overly exercised about. In the past decade, the state's tax revenues appear to have risen by almost one third. That is somehow not enough?

Things Are Really Bad in Kansas … Not!

We will get back to that point, but first we want to show a few statistics the authors of this critique of tax cuts in Kansas have for some reason decided not to discuss in greater detail. For instance, we learn in the article that although the employment situation in Kansas has improved, “rates of job growth have been slower than the country as a whole and compared with nearby states like Nebraska and Missouri”.

This appears to be a case of cherry-picking data. The reality is a lot less dire than the article implies. Here is a chart of the Kansas unemployment rate:

 

The unemployment rate in Kansas is at a mere 4.9%, a full 1.3% below the nationwide unemployment rate

Res ipsa loquitur. The chart above shows why we only got a wishy-washy statement about unemployment declining even faster in Nebraska and Missouri, instead of actual numbers.

We were also wondering if there was any other meaningful data point we might be able to present, and decided to plot the ratio of personal income per capita in Kansas versus nationwide per capita personal income. As it turns out, it has been in a rarely interrupted upward trend for many decades. This felicitous (for the inhabitants of Kansas) trend has recently once again accelerated.

Evidently, they must be doing something right in Kansas. Perhaps letting people keep more of their hard-earned money is one of those things. Just saying.

 

Personal per capita income in Kansas vs. nation-wide per capita income is in a long-term uptrend that has recently once again accelerated

Economic Statistics Cannot Prove or Disprove Questions of Theory

However, we should point out here that statistics actually cannot prove or disprove the theoretical argument in favor of tax cuts. The theoretical argument can be briefly summarized as follows: most of the money appropriated by the State in the form of taxes will simply be consumed and wasted. It would be an exaggeration to assert that all of it will be wasted, since the State does provide a certain minimum of extremely overpriced and inefficient services in exchange for its tax take.

However, beyond this, the bureaucracy is always faced with a variation of the socialist calculation problem: it has no way of correctly estimating the opportunity costs associated with its spending. It follows from this that lowering taxes and leaving more of the wealth generated in the hands of those who actually produce it, will over time have a beneficial effect on the economy, as capital accumulation is likely to accelerate and incomes and living standards will increase faster as a result.

Why can economic statistics not be used to prove this point? The answer is that every economic theorem by necessity involves ceteris paribus assumptions that can never pertain in the real world. We can for instance use Kansas to construct a hypothetical example that makes this point clear. Let us say that for instance the state's economic data really did look bad a year or two after tax cuts had been enacted (instead of actually looking good, as they do in reality).

Would that then “prove” that tax cuts have actually harmed the economy? No, not at all. For instance, it may have happened that the prices of agricultural products Kansas is a large producer of had weakened sharply after the enactment of tax cuts. In that case, the positive effect of tax cuts on the overall performance of the economy could easily have been outweighed by the negative effects of declining revenues and profits in a sector of the economy that is very important for the state – due to price movements no-one has any control over.  Economic history is always subject to a myriad of complex interrelated dynamic factors – it simply cannot be used to clear up questions only theory can satisfactorily answer.

In that sense, even the “good” data we have shown above are not really proving anything. There may be other factors besides the recent tax cuts that have significantly influenced these positive outcomes. However, we don't actually need such data to prove the point that tax cuts must be economically beneficial. The application of economic logic, or simply common sense, is all that is required. The main reason why we showed these statistics is to stress that one can always pick out economic statistics that seemingly buttress one's point. Statism-worshiping leftist journalists and economists are not the only ones who can do that.

Tax and Spend

However, the article also makes a point we actually agree with, namely that tax cuts need to be supplemented by spending cuts if they are to fully exert their positive effects. Of course the author's main concern is the “financial footing” of the government, which interests us only to the extent that it could have negative repercussions for liberty and the economy:

“It shouldn’t be a surprise that tax cuts, without more difficult spending cuts, leave governments on unstable financial footing. After all, federal deficits exploded under president Ronald Reagan, the patron saint of Republican tax-cutting. (Arthur Laffer, an architect of Reaganomics, is a key adviser to Brownback.)

But from a political tactician’s standpoint, undermining state finances probably isn’t a bad thing. After all, the backdrop of declining state finances makes it much easier to argue that the time for steep spending cuts has come.”

(emphasis added)

The latter point – namely that it will now be easier to argue in favor of steep spending cuts – is presented as a negative, a mere '”political tactic”. However, if true, then it is really an unalloyed positive. The author seems to want to have it both ways in just two paragraphs – first he is censuring tax cuts that have been enacted without tackling the “more difficult spending cuts”, and in the next breath he seems to be arguing that making these spending cuts politically more palatable is somehow bad.

In reality, cutting spending is indeed just as important as cutting taxes, and any tactic that makes cutting spending politically easier should be welcomed as a step in the right direction. Government spending is a burden on the economy and reducing it is therefore a good thing.

Many in the media are propagating the myth that high taxes and big government spending can improve society's well-being and that we need more of them rather than less. Nothing could be further from the truth. Note in this context that the fact that government spending is counted as a “positive” in GDP merely underscores what a useless number GDP actually is.

Conclusion:

We don't know anything about the governor's other policies, but his tax cut policies are definitely positive for the economy of Kansas. Capital accumulation and wealth creation are getting a shot in the arm, which will lead to rising living standards faster than would have been the case otherwise. Citizens' economic liberty is increased. It is without a doubt far better to have politicians with a “tax cut obsession” than politicians with a “tax and spend” obsession.