Wednesday, December 03, 2014

Real world contradicts right-wing tax theories

http://america.aljazeera.com/opinions/2014/12/laffer-curve-taxcutshikeseconomics.html

December 1, 2014 2:00AM ET
by David Cay Johnston

Ever since economist Arthur Laffer drew his namesake curve on a napkin for two officials in President Richard Nixon’s administration four decades ago, we have been told that cutting tax rates spurs jobs and higher pay, while hiking taxes does the opposite.

Now, thanks to recent tax cuts in Kansas and tax hikes in California, we have real-world tests of this idea. So far, the results do not support Laffer’s insistence that lower tax rates always result in more and better-paying jobs. In fact, Kansas’ tax cuts produced much slower job and wage growth than in California.

The empirical evidence that the Laffer curve is not what its promoter insists joins other real-world experience undermining the widely held belief that minimum wage increases reduce employment and income.

Is this absolute rule right? Let’s consider the tax law changes in Kansas and California that took effect at the start of last year.

When Sen. Sam Brownback ran for governor in 2010, he said he wanted to turn the state into a low-tax paradise and eventually to eliminate the state income tax — Kansas’ largest source of revenue, at about $2.7 billion. (Sales taxes, the state's second largest revenue source, brought in $2.25 billion.) The Brownback administration paid Laffer $75,000 for his advice on the tax cuts.

In 2012 Brownback signed his tax cuts into law. The bottom rate was cut from 3.5 percent to 3 percent. The top rate, which starts at $15,000 of taxable income for singles, was lowered from 6.25 percent to 4.9 percent.

The biggest impact was on 191,000 businesses. Their profits are now tax-free, though wages paid to owners remain taxable. This change prompted many owners of corporations to convert to partnerships and other forms of ownership that the law exempted from the income tax.

Beneficiaries of this change included Charles and David Koch, the billionaire brothers who are the richest people in Kansas. Much of their $82 billion of known wealth is in businesses that are now eligible to earn profits without owing Kansas state income taxes.

Moody’s Investors Service lowered the state’s credit rating after the $800 million of tax cuts took effect, a move Brownback dismissed as telling more about Moody’s policies than Kansas’ finances. Later Standard & Poor’s also downgraded Kansas bonds, citing “a structurally unbalanced budget,” in which taxes were cut more than spending.

The same month the Kansas tax rate cuts began, tax rates rose in California. For those making $500,000 or more, rates went up about 30 percent. Californians voted to raise the state sales tax by a quarter of a percentage point, to 7.5 percent, the nation’s highest rate.

[This article said "The same month the Kansas tax rate cuts began, tax rates rose in California. For those making $500,000 or more, rates went up about 30 percent. ". I believe this is the marginal tax rate. So if someone made $600,000, the increased rate would only apply to $100,000 of their income.]

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So how did Kansas fare against California?

From January 2013 through September 2014, the latest data, California grew jobs at 3.4 times the rate of Kansas. Total nonfarm payroll jobs in Kansas increased 2.1 percent, in California 7.2 percent. The rate of cutting government jobs was also larger in California than in Kansas, Bureau of Labor Statistics data show.

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Compensation in California also grew faster than in Kansas. California’s average weekly wage of $1,165 in the first quarter of this year was 13.4 percent higher than in mid-2012, while the Kansas average of $840 was up only 10.1 percent.

California’s credit rating improved. The Golden State can borrow at lower rates, while Kansas will have to pay more to compensate investors for the risk that the Sunflower State will lack the revenue to repay its debts.

Opponents of California’s tax-rate hike predicted that it would cause the rich, especially entrepreneurs, to flee the state. They did not. That’s because making big money typically requires living where one’s business is. A big Los Angeles car dealer would not sell nearly so many cars in Topeka.

Rich retirees can move, but they are a small slice of the high-income pie. Empirical research shows that most rich retirees stay put.

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Various studies have shown that employment and income may both rise with increases in the minimum wage.

The best data comes from counties that border one another but belong to different states, with one state raising its minimum wage and the other not.

A rigorously designed analysis of 504 such bordering counties by economists found “strong earnings effects” — meaning workers were paid significantly more in those counties which raised minimum wages — with “no detectable employment losses from the kind of minimum wage increases we have seen in the United States.”

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The important thing is that policy should follow the facts, no matter where they go.

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