The Brookings Institution delivered another blow to the received wisdom that tax cuts generate economic benefits the other day, with this post examining the long term impacts of the federal deals that set the ground work for similar programs nationwide. Here’s a selection:
But the record is clear that tax cuts have not boosted growth. When growth is (appropriately) measured from peak to peak of the business cycle, the vaunted Reagan tax cuts in the early 1980s produced a period of average growth. Indeed, research by Martin Feldstein, President Reagan’s former chief economist, and Doug Elmendorf, the former Congressional Budget Office Director, concluded that the 1981 tax cuts had virtually no net impact on growth.
Virtually no one claims the 2001 and 2003 Bush tax cuts stimulated growth. Despite cuts in tax rates on ordinary income, capital gains, dividends, and estates, economic growth remained sluggish between 2001 and the beginning of the Great Recession in late-2007. The growth that did occur, however, is generally attributed to the Fed’s easy money policy….
Despite all of this, the zeal for lowering income tax rates, especially at the top, spread beyond Washington decades ago. Failure at the federal level does not necessarily imply that tax cuts would fail at the state level too. Lower taxes might lure businesses from other states, even if they yield no collective increase in jobs or output. But the stakes are higher for the states, which can’t borrow the way the Federal government can. As a result, they often end up enacting regressive tax increases or regressive spending cuts when high-income tax cuts fail to produce the promised growth.
In the 1990s, six states cut taxes by more than ten percent, mostly by enacting significant personal income tax cuts. However, only the tax-cut states that were boosted by the financial boom rose faster than average. Between 2001 and 2007, Arizona, Louisiana, New Mexico, Ohio, Oklahoma, and Rhode Island cut personal income taxes. Only New Mexico and Oklahoma, which benefited from oil and gas trends, experienced net gains in their employment share over an extended period.
The most widely-reported recent state income tax cut occurred in Kansas in 2012. Gov. Sam Brownback argued it would be “like a shot of adrenaline into the heart of the Kansas economy.” The tax cuts did not produce the hoped-for growth, though, and more revenue was lost than originally anticipated. Fiscal year 2014 revenues were $700 million lower than FY 2013 — $330 million less than expected – during a period in which most of the American economy was picking up steam. Put in context, these numbers are pretty significant: $330 million represents more than 5 percent of Kansas’ government spending from general funds. Moody’s and Standard and Poor’s reduced Kansas’ credit rating, and the state failed to keep up with the region’s pace of job growth.
Somewhere early in my entrepreneur years, I was told by someone much wiser than me that “you have to spend money to earn money.”. That doesn’t by any stretch mean that all the things we’ve spent money on in economic development over the years were necessarily the right things to spend money on, but it does mean that once again, starvation diets seem to have less than the promised impacts over the long run.