Proof That Cutting Taxes Does Not Stimulate?

by: Steven Hansen

Summary

Paul Krugman says Kansas is a failed experiment for austerity.

For sure Kansas is not a roaring success based on short term fundamentals.

But I question whether it is too early to label the Kansas' experiment a failure.

Economic theory is interesting. There never has been "scientific" proof documenting how any theory performs against the wide range of economic dynamics because there is no experimental control sample for comparison. Like most of us, I have opinions (based on theory) but I do not confuse opinions with data or facts.

This past week, everyone's "love him or hate him" economist Paul Krugman opined:

Two years ago Kansas embarked on a remarkable fiscal experiment: It sharply slashed income taxes without any clear idea of what would replace the lost revenue. Sam Brownback, the governor, proposed the legislation - in percentage terms, the largest tax cut in one year any state has ever enacted - in close consultation with the economist Arthur Laffer. And Mr. Brownback predicted that the cuts would jump-start an economic boom - "Look out, Texas," he proclaimed.

But Kansas isn't booming - in fact, its economy is lagging both neighboring states and America as a whole. Meanwhile, the state's budget has plunged deep into deficit, provoking a Moody's downgrade of its debt.

Yah, Kansas is not booming, but consider the following and let's see where these items might take us:

  • the debt in Kansas is not much worse than any other state;
  • last time I looked, more than two states bordered Kansas;
  • how fast does any economic theory work? Should it be judged in the short, medium or long term?
  • raising income taxes removes money from consumers.

There is no question that based on employment, Kansas is doing worse than its neighbors (about the same as Missouri) and the average for Kansas and all its neighbors looks to be slightly below the national average. Remember that employment is a lagging indicator of economic growth.

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GDP growth for Kansas appears also be very near the national average - but GDP growth is less than 3 of its 4 neighbors.

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If raising taxes were an answer, the USA economy should be flying. And what about Illinois? My point? You cannot condemn a single element of an economy without examining all elements. I am not for or against raising taxes per se on a state level. My opinion would be conditional when judged against all the other economic dynamics.

Consider also that the Federal Government has different monetary dynamics than the states (being a sovereign monetary issuer) - and the examples given in Professor Krugman's oped were based on Federal Government experience.

The individual states in America are economic laboratories. States should be encouraged to leave the trodden trail and experiment. In life, most experiments end in failure, but without failures - our understanding of economic dynamics is not enriched. Professor Krugman is the mouthpiece for liberal partisan politics, and partisan politics have no place in "factual" economic discussions.

My usual weekly wrap is in my instablog.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.