June 8, 2017
Federal Policy Director
June 8, 2017
Sitting in the National Museum of American History in Washington, DC, hidden in the jumble of Americana like Thomas Jefferson’s desk, Michelle Obama’s inaugural gown and the ruby slippers worn in the Wizard of Oz, is a napkin with a drawing on it. Probably one of the least known exhibits in the museum, this napkin, quietly hiding behind glass lest some child wandering from a school group wipe his nose on it, has on several occasions destroyed the finances of the federal government and several state governments, most recently in Kansas.
This is the napkin that Arthur Laffer scribbled on to illustrate his version of “supply-side economics” for Donald Rumsfeld and Dick Cheney in a restaurant in 1974. The “Laffer Curve” sketched on the napkin illustrated a point at which higher taxes would supposedly hurt the economy enough to reduce the overall amount of revenue collected, while tax cuts could pay for themselves or even increase revenue.
Today this napkin has caused about as much damage as the ring in J. R. R. Tolkien’s books. But Kansas — a Republican state if there ever was one — may have saved us all. After an epic struggle about as long as the hobbits’ efforts to throw their ring into the fires of Mordor, the Kansas legislature has finally, miraculously, largely rolled back the supply-side tax cuts that were enacted by Governor Sam Brownback on the advice of Arthur Laffer. The roll-back required a bi-partisan group of lawmakers to agree on a bill and then come up with the votes to override the governor’s veto.
The same advice that caused Governor Sam Brownback to propose a massive tax cut for the wealthiest Kansans without worrying about the cost also led the Trump campaign and the Trump administration to do the same. As Mother Jones has explained,
Kansas paid $75,000 for Laffer to spend three days consulting with lawmakers on the state’s tax plans. Laffer also visited Trump Tower to consult on tax reform last year, and in December he called Trump’s campaign tax plans “terrific.”
ITEP estimated that the tax plan proposed by Trump as a presidential candidate would cost up to $6.4 trillion. The tax “principles” Trump released in April and reaffirmed in his budget proposal in May are less detailed but are likely to have a similarly traumatic impact on the Treasury.
Brownback and Trump Both Focus on Cutting Taxes for High-Income Business Owners
Perhaps it is unfair to characterize supply-side economics as being solely about cutting taxes. A fairer characterization would be that it is solely about cutting taxes for the rich. In fact, changes made under Brownback in Kansas eventually raised taxes on the poorest fifth of state residents by an average $200 a year, while the richest one percent saved an average $24,600 a year. Under Trump’s campaign proposal, the richest one percent would receive at least 44 percent of the tax cuts.
Laffer’s supply-side ideology calls for cutting taxes specifically on the wealthy people who do the most investing. On the advice of Laffer, Brownback included a full exemption for income from pass-through businesses (businesses that are taxed only under the personal income tax rather than the corporate income tax) as the centerpiece of his tax cuts first enacted in 2012. Trump, also taking Laffer’s advice, has proposed a special tax rate of just 15 percent for pass-through business income.
Kansas’s pass-through break cost $472 million in 2014 alone but growth in the number of new business entities actually slowed in Kansas. Any new businesses that were created in the state since then were likely to be people simply recharacterizing their income as pass-through business income to avoid the state’s income tax, which had a top rate of 4.6 percent.
Far more people would engage in this trick to take advantage of Trump’s proposed 15 percent income tax rate for pass-through businesses because it would knock 20 percentage points off the federal income tax for well-off individuals who would otherwise be subject to the top tax rate of 35 percent under Trump’s proposal.
No Evidence to Support Laffer Curve
The appeal of supply-side economics has never been that it is supported by evidence. The first supply-side experiment was the 1981 tax cut enacted by President Reagan. The Reagan administration itself admitted that this policy was hugely costly in the fiscal year 1990 budget that it released in its closing days. (On chapter 4, page 4, the document indicates that his 1981 tax cut reduced revenue by more than $600 billion in just two years, from 1989 through 1990.)
And that was not the only Republican administration to admit that tax cuts have costs. After President George W. Bush enacted tax cuts in 2001 and 2003, his Treasury Department did a study in 2006 concluding that those tax cuts generated enough economic growth to offset less than 10 percent of their costs. And even that conclusion was based on a best-case scenario.
The idea that tax cuts could pay for themselves depends on another idea — that tax cuts grow the economy — which is itself totally unproven. President Clinton, who raised taxes, and President Obama, who allowed several tax breaks for the rich to expire, both ended their administrations with unemployment at a much lower rate than when they started. President George W. Bush cut taxes dramatically but left behind an economy that was in far worse shape than the one he inherited from Clinton.
People remember the Reagan administration as a time of excellent growth but unemployment actually rose dramatically during the first two years of his administration and fell as he raised taxes in 1982, 1983, 1984, 1985 and 1987.
Supply-side tax cuts did not revive the Kansas economy either. Job growth has been less than half the national average, the state’s credit rating has been downgraded, school funding has fallen dramatically and some districts have had to close schools early.
It’s clear that tax policy is not always driven by the available evidence. But there comes a point when the evidence is so clear to voters that politicians can no longer ignore it. And if this can happen in Kansas, a state where only 36 percent of the voters backed Hillary Clinton in November, then perhaps it can happen anywhere in America.