Today, I ask you to join me in burying one of my key political beliefs. I am getting rid of it because I now see it was a product of its time. This idea will not work today. Not anymore. Because I have seen proof that it will not.
Let's start with the theory itself, and then I'll get to why it is bullshit. The economy sucks. Everyone knows it. And everyone has theories about how to handle it. And I had my theory. It wasn't a theory so much as actual history. In the late 1970's, the economy was in the toilet. When Reagan became President in 1980, he cut taxes on corporations by an astonishing degree. Suddenly, businesses weren't moving overseas for tax advantages and started investing in their workplaces and employees. It helped fuel an economic turnaround.
There are a lot of American businesses looking to dodge shelling out in taxes. The newest technique is called an "inversion". It's where an American company finds a foreign company similar to them in a country that is more generous with tax leniency. They "merge" -- the American company still retains its name and autonomy, but for financial purposes, it is foreign and doesn't have the same tax payments and duties anymore. Illinois-based Walgreen's did this just this week, merging with a company in Switzerland. I wonder if any other Illinois-based companies, like, oh I don't know, Caterpillar might do something similar and what the fallout might be.
The tax thing created a potential counterargument to my idea that, if the Obama administration would reduce the tax burden, we'd have more businesses staying put, investing in their infrastructure, and things would improve. Early in the Obama administration, companies lobbied for a tax holiday. With all their global offices, companies will shuttle funds between those entities to keep from paying American taxes. Google, for example, dodges $3 bil a year in tax payments doing this (not that I blame them, no one wants to pay more taxes on anything). So these companies said that, if the Obama administration declares a tax holiday, where they can bring that money into the US without the exorbitant tax rates, it will boost the economy because they could then invest that money in the country.
Well, it didn't work out that way. Most of the money went to bonuses and perks for the executives, and improvements in their offices, very little trickled down to the general work force. I wasn't willing to say my idea was dead, but I was wary that maaaaaaaaaaaaybe it wouldn't work as well as I'd hoped.
Well, we now have proof that I was wholly, unequivocally wrong. And it comes from the state of Kansas and those accursed weekend warrior activists, the Tea Partiers.
In 2012, the Tea Partiers took control of the state of Kansas on a platform of economic recovery, prosperity, and freedom. Spearheaded by Sam Brownback (R), Art Laffer (a supply-side economist made Brownback's tax consultant), and his newly majority Republicans in the state leg, a slew of tax cut programs and streamlining was implemented to restore the state to its former glory. "Our new pro-growth tax policy will be like a shot of adrenaline into the heart of the Kansas economy." A logical question is, with the funds you guys are losing, where are you going to get the money to balance the budget? The assurance was that the supercharged economic growth would result in more money coming in, and everything would balance out perfectly.
It's not working out that way. Those of you familiar with economic theory realize this is the Laffer curve. Those of you REALLY into economic theory also realize that this has been proven to be wishful thinking on a level of Adam Smith. It has been thoroughly discredited, and if anyone starts proposing anything that hinges on it, grab your wallet and head for the hills with shotgun in tow, and send an assful of lead at anyone carrying a briefcase. (For those wondering why everyone bought into the Laffer curve during the Reagan 80's, it's because it wasn't disproven at the time. In fact, it was Reagan's own economic policies that provided the data that destroyed the taxation relative to economic growth arguments the Laffer curve supported.)
Job growth in Kansas is the worst in the nation. If you are doing worse than Illinois and tax-happy California, you need to rethink what the hell you're doing. Brownback, a Tea Partier, the party of "transparency and honesty," is doing spin control. He wrote in the Wall Street Journal, which never met a supply side theory it didn't like, that "the early results are impressive." Do tell. "In the past year, a record number of small businesses -- more than 15,000 -- were formed."
...yeah...about that...the wording of the tax reform laws that were passed by Brownback and his buddies makes it so that no taxes are paid by any business as long as they pass through their tax liabilities to their owners. So any new business can claim this new tax exempt status. Sole proprietorships. LLC's. Freelancers. Petty contractors. Partnerships regardless of size, even huge ones. ESPECIALLY huge ones. As a result, 16,000 businesses went tits up during that reincorporation period. Which still means a net loss of 1,000 business.
State income tax dropped from 6.45% (over $60K a year) and 6.35 ($30 to 60K per year) to 4.9%. Income tax below $30K a year went from 3.5% to 3. The standard deduction was increased, but a lot of tax credits for the poor were dropped under the belief that the tax cuts made them redundant and/or unnecessary. (This is actually a shell game, which I will get to in a minute.)
The Kansas school budget is falling while school budgets around the country are recovering. State services like healthcare, assistance to the poor, and courts are getting chopped due to lack of money. The state emergency fund is getting smaller and in danger of running out. The revenue coming in is lower than the projected worst case scenarios. Kansas has a 2014 budget shortfall of $338 mil.
Now, about those tax cuts -- more cuts are coming, with a target of 3.9% in 2018. Good, right? No. Because other cuts are getting reversed, such as a sales tax reduction and lowering the standard deduction. This basically raises taxes on the middle and working class. The taxes of the wealthiest 1% of Kansans, such as the infamous Koch brothers, will drop by 2.2%, and the poorest 20% of Kansans will see their taxes go up by 1.3%.
These are hard numbers. These cannot be dismissed by hand waving. Now, this isn't to say that cutting taxes is a bad idea. It just has to be done 1) when the economy is doing better and 2) not be so sweeping and blind. A lot of the government centers that provide data and opportunity for economic recovery are getting cut off due to these policies.
All because of policies made to be taken advantage of, that provide no benefit to society but just a few penny pinchers.
So I am officially abandoning my Reagan era stance. It's not ideological, we have seen proof that it doesn't work anymore. Real world proof.
I'm open to new ideas.