Only in a fantasy world do tax cuts pay for themselves

Charles Ballard

Charles Ballard is a professor of economics and director of the State of the State Survey in the Institute for Public Policy and Social Research at Michigan State University.

Michigan’s roads and bridges are crumbling. Our water and sewer systems are aging.  Cuts to state support for higher education have led to skyrocketing tuition at public universities in Michigan. So naturally, some members of the Michigan Legislature want to cut taxes.

The First Rule of Holes is that if you’re in a hole, you should stop digging. It seems that some members of the Legislature are unaware of the First Rule of Holes.

Or maybe they really think that if they keep digging the hole will magically fill itself! A few months ago, shortly before the absurd legislation to roll back the income tax was narrowly defeated in the House of Representatives, I attended a public meeting of the House Tax Policy Committee. Some of the folks who spoke in favor of the tax cut suggested that a reduction in tax rates would lead to such an explosion of economic activity that tax revenues would hold steady, or even increase!

This is what George H.W. Bush once called “Voodoo Economics”. He was right.

Let’s step outside the ideological bubble in which so many members of the Legislature reside, and think about this for a minute: If we cut the income-tax rate by eight percent, the only way for tax revenues to be maintained is for the economy to suddenly expand by about eight percent.

There is simply no reason to believe that this will happen. The incentive provided by a tax cut just won’t unleash enough extra work or investment. In the jargon of economists, the elasticities just aren’t big enough for tax cuts to pay for themselves.

The proposed tax cut will give most Michigan families a tax cut of a hundred bucks, or a couple of hundred. The purveyors of Voodoo Economics seem to think that some people will respond to that by deciding to work all day Saturday.

Sad to say, Michigan isn’t the only place where this foolishness is rampant. President Trump campaigned on a promise to slash taxes. In the tradition of the Reagan tax cuts of 1981 and the Bush tax cuts of 2001 and 2003, the overwhelming majority of the proposed Trump tax reductions will accrue to those with very high incomes. Some folks said that the tax cuts of 1981, 2001, and 2003 would pay for themselves. They didn’t.  And now some are saying that the proposed Trump tax cuts will pay for themselves.

They won’t.

It’s hard to say whether members of the Voodoo Gang really believe what they are saying. My guess is that some really do believe this stuff. After all, if something gets said again and again and again, some people may come to believe it, no matter how silly it is.

For example, various folks in Washington, D.C., have referred again and again to “job-killing Obamacare”.  Let’s step outside of the ideological bubble in which so many members of Congress reside, and think about this for a minute: The Affordable Care Act was signed into law in March, 2010. Since then, the U.S. economy has added about 16.2 million jobs, of which more than 550,000 have been in Michigan.

And yet, some folks keep talking about “job-killing Obamacare”. Some of them may even believe what they say.

And yet, reality is sometimes so real that it breaks through the ideological bubble.  In 2012, Kansas Republican Governor Sam Brownback pursued deep tax cuts. This “real live experiment” in conservative governance was supposed to create a burst of prosperity and abundance. Instead, economic growth in Kansas has lagged behind the national average. Meanwhile, lack of tax revenue forced delays in construction projects, and the Kansas Supreme Court ruled that lack of funding for public schools violated the state’s constitution.

Finally, in early June, the Kansas Legislature overrode Brownback’s veto of a tax increase. Reality triumphed over Voodoo.

If Reality can defeat Voodoo in Kansas, maybe it can happen in Michigan, too.

Every autumn in the “Peanuts” comic strip, Lucy pulled the football away at the last minute, and Charlie Brown fell on his butt. Lucy would promise and promise that she wouldn’t pull the ball away, but then she would do it again. Lucy is sort of like the Voodoo Gang, promising and promising something that never gets delivered. Charlie Brown never figured it out, but the Kansas Legislature has demonstrated that it really is possible for people to learn.

If Reality can defeat Voodoo in Kansas, maybe it can happen in Michigan, too.

Bridge welcomes guest columns from a diverse range of people on issues relating to Michigan and its future. The views and assertions of these writers do not necessarily reflect those of Bridge or The Center for Michigan.

About The Author

Charles Ballard

A guest author for Bridge Magazine.

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Comments

Anasazi
Thu, 06/29/2017 - 9:06am

I largely concur with the author's perspective on the fantasy that tax cuts will generate sufficient economic growth to offset the lack of revenue generation desperately needed for publicly funded projects. Economic engines just cannot grow fast enough in response to small increases in personal disposable income to offset an immediate reduction in revenue.

Of course none of us wishes to have our disposable income depleted when there is little evidence that sacrifice will result in benefits we can enjoy and appreciate.
It seems to me that the "missing links" are a) transparent evidence of the connection between personal sacrifice (taxes paid) and results achieved (roads, bridges, schools) and b) some proof that our government is addressing waste and inefficiency with every readily available tool and technique used by viable commercial businesses to increase their productivity and efficiency.
Taxes should be seen as investments by each citizen in services and systems with obvious, direct benefits to the investor - not as some mysterious, not-to-be-trusted way for legislators to take without giving back.

Sue
Thu, 06/29/2017 - 9:12am

Important to note that the "tax cut" parade has been trotted out repeatedly at the state and federal levels over the past several decades. The pending healthcare bill in DC pushes back to the states the possibility of having any type of health care available. Now the possibility exists that Michigan may not having enough money to cover anything for it's citizens because tax cuts have already been taken. Me? I vote every time there is a millage to raise my own taxes because I know it keeps things in my city or county working.............and I don't even have kids in school any longer. But I want the other kids in my community to have the education they need to have a better life. I want amenities in my community that make everyone's life better. And I'm only in the middle class.

This has to stop. We did best when taxes were higher, infrastructure could be managed or built, and healthcare was more affordable because there wasn't a drug commercial 5 times in a one hour show. We don't have to go back to the max rate of 70% that existed in the 1950's to 1970's, but there has to be some improvement in the inequality between higher and lower income individuals. Continuing to make the upper income people have more, and the middle or low income citizens have less is not the answer. How many homes, cars or luxury toys does one person need? Trickle down is not working, has never worked, and insanity is doing the same thing over and over again and expecting a different result.

Michigan Observer
Thu, 06/29/2017 - 9:23pm

Sue says, "We did best when taxes were higher, infrastructure could be managed or built, and healthcare was more affordable because there wasn't a drug commercial 5 times in a one hour show. " We were wealthier in the fifties and sixties because all the other developed nations were rebuilding after the war. We were not wealthy because of high taxes and health care was not more affordable because of a lack of drug commercials. That era could not, and did not, last.

She says, "there has to be some improvement in the inequality between higher and lower income individuals. Continuing to make the upper income people have more, and the middle or low income citizens have less is not the answer." Who makes the upper income people have more and the middle or low income citizens have less? No one. How could they? And it is not a case of the rich not paying their share of the common expenses. The Congressional Budget Office said that a few years ago, the top 20% of income people's share of federal tax liability was 67.9%, while their share of before tax income was 50.8%. Their share of tax liability was 133.7% of their share of income. The middle 20% of income earners share of federal tax liabilities was 9.4%, while their share of income was 14.7%. So their share of federal tax liabilities was 63.9% of their share of income. So the rich are not taking advantage of us middle class people.

And there is no such thing as "trickle down." But there is a legitimate, unavoidable source of inequality: innovation. People, like Bill Gates, who introduce new, more efficient ways of doing things reap enormous rewards. But they produce far more social value for the community than they retain. It has been estimated that Bill Gates fortune only amounts to five percent of his contribution to society. Economist William Nordhaus has estimated that innovators only retain two or three percent of the value they create.

Increasing efficiency, using resources more efficiently is what raises standards of living. China increased their living standard by 1900% in twenty years after dumping Mao's emphasis on equality.

Matt
Sun, 07/09/2017 - 8:34pm

It's not about an individuals wealth. It's about the wealth of the state and local governments to be able to provide us with smooth roads, clean water and streetlights at night to help keep us safe. How can government pay these things with little comming in? Tax the people with higher incomes. Tax capital gains that is basically un-earned income even higher. Trust me, you'll still have your Cadillac and vacation home. My wife and I make over 160k/yr with no kids. I'd be happy to pay an extra point or two so when I do take a drink of water I'm not being poisoned and when we do take our Cadillacs out we aren't sending them to the service station. It's all about greed, pure an simple

Le Roy G. Barnett
Thu, 06/29/2017 - 9:15am

Back in the 1950s, when the federal government started building the interstate highway system, there were big signs at every project telling people this road improvement was their tax dollars at work. For decades now, I have not seen signs like this, letting people know that any government-initiated undertaking is courtesy of the taxes paid by citizens. Consequently, in my opinion, a disconnect has developed in the public's mind between the money we send to Washington and the benefits we get in return. This is one reason why the message of the tax-cut crowd resonates so with the electorate.

Jesse
Thu, 06/29/2017 - 9:23am

So under your tax philosophy...a tax increase of 8% would result in an economic increase of 8%? Is there anybody else that sees absurdity raising its ugly head again....The real question that needs to be asked is : What happend to all the money that was put into the system to take care of the problems in the first place? Can you say; The idiots in the legislature pissed it away?

Anonymous
Mon, 07/03/2017 - 7:20pm

Cutting taxes doesn't increase revenue is what he said. You cannot cut your way to prosperity--or to good roads, good schools, safe environments, health, or anything else. Cutting business taxes doesn't increase businesses. it increased profit. It doesn't create jobs. Taxing and building roads does create jobs. Somebody builds new roads. That also increases tax revenue because more are working. People drive more on good roads. That increases travel businesses. You cannot cut and increase businesses or increase jobs. You cannot increase state revenue by cutting so services and jobs are lost.

Rich
Thu, 06/29/2017 - 9:32am

It is true that tax cuts will never provide an increase in revenue enough to offset the cut. It is also true that you can never spend your way out of bankruptcy or poverty. The real question is what do we as citizens really need. We may want free popsicles on a warm day, but is it really a need. We do need decent roads, some education, and a few other things, but do we really need free books on demand? I'd be willing to pay a few dimes every time I checked a book out of the library, or a few quarters every time I took my bike on a converted rails to trails, just as I pay to enter a state or metropark. Those who lack the ability to pay could be given a pass.

It is time for the politicians to think about what we as citizens need, and stop worrying about who we are married to or what a person's doctor thinks is best for that person.

Bobbi
Thu, 06/29/2017 - 10:32am

Thank you, Professor Ballard. I wish your message could be automatically implanted in every brain. It should have made it there by experience by now. So far as I can see, the best way for government to stimulate economic growth is by building and maintaining infrastructure so that commerce can travel on good roads and bridges and have access to educated workers from well maintained schools with well paid teachers.

Tom
Thu, 06/29/2017 - 10:46am

I don't think there has ever been a study that demonstrates a direct correlation between tax cuts and economic growth.

This just a conservative fantasy.

Kevin Grand
Thu, 06/29/2017 - 11:13am

Why is it when the topic of government spending comes up (along with the myriad of areas in which there NEVER is enough money), the solution invariably turns to the taxation side of the equation.

A very long time ago, a very wise person once wrote that,"the powers of government are few and defined."

Before someone goes out and tries to argue that those of us who go to work each day, be it blue collar or white collar job, have less of a right to the results of that labor than a politician who has in their ear an individual who has made a long-lasting career out of finding new ways of spending other people's money, shouldn't an effort be made as to whether or not the government has any legitimate duty in that area in the first place?

This is the one major point that everyone who cites what happened in Kansas ALWAYS fails to include in their arguments.

One other item worth mentioning, I noticed that Prof. Ballard cited Obamacare as the reason for job growth in the American economy.

If that happened to be THE reason (which it wasn't), then what caused the increases in job growth after the previous downturns in our nation's economy?

Adding to that dilemma in his logic, I would also be curious as to whether or not Prof. Ballard can reconcile his position with what the federal government did during the 1920 Depression?

What did they call that decade again?

David
Thu, 06/29/2017 - 11:50am

I do not like taxes, never have and never will! In fact, I am so opposed to taxes that I am willing to go it alone... I will pay for everything I need in this world by myself and through my own resources. I will build the road to my house and maintain it. I will develop the systems and infrastructures necessary to support me and my family. I will protect my family from all perils that may befall me without resources from the community in which I live. I will produce all that I need. I will stand alone and alone I shall prosper.

Anonymous
Sat, 07/01/2017 - 7:12pm

You say you'll build the road to your house. But what will be at the other end of that road? Are you also going to build your own interstate highway system? Your own Center for Disease Control? Your own armed forces, capable of defending against an attack by a foreign state?

Talk is cheap.

Anonymous
Mon, 07/03/2017 - 7:21pm

That is laughable. It would literally be a driveway. You wouldn't hve the right to build beyond your own properity.

Matt
Thu, 06/29/2017 - 12:45pm

Are you arguing that there are no taxes or level of taxes that are destructive to economic growth? Assuming you aren't (?), then it would be logical to say that there are some "tax cuts" that lead to positive economic growth, (and by definition pay for themselves)? If this is the case then why does the State and federal government offer the multitude of tax credits that they do, if taxes have no bearing on economic behavior? Or is it just a question of the structuring of tax cuts?

Anonymous
Mon, 07/03/2017 - 7:22pm

Tax credits are subsidies the taxpayers pay to businesses. They are not part of a free market economy. They should never be offered.

Matt
Wed, 07/05/2017 - 8:27am

That's the point, Ballard and his cohort say taxes have no stimulative effect on the economy but then are in favor of offering all sorts of tax credits to people they like for things they like.

Gene
Thu, 06/29/2017 - 3:47pm

No Taxes = No Government = Chaos which appears to be the condition of our government with no means of reducing the Deficit, improving our infrastructure or ending wars of choice.
Pre Reagan era the maximum tax on individuals was 70% for individuals making over $110,000.00 which equates to over $250,000.00 today. There was a deficit of $300 Billion or 4% of the GDP. The deficit as a carry over from the Vietnam war.

Michigan Observer
Thu, 06/29/2017 - 9:46pm

Professor Ballard says, "If we cut the income-tax rate by eight percent, the only way for tax revenues to be maintained is for the economy to suddenly expand by about eight percent." He then properly goes on to point out that that is very unlikely. What he does not say is that if the resources transferred to the private sector produce a greater rate of return than if left with the government, then, over time the tax cut would have produced a substantial net gain to the general welfare. Of course, it takes time for compound interest to work its magic.

Anonymous
Mon, 07/03/2017 - 7:23pm

That is absolute nonsense. The rate of return to a few individuals may occur but the economy doesn't expand. Ask Kansas.

John S.
Thu, 06/29/2017 - 10:28pm

Professor Ballard for years has furnished sound advice for state legislators regarding the Michigan economy and policies that will strengthen it. Message to legislators: Listen to him and follow his advice. He knows what he's talking about. You don't.

duane
Fri, 06/30/2017 - 9:43pm

I wonder why Mr. Ballard feels any of us believe the numbers associated with political claims are real or valid or that all of them aren't a version of 'voodoo economics.'

As best I can tell all economists, including those at our institution of higher learning and in the government make assumption based on the results they want to achieve and never go back to verify or even admit their presumption were not validated by reality.

It maybe heresy, but as best I can tell economics is a world of estimation and guesstimates to promote a point of view or theory, for no other reason than it is not possible to collect real data of the whole of the population that are prognosticating for.

The good professor is focused on the Republicans at this moment in time for whatever reason, but he could replace them with Democrats such as for the Obamacare economic presumptions and his remarks would be just as valid. I offer that he could replace Republican or Democrat with 'economist' who would be making any claims about programs for Michigan economics and his remarks would be as credible [though he would be much more uncomfortable saying that about his peers.

I wonder if the professor can reference any economist projection for a population the size of Michigan that has had those projections validate after years of implementation of a particular program.

The pronouncements of economist are good for conversations, they can articulate logical principles but in reality they aren't the data driven nature the sciences of physics or even chemistry are, this not to be to critical but their expertise is not in the same 'ball park' as the proverbial 'rocket science.'

Whether it be Keynes or Friedman it is still data soft [not precise and reproducible in a range of settings].

David L Richards
Sat, 07/01/2017 - 10:07am

It is interesting to note that the greatest periods of economic disaster in the US were the Great Depression and the Great Recession of 2008, both of which followed periods of tax and regulation cutting. The most recent period of notable prosperity in the US was the 1990s, following tax increases under George H. W. Bush and Bill Clinton. Tax cuts can provide economic stimulation when they are cuts from extreme levels (91% marginal rate in the 1950s and early 1960s), or for a short term during an economic crisis, but they do not pay for themselves and they don't assure prosperity, despite the myths to that effect.

duane
Sun, 07/02/2017 - 7:22pm

David,
There maybe a bit more to the 'great recession' than just low taxes or even Wall Street abuses. November 15, 2007 FSAB [Financial Accounting Standards Board] 157 was implemented, effectively taking long-term bank holdings [that could not be liquidated until the end of the fulfillment date] to a current market value which was negligible [not liquid market for them]. Many banks using those financial devices in calculation their capital value [a cash value to borrow against], so institution such as Lehman had so much in those type of vehicles that they could not borrow against that long-term capital, neither other banks or the FED would lend them needed cash so they went bankrupt becoming the most glaring failure of the banking crisis and the 'great recession'.

Since the FSAB is the organization that sets accounting standards for the US it is one of those regulation organization that are mentioned in a general way and do have a direct effect on the economy/the back/business. SEC suspended FSAB 157 October 3, 2008.

DAVID L Richards
Sun, 07/02/2017 - 9:28pm

I agree causes of things like the Great Recession are more complicated than I expressed, and your comment may be accurate. However , even Republican economists admitted at the time that part of the cause was the failure for financial institutions to be governed by their own self-interest in the absence of regulation. Greenspan attributed the collapse to the failure to properly value mortgage- backed securities, which means to me the securities rating agencies were left free to indulge in fantasy evaluations because of the inherent conflict of interest when they are hired by people whose securities were being evaluated. In any case when you add in the Savings and Loan crisis under Reagan, I see a pattern even if the specific causes are complex, and certainly cutting taxes and regulation have not historically been a recipe for economic success.

duane
Mon, 07/03/2017 - 10:42am

My mention the FASB 157 was to remind people that what we are told is not necessarily the whole of the facts and that when we narrow the information we use to support a particular issue of concern we risk creating misunderstandings and taking actions that may not be relevant to events.

Just as you mention the S&L crisis, which effectively end that industry, it actually was set-up in the 1970s and triggered when the Fed hiked their borrowing rate by nearly a third, 9.5% to 12%, in 1979 [when home loans were 13% with an annual balloon clause/refinancing] and in conjunction with major S&Ls inflation their worth taking and over extending themselves to buy more properties [jacking up their based capital value on inflated real-estate prices to borrow more]. Regulators allowing things much like the bundling of overvalued real-estate loans as investment vehicles just prior to the 'great recession' [in both case a lot political influence facilitating both practices.

The lowering tax rates is a new and different issue, I see the current public emphasis taxes as trying to get some accountability of spending. The taxing level is less an issue with all the 'loop holes' the politicians have create to distort decision making. My approach is to eliminate all 'loop holes' and let the money decisions be based on real notdistorted financial considerations. In the past 8 years the federal debt has double without any significant tax increases so what does it matter what the tax rates are if the government shows not fiscal relationship between their revenues and spending. At least at the state level there is some modicum of linkage, but as we see Illinois that can be disregarded. You demonstrate the linkage between the results the governments deliver and the taxing rates then I will become interested in the rates. Our local commuinty has a linkage, they need more taxes to spend on roads but they don't get the money [requests have lost twice in the past few years]. But that is about confidence/trust or lack of in who is spending the money rather than what it is being spent on. I think that approach [reduce or limit tax increases] is what we see trickling up on taxing rather then about how much people have to pay.

Which elected official do you trust more than yourself to spend your money/taxes?

Anonymous
Mon, 07/03/2017 - 7:24pm

Caused by deregulation, removal of limits on growth of corporations, and Reagonomics--the killer of the middle class.

duane
Tue, 07/04/2017 - 11:42am

Anonymous,
Deregulation was not the problem, it was and is the mindset of those [much like yourself] that want to command and control those producing products or services. You verify this by whether a person uses citations and fines as the measure of regulatory performance or if they use the performance of those being regulated.
Our regulation is a prescription based on past practices rather than a performance based system designed to facilitate improving performance.
If you talk to any regulation writer they will tell you their primary need to is to ensure the ability to enforce the regulation, they never start with how to enhance the performance of those being regulated. And when they lose a regulation to enforce they place more emphasis on enforcing the ones they do have. If ever talk to an enforcement office you will find that each organization [even those providing the same service/product] are different adding difficulty to their job. In reality they inspect one what they have seen before rather than what the organization is doing.
Rather then deregulation we need a shift from command and control to performance based regulation.
Where command and control regulation require a ‘letter of the law’, a performance based regulation is a place for proven principles and practices and it puts the emphasis on those organizations being regulated to develop their own practices and measure the effective performance of those practices.
The command and control approach build a barrier to improving performance and innovation both in practices and methods.

The question is for you and regulators; are you a barrier to improving performance in a dynamic world or do encourage status quo?

Mark
Mon, 07/03/2017 - 5:32am

At the Federal Level, without a doubt, tax cuts generate robust economic activity that results in significant increase in Federal Tax Revenues. The problem then is congress increases spending. At the State and local levels, it is a bit of a different scenario because each state has different tax policy and structures along with specific responsibilities. People don't have trouble paying for roads, bridges, safety.....Entitlements are the problem at all levels. We have too many people living in Comfortable Poverty. Michigan has over 100,000 job openings on the MI Works Program Listing. Lets get these Comfortable Poverty Recipients off my tax dollars and let them start generating tax revenue so we can spend money on roads, safety, etc. Nice try Professor!

Anonymous
Mon, 07/03/2017 - 7:29pm

Entitlements are literally money that people are entitled to because they PAID INTO A SYSTME THAT PROMISED a return. Like Social Security. The notion that the miniscule amount that welfare for the poor takes up is hurting the economy is insane. every tax payer on the federal level pays on average 834 yearly per taxpayer to subsidze BUSINESS AND WEALTHY PEOPLE. Food stamps cost a dime a day or 36 dollars. Give me the food stamp bill any day. Want to shift the economy? Start giving the middle class that same tax cuts you give the wealthy. Subsidize them. Give them deductions for borrowing on credit. re-instate usury laws. Provide free education like other countries do. let the rich take cre of themselves.

Mark
Wed, 07/05/2017 - 6:21pm

For the most part you are wrong. Those incentives you talk about result in lack of motivation. As we see in the news this past week, states that have tied Food Stamps to Working, the amount of people the Food Stamp Program has reduced and the Cash Earnings for those people have significantly increased. We have taxpayer funded Free K-12 Education and unfortunately the masses in our urban areas do not take advantage. Free College Education is very very wrong for a whole lot of reasons. Again, don't let emotions dictate your policy decisions. Comfortable Poverty is Real and is chipping away at the industrial creative fabric of our country.

duane
Thu, 07/06/2017 - 3:43pm

Anonymous,
If you really want to grow the 'middle class' and get the economy moving, ignore the government and focus on the children. Today's 'middle class' is based on knowledge and skills, those with take advantage of the opportunities and all that entails, those without miss those opportunities. The 100,000 jobs we hear about going unfilled are 'middle class' opportunities, the problem for today's work force and economy is that not enough people applied themselves to learn so they have neither the knowledge and skills and probably not even a practical knowledge of the necessary 'work ethic.'

All the money that people want pored into every conceivable program to employ people will disappoint if the individual is not will to work at learning, that start when they are young and carries on for the rest of our lives.

Steve Smewing
Tue, 07/18/2017 - 3:46pm

For a professor some of your monetary conclusions are wrong at a very low level.

I am a fiscal conservative. As such I have a very different view on taxation. I believe that personal taxes need to increase to the point that they pay for all the government functions that benefit the people. In simple terms people should pay for what they will get, as a whole. This would eliminate liberalism completely.

Business taxes would be slashed. They too would pay for what they consume. Businesses would of course be free to consider philanthropy as many do so now. They would benefit from enhance area assets to attract talent. Dow Chemical is an excellent example of this.

With the huge cut in business taxes and the increase in personal taxes, wages would have to inflate. But, the people would be the stake holders in how money was spent and used by the government. We would have a truly representative government with people being the ones making the deposits and very mindful of the checks written.

When it becomes black and white clear who is going to pay for such things as the Bernie Sander's promise of free college education, people will know it is not free, the people will now understand that they will be paying for the free college education for everyone. As it is now people do not make that connection. The government dies not and cannot provide free anything.