Friday, November 20, 2009

Declare victory, supply-siders 

I was listening to an interview of Bruce Bartlett the other day. You might remember him if you're about my age and a fan of supply-side economics as being one of its leading lights. He's recently fallen on hard times in Republican circles for saying a tax cut isn't the cure for the common cold ... or for that matter, the cure to every single economic problem. He writes:
In [2007] I argued that supply-side economics (SSE) should declare victory and then go out of existence. Everything that was true about it had by then been fully incorporated into mainstream economic thinking and all that was left was a caricature. Continuing to maintain a separate identity for SSE only created unnecessary conflict with mainstream economists, I argued.

...All economists today accept the importance of the money supply--perhaps too much; during the recent crisis many asserted that fiscal stimulus was unnecessary because an increase in the money supply was the only thing necessary to restore growth. (How this would have been accomplished when interest rates were close to zero was never explained.) All economists now accept the importance of marginal tax rates to economic decisionmaking, and organizations like the National Bureau of Economic Research publish vast numbers of papers on this topic.

During the George W. Bush years, however, I think SSE became distorted into something that is, frankly, nuts--the ideas that there is no economic problem that cannot be cured with more and bigger tax cuts, that all tax cuts are equally beneficial, and that all tax cuts raise revenue.
As someone who learned his graduate economics during the first Reagan Administration, I agreed with this back in the 1980s and still do. There were some taxes at that time, on particular types of equipment and structures, that approached and sometimes even exceeded 100%. Certainly those were on the wrong side of the Laffer curve hill. But others were almost certainly NOT. While I think the brush Bartlett uses to paint Bush is a little too broad, there was certainly some excessive statements about the gains we would find if only we used dynamic scoring.

But the more important point Bartlett makes is the general acceptance of the disincentive effects of high tax rates. And the reach of that acceptance is even to places generally unreceptive to conservative thought. Witness today's StarTribune:

Organizers of last week's program at the TwinWest Chamber of Commerce may have been hoping for a tax policy fight. The lineup featured state Rep. Ann Lenczewski, DFL-Bloomington, head of the House Taxes Committee, and Mark Haveman, head of the business-oriented Minnesota Taxpayers Association.

But instead of an argument, chamber members heard considerable consensus around a key proposition: Minnesota's corporate income tax is too high, and it should be either reduced or scrapped. That would not be the universal view among DFLers at the Legislature. It might not be the first choice of Republicans or of most Minnesota businesses, since many small businesses don't pay corporate tax.

But it's an idea Minnesota policy leaders should seriously consider. State corporate income taxes generally top "worst tax" lists when economists and tax experts from around the country convene to dispense policy advice. State taxes on corporate profits are faulted for several reasons. They're highly volatile, rising and falling dramatically with the economic cycle. They're costly to collect, especially from big businesses that employ high-powered legal talent to dodge them. They're regressive -- invisibly so. They are paid by customers in the form of higher prices and by workers in the form of reduced wages and fewer jobs, all of which hits the poor disproportionately hard.

Minnesota's corporate income tax has one other defect -- its 9.8 percent rate. That's among the highest in the country. It's also deceiving because of adjustments that have been made through the years to the income base that's taxed. The effective rate most businesses pay is a good deal lower, particularly among those with foreign operations or those based in Minnesota with sales elsewhere. But the high rate creates a damaging impression among would-be out-of-state investors.

Yes, go check that link: This was in the StarTribune, in its editorial voice. More supply-side words have not been written.

Rep. Lenczewski, who has also had her eye on tax expenditures, is in a strong position to make this argument from her position on the tax committee. While I fear her colleagues will not let her cut any tax when they face a tremendously high projected deficit in the next biennium, it would be wise for the long-run growth of this state for Republicans to focus their attention on that. And if it means killing a few tax expenditures that create corporate welfare, so be it. Along with it you could include eminent domain reform, which also strikes at corporate welfare.

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