Monday, March 14, 2005

Taxes and reality

Alex quotes Mayor Bloomberg questioning the all-tax-cuts-are-good-tax-cuts orthodoxy. It's a welcome and very rare momement of candor (though to be fair, our Mayor has done better than most politicians on this isue.) Because on the question of taxes and the economy, conventional wisdom and empirical evidence are so far apart that one despairs of any kind of rational discussion.

Common sense sugegsts that lower taxes perhaps aren't everything, of course. Where are taxes higher, in New York or Mississippi? In Sweden or Somalia? And where would you rather live?But the economic evidence is also quite clear: lower taxes are, if anything, associated with lower economic growth, especially when you consider that cuts in taxes mean cuts in public services too.

The best recent overview of this literature is a little book from the Economic Policy Institute called Rethinking Growth Strategies by Robert Lynch. Here's what Lynch says:

A review of the hundreds of survey, econometric, and representative firm studies that have evaluated the effects of state and local tax cuts and incentives makes clear that these strategies are unlikely to stimulate economic activity and create jobs in a cost-effective manner. ... recent econometric studies find that state and local taxes have either a positive or no effect on economic activity, and most of the studies that suggest taxes have a small negative effect on economic activity do so only when public spending is held constant as taxes increase—a circumstance that is highly uncommon in the real world.

The literature on the effects of state and local public services indicates that state and local spending may stimulate economic growth and create jobs. In addition, the studies that have examined the net effects of simultaneously changing taxes and public spending--arguably those studies that provide the best "real world" measure of the effect of state and local tax cuts--generally find that raising taxes and using the additional revenues to pay for more public services enhances economic growth and expands employment.

It follows that, if taxes are not a decisive factor and public spending can be a positive force, then the use of tax cuts to create jobs can carry uneconomical "costs per job." Even with optimistic assumptions, for each private-sector job created by state and local tax cuts, governments may lose between $39,000 and $78,000 or more in tax revenue annually. This substantial revenue loss forces governments to lay off public employees in numbers that probably exceed the number of jobs created in the private sector. The net effect of tax cuts is thus likely to be a loss of employment. In addition, the public would lose the value of the public services that would no longer be provided. So, while access to jobs is clearly a vital concern in today's economy, public officials and voters should focus not solely on faith in tax cuts but on the best ways to get employment results. In the end, any jobs that might be gained by cutting taxes can be more than offset by the jobs lost as a result of cuts in public services.

No one likes to pay higher taxes. But the idea that cutting taxes is the ticket to faster growth and more jobs is one of the biggest myths in American politics today.


Anonymous said...

Okay, clearly you do not understand that if we cut taxes, we will end our dependence on government to solve our problems for us. Once they are liberated from their dependence on government, rocks and asphalt will self-align and will form roads. That's how the free market works!

Feiner Points said...

WFP shouldn't focus on high taxes or low taxes. The focus should be, who is paying the taxes? Our position must be the wrong people are paying the taxes. Working families pay a higher proportion of their incomes on all taxes, federal, payroll, local, school and state-----we have to agitate for a big shift in the burden of taxes---from the working class to the wealthy.
the "the all-tax-cuts-are-good-tax-cuts orthodoxy" is nonsense----but tax cuts that improve the lives of working families is good if it is accompanied with a transfer of the tax burden to the wealthy--

Anonymous said...

yes irv, but that maybe politically impossible. Why not say, instead, we support fair taxes to pay for the things we think government needs to do to protect people. For that, we are willing to pay our share, as long as the wealthy do too.