Only in a fantasy world do tax cuts pay for themselves

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.