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Bad theory, selective outrage mark anti-tax cut screed

Once again, the usual suspects, with little merit, complain about tax reduction in Louisiana, telling us more about their preference for big government than any useful public policy prescriptions.

A week after it seemed to have caught smaller-government fever against type, the Baton Rouge Advocate editorially went back to its old ways by highlighting a warmed over report, the gist of which already has been critically examined, chastising the state for reinstating deductions and marginal rate cuts to state income taxes. In the end, it concludes that these actions were unwise because they took revenues from the state.

Such a view shows a vast ignorance about economics and how the world really works, and disregards that state government’s fiscal difficulties come from its revenue-raising structure and overspending. Its most basic mistake is that it relies upon a model of tax policy that is unsustainable in theory and in data, a belief that taxation rates do not affect human behavior.

Simplistically, the report from the Louisiana Budget Project – a creature of the Louisiana Association of Nonprofit Organizations – relies upon static revenue forecasts from the original bills that, first, reinstated (and actually relatively increased) deductibility, then, second, lowered marginal tax rates. These were snapshot guesses from years ago that made a static assumption about people – that the amount of money not coming into government because of the cuts, when used by the private sector, did not produce more tax revenue because of people’s use of it. This view makes no theoretical sense because the private sector is a much wiser and more efficient user of resources than is government. Simply put, the more money in the hands of the people, the greater productivity economically comes out of it, boosting tax revenues. The economic growth that results may even offset the loss in tax revenues, depending upon other factors (this summarizes that effect).

Amplifying this impact is that the nature of the cuts disproportionately put money in the hands of the higher-earning households, who acquire wealth precisely because, in a semi-free market economy, resources accrue to those who make the best, most efficient use of them. This helps raise the tide of society’s overall wealth higher, lifting household boats higher. And it’s not like they aren’t paying their “fair” share. At the end of fiscal year 2009 (right before withholding at the new lower rates kicked in), filers making over $50,000 a year – about a third of all filers which includes single people and married or jointly filing households – paid a crushing 84 percent of total Louisiana state income taxes, or an average of about $3,686 per filing, while the remaining two-thirds of filers paid less than a tenth of that, around $357.

(The editorial also repeated an oft-made error, that a fifth of all taxpayers only file deductions. Actually, that is a fifth of all tax filers since many never have to pay any Louisiana state income tax or file in order to be able to take advantage of tax credits or other purposes. A much higher proportion of those who actually pay taxes take one or more deductions.)

The number used also does not take into account that a forecast of years ago often bears little reality to present conditions. The Legislative Fiscal Office was a as surprised as everybody else about the severity of the economic retrenchment which affected income tax take, meaning the estimates of what the reversal would “cost” were too high. Therefore, part of the reduced revenue picture for income taxes is not a result of the rollback, but by a sputtering national economy that shows few signs of revival anytime soon.

Thus, this “cost” is an overestimation of an unknown, but likely significant, magnitude. It does not factor in forecasting error, nor does it acknowledge the reality that tax cuts stimulate economic growth that produce higher tax revenues – not a great amount in this, the first year of it, but over the next few years it will multiply. So, when an estimate of $649 million is said to have been “lost” by these changes, in reality the figure is less, perhaps much less. And, because of the economic growth the cuts will trigger, in a few years that “loss” will turn into a surplus.

We know this because of past data. One indicator is change in the rate of increase in individual income tax collections relative to the overall change of the rate in increase in gross state product – the economic output of the state’s production. From fiscal years 1990 to 2002, before the “Stelly Plan” change that raised taxes on all but the lowest level of taxpayers, Louisiana’s GSP went from $91.4 billion to $134.6 billion, while its individual income tax collections went from $677 million to $1.789 billion – increases of about 50 percent and over 250 percent, respectively. But from then through 2006, the increases to $193.1 billion and $2.512 billion are about the same rate, just above 40 percent (the next couple of years get hard to judge because of hurricane recovery cost distortions, with the deduction part of the Stelly reversal happening beginning in 2008, and the reduction part in 2009). In other words, higher rates depressed economic growth that kept overall total income tax take down from where it would have been at lower rates.

But besides its errors in economic theory, the Advocate’s view ignores other considerations. It completely discounts expert advice to create a fiscal structure to capture revenues more efficiently. For example, instead of spreading out payment, Louisiana allows too many exemptions to its sales tax – just the food, utility, and uncovered services tax revenues forgone the LFO estimated cost almost $1 billion a year. (The tax rate rollbacks in fact followed expert advice, of flattening rates.)

Nor does it consider getting rid of genuinely unproductive tax breaks. What about the wasteful spending on film production tax credits, which return less than 17 cents on the dollar to the state, which the LFO estimated cost $125 million in forgone revenues? Or the earned income tax credit, which because it goes to the least productive workers generates next to no economic growth, which took away $41 million? Why does the Advocate pretend these nonproductive revenue-sappers don’t exist yet it rants about policy that promises in the near future to produce far more revenue?

And it doesn’t even address the real reason for fiscal difficulties, state spending, at a macro and micro level. Not only does Louisiana rank fourth in per capita spending on government and 12th in workforce numbers, showing how inefficiently it is, but even in these lean times a number of wasteful programs continue to operate, such as paying nursing homes for empty beds. (Of course, the report authors have no desire to delve into this side of the equation, especially not to criticize such things as “members’ amendments” because they get taxpayer largesse from that spending.)

Understand that the Advocate’s interest is to grow government by championing its ability to take more of the people’s money. Ignoring economic reality, turning a blind eye to the consequences of the programs it ideologically favors, and a refusal to view holistically the question of what is the appropriate level of revenue raising given the genuine needs of the state explain why, through criticism of tax cuts, it trusts you less than state government to control your own resources.


Mr. Harris Plutocrat said...

The chutzpah for jeff to preach about "selective outrage". Right after the politicians he worships run up the largest debt burden in the history of the entire planet, he folds his arms, pouts his lips, digs in his highheels and absolutely refuses to have any part in paying back the huge pile of debt he helped run up.

Naturally, Jeff is drinking on the most impressionable of kool-aid. If we merely stop paying taxes collectively, according to jeff, we will all be rich and the debt will magically be paid back somehow. To suggest otherwise is "vast ignorance about economics". [By the way, Jeff, The Economist magazine used to be well respected by conservatives until it failed to sprint in the direction of your discredited economic policies. When you drove the country's economy into the ground, they didn't even gloat. And when they took a poll worldwide of the most respected and successful economists, you know what they said, Jeff? They said - en masse - that Obama and his economic policies were superior to the plans of your beauty-pageant queen and tv sportscaster airhead.]

You're right, Jeff, people who don't take economic lessons from Professor Palin are simply ignoramus simpletons.

I love your fourth paragraph. Filled with economic-y sounding stuff that appears to have been written by Palin herself, rather than your former hero, Greenspan, who, unlike you dedicated neocon ideologues, is slowly coming to grips with the consequences of reckless fiscal policy.

But you aren't here to make an economic argument. It's all about pushing more tax burden on the poor people you look down on for not being "productive." Maybe if we're lucky, jeff, with your lead the whole country will someday be as rich and shiney and Shreveport.

Anonymous said...

The nutty professor - Jeff Sadow - has spoken. Jeff, you seem to want everything for free - seems to me you have the same characteristics as the poor, non-productive segment of society that you loathe.

Anonymous said...

H-Airy writes:
"It's all about pushing more tax burden on the poor people you look down on for not being 'productive.'"

As opposed to, say, Obama's HHS Secretary and Obama's Treasury Secretary and Democrat Charlie Rangel who all "forgot" to pay their taxes? You'd prefer the tax policies of a Democrat like John Edwards who laments two Americas at the same time his lawyers and accountants make sure he doesn't pay more than 5%? Or you'd prefer the tax policies of a John Kerry who moves his yacht out of his home state so that he can save on taxes?

If you think because of some lack of education or inbreeding that businesses don't care about higher taxes, look at the Obama administration...they cared enough to avoid them. If you think that somehow rich political elites will pay their fair share under the current system, look at the Obama administration. It's rich political elites who want to push the burden onto small business owners, whom I like to call "employers".

But this is the venom we get from Democrats who despite putting huge segments of banking, auto, and health industries under "brilliant" federal regulation, still want more, more, more.

Anonymous said...

"But this is the venom we get from Democrats who despite putting huge segments of banking, auto, and health industries under "brilliant" federal regulation, still want more, more, more."

Wow, I'm sorry that happened in your country. What country do you live in, anonymous at 9:27? In the United States what happened is the banking, auto and insurance industries ran themselves into the ground and had to beg government to bail them out of the mess they had made. Nothing like what happened in your country.

Anonymous said...

From where does government get the money to buy an auto company? I guess if you live in Zimbabwe you can take it just from rich white people, but in the United States, the government takes money from working people, earners. Where in the Constitution does it say the government can confiscate by force workers' money, where does it say the interest of a company being too big to fail is greater than the right of an individual to keep what he works for?

Your ignorance in believing that when government takes over companies it runs them "for the people" astounds me. Government regulators and industry executives are revolving doors. The woman in charge of health care regulation is a former insurance executive. Look at how many people from Goldman Sachs work in the government.

Why do you think the "financial reform" bill wrote in exceptions for big banks? They know if they go soft on some banks instead of guaranteeing equal protection under law, those banks will make it worth their while.

Anonymous said...

Income tax was created in the 16th Amendment, that's where the Constitution gives the right for government to tax.

As to your other comments, your implication was that the government forcibly took over these companies and turned them from success to failure. The reality is the "brilliant" private sector ran these industries into the ground and they came to government for help.

I have a feeling you are one of the hypocrites that cry about government control and then whine and moan when government doesn't take action "quickly enough" as in the oil spill.

In a similar fashion, if the government had given these bailouts and had NOT put some restrictions on the money, you would be crying about that. The bottom line is the government did not take over these companies, it bailed them out and simply put some strings on how that money would be used.

Now run along and go play with your tea bags.

Anonymous said...

You're avoiding the point and distracting which is exactly what someone doesn't when they don't have the facts but don't want to lose the argument. From where does the government get the power to run private sector companies? I'll help you out since you want to play hostile witness; it's not in the Constitution, it's a way for politicians to fill their coffers and earn favors by appointing friends to jobs.

If you want to tell me the government didn't take over GM, you should really learn something before you presume to teach something.

"The U.S. Treasury, which already has loaned GM $19.4 billion, would get 72.5 percent of the new company’s stock and provide $30 billion in additional financing to keep the new GM operating under bankruptcy protection."

"The government still has $2.1 billion invested in preferred shares that pay dividends, plus a 61% share of common equity valued at about $45 billion to the U.S. and another $8.1 billion to Canada."

Anonymous said...

Plutocrat is a vile human being.

Mr. Harris Plutocrat said...

Nice to see that I'm not the only one holding Jeffrey to task for his vitriolic lash-outs.

A few points worth mentioning:

First, the problem with BP is that it learned that if it became good at lobbying, it wouldn't have to be good at safety. What we really want is an industry that is good at safely drilling oil but terrible at lobbying. All you conservatives (including your CREW-award winning Landrieu) prefer that there are zero incentives for safety, every incentive for recklessness, and to top it off, a cap on liability so that even in the event of gross recklessness they are off the hook.

As for the auto industry, I was completely against that bailout. But you know what, the government sure as hell did a better job of running it than the private-sector executives. If you conservatives weren't in self-imposed exile in Fox-"news" land, you would be coming to grips with that. [Not that the govt should have any hand in it, they should sell that stock ASAP and never get back in the business again, I'm just saying they are at least turning a profit.]

And unlike you cheesy, neocons, I will freely admit the corruption of people like Rangel, Landrieu, and the thankfully-dead Murtha. I'd love to see them in jail. There isn't a single conservative on the planet who is as honest with Ted Stevens, Randy Cunningham, Bob Ney, John Boehner, etc. The reason is that you are hypocrites.

Anonymous said...

"All you conservatives (including your CREW-award winning Landrieu) prefer that there are zero incentives for safety, every incentive for recklessness, and to top it off, a cap on liability so that even in the event of gross recklessness they are off the hook."

Let's see there's a straw man, black and white extremist thinking, and a demon. Quite the resume for someone who criticizes "vitriolic lash-outs"

Anonymous said...

It all boils down to this:

Plutocrat is a vile "human" being.