The Great Tax Experiment

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At the core of the republicans tax plan is the notion that if they cut taxes for the wealthy, there will be a trickle down effect and we’ll all be better off. But when you ask for any hard evidence of this, they’ll usually go quiet for a bit, mumble something about Reagan (who, as I discussed in a prior post put up taxes, oversaw three recessions as well as the biggest decline in real wages in history), then change the subject.

Well actually, as Richard Reich points out, we’ve actually been conducting a tax experiment in the US going back over many years now. He compares the state of economies like California (which has relatively high state taxes) to economies like Texas and Kansas (who have very low taxes). And suffice to say, the results of this “experimentare at odds with everything that conservatives say about tax.

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We’re told that high taxes will lead to sluggish economy growth and lower wages. California has consistently had one of the highest economic growth rates, highest wages and highest standards of living, not just in the US but in the entire world. Kansas and Texas are left eating California’s dust.

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Kansas governor Brownback’s reign of error has seen the Kansas economy stagnate due to his tax cutting and austerity policy……

High taxes we are told will scare away the wealthy leading to capital flight and more unemployment. Well then explain Beverley hills! Or why are so many tech billionaires and their companies concentrated in California? Think about that for a minute. The CEO’s of Apple or Google could simply move headquarters to Kansas, staying within the same country and save themselves millions a year in personal taxes. Yet they haven’t.

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Private employment in Kansas, far from growing in response to tax cuts, it has dropped well below the US average

And here in Europe we’ve been conducting our own tax experiment. The Scandinavian countries have traditionally adopted a policy of high taxes and large levels of public spending. Yet they too enjoy some of the highest standards of living in the world, the highest wages and yet low levels of public debt. By contrast it is southern European countries, such as Italy, Greece the UK or Ireland, who’ve gone for the low tax model who tend to be the ones getting into trouble.

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Of course we are being a bit obtuse here. The economic growth rate of one country or state is not solely down to its tax policy. There are many good reasons why the tech companies are based out of California and not Kansas (the weather for one thing! And I can’t see a bunch of computer nerds surviving a night in a bar full of rednecks). The economy of California is fairly diverse, covering, mining, oil, manufacturing, tourism, agriculture, movies, etc. Texas and Kansas are by contrast heavily dependant on one or two core areas, notably agriculture and oil production. A low oil price or a hard winter and their economies can tank. So tax is merely one of a number of factors that influence the economy. But that’s kind of the point.

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California spends $0.78 for every tax federal dollar it raises, while Texas spends $0.94 (20% more) and Kansas spends $1.12 (44% more)

Republicans will have us believe that if you put up the taxes of the wealthy, an increase that will cost them a few pence on the dollar, something they can easily afford (and probably won’t even notice, as its their accountant who works out their taxes). That they’ll be so incensed by this, they’ll take their money, pile it in a corner and sit there sulking. While if you give them a tax cut, that again amounts to few pence on the dollar more into their pocket, they’ll go on a massive spending spree. Not only spending the pennies they got back from the tax man, but millions more of their own money. And they will magically find a way to spend it in a way which will only benefit the local economy. i.e. they won’t say buy an Italian sports car (which is made abroad) or invest it in a transnational corporation (which does most of its business overseas and reports its profits within some offshore tax haven) or hoard it in their bank account.

So the point here is the best we can say about tax cuts is that they might give a temporary economic boost, but the benefits won’t necessarily occur where we want them (or need them) to occur and the effect is likely to be short lived. While increasing taxes (up to a point of course) doesn’t necessarily cause a negative effect on economic growth. But a government can chose how and where it spends the money it raises from taxes.

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2 thoughts on “The Great Tax Experiment

  1. Pingback: Left wing Sadopopulism | daryanblog

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