Wisconsin Gov. Scott Walker believed in the Laffer Curve. It's coming back to bite him.
“I don’t want to say the Laffer theory is disproven, but it’s a difficult time to advance that way in Wisconsin because our revenue numbers aren’t as robust as we need,” said a senior Senate GOP leadership aide, adding that Republicans were disappointed that Walker tax cuts from earlier this year didn’t grow revenue as much as they predicted.
--Rachel Bade, Politico
There's only one upside to the fact that Republicans have complete control of so many state legislatures and can use them as incubators for arch-conservative policies: it gives the perfect opportunity to demonstrate that these same policies are blindingly wrong and produce bad outcomes for just about everyone. Case in point? The most famous economic theory ever devised on the back of a napkin, the Laffer Curve.
The Laffer Curve came about as the result of a lunch conversation in 1974 among conservative economist Arthur Laffer, Dick Cheney, and Donald Rumsfeld. The curve in question is the relationship between tax revenues and tax rates—at zero percent, no tax revenue will be collected because no income is taxed, while at 100 percent, no revenue will be collected because there is no incentive to work if all income is confiscated. Somewhere in the middle is a sweet spot: the perfect rate of taxation at which revenue is maximized, and where any tax increases past that point will actually result in a decrease in revenue.
The Laffer Curve has been consistently used as justification for the supply-side belief that tax cuts will pay for themselves through the increased economic activity that they will create. This belief is no longer simply a theory, but is now official federal policy: the 114th Congress changed the rules for how budget bills are evaluated from static scoring to what is called "dynamic scoring," which will mask the actual cost of tax cuts by simply assuming that they will increase economic output.
Unfortunately for Laffer, the facts aren't bearing this out. The governors who brought him on as an adviser to their tax-cut schemes have been hard hit by results they did not expect. More below the fold.
Kansas Gov. Sam Brownback brought on Arthur Laffer as an advisor to steer his radical experiment of cutting taxes to the bone under the assumption that the cuts would simply pay for themselves through economic expansion. The results, however, have been absolutely horrific: job growth on the Missouri side of the Kansas City metropolitan area is occurring at four times the rate on the Kansas side. Education is being vastly underfunded. And perhaps most tellingly, the state collected far less money in taxes than it expected in December, even after downgrading expectations. In other words, Laffer was wrong in every single way possible.
In Wisconsin, meanwhile, Republican Gov. Scott Walker has followed a path nearly has extreme as that of Brownback, but is being forced to scale his ambitions back because the theory just isn't working:
Earlier this year, just before enacting the half-billion-dollar tax cut, Walker said it was just the beginning — that he wanted to eliminate income taxes. Now, a representative of Walker, asked about the elimination plan said the governor “has only said that he would explore other areas of tax reform.”
The state has a projected $2.2 billion deficit for the next biennium, 2015 to 2017. There’s also a transportation funding problem.
Now, not even his top allies in the House think new cuts aren’t possible.
The situation is so bad in Wisconsin that to try to balance the budget in anticipation of a possible 2016 presidential campaign, Walker is rumored
to be considering selling off public assets as a stopgap measure just to make the numbers look good. The contrast with states like California, which raised taxes
to help balance its budget and cover a shortfall in education, couldn't be clearer: California's revenue is surging, while tax-cutting states are figuring out how to mitigate the damage.
The senior GOP leadership aide in Wisconsin may not want to admit it, but the Laffer theory as currently understood—that tax cuts always pay for themselves—is dead. Govs. Brownback and Walker killed it simply by implementing the theory and proving its lack of success. The funny part? The whole other side of the Laffer Curve is never discussed. Supply-side theorists who believe in the Laffer theory always assume that our tax rates are on the prohibitive side of the graph, where cutting taxes will increase the total amount of revenue collected. But the other side of the graph is the one where tax rates are lower than the one that would maximize revenue.
For believers in the Laffer Curve, then, the results from Kansas and Wisconsin don't necessarily disprove the theory. Instead, perhaps Brownback and Walker were simply wrong about what side of the curve their state's tax rates were on. If they were true believers, the sound Laffer theory solution would be to raise taxes as soon as possible.