“Supply-Side Experiment” by John Edward

John Edward, who teaches economics at Bentley and UMass Lowell, frequently contributes columns on economic issues. Here is his latest:

A single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.
Supreme Court Justice Louis Brandies

I do not want to get in trouble with PETA, but there is something to be said for testing experimental drugs on laboratory mice before exposing humans. No offense to the good people of Kansas, but I am glad they get to be the lab rats instead of us.

Kansas Governor Sam Brownback is the mad scientist, or economist. Using the people of Kansas as guinea pigs, he is testing theories about supply-side economics. No one should be surprised the experiment is failing. Everyone should be concerned about the serious problems his policies cause.

The supply side of our economy is vital. It is important that government policies promote production of goods and services. Economic growth requires a healthy supply side.

According to supply-side disciples, the key is lower taxes. The basic premise is that if you lower taxes for corporations and wealthy investors, you will encourage production.

It is not clear how much new investment the government promotes by reducing tax rates. To Governor Brownback the effect is very clear. He believed his tax cut policies would spur so much economic growth that total tax revenue would increase. That is the heart of the Kansas supply-side experiment.

Under Brownback, Kansas reduced both personal and corporate income taxes. He did nothing to replace the lost revenue. Brownback believed that would not be necessary. He thought increased business activity would more than make up for the shortfall.

He was wrong. Kansas tax receipts decreased by 3.8% last year. For all fifty states tax revenue was up 2.2%. Kansas lost 300 million in revenue. As stated by Bloomberg: “Alas, reality trumps theory. As we have seen almost every time this thesis has been put into practice, it fails. The tax cuts don’t magically kick the economy into higher gear and the government ends up short of money.”

Governor Brownback had not planned any spending cuts. When his experiment failed Brownback had created a $400 million deficit and cuts were unavoidable. The people of Kansas are now suffering big reductions in investments in education and road maintenance. Job growth in Kansas is well below the national average. Credit agencies have downgraded Kansas’ credit rating. These side effects of the supply-side experiment will impair economic growth in Kansas for years to come.

However, Brownback is undaunted and preaching patience. He is proposing an increase of the regressive sales tax that will hurt the poor. Ironically, Brownback is now considering what must be a desperate step for him. He may allow Kansas to accept Medicaid expansion under Obamacare – a program he intensely opposed while serving in Congress.

We have been down this road before. A supply-side experiment was a big part of Reaganomics. That failed as well. Reagan passed a big cut in federal tax rates. Tax revenue went down.

At least when President Reagan adopted supply-side policies there was some justification. We were suffering from stagflation. Therefore we desperately needed an increase in supply. Tax rates were relatively high, with the rate on the highest income earners at 70%.

President Wilson cut taxes when the top tax rate was 77%. When President Kennedy cut taxes it was 91%. In those cases the tax cuts did result in an increase in tax revenue.

However, when tax rates are already low, it will not work. President George W. Bush reduced the top tax rate from 39 to 35%, tax revenue went down, and he turned budget surpluses into a large deficit.

Governor Brownback cut the income tax rate that most Kansans pay from 6.45 to 4.8%. State income tax rates are much lower than federal rates and inherently have much less impact on economic growth. There was no reason for Brownback to repeat a failed experiment.

Lately many conservatives have abandoned the supply-side myth. They still advocate cutting taxes. However, they no longer endorse the illusion that tax revenue will magically increase.

As reported by The Washington Post: “[supply-side] ideas have also grown out of fashion with much of the mainstream economic community. There is an entire branch of economic literature that uses detailed equations to show cutting top tax rates does not spark additional growth. Most recently, the University of Chicago’s Owen Zidar showed that the biggest gains from tax cuts come when rates are reduced for low-income workers.”

The last point is important. Brownback and other supply-siders emphasize tax cuts that predominately favor the wealthy. However, cutting taxes for low-income earners, more progressive taxation or increasing the minimum wage would be more effective policies for promoting economic growth.

The supply-side failure has become a serious burden for the residents of Kansas. The rest of the country is now at risk. Some of the Republican presidential candidates are endorsing the supply-side ideology. For some of the candidates, it might be an attempt to starve the beast and force cuts in government spending.

For the unaware, there is a visceral reaction to the promise of lower taxes. After all, politicians tell us there is no price to pay. People want to believe in supply-side economics. Just be aware – there is a price to pay. Do not buy the argument that a lower tax for high-income earners and corporations is a free lunch.