Kansas: Nirvana or Nuts

[SezMe]

Another thread got a bit off-topic (with my help - sorry) about the hard-line GOP politics of the Brownback administration in Kansas. This thread is intended to discuss this issue.

Kansas is a bit of a petri dish of Republican economic ideas. Governor Brownback and a staunchly supportive Republican legislature have enacted policy that puts in place budget cuts and trickle down theories in actual practice. Some (including me) see the results as disastrous. Others cheer.

The discussion originally began in this thread. To provide additional fuel for the discussion, I would note the following links:

Forbes Another view. A biased view in my favor. A local interview that includes the governor and a local political reporter:



And an article comparing Kansas to California.

What say you?

 

[The Don]

Another case where reality just refuses to conform to right wing economic orthodoxy. The more I think about it, the more I come to believe that the problem isn't with the theories per-se but rather that they relate to a different economic environment than Western economies currently reside in.

Advocates can presumably point to the 19th and early 20th centuries where we had (comparatively) low tax rates, poor welfare provision but a booming economy (although the U.S. and other economies did have periodic depressions and recessions ). The theory is that a return to similar policies will yield similar results.

I think this ignores the reality that most Western economies are post-industrial and developed and cannot expect the kinds of growth rates they enjoyed in the past and which are possible in today's developing economies.

 

[Gawdzilla Sama]

The Kansas Evolution Wars, I and II, illustrate the socially bifurcated nature of that state.

 

[sunmaster14]

Another thread got a bit off-topic (with my help - sorry) about the hard-line GOP politics of the Brownback administration in Kansas. This thread is intended to discuss this issue.

Kansas is a bit of a petri dish of Republican economic ideas. Governor Brownback and a staunchly supportive Republican legislature have enacted policy that puts in place budget cuts and trickle down theories in actual practice. Some (including me) see the results as disastrous. Others cheer.

The discussion originally began in this thread. To provide additional fuel for the discussion, I would note the following links:

Forbes Another view. A biased view in my favor. A local interview that includes the governor and a local political reporter:



And an article comparing Kansas to California.

What say you?

Seems like a partisan-driven tempest in a teapot. The revenue shortfall is less than $400MM this year compared to prior projections? In a state with $25.7B/yr of revenue from all sources, $28B/yr in spending and $29.8B in total debt (see Kansas debt clock)?

Hardly seems catastrophic to me. If certain domestic programs need to be maintained at prior levels, there is considerable borrowing capacity to do just that without restoring lost revenue in the short-term. S&P has maintained a AAA rating (the highest possible) on Kansas, and Moodys only dropped the rating one notch from its highest rating (from Aa1 to Aa2). This has an utterly negligible effect on the interest rates Kansas is charged (a few basis points at most). There was probably a larger increase in interest rates due to the tax rate change (tax-exempt Kansas muni bonds are less attractive to Kansas residents now that they're faced with a lower income tax rate).

As for the effect on growth and jobs, it's too early to tell. When you cut taxes at the state level, there is very little direct stimulus because so much of personal spending goes out of state (as compared with state government spending which is highly concentrated in state). So if tax cuts are offset by decreased government spending, you should expect a period of slower growth and reduced employment initially. Over time, however, the lower tax environment should attract new business and higher income residents to the state.

I was surprised to see that the tax cuts included eliminating the income tax on non-wage business income. To me that is a mistake, since it provides a big loophole for pretty much any wealthy business owner to shield the vast majority of his income from taxes. Well, not a mistake necessarily. It sure does provide a big incentive for somebody to move his business to Kansas (I'm starting to have some thoughts myself actually), but I wonder if the governor and legislature really intended to leave the door open for people to use various tax strategies to avoid paying Kansas income tax. It's probably a nice stimulus for accountants and tax lawyers in Kansas at least.

 

[sunmaster14]

<snip>

I think this ignores the reality that most Western economies are post-industrial and developed and cannot expect the kinds of growth rates they enjoyed in the past and which are possible in today's developing economies.

I don't quite see your point. Why would low tax rates work better in a high growth environment but worse in a low growth environment? I could more easily argue the other way around. Income taxes in particular provide a disincentive to work (i.e. to produce). It seems that in a low growth environment, there already is less upside to working, so any additional disincentive might tip the balance towards working a lot less or not at all.

 

[Aulus Agerius]

I don't quite see your point. Why would low tax rates work better in a high growth environment but worse in a low growth environment? I could more easily argue the other way around. Income taxes in particular provide a disincentive to work (i.e. to produce). It seems that in a low growth environment, there already is less upside to working, so any additional disincentive might tip the balance towards working a lot less or not at all.

I don't think he means that the important difference is that today's economy is low growth, rather than today's economy is post-industrial. The US economy of the 19th and 20th century was largely and industrial one, accompanied by substantial territorial expansion. Therefore, one should not expect any policy to produce 19th century growth rates in 21st century America.

It has always astounded me how traditional rational-actor economic theory continues to produce statements as divorced from reality as "Income taxes in particular provide a disincentive to work." Here in real life, regardless of the tax rate, people need to work because they don't want to be destitute. Whether they're taxed at 5% or 40%, work is still better than no work: better a slice of the pie than no pie at all. The tax rate has absolutely no effect on the amount of work I do. That is influenced by other factors - like how much work I'm able to get, family commitments, whether the work is worthwhile and interesting, the bills that need to be paid.

But hey, the big incentive here is to hire an accountant and take advantage of the loophole. I wonder if it is actually possible to structure a complete range of jobs as distinct businesses. Subcontractors for stocking shelves at Walmart?

 

[DavidJames]

It has always astounded me how traditional rational-actor economic theory continues to produce statements as divorced from reality as "Income taxes in particular provide a disincentive to work."

The forum has more then a few who live in the world of theory. Some people are "deep thinkers" and love to pontificate (read show off/********) on their "knowledge" of pet theories.

In the science forum it's fun because it's educational and good reading. In politics and economics, it's laughable, and fun for that reason.

 

[sunmaster14]

I don't think he means that the important difference is that today's economy is low growth, rather than today's economy is post-industrial. The US economy of the 19th and 20th century was largely and industrial one, accompanied by substantial territorial expansion. Therefore, one should not expect any policy to produce 19th century growth rates in 21st century America.

Well, then it's a strawman, since the argument in favor of income tax cuts is not that it will produce 19th century growth rates (were those even high?), or any particular growth rate. It is only that they will lead to higher growth rates than we currently have.

It has always astounded me how traditional rational-actor economic theory continues to produce statements as divorced from reality as "Income taxes in particular provide a disincentive to work." Here in real life, regardless of the tax rate, people need to work because they don't want to be destitute. Whether they're taxed at 5% or 40%, work is still better than no work: better a slice of the pie than no pie at all. The tax rate has absolutely no effect on the amount of work I do. That is influenced by other factors - like how much work I'm able to get, family commitments, whether the work is worthwhile and interesting, the bills that need to be paid.

It depends on your particular situation, the difference in marginal tax rates that you're facing, and whether or not you fully appreciate the amount of taxes you're paying. I am very cognizant of tax rates, and when marginal rates went up a lot for me in 2013, I actually turned away business because I didn't think it was worth my time. I also spend a lot more time thinking of ways to manage taxes, both for myself and my clients. The Obamacare taxes on investment income really altered the investment landscape for affluent people quite a bit.

At the lowest end of the wage scale, implicit marginal tax rates are very high and create a huge disincentive to work. That was the main factor in the loss of jobs due to Obamacare predicted by the CBO early this year. The income-dependent phase-out of subsidies resulted in a 15-20 point increase in the marginal tax rate for those receiving subsidies.

I agree that for most people a 1 or 2 percentage point change in marginal tax rates won't change how much they work. Still, when averaged over the entire population, the effect is probably noticeable. Remember, many of the metrics of the economy reported in the media and by politicians are only fluctuating by a 1 or 2 percentage points. For example, 6% unemployment is bad, but 5% unemployment is great. Real GDP growth of 2.5% is good, but 1.5% growth is sluggish. You think a reduction in your take-home pay of 4% is not enough to make you work less, but would you really notice if you worked less by 1 or 2% because of it? Or quit that job a little earlier than you would have, or took a little extra time between jobs to travel?

But hey, the big incentive here is to hire an accountant and take advantage of the loophole. I wonder if it is actually possible to structure a complete range of jobs as distinct businesses. Subcontractors for stocking shelves at Walmart?

Not a bad idea, but the state probably requires that you pay yourself a plausible market level wage, so unless you make a lot more than that, it wouldn't help.

 

[The Don]

I don't quite see your point. Why would low tax rates work better in a high growth environment but worse in a low growth environment? I could more easily argue the other way around. Income taxes in particular provide a disincentive to work (i.e. to produce). It seems that in a low growth environment, there already is less upside to working, so any additional disincentive might tip the balance towards working a lot less or not at all.

I explained myself badly, Aulus Agerius made my point. IMO there's a cargo-cult culture going on where right wingers are saying "we had great growth back in the day when taxes were low" when they're ignoring the myriad other factors that brought about the high growth.

 

[The Don]

Well, then it's a strawman, since the argument in favor of income tax cuts is not that it will produce 19th century growth rates (were those even high?), or any particular growth rate. It is only that they will lead to higher growth rates than we currently have.

......and the Kansas experiment seems to show that in the short term at least, lower taxes do not lead to higher growth.

I presume this is because at the moment the issue isn't people choosing to work less because it isn't tax efficient or convenient for them to do so but rather a lack of job opportunities which pay a living wage.

 

[sunmaster14]

I explained myself badly, Aulus Agerius made my point. IMO there's a cargo-cult culture going on where right wingers are saying "we had great growth back in the day when taxes were low" when they're ignoring the myriad other factors that brought about the high growth.

I see. Well, I haven't comes across very much of that. There's quite a bit of economic research on the response of workers to marginal tax rates, so I don't think it's necessary for proponents of lower taxes to fantasize about the good old days 120 years ago. Here's the most recent CBO analysis I could find. Note that the relevant effect here is the "substitution" effect. That's where people substitute more leisure time for work time as marginal tax rates on work increase. The "income" effect has to do with the influence increasing income (usually from government subsidies) has on the desire for people to work.

The table shows a substitution effect elasticity of about 0.24. This means that for each 1% decrease in after-tax income (which corresponds to a smaller than 1 percentage point change in tax rates because your after-tax income is smaller than your taxable income on which the tax rates are applied), the amount you work is expected to decrease by 0.24%. The example the CBO illustrates is for a person whose marginal tax rate increases from 30% to 32%. In this case, there is a reduction in after-tax income of 2.9% (2%/70%), and the amount that person works is expected to decrease by 2.9% x 0.24 = 0.70%.

The income effect would actually counter this to some degree (the worker is made poorer by the lower after-tax income, so he feels he needs to replenish that lost income by working harder), and that contributes 0.13% in the other direction. So the net effect would be a decrease in work of 0.57%.

 

[sunmaster14]

......and the Kansas experiment seems to show that in the short term at least, lower taxes do not lead to higher growth.

I presume this is because at the moment the issue isn't people choosing to work less because it isn't tax efficient or convenient for them to do so but rather a lack of job opportunities which pay a living wage.

Well, when those tax cuts are coupled with spending cuts, I agree, but I also think it is a fairly obvious effect (which is not to say that Governor Brownback understood it or told the truth about it). When the government cuts spending, the first order effect is that GDP goes down. It's as simple as that because GDP is equal to all of the spending within the state, and the government spending is a part of that. That doesn't mean that spending cuts are always bad, and spending increases are always good, however. First, it is a short-term effect which fades over time as the economy adjusts and the private sector grows; second, GDP is not the only measure (or even the best measure) of economic growth or vitality. For example, if the government were to spend $1B hiring people to dig holes and another $1B to fill them back in again, GDP will have increased by $2B, but I'm not sure any good will have come of it.

 

[The Don]

Well, when those tax cuts are coupled with spending cuts, I agree, but I also think it is a fairly obvious effect (which is not to say that Governor Brownback understood it or told the truth about it). When the government cuts spending, the first order effect is that GDP goes down. It's as simple as that because GDP is equal to all of the spending within the state, and the government spending is a part of that. That doesn't mean that spending cuts are always bad, and spending increases are always good, however. First, it is a short-term effect which fades over time as the economy adjusts and the private sector grows; second, GDP is not the only measure (or even the best measure) of economic growth or vitality. For example, if the government were to spend $1B hiring people to dig holes and another $1B to fill them back in again, GDP will have increased by $2B, but I'm not sure any good will have come of it.

If there aren't spending cuts then it's just a return to the GOP's favourite "borrow and spend" as opposed to "tax and spend" from the other lot.

As I mentioned above, the long term effects are not known at this time but I presume that if Kansas keeps this experiment up and is still lagging 5, 10 , 15 years down the line, it's just that we haven't waited long enough. The UK adopted an "austerity" approach (cutting taxes for the wealthy and reducing spending in real terms) to recovering from the depression which is why, in GDP per head terms, we are still well behind where we were in 2008 whereas the US stimulus approach has the economy well ahead. So a 6-year timeframe isn't long enough.

One thing that does seem to be clear from analysis from country to country and looking at mature economies like the UK which has tried various models is that countries which have comparatively generous welfare provision and more progressive tax regimes have lower levels of income and wealth disparity and have higher levels of economic and social mobility. If the Kansas experiment does work and per-capita GDP growth does outstrip the rest of the U.S. economy then it is likely that an increasingly isolated top n% will be the ones who actually benefit whereas the vast majority won't share.

 

[NWO Sentryman]

For a minute there I thought Kurt Cobain had risen from the grave and was doing a gig in Kansas

 

[MG1962]

The Kansas Evolution Wars, I and II, illustrate the socially bifurcated nature of that state.

I'd suggest it has more to do with the disconnect between the people who were voted in and those who put them there.

Remember the most recent evolution war was ended when 6 of the 8 politicians who championed the creationist view in schools were voted out of office the very next election.

 

[MG1962]

One thing that does seem to be clear from analysis from country to country and looking at mature economies like the UK which has tried various models is that countries which have comparatively generous welfare provision and more progressive tax regimes have lower levels of income and wealth disparity and have higher levels of economic and social mobility. If the Kansas experiment does work and per-capita GDP growth does outstrip the rest of the U.S. economy then it is likely that an increasingly isolated top n% will be the ones who actually benefit whereas the vast majority won't share.

However Kansas is a poor test subject. It has two industries that dominate the economy, agriculture and oil. Neither of which react all that much to domestic policies.

 

[sunmaster14]

If there aren't spending cuts then it's just a return to the GOP's favourite "borrow and spend" as opposed to "tax and spend" from the other lot.

The GOP is supposed to be about less government spending period, since too much government spending is both inefficient and liberty-reducing. Still, borrow and spend is preferable to tax and spend, provided that the borrowing capacity is there (in the context of a state) or that inflation is moderate (in the context of a country with a fiat currency).

As I mentioned above, the long term effects are not known at this time but I presume that if Kansas keeps this experiment up and is still lagging 5, 10 , 15 years down the line, it's just that we haven't waited long enough. The UK adopted an "austerity" approach (cutting taxes for the wealthy and reducing spending in real terms) to recovering from the depression which is why, in GDP per head terms, we are still well behind where we were in 2008 whereas the US stimulus approach has the economy well ahead. So a 6-year timeframe isn't long enough.

Cutting taxes and cutting spending is not necessarily austerity. Austerity means reducing budget deficits, however you get there. I disagreed with the UK approach. I think budget deficits should have been allowed to swell as they were allowed in the US for the most part (although Obama has administered his own dose of austerity by raising taxes). I don't think the stimulus was key to the US recovery (such as it is), but rather the strong automatic stabilizers built into our system. A slowdown has a nonlinear effect on tax revenues (decreasing them) and a nonlinear effect on certain transfer programs (increasing them). So budget deficits rise quickly which then go to replenish private sector financial wealth. The stimulus was rather small in the grand scheme ($831B gross, which net of extra federal taxes paid on that spending, was probably less than $650B). As for the comparison between the UK and the US, there's a lot more going on than just fiscal policy. The UK is far more dependent on the Eurozone, which obviously has had its own unique problems.

One thing that does seem to be clear from analysis from country to country and looking at mature economies like the UK which has tried various models is that countries which have comparatively generous welfare provision and more progressive tax regimes have lower levels of income and wealth disparity and have higher levels of economic and social mobility. If the Kansas experiment does work and per-capita GDP growth does outstrip the rest of the U.S. economy then it is likely that an increasingly isolated top n% will be the ones who actually benefit whereas the vast majority won't share.

I don't believe it is true that there are higher levels of economic and social mobility in so-called welfare state countries as compared to the US. Studies claiming that completely ignore the diverse demographics in the US and the relatively homogeneous demographics in those other countries. There's a problem in the US to be sure, but it is wholly unrelated to our economic system. As for income and wealth inequality, meh, I think there is too much focus on this. Consumption inequality is what people should be focusing on, and there is far, far less of that. The consumption distribution is shifted so much higher in the US, that even the poor live pretty well compared to the poor in other countries. I don't see why it should matter so much that there are so many billionaires in the US.

 

[sunmaster14]

However Kansas is a poor test subject. It has two industries that dominate the economy, agriculture and oil. Neither of which react all that much to domestic policies.

This is a good point. Changing tax policy could encourage a move to a more diversified economy in the long term, but in the short term, Kansas' economy will be more dependent on the weather and the price of oil and natural gas. Because of this thread, I actually know more about Kansas' economy than I ever wanted to (which was zero), but it does seem that the government could do with a lot more debt financed spending. It sounds weird, but the financial strength of the state was too good. Lowering taxes and increasing debt seems like the right thing to do to me.

I have advocated for this in both cities I've lived in over the last 12 years, directly to the mayor in the most recent case about five years ago. At a campaign fundraiser, he was bragging about how my city had been able to maintain its AAA rating by reducing spending, etc, and I told him afterwards that it wasn't worth it. Even a downgrade to an A rating would cost the city bupkis in terms of higher interest rates, and he may as well take advantage of the implicit subsidy provided to municipalities by the federal government by issuing more tax-exempt debt.

 

[The Don]

I don't believe it is true that there are higher levels of economic and social mobility in so-called welfare state countries as compared to the US. Studies claiming that completely ignore the diverse demographics in the US and the relatively homogeneous demographics in those other countries. There's a problem in the US to be sure, but it is wholly unrelated to our economic system. As for income and wealth inequality, meh, I think there is too much focus on this. Consumption inequality is what people should be focusing on, and there is far, far less of that. The consumption distribution is shifted so much higher in the US, that even the poor live pretty well compared to the poor in other countries. I don't see why it should matter so much that there are so many billionaires in the US.

It's not a case of belief, studies show it both inter and intra-generationally that the US has low mobility

 

[rwguinn]

Since Kansas has a large portion of its economy based in aviation, especially GA, and given the current US administration and Congressional hatred of and ongoing attempts to kill all aviation in the United States, it is no surprise that Kansas has gone to the weird side...