Head Smacker: The Rationale Construction Industry at Work


December 31, 2014

When the Republican-majority Congress starts up in January, they will want to set the stage for tax reductions for corporations and the wealthy.  The Rationale Construction Industry is doing its best to help.  Its work was in evidence in an opinion piece by Stephen Moore of the Heritage Foundation printed in the Washington Post on December 28.  It was an attempt to revive the Laffer Curve.  Arthur Laffer sketched a graph on a napkin 40 years ago, showing two unarguable points – that you don’t collect any revenue with tax rates at either 0 or 100 percent.  It’s the space between these two points that’s a lot murkier – is there some point within the realistic parameters of taxation where you get more revenue because tax reductions stimulate economic growth?  Even Mr. Moore acknowledges that getting more revenues by cutting taxes is a pretty well discredited idea.  “…even the most ardent disciples of the Laffer Curve don’t argue that cutting tax rates will increase revenue…,” he writes.  Still, Moore wants to bring it back, as a handy boost to the Congressional majority’s tax cut agenda.  His justification: revenues went up an inflation-adjusted 25 percent over the 8 years of the Reagan presidency, when tax rates were substantially reduced.  What he fails to say, but Paul Krugman points out:  in the decade before Reagan and those tax cuts, revenues grew by 30.3 percent; in the decade after, revenue grew by 31.4 percent.  Something besides tax cuts spurred greater revenue growth than in the Reagan years.  Krugman ascribes the growth that did occur during this period to monetary policy – steps by the Federal Reserve to loosen the money supply after a recession.  By the way, Krugman’s calculation of the revenue growth during the Reagan years is 14.3 percent, not Moore’s 25 percent.  But either way, the surrounding periods generated more federal revenues.
Moore’s revival of the Laffer Curve is meant to help construct the rationale for a new rule to be taken up by the House Republican majority on January 5.  The rule change will seek estimates of the long-term impact on the economy of various budget and tax bills.  The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) will be directed to guess how a proposal will affect jobs and economic output, and how those changes will affect federal revenues – known as “dynamic scoring.”  Some of this estimating is already done, but it has not been used much to project federal revenues because many respected economists are skeptical of how accurate such long-term projections would be (see a concise explanation of those difficulties from Jared Bernstein’s On The Economy blog).  There is a reasonable concern that those in Congress who want to cut taxes would drape their proposals in over-optimistic estimates of economic growth.  If the estimates are wrong, hundreds of billions of dollars in tax breaks will benefit corporations and high-income households, while the rest of us will be left to do without or pay more for services.

Of course, that’s why all of this matters.  Right now, big tax cuts are scored by the CBO as losing revenue and deepening the deficit.  Current federal budget law serves to discourage Congress from reducing revenues or increasing spending without replacing the lost funds somehow.  But what if you could show that revenues won’t decline, or at least not as much as the size of tax breaks would suggest?  Tax cuts get easier to make – your Rationale Construction Industry at work.

There is a lot of evidence that giant revenue reductions do not promote economic growth.  Over the decades, the policies most likely to generate growth, in addition to monetary policy, include federal investments in infrastructure like the interstate highways or in research, education, and health care, and federal spending to increase incomes – such as Social Security, unemployment insurance, SNAP/food stamps, and low-income tax credits.  The Rationale Construction Industry is not interested in showing how those federal actions promote growth; they just want to power those tax cuts.

The spending that government does expands the economy by funding some jobs directly and spurring the creation of others because more people, governments, and businesses have money to spend on products and services.  Moore, Laffer, and the other supply side rationalizers just don’t get this.  In discussing how to get economic growth after a downturn, Moore writes “The Laffer model countered that the primary problem is rarely demand — after all, poor nations have plenty of demand — but rather the impediments, in the form of heavy taxes and regulatory burdens, to producing goods and services.”  This is most head-smacking.  In a recession, or in an impoverished nation or community, there sure is plenty of demand.  Because there is no money to satisfy demand, no sane business will expand production, whatever the tax rate or regulatory picture is.  That is exactly what has slowed the current recovery.  Europe has had less recovery than the U.S. because their austerity policies have cut more than we have.

To the extent that Congress pushes through more tax reductions that benefit corporations and the rich, the lost revenue will be used as the excuse to cut the federal programs that really contribute to economic growth and our people’s economic security.  The Rationale Construction Industry will really crank it up then – we’ll be told we can’t afford education, or nutrition aid that responds when there is growing need, repairing roads and bridges, adequate payments to physicians through Medicaid, or protections against pollution and unfair corporate practices.  Don’t buy it.

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