Income Tax Cuts - Mary Fallin's War on the Poor

It has been an absolutely wacky first week of the Oklahoma legislature's 2012 session. Foods containing aborted fetuses? Personhood definitions? This cake featuring Ronald Reagan's face and an extra "W"? This declaration that "any action in which a man ejaculates or otherwise deposits semen anywhere but in a woman's vagina" would be "an action against an unborn child"? This isn't even counting the stuff going down at Night Trips' newest location, the insurance commissioner's office.

But maybe the most important news from this week was officially unveiled at Governor Mary Fallin's State of the State address. Fallin introduced a plan to reduce the Oklahoma state income tax drastically, from a current top rate of 5.25% down to a rate of 3.5% for individuals making more than $35,000 per year or couples making more than $70,000 per year. Fallin said that a family making $40,000 per year would pay 37% less in taxes in 2013. Amazing, right? So, how will we pay for it?

The official word is that the $100,000,000 revenue-deficiency in 2013 and the $300,000,000 revenue-deficiency in 2014 would be made up with the elimination of "loopholes", "credits", "carve-outs", and other words for things that unscrupulous businesses and rich people with personal accountants take advantage of. But, as it turns out, just doing the transferable tax credit stuff still means that the state is "woefully short" on making up the revenue lost. So that means eliminating a bunch of other tax credit programs that normal people use, like the personal exemption (claimed by 83% of tax payers), the earned income tax credit, the child care tax credit, a tax credit used to offset the sales tax for groceries for poor people, et cetera.

As it turns out, Mary Fallin's tax reform proposal would actually result in tax increases for the bottom 55% of income earners, according to the Oklahoma Policy Institute. Now that's broadening the base!

Other ways to pay for Fallin's tax reform proposal, according to Fallin, would be that as a result of shoveling fat stacks of Benjamins into the pockets of the Aubrie McClendons of the state, the state's economy would grow fast enough to overcome the revenue shortfall. "New jobs and increased investments in Oklahoma will lead to more revenue and increased collections in sales tax, corporate tax, excise tax, and more." Tax cuts pay for themselves, y'all. If this smells exactly like an Arthur Laffer supply-side voodoo economics argument-turd, it's because Arthur Laffer's consulting firm helped create the plan with the right-wing think tank Oklahoma Council on Public Affairs.

Oklahoma's economy has grown quite fast since the 2008-2009 recession in part due to our booming energy industry and in part because, well, nowhere to go but up, right? This should mean that bond ratings agencies would look more favorably at the credit rating of the state and its ability to pay back its bonds. But today Moody's announced that it was keeping the credit rating of the state steady, partly because of the tax reform plan, but mostly because our constitution makes it really hard to raise taxes.

From the Tulsa World:

The Moody's report says the state's financial situation is made stronger by a strong state constitutional balanced-budget requirement, a healthy state balance sheet, and substantial oil and gas reserves.

But the agency expressed concerns about the state's past and future plans to cut income taxes.

"The trend of decreasing income tax rates combined with the difficulty in increasing taxes constricts future financial flexibility," the Moody's report says.

So when bad economic times come again, tax reform will cripple the state, and we will be unable to afford many of the functions of government that so many people, at least in part, will depend on to offset the cost of having to pay higher taxes due to said tax reform.

Obligatory Debunking of Supply Side Economics by Liberal Blogger

Jacob mentioned something last week that I had never heard of before: the Laffer Curve. Alas, if only I had been taught economics by Ben Stein, like Ferris Bueller was. The Laffer Curve theorizes that at some rate of taxation, the revenue from taxation will reach a maximum. It is derived from this information:

1. Going up from a tax rate of 0%, the revenue from taxation will increase.
2. Going down from a tax rate of 100%, the revenue from taxation will increase (people will actually have a reason to work and invest).
3. The rest of the function is a continuous, second order equation with one and only one maximum (this is probably not true).

Those emphasizing supply-side trickle-down economics always assume that our nation operates on the high side of the curve. This was the rationale for the series of tax cuts that Ronald Reagan proposed in the early '80's, and you can still hear echos of this sort of thinking from conservative presidential candidates like John McCain and Rudy Giuliani.

Unfortunately, they say it is impossible in real life to empirically determine this magic tax rate, if it even exists (many think it does not). The position of the maximum revenue will be at a different rate depending on the state of the economy and government involved. But assuming the Laffer Curve is an appropriate model, we can see where on the Laffer curve we are by tracking the years where income taxes are cut and seeing if income tax revenue goes up or down as a function of gross domestic product (in order to normalize the data for good and bad economic periods). Or at least, that's what I'm going to try to do right now, with data from my favorite source as of recent, the Congressional Budget Office, and the Tax Foundation.

Methodology: I identified 8 times since 1962 where the tax policy changed from one year to the next. I tried to look at all statuses and all incomes to determine if the intent of the policy was to generally raise taxes or generally lower taxes. I then compared the income tax slash or hike with the change in income tax revenue from the effective policy year to the next.

• Bush had two tax cut bills, in '01 and '03, effective in '02 and '04. In both '02 and '04, income tax revenue went down, by 1.6% and 0.3% of the GDP, respectively.

• In '90 and '93, Elder-Bush and Clinton raised taxes. Income tax revenue went up in '94 0.1% of GDP, but went down in '91 by 0.2%.

• Reagan slashed taxes seemingly every year from '81 to '84, which resulted in a 1.5% decrease in GDP-normalized revenue from '82 to '84.
  

• In '78, taxes were raised, and the revenue increased 0.5% the following year.

• In '69, taxes were lowered, and the revenue decreased 0.3% the following year.

• In '64, taxes were lowered quite a bit, and revenue decreased 0.5%.
  

Thus, in every event (except for Elder-Bush's tax hike on the rich in 1990), economic data showed that we were in fact operating on the low side of the Laffer Curve, since tax rate increases always yielded more revenue, and tax rate decreases always yielded less revenue. This even occurred in '64, when those in the top tax bracket were taxed at an astounding 91%. Why is this important? If any presidential candidate tries to insist that they can pay for their tax cuts by the economic gains created for businesses, we should all know now that this is hog-wallop.

- QP