We retired Tax Justice Blog in April 2017. For new content on issues related to tax justice, go to www.justtaxesblog.org
Supply-side economist Arthur Laffer has been very busy the last few years trying to convince state lawmakers that cutting taxes and making them more regressive will lead to an economic boom. At the same time, our partner organization, the Institute on Taxation and Economic Policy (ITEP), has done a lot of work pointing out the serious flaws in Laffer’s so-called research, and explaining why taxes and the public investments they pay for are key to healthy state economies.
Over at PBS, meantime, the fedora-donning business correspondent for the News Hour, Paul Solman, had gotten wind of ITEP’s critiques. After reading ITEP’s “States with “High Rate” Income Taxes are Still Outperforming No-Tax States” and deeming it “a convincing piece of work,” Solman decided to sit down with Laffer and ask some questions. Laffer’s response was predictable and anecdote-heavy. Aside from recycling the same meaningless statistics ITEP has debunked before, he also included a data point that’s hard to rebut unless you live inside his brain, that he and his family moved to Tennessee “exclusively because of taxes.” (Of course, a guy who’s made a living bashing taxes is not a particularly representative citizen.)
Happily, PBS’s Solman decided to do a little fact-checking and went looking for an expert, “impartial point of view” (his words, not ours) to help glean whether Laffer’s promise of sure-fire economic growth is all that – or all wet. For his follow up piece, he turned to Joel Slemrod, noted public finance expert and chair of the Economics Department at the University of Michigan.
In one of many subtle but clear swipes at Laffer’s methods, Slemrod explained that while “economists have developed increasingly sophisticated statistical techniques to try to tease out the causal link between policies and performance … Laffer’s analysis is not sophisticated.”
Slemrod’s criticisms of Laffer closely parallel those made by ITEP in 2012 and early 2013. For one thing, Laffer fails to control for non-tax factors that impact growth. For another, the economic measures he chooses (cherry picks, really) don’t capture “what’s happened to the … well-being of a typical resident.” And, Laffer ignores how tax cuts require cuts in public investments that are hugely important to state economies.
On this last point, Slemrod notes that: “Laffer makes clear that … he believes more money does not provide better public services. This is a controversial statement that he backs with a few anecdotes, but it is not one that is widely held.”
In other words, Laffer and his supply-side compatriots have campaigned to frame most every government program as “wasteful” to make the idea (and their ideological obsession) of defunding government seem somehow justified.
Given all of this and his vast expertise, Slemrod concludes that ITEP’s study “make[s] arguably better methodological choices” than Laffer’s. (We’ll take that as a compliment!) As Slemrod has pointed out in previous interviews, serious research has shown taxes to have little, if any, effect on economic growth; in fact, that “[r]aising taxes and using the money for education and certain infrastructure could certainly be beneficial to an economy.” Laffer’s tax-phobic worldview notwithstanding, public services do matter to economic growth, and that means we will always need an adequate, fair, and sustainable tax system to pay for them.