Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Why Kansas’s Tax-Cut “Failure” Is Really a Success

  by    0   0

During its last session, the Kansas legislature voted to raise taxes. The national media and left-wing politicians immediately began finger-pointing, calling the state’s five-year tax cut experiment an epic failure.

In 2012, Kansas implemented an economic reform package that included a reduction of the top income tax rate from 6.45%  to 4.9%. The plan eliminated income tax on some businesses altogether. At the time Gov. Brownback called the plan “a shot of adrenaline into the heart of the Kansas economy.”

It didn’t quite work out as planned. Government expenses are expected to outpace income by $1.1 billion through June 2019. The legislature reversed course.

So what happened? One obvious answer is that you can’t just cut taxes. Government needs to shrink proportionately. That didn’t happen. But as economist Kel Kelly points out in the following article originally published at the Mises Wire, there is more to the story. It wasn’t a failure. You just have to understand how to look at it.

Last month, Kansas ended a five-year long experiment, whereby it lowered state income taxes with the expectation that it would boost economic growth in the state. As is widely acknowledged, Kansas’ low tax experiment was a failure. However, it was also a success. Few people know how to interpret the results, however, because few people use the correct economic framework to assess this experiment.

Lower taxes do contribute to higher economic growth and for everyone. This is because income that is not spent on taxes or otherwise, but saved — especially by the rich who have most of the savings — is put into bank accounts, money markets, stocks, bonds, and private equity, etc. (i.e., what some critics call “hoarding”). This saved income is the source of capital that businesses use to pay workers’ wages, as well as to support factories, office buildings, and tools and equipment that workers use to produce goods and services. Most of the physical means of production that our economy employs in sustaining us with goods and services is paid for by savings that people are allowed to keep, instead of having it taxed, in which case it would be used for consumption instead of investment (thereby depleting capital). The more incomes that are saved instead of taxed, the more investment, production, and economic growth our economy experiences. Productivity-enhancing capital from savings is the only source of increased economic growth.

The Kansas Republicans were correct, therefore, in assuming that lower tax rates cause greater economic growth. However, like most economists, they assumed that economic growth would show up in the form of increased wages, business revenues, and GDP. They further believed that these additional incomes would result in increased tax revenues that would offset the reduced revenues caused by lowered tax rates.

The problem with this thinking is that economists characteristically attempt to measure economic growth in monetary terms, which commingles two different concepts. Economic growth actually consists of and is defined by an increase in physical goods and services, not an increase in quantities of money. The quantity of money is controlled only by the central bank, and is thus independent of economic growth. The additional supply of goods and services created by economic growth lowers consumer prices relative to wages, which increases real incomes, but not money incomes. The practice of measuring real, physical production in monetary terms led Kansas economic planners into the error of thinking that increased economic growth would result in higher money incomes and thus higher tax revenue from incomes. They were looking in the wrong place for the benefits from lower taxes.

Kansas economic planners also expected decreased unemployment, but that did not materialize, for a different reason. Unemployment, in the long run, is not caused by lack of economic growth or of work available for unemployed workers to perform; it is instead caused by artificially high wage rates at the low end of the wage spectrum (i.e., minimum wage, union legislation, etc.).

Separate from the above is a bigger picture that critics on all sides ignore. First, it is not the tax rates in a single state that affect economic growth in that state, but the tax rates nationally (as well as international capital flows). Kansas taxpayers received a small 24% reduction on the state income tax they paid, but state income tax is a small portion of all taxes paid. Federal income taxes are more than six times greater, not to mention payroll taxes and other taxes and fees that equally serve to consume the savings that would otherwise be used for capital investment. And, it is not only taxes but also regulations, credit market distortions, and other restrictions on and manipulations of production that impede growth.

Second, the capital that supports production and economic growth in Kansas comes from savers across the country, not just from Kansas. In order to produce an observable result in Kansas, national — not only state — tax reductions would be required. Similarly, the increased savings that wealthy Kansas taxpayers received from tax cuts would not be used only by businesses in Kansas, but by businesses all over the nation. Just as capital from other states flows into Kansas, Kansas capital flows out of Kansas across the nation.

In sum, though every bit of extra capital helps the economy somewhere, it should not be expected that such a small tax cut would benefit Kansans, specifically, to a noticeable degree. Lowering state income taxes helps economic growth, but the benefits are spread nationally and not directly traceable through economic statistics such as GDP, nominal wage growth, or unemployment.

TaxFreeGold.Banner.1000x285

Get Peter Schiff’s most important Gold headlines once per week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

Government and Central Bank Medicine Makes the Economy Sicker

Every time the economy gets into trouble, governments and central banks react the same way – they cut interest rates and loosen monetary policy to stimulate borrowing and spending. The idea is that the “stimulus” will increase demand and pull the economy out of trouble. But there is a dark side to this policy – […]

READ MORE →

Ron Paul: The Fed Is Enabling Biden and Congress’ Destructive Agenda

On March 1, the national debt eclipsed $28 trillion. The mainstream media hardly gave it a mention. To put the speed of the borrowing into perspective, the US government added $5 trillion to the debt in less than 18 months. The Federal Reserve was already intervening in the economy prior to the pandemic. Remember, the […]

READ MORE →

Commercial Real Estate Market Drowning in Debt

We’ve talked extensively about the growing levels of debt in the economy. The national debt recently eclipsed $28 trillion. Corporate debt was already skyrocketing prior to the pandemic. All of this is driven by loose Federal Reserve monetary policy designed to drive borrowing. And people wonder why Peter Schiff insists the Fed can’t actually let […]

READ MORE →

Interesting COMEX Trend: Silver Short Squeeze Appears to Be on Track

COMEX is the primary futures and options market for trading metals such as gold and silver. There have been some interesting trends for silver in the COMEX in recent months. More investors are taking delivery of silver. In other words, the short squeeze may still be on track – albeit in slow motion – and […]

READ MORE →

What Is the Shipping Container Shortage Telling Us About the Economy?

As Peter Schiff pointed out during a recent interview with NTD News, America has never done worse on trade. He called it a sign that we don’t have a recovering economy. In fact, we have a phony economy in danger of collapse. The annual trade deficit for goods came in at an all-time high in January, […]

READ MORE →

Comments are closed.

Call Now