Why tax cuts don't work

Republicans are rolling out their tired claims that tax cuts are the way to prosperity. Of course they would say that - it's been the party mantra going back 30 years or more. Except that it's not true. Never has been, never will be. The California Budget Project has an easy-to-digest prime report that lays out the reasons.

In order for the state to make up any loss in tax revenue, businesses would either have to see their profits double or the state would have to bring down spending by a like amount. Both scenarios are unlikely. But won't lower taxes encourage businesses to spend more? Not really. State and local taxes represent a very small share of a company's costs (some businesses don't even pay state income tax). A business with costs totaling $100,000 would pay $1,000 to $2,000 less if it owed no state or local taxes - hardly consequential in deciding whether to expand.

From the report:

The historical record shows that large tax cuts - both at the state and national levels - fail to generate the substantial economic growth necessary for tax cuts to pay for themselves. For example, states that enacted large tax cuts between 1994 and 2001 - reducing revenues by at least 7 percent - performed worse on key economic indicators than other states: They subsequently experienced weaker growth in jobs and personal income and larger increases in the unemployment rate, on average, than states that did not enact large tax cuts.In the absence of strong economic growth, it is highly unlikely that states eventually recouped the revenues they lost as a result of providing the cuts. In fact, as state economies weakened during the economic downturn that began in 2001, the states that had provided large tax cuts had lower budget reserves and faced larger budget shortfalls, on average, than other states.

Paul O'Neill, who was Bush's first treasury secretary and former CEO of Alcoa, said he never made an investment decision based on the tax code. "If you are giving money away I will take it. If you want to give me inducements for something I am going to do anyway, I will take it. But good business people do not do things because of inducements, they do it because they can see that they are going to be able to earn [at least] the cost of capital out of their own intelligence and organization of resources."

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
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