Sunday, July 18, 2010

The Price of Government

Senate Minority Leader Mitch McConnell, struggling vainly against his smirk, says that there is "no evidence whatsoever that the Bush tax cuts actually diminished revenue." The GOP has become the party of all tax cuts all the time; no matter the economic ailment or situation, tax cuts are always the right policy.

The laughable Laffer Cruve
Such a doctrinaire certainty accords poorly with both its economic underpinnings and with common sense. The intellectual basis for tax cuts as stimulation is so-called supply-side economics, and specifically the Laffer Curve. The core concept is that there is an optimal tax rate where revenues from tax collection are maximized. The problem (true in too many economics graphs) is the axes are labeled minimally, if at all. Obviously a tax rate of zero will produce no revenue, and a perfectly confiscatory tax rate of 100% will likely produce little revenue either, whether by disincentive or by noncompliance. These are the easily numbered endpoints of the curve. But where does the "revenue maximizing point" lie on the x-axis? The typical Laffer Curve graphic is symmetric, suggesting perhaps a tax rate of 50% is optimal, but no one truly knows, and I doubt you would find many politicians of any party advocating such a number.

McConnell and his sycophantic elephant herd clearly assume that current tax rates place us on the right hand side of the Laffer Curve, in the "region of declining revenue" so tax cuts increase revenues. Economists of all political stripes agree that the available evidence suggests instead that we are in the "region of increasing revenue" and that cutting taxes will decrease rather than increase revenues.

It's not hard to see why an unrelenting belief in endless tax cuts is bad economics. Politicians who run on a platform of ever more tax cuts will, at length, run up against the lower bound, a zero tax rate where there is no tax revenue at all. Long before that time revenue will shrink with the decline in tax rates. Asymptotically, advocacy of blind tax cut orthodoxy will run into empirical reality long before. Then what? It is a reductio ad absurdum and we are already breaching the absurd.

The slogan of running government like a business has been around for years, but I don't see this as more than a facile nostrum. Government and businesses have different purposes and different governing structures. What products and services they provide, and how they do so, is not the same. For example, pricing a product or service involves weighing many factors. The amount of revenue generated is important, but not the only consideration.

In pricing government, i.e. in establishing the price (in taxes), what business purpose is government trying to achieve? Providing value for the money? Building brand loyalty? Expanding market share? Driving competitors out of business? Being the lowest cost provider? There is doubtless disagreement about the purpose, and democratic government, unlike business, virtually never operates under one coherent strategy embraced by all its employees. It is pointless, however, to evaluate what government does, or to modify its policies without being clear on the objectives.

McConnell lies. The real reason for endless tax cuts is not that we can afford them, but rather precisely because we cannot. Deliberately increasing the deficit forces either a retreat from tax cuts or increasing cuts in spending, and Americans don't tolerate retreat in any context. Today's deficit scolds are the policy heirs of Grover Nordquist, and his ilk: to shrink government enough that it can be drowned in a bathtub.

A business can survive declining revenues by cutting costs and by borrowing--to a point. Eventually, the business must have adequate revenues to continue as a going concern.

What business is governed by a board and run by executives relentlessly determined to shrink revenues until the business fails? Today's GOP, with their antipathy to taxes irrespective of history, economics or reason, reveal their true agenda as political nihilists. I would never hire them for any business of mine. Would you?

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