Why Tax Cuts Worked for Russia, But Not Kansas

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“Why Tax Cuts Worked for Russia, But Not Kansas” is the title of a 10/18 article in Bloomberg View.

The article was written by: “Leonid Bershidsky, a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.”

It is a typical, though still infuriating, article about economics by someone who either doesn’t understand economics or intentionally is deceptive.

Here are some excerpts:

Donald Trump may lose the presidential election, but the idea of major tax cuts as a way of boosting the economy is likely to remain a central tenet of Republican ideology long after he’s gone.

Opponents say that if you want to see why such programs don’t work, you need look no further than Kansas, where the Republican governor, Sam Brownback, put in place radical tax cuts four years ago.

Overall, federal tax cuts are economically stimulative. However, the latest iteration of Trump’s proposals indicate the cuts mainly would go to the rich, thereby widening the Gap between the rich and the rest.

“Such programs don’t work” (meaning, “tax cuts don’t stimulate an economy”) is, as a general statement, false. But there is a gigantic difference between state (monetarily non-sovereign) tax cuts and federal (Monetarily Sovereign — MS) tax cuts.

To lump the two is a sign of economics ignorance, and that is the problem with Bershidsky’s entire article.

The ignorant/deceptive equate tax cuts with the need for spending cuts.  True for state and local governments; false for the U.S. federal government.

The most effective economic initiative undertaken by President Vladimir Putin in his 16 years in power was to replace a progressive tax scale with a 30 percent top rate in favor of a 13 percent flat tax.

Putin’s 2001 tax reform saved the Russian budget from chronic underfunding and a woeful dependence on high-rate borrowing.

Replacing a progressive tax with a regressive tax is a gift to the rich, and widens the Gap. In the U.S., for instance, sales taxes and FICA are the two main regressive taxes.

One thing tax cuts do not do is save a budget from “chronic underfunding” and/or a “dependence on borrowing.” Cutting taxes to increase total tax collections works only in special circumstances (the “Laffer curve.”)

The Laffer curve is based on a simple premise: Because zero taxes would be collected if the tax rate was 0% or 100%, there must be some place between 0% and 100% where the maximum tax is collected.

The problem: No one ever can know where that place is, because it varies according to a multitude of ever-changing circumstances.

“The Trump tax plan is the Brownback tax plan,” says Duane Goossen, the state’s former budget director. Under a Trump administration, “what’s happening here would happen to the whole country.”

Whether Trump’s plan is a good plan or a bad plan, one thing is certain: The effects on Iowa and on the U.S. would be markedly different.

It’s like saying that feeding manure to animals would have the same effect as feeding manure to plants. That is how different Monetarily Sovereign governments are from monetarily non-sovereign governments.

To the supporters of Hillary Clinton, who wants to raise taxes on the wealthy, Kansas’s problems  — a big budget shortfall and anemic growth — are the natural result of any broad tax-cutting strategy.

Absolutely, 100% false as regards to anemic growth. While tax cuts can cause a budget shortfall, this is no burden at all for MS governments, which create money ad hoc, by paying creditors.

The U.S. government has run “budget shortfalls” during all but a handful of its  240 years. No problem. We still are solvent.

The federal government can (should) run budget shortfalls every year in the future, to achieve economic growth.

Putin’s reforms immediately increased personal income tax revenue to 2.9 percent of gross domestic product in 2001, from 2.4 percent the previous year.

Why does the author consider this a good thing?  Every nation has three financial sectors: The private sector, the federal government sector, and the foreign sector.

Money flows between sectors. In order, for instance, for the federal sector to have an inflow of money, that money must flow out of the private and foreign sectors.  Why would it be beneficial to any nation for net money to flow out of the private sector?

It wouldn’t be beneficial.  It would be harmful.

Since the income tax cuts, Kansas has raised its sales tax twice.

Of course, it has.

Brownback is a Republican. Republicans support the rich vs. the rest. Sales taxes are regressive, punishing the rich far less, and widening the Gap.

Brownback was mainly concerned with his home state’s population outflow to other states and the subsequent loss of Kansas’s political power.

The governor’s analysis of the migration flows gave him the idea that Americans were fleeing to states with lower taxes.

(But) Kansas lost almost 6,000 people to outward migration last year, many of them to higher-tax states. “I don’t have oceans and I don’t have mountains,” the governor told me. “Just got mountains of grain.

Right. People move for many reasons, but taxes are not high on the list, especially for the middle and lower income groups.  Jobs and weather are far more important.

Kansas’s gross domestic product grew 4.8 percent from the end of 2012 through the first quarter of 2016, less than half the national rate.

Nor have the cuts resulted in a job boost.

“Kansans treasure their schools, and I do, too,” the governor says. Schools are responsible for more than half of the state’s spending. At the school level all people see are painful cuts.

Classroom assistants have been moved to a 29-hour week, stripping them of benefits and making them hard to hire at $7.50 an hour.

While six years ago, there were 22 students in the average class, there are 27 to 28 now.

The privatization of school transport has resulted in more crowded buses and longer routes.

Ah, yes, privatization — the rich love it. But contrary  to what the rich claim, privatization almost always results in poorer service and ultimately higher costs.  See: Privatization scam.

Republican politicians and the governor’s office contend that the cuts should make the public school system more efficient, not weaker.

“Every time the schools need more funds,” O’Neal, the former speaker, says, “They say, oh, we’re going to lose this chemistry teacher. But why not a janitor or a third vice-principal?”

Or why not privatization? That usually is the recommendation.  Fire the janitors and hire an outside maintenance company. That is what the rich love to recommend.

“We’re broke,” Goossen says. “There’s no money in the bank.”

And there it is, the answer to the question. Kansas, being monetarily non-sovereign, is broke.  The United States, being Monetarily Sovereign, never can be “broke.” It has the unlimited ability to pay its bills.

Tax cuts are like a train that cannot back up.

Even Teflon Putin rebuffed his technocratic advisers this year when they suggested going back to a progressive income tax.

Putin did it because he caters to the rich, who do not like taxes (except a regressive tax like sales tax). The rich despise progressive income taxs.

The danger of Trump’s Brownbackian proposals is not inherent in tax-cutting as such.

It’s that Trump and congressional Republicans might cut taxes for the wrong reasons, with the wrong expectations and in the wrong way.

The U.S. federal  government neither needs nor uses tax dollars. Federal taxes do not fund federal spending.

That being the case, even if all federal tax collections fell to $0, the government could continue spending forever, and the economy would grow markedly.

Though all federal tax cuts are stimulative, tax cuts done “the wrong way,” i.e cuts that benefit the rich more than the rest, widen the Gap and so, damage the economy.

Sadly, the Kansas tax cut experience will provide false grounds for claiming that “tax cuts don’t work,” without consideration of the differences between the federal government and state/local governments.

Those who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics, and should not make economics decisions.

Rodger Malcolm Mitchell
Monetary Sovereignty

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•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)

•Deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control.

•The limit to non-federal deficit spending is the ability to borrow.

•Liberals think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between rich and the rest.

•Austerity is the government’s method for widening the Gap between rich and poor.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY