Cutting Taxes

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Do government revenues increase when taxes are cut? It’s a claim often made in congress and the state legislature. ASU Economists Dennis Hoffman Dean Robert Mittelstaedt from the W.P. Carey School of Business will discuss the issue.

Ted Simons: Republican lawmakers often promote cutting taxes as a way to increase government revenues. It's a topic of much debate, a debate we continue this evening with Robert Mittelstaedt, the dean of ASU's W.P. Carey School of Business, and Dennis Hoffman, an economist with the school's Seedman Research Institute. Good to have you both here.

Dennis Hoffman: Nice to be here.

Robert Mittelstaedt: Good to meet you Ted.

Ted Simons: The topic on the table is, do government revenues increase when taxes are cut?

Robert Mittelstaedt: I think there's lots of politician who's would like to have a simple yes-or-no answer to this. But the best I can come up with is, yes, sometimes. Maybe but. And it all depends. So it's the kind of thing -- I think the fundamental issue that you have to ask is, what do people do with their money if they get extra money they didn't expect? And rich people do different things than middle class people, than poorer people. So it's not an easily answered question.

Ted Simons: Not an easily answered question. But a question nonetheless. What say you?

Dennis Hoffman: Generally no, because of the laws of arithmetic. That just doesn't happen. There's certain circumstances that I can think that it could happen, and Bob is alluding to one, certainly if you -- if you provide incentives for more work, for more investment in the economy by lowering a tax burden, one could envision an economy churning along, increasing rather robustly in response to that, and having some revenue generated. But it's really going to be tough to generate based upon the new tax rate, literally more tax revenue than would you have otherwise.

Ted Simons: So the idea that a tax hike hurts business, fewer dollars for folks to spend, that particular idea disagree?

Dennis Hoffman: Well, look. It depends on what you're going to do with the money. Most of the arguments that you hear in the political arena today suggest, Ted, that the only thing we want to think about is the negative of this tax. Taxes by themselves are certainly a drag on the economy, they're a leakage out of the spending strain, OK? But we don't typically take those dollars and fly them out over the Pacific Ocean and dump them. We put them back in the economy.

Robert Mittelstaedt: Beyond being a drag on the economy, the real problem is that most folks -- most economists would agree that giving more money to government is not an effective way to produce jobs or to grow the economy. The government was created to do things that the private sector can't do for itself. And we've expanded that definition so far that now that we end up having big arguments about what the tax rates ought to be when we ought to be talking about what do you want government to do? So the complexity here is you can't pick any one variable like taxes alone, or benefits alone, or services alone and say, let's just turn this dial and see what happens. I think the biggest problem isn't what the tax rate is, it's the inconsistency over any uncertainty surrounding whether it's businesses or individuals over constantly changing all kinds of variables. And whether you're an individual or a company, you end up saying, how do I know what's going to happen next? And if I want to make a long-term plan or even a near-term plan, do I change my behavior because I heard this today about something that's going to change? So all these things where we're changing lots of things under lots of circumstances, becomes very difficult for people to understand what's going to happen.

Ted Simons: I hear that a lot, that business needs confidence, business needs stability in order to do X, Y, or Z. But as a business, knowing that X, Y, or Z equals profit? Will they not do that simply because they think a tax hike is coming or they're may be some stain built or they're not quite as stable as they would like? It seems to me if a business think as profit is coming, this other stuff shouldn't matter that much.

Robert Mittelstaedt: It shouldn't matter except to the extent that you have choices. And so in this country, within the borders of the United States, don't even talk about offshore, one of the big issues is, do you build a new plant in this state, or in an adjacent state or someplace else.
Ted Simons: Right.

Robert Mittelstaedt: Even do you set up separate corporations, so one big thing is, you set up a corporation in Delaware where there's no little or no tax, and you license all your own intellectual property from them so you pay revenues into that state's bank, bring them back out again, and you pay less state tax. This is the complexity.

Dennis Hoffman: We get caught on tax rates, I think the uncertainties over obligations for health care and benefits, meeting regulations and rules about who I can hire, and whether or not I'm culpable if I hire somebody who is illegal. Those are things and uncertainties I think that are far bigger barriers to business than small changes in tax rates.

Ted Simons: The idea of austerity equaling confidence and confidence equaling growth, do you agree with that?

Dennis Hoffman: Sure. Sure.

Ted Simons: That would suggest that you would agree with the other position.

Dennis Hoffman: I'm sorry, restate -- I heard the second part.

Ted Simons: If austerity --

Robert Mittelstaedt: OK. OK.

Ted Simons: That equals confidence, and confidence equals growth, we --

Dennis Hoffman: You gave me the "if" there. You gave me an "if". The first thing true. I don't know how austerity equals confidence in my way of looking at things. I don't -- I don't understand exactly the -- how that public finance calculus would work. Austerity initiatives, it's going to mean a massive deleveraging on the part of government now. What have we had over the last three years? Massive private sector deleveraging. It was time, we had overindulged. And this economy is going to take a lot of years to come back because the private sector has to deleverage. Rid itself of too much debt. Now we're asking government to do the same thing. I think you can make a very strong case that one of the things that's actually sustained us over the last couple years, there was one segment of our economy that continued to spend. We may think it's too much, but in a time of crisis, it was very useful.

Robert Mittelstaedt: So the sector of the economy that I think Dennis is talking about that continued to spend was government.

Dennis Hoffman: Absolutely.

Robert Mittelstaedt: And now --

Dennis Hoffman: that's not going to --

Robert Mittelstaedt: It's not that austerity is good, it's a question of when does government take too big a share of the economy what is so big it hinders the growth of the country. I heard a stat the other day I haven't verified yet, but I saw in print in one of the newspapers that in the last 20 years, 25% of all jobs created in the United States were created by government. That strikes me as crazy. At some level you ought to be able to say, wow, the economy grew, but government jobs shouldn't grow in proportion to the economy. Government ought to have economies of scale like you gain in industry, so it's not austerity per se, it's this balance.

Ted Simons: Last question, if cutting taxes is so good for the economy, why did the bush tax cuts and the years preceding -- what we've seen, from when President Bush took office, and that particular idea, why did we not see a boom economy? Why did we see the slowest growth really I've heard slowest growth in decades, maybe back to World War II?

Robert Mittelstaedt: Because we had a bubble. Because we had other things wrong in the economy. Juan Salvador Acevedo the problem with the economy wasn't the tax rate, the problem in the economy was lax lending standards, the problem was excessive borrowing, the problem in the economy was my kids' generation that doesn't understand by things you can pay for.

Ted Simons: Do you agree with that?

Dennis Hoffman: He's right in one sense, but I think what this tells us, Ted, is that modest and minor increases in taxes in D.C., along with cuts in government, can be a good solution to this deficit problem gone forward.

Ted Simons: OK. We need to stop it right there. Gentlemen, thank you so much for joining us. And that is it for now. Thank you for joining us. I'm Ted Simons. You have a great evening.

Robert Mittelstaedt: Dean, ASU W.P. Carey School of Business; Dennis Hoffman: ASU Economist;

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