As I See It

July 7, 2014

Stephen Moore: What’s the matter with Paul Krugman? Give Kansas tax breaks time to work

There are dozens of reasons why some places grow and others lag behind — and taxes are only one of them.

Editor's note: This column misstated the job growth rates for four states and the time period covered.  Please see notes below where the errors occurred.

Paul Krugman of The New York Times took a shot at Arthur Laffer and me last week calling us “charlatans and cranks” for advising governors around the country to cut taxes to boost economic growth and jobs.

Krugman says it went awry in Kansas, where Republican Gov. Sam Brownback cut the top tax rate from 6 percent to 4.5 percent and to zero on small-business income. According to him, the Kansas economy is lagging and the state shows that “tax cuts don’t have magical powers.”

Well, it’s true, tax cuts don’t have magical powers, and it is an often-repeated caricature by the left that Laffer and I and others believe that to be true. There are dozens of reasons why some places grow and others lag behind — and taxes are only one of them.

But what is irrefutable from the evidence in the states, not just Kansas, is that strategic tax-rate reductions can ignite growth and employment. Memo to Krugman: Read our new book: “An Inquiry into the Nature and Causes of the Wealth of States.”

Here is what the national data tell us: Over the past two decades, the nine states without an income tax have had double the population growth and more than double the income growth of states with very high income taxes. These results are statistically significant, which means it is very unlikely they happened by chance.

This does not mean all states that cut taxes have growth or that all states with high taxes don’t have growth. It means there is a strong propensity for low-tax and tax-cutting states to grow. Period.

This is a problem for the left because places such as New York, Massachusetts, Illinois and California that have been following Krugman’s (and President Barack Obama’s) economic strategy are getting clobbered by tax-cutting states.

Please see editor's note at the top of this column. No-income-tax Texas gained 1 million jobs over the last five years, California, with its 13 percent tax rate, managed to lose jobs. Oops. Florida gained hundreds of thousands of jobs while New York lost jobs. NOTE: These figures are incorrect. The time period covered was December 2007 to December 2012. Over that time, Texas gained 497,400 jobs, California lost 491,200, Florida lost 461,500 and New York gained 75,900. Oops. Illinois raised taxes more than any other state over the last five years and its credit rating is the second lowest of all the states, below that of Kansas!

Low taxes may not be “magical,” but they do seem to make places mighty attractive to millions of Americans who are voting with their feet to call these places home.

As for Kansas, the tax cut has been in effect a mere 18 months — not a lot of time to measure the impact. What we do know is that Kansas had slightly more economic growth (2.4 percent) than the nation as a whole (2.2 percent).

Krugman says job growth in Kansas lags behind the rest of the region, but in an interview, Gov. Brownback explains why: “We’ve cut public-sector jobs by making government more efficient.” As for private-sector job growth, “we’re second in the region last year behind only Oklahoma, which has an energy boom.”

The Kansas story is still incomplete, and we will see over the next few years whether growth is revived in a state that people have been fleeing for the past decade. Tax revenues are down, but they are in most states because of reductions in capital gains receipts from 2013.

In Kansas City, the growth has been much faster on the Kansas side of the border than the Missouri side. For now, there is nothing the matter with Kansas.

Krugman resorts to a line of argumentation that is all too typical of liberals. Cherry-picking a few events — the occasional high-tax state that is doing better than average, or a low-tax state that is falling behind — to blur the unmistakable pattern that low taxes (along with light regulation, energy production and right-to-work laws) have become magnets for people and businesses and jobs.

Governors and state legislators are starting to get it. Liberalism left unchecked creates economic mayhem, high unemployment, poverty and dead zones like Detroit and Newark and Rochester.

Blue states and cities have two options: lower taxes and regulations to grow the economy or keep listening to Paul Krugman and continue to bleed to death.

Who’s the real con artist and charlatan here?

Stephen Moore, of Falls Church, Va., is chief economist at the Heritage Foundation. A version of this piece first appeared in Investors Business Daily.

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