When cause and effect aren't related

by: Eric B.

Tue Jun 26, 2012 at 11:05:14 AM EDT

Some of you might have caught a piece written by a guy named Michael Fumento published a couple of weeks ago in Slate about why he no longer considered himself a conservative. Well, that's not entirely true. Like a David Frum, he still considers himself a conservative. He just doesn't regard today's conservative movement to be a movement of political conservatives. It has, he said, become what the conservative movement was supposed to be a reaction to ... hyperemotionalism and argument making detached from cold, hard facts. To anyone who's paid attention to the conservative movement's reaction to climate change and most other science-based issues, this was an unsurprisingly development.

In that vein, the News published an Op-Ed piece Sunday from ALEC about taxation and business. It's mostly just name calling and false causes.

Just in time for election season, junk economics is making a 2012 comeback bid. Some well-funded groups on the extreme Left are pulling out all the stops to beat pro-taxpayer reforms in the states under the guise that taxes "don't matter" in economic growth. Unfortunately, the numbers say otherwise. For decades, states with the most competitive, unregulated economic policies have grown while their big government counterparts have suffered.

The "Texas miracle," except that Oregon had even greater growth last year than did that state, and better than any state than the nation's second-smallest state economy in North Dakota. Oregon, by the way, has a graduated income tax, which Republicans and conservatives in Michigan claim would kill growth, and taxes the highest earners of its citizens at 11 percent. (Meanwhile, the tax-and-regulation vacant paradises of Mississippi and Alabama grew at negative .8 percent apiece, while Indiana, the state Nolan Finley most wants Michigan to emuluate, grew at a pace smaller than our own.) The sectors of greatest growth: Durable goods manufacturing (cars, i.e. the Detroit bailout); and professional, scientific, and technical services; and information services. Those last two groupings are significant because they represent high education sectors ... high education sectors that require an investment in, you know, public education.

The upshot of this is that raw tax rates, contrary to the entire premise of the piece, have little to do with economic growth and especially potential growth. There are other things at work there. In the biz, pretending that events are caused by stimuli through a chain that is either not real or that you can't prove is a false cause. It's the same thing as a lost cause, except that the person promoting it either doesn't realize how flimsy it is or does know but doesn't care because he or she is simply dishonest.

For anyone who has run a business, the idea that taxes don't matter for economic growth is absurd. High tax rates have a direct, negative impact on work, savings and investment.

More name calling. As the poet once said, if he could make his case he would. Instead, he has to resort to saying that the other person doesn't know what he or she is talking about.

Okay, let's bite, once again. Businesses don't expand based on tax rates.  Tax rates are a cost that are ultimately passed along to a consumer, so if consumers are willing to pay the higher costs for a good or service, then the business can continue to expand no matter the tax rate.

Businesses expand based on supply and demand. If they need more supply to satisfy demand, they grow. It's as simple as that (it's also even more true for small businesses, which have fewer resources to lean on to survive hard times). Now, this is where tax rates do come in. If you take more money away from the people most likely to spend it, and statistically these are the people at the lower ends of the earning rates, then you remove money from the economy that could be spent purchasing goods and services. This is why they call a flat income tax rate a regressive tax. It harms the economy by hitting up someone who spends 90 percent of his or her income on hard goods or services the same as someone who might spend 40 percent. You can tax the person who spends 40 percent of his or her income higher and have a smaller impact on potential economic growth.

So, what did we have last year, what "pro-taxpayer reforms" did we get? We got a cut in business taxes, and a hike in income taxes for the lowest earners. This is hardly "pro-taxpayer" since a lot of them paid more to support a business tax cut. That tax cut further created a budget deficit that was largely addressed by cutting wages and benefits packages (requiring part of those lowered wages to be spent making it up) for public employees. In other words, not only was it a direct transfer of wealth from those most likely to stimulate growth through higher use of the money, it also took money from others likely to spend it to make it happen. You could not, if you tried, come up with policy more intended to encourage economic stagnation, and more harmful to small businesses, if you tried.