The failed low tax experiment

Former Governor Granholm commented on my blog on a decade of state spending restraint. (You can find the blog and comment here.) The Governor wrote:

… Of course much of that was due to the changes in the economy, but I also cut taxes 99 times (small and large) in the first 4.5 years of my terms in the hope that Friedman/Adam Smith/Reagan were right. They were not. We still had the highest unemployment rate in the country. Enough of that experiment. Let’s move to what we know works. … This is what people must learn from Michigan’s laboratory of democracy: laissez-faire trickle-down theory might have been a fine strategy last century. But in a global economy our economic competitors are playing a much more aggressive, hands-on game. We’ve got to do the same: invest and grow rather than cut and lose.

The lesson she learned, most elected officials here and nationally have not. Seems like it would be a relatively easy lesson to learn. The evidence is clear. Bill Clinton started his Presidency with a big tax increase. The tax cutters guaranteed economic disaster. We got the strongest American economy, at least since the Great Depression, maybe ever. George Bush started his Presidency with what was billed as the biggest tax cut in American history, followed by more tax cuts, and we got the weakest economy since the Great Depression. How can anyone – except those living on planet ideology – still believe that lowering taxes is the key to economic growth?

Warren Buffet in a terrific New York Times op ed, entitled Stop Coddling the Super-Rich, arguing for higher taxes on the rich, explains the irrelevance of lower taxes to economic growth this way:

Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends. I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off. And to those who argue that higher rates hurt job creation, I would note that a net of nearly 40 million jobs were added between 1980 and 2000. You know what’s happened since then: lower tax rates and far lower job creation.

Bruce Bartlett – one of the original supply side tax cutters – provides further evidence in a New York Times Economix blog. He writes:

It would have been one thing if the Bush tax cuts had at least bought the country a higher rate of economic growth, even temporarily. They did not. Real G.D.P. growth peaked at just 3.6 percent in 2004 before fading rapidly. Even before the crisis hit, real G.D.P. was growing less than 2 percent a year. By contrast, after the 1982 and 1993 tax increases, growth was much more robust. Real G.D.P. rose 7.2 percent in 1984 and continued to rise at more than 3 percent a year for the balance of the 1980s. Real G.D.P. growth was 4.1 percent in 1994 despite widespread predictions by opponents of the 1993 tax increase that it would bring on another recession. Real growth averaged 4 percent for the balance of the 1990s. By contrast, real G.D.P. growth in the nonrecession years of the 2000s averaged just 2.7 percent a year — barely above the postwar average.

Buffett is right: lower tax rates and far lower job creation! So is Granholm. It’s time for a change away from a failed strategy. Let’s – as she wrote – invest and grow rather than cut and lose

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Lou Glazer

Lou Glazer is President and co-founder of Michigan Future, Inc., a non-partisan, non-profit organization. Michigan Future’s mission is to be a source of new ideas on how Michigan can succeed as a world class community in a knowledge-driven economy. Its work is funded by Michigan foundations.

This Post Has 2 Comments

  1. As one who lives in Michigan and barely survived the “dark ages” aka the Granholm Administration her statement is absurd. Business taxes and regulations have driven out droves of good companies. The woman is a disillusion liar and the States record of high unemployment, mass exodus of the population, burdensome labor and regulatory policies enacted by her ideas was the DIRECT cause of it. Jennifer Granholm left the State of Michigan a WRECK. Shame on you…

  2. Adam: Those comments may be what you post in your usual sites, but this site aims to provide factual backup for its positions. Can you please give m the list of additional labor and regulatory policies passed by Gov. Granholm that were not in place under Gov. Engler. Can you also demonstrate how business taxes “drove out droves of good companies,” complete with data that shows any business tax increases from the beginning to end of her term, and the names of the companies who left.
    The facts are clear: Michigan in 2000, under Gov. John Engler, was spending 9.49 percent of its personal income on state government. Under Granholm, that decreased to about 6.85 percent — a huge reduction in the tax burden on all of Michigan, but in particular on the top 10 percent of the income earner, including most businesses. The MBT rate under Granholm started at 2.35 percent and decreased to 1.9 percent. The income tax rate started at 4.4 percent and decreased to 3.9 percent. If you have different information, please bring it forward. But diatribes with no factual back up have no place here. Thanks.

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