Tax cuts not the answer to the Great Decoupling

In our first ever state policy agenda we identify dealing with the Great Decoupling as the preeminent economic challenge of our times. Figuring out how everyone benefits from a growing economy, rather than just those at the top.

In the report we make the case that cutting taxes is not the way to combat the Great Decoupling. That as Michigan has gone from a high-tax state to a low-tax state over the past three decades, we have also gone from a high-prosperity state to a low-prosperity state.

Ronald Brownstein in an Atlantic article entitled How Much Do Tax Cuts Really Matter? explores what happened nationally to median household income and the poverty rate during the administrations of the last four presidents who were in office for two terms. His conclusion:

With the Census measures from 2016 now public, it’s possible to compare the economic records of the past four two-term presidents. Over their respective eight years, Bill Clinton and Obama each raised taxes on the affluent and generally increased federal regulation of business (though Obama did so more aggressively than his fellow Democrat). By contrast, Republicans Ronald Reagan and George W. Bush each cut taxes, particularly on top earners, and slashed regulation, exactly as the GOP is promising to do now.

As the Republicans intensify their push for a major tax reduction, these economic records directly refute the idea that their plan is a surefire recipe for growth—or that its opposite is certain to depress it.

Notwithstanding Clinton’s tax increase and relatively pro-regulatory posture, the economy during his two terms produced by far the best record on both raising incomes and reducing poverty. Reagan generated the second-best record on raising incomes, but he trailed well behind Obama in reducing poverty. Despite two big tax cuts, Bush generated, by far, the worst record on both fronts.

The data: median household income up 15 percent during the Clinton administration, up ten percent in the Reagan administration, up 6 percent in the Obama administration, down two percent in the Bush administration. The poverty rate down 20 percent in the Clinton administration, down seven percent in the Obama administration, unchanged in the Reagan administration and up 21 percent in the Bush administration.

So if lowering taxes are not the answer to insuring a rising standard of living for all what is? Our answer: public investments in education, placemaking and shared prosperity. As we write in our state policy agenda:

The places with the strongest economies are those that combine high quality education systems and high quality of place that retains and attracts mobile talent. Both education and placemaking require public investments. These types of public investments, paid for by our taxes, are the state policy playbook most likely to return Michigan to high prosperity, creating an economy with lots of good-paying jobs. Add to that making shared prosperity a priority and it gives the state the best chance of getting Michigan on the path to good-paying careers for all.

By adopting policies that transforms education from birth through retirement and investing in it the state can best help all Michiganders have the skills necessary to have good-paying, 40-year careers. By creating regions across the state that are places where talent from across the planet wants to live and work the state can attract high-wage employers and entrepreneurs that start high-wage businesses. And by establishing and investing in policies that help those not in high-wage work work more and earn more we can share prosperity widely. This is the recipe for a Michigan where each of us can pay the bills, save for our retirement and the kids’ education and pass on a better opportunity to the next generation.

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