Viewpoint

A billion-dollar tax cut sounds good. It’s not

President Obama pushed the earned income tax credit during a Charlotte visit in 2015.
President Obama pushed the earned income tax credit during a Charlotte visit in 2015. dtfoster@charlotteobserver.com

Brian Balfour of the conservative Civitas Institute takes progressives to task for opposing the N.C. Senate’s $1 billion tax cut plan, arguing such cuts give people more reason to work (“Low taxes give people more reason to work,” April 16 For the Record). This sounds like common sense, but further review of his argument with solid data demonstrates his position is Economics Light.

Our tax system is a complicated maze of rates, deductions and subsidies. Any conversation around tax reform limited to generalities is a waste of time. Mr. Balfour asserts that liberal support programs are wasteful and that tax cuts promote work and economic growth. With no data, he fails to support both stances.

johnclark
Clark

Let’s first take his assertion that “higher taxes and liberal welfare state policies advocated by the Left … erode human capital.” Human capital is the combination of skills, knowledge and other assets which can be used by people to create economic value. Mr. Balfour’s statement is another way of saying such support programs turn people into lazy bums. There are strong data to show many of these types of programs actually create positive results.

The earned-income tax credit, created in 1975, supplements the income of low-income workers. The program was expanded in 1993 and by 1999 the data showed 460,000 more single mothers were working than would have been without the expansion (Jeffrey Grogger/University of Chicago). Or take the food stamp program introduced in increments from 1961 to 1975. A study of that period showed healthier children who were more likely to be working decades later than other children in similar situations who had not come under the program. (Hilary Hoynes/University of California and others). Studies also show positive benefits for early childhood education investments. Smart Start is an example.

Mr. Balfour, in his generalities, draws upon the conservative economist Thomas Sowell. An example is Sowell’s view that to create the conditions of economic growth “… incentives that reward those who have it (human capital)” are necessary. As far as it goes, this makes some sense, but what kind of incentives? Most workers, if questioned, I would bet would say their greatest incentive is to provide for their families and, further, their work gives them pride in what they do.

But let’s get to the point Mr. Balfour is really pushing: Tax cuts will motivate people to work and create economic growth. As noted, tax reform is very complex, but Mr. Balfour offers no data on “tax-cuts and pro-growth.” Here are some data.

Taxes were cut during George W. Bush’s administration. Individual tax rates were reduced in 2001 and rates on dividends and capital gains were decreased in 2003. According to an economic study by Gale (Brookings Institution) and Samwick (Dartmouth College), “The impact on growth of these changes appears to have been negligible.” Economic growth between 2001-2007 was modest and occurred in housing and finance, which the tax cuts did not target. Real per-capita income increased at an annual rate of only 1.5 percent during those six years compared to an annual rate of 2.3 percent from 1950-2001. The authors do note that the owners of old capital got windfall gains during this period, that is, with no incentive to create jobs or grow the economy. During the Clinton administration of the 1990s, taxes were increased, and jobs and the economy grew.

In summary, Mr. Balfour fails to make a good case that 1) liberal support programs are wasteful and 2) tax cuts are good for the economy. His argument contains only generalities and he offers no data. I conclude his article was simply a drumbeat for the very one-sided tax-cut plan offered by N.C. Republicans. Hardly a public service from the tax-free Civitas Institute.

Clark, now retired, is the former manager of public radio station WDAV.

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