21 June 2016

Higher Taxes Don't Kill Economic Growth

It is well known that the U.S. economy and the federal government's fiscal health has been better under Democratic Presidents than under Republican ones.  At least at the extremes of Colorado and California vis-a-vis Wisconsin and Kansas, this is true of Democratic v. Republican Governors of states as well in recent history.
In 2012, voters in California approved a measure to raise taxes on millionaires, bringing their top state income tax rate to 13.3 percent, the highest in the nation. Conservative economists predicted calamity, or at least a big slowdown in growth. Also that year, the governor of Kansas signed a series of changes to the state's tax code, including reducing income and sales tax rates. Conservative economists predicted a boom. 
Neither of those predictions came true. Not right away -- California grew just fine in the year the tax hikes took effect -- and especially not in the medium term, as new economic data showed this week.

Now, correlation does not, as they say, equal causation, and two examples are but a small sample. But the divergent experiences of California and Kansas run counter to a popular view, particularly among conservative economists, that tax cuts tend to supercharge growth and tax increases chill it.

California's economy grew by 4.1 percent in 2015, according to new numbers from the Bureau of Economic Analysis, tying it with Oregon for the fastest state growth of the year. That was up from 3.1 percent growth for the Golden State in 2014, which was near the top of the national pack.

The Kansas economy, on the other hand, grew 0.2 percent in 2015. That's down from 1.2 percent in 2014, and below neighboring states such as Nebraska (2.1 percent) and Missouri (1.2 percent). Kansas ended the year with two consecutive quarters of negative growth -- a shrinking economy. By a common definition of the term, the state entered 2016 in recession. ...

Few, if any, economists would say today that the recovery has been sufficient for all Californians. But almost no one can say that raising taxes on the rich killed that recovery. Or that given a choice of the two states' economic performances over the past few years, you'd rather be Kansas.
From here.

UPDATE June 24, 2016:

Additional GPD data from Kansas and other states nearby confirm the story about the economic health of Kansas relative to its peers.  GDP in Kansas flatlined in the state relative to the U.S., to neighboring states and to the GDP growth trend lines it had been on, following the policy changes it made under Governor Brownback.  Colorado, meanwhile, under the stewardship of Democratic Governor Hickenlooper, has thrived.

Wisconsin's economy has similarly faltered following its implementation of a slate of conservative economic policies under Governor Walker.

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