Tax cut schizophrenia

This column gets down into the weeds on economic theory. It’s not something I know a lot about — probably just enough to be confused.

So if that stuff glazes your eyes, you may certainly stop reading now.

It’s about tax cuts.

And it seems to me that tax cut advocates in the Iowa legislature, who did very well in the Nov. 8 election, are split on what tax cuts actually accomplish. Not just split, but split in opposite directions.

One theory says simply that people should be able to keep more of their hard-earned money. (“Hard-earned” for tax-cutters seems to apply whether you work 14 hours a day at tough tasks or clip the coupons of your inherited wealth.) This theory is that you know better how to spend your money than the government does.     

This position has been around for at least 100 years, ever since the nation adopted income taxes in 1913.

It’s been the mantra for many well-to-do Americans who would prefer to retain much of their income that now goes to provide government services and government employee salaries.

Advocates of this line of thinking see tax cuts as a zero-sum game. If people keep more of their income, government gets less of it. Therefore, government programs must tighten their belts, maybe even face elimination.

Public programs across the board must shrink because after the tax cuts, in order to maintain a balanced state budget, expenditures must shrink in an equal amount.

This theory’s slogan is something like, “We’re sympathetic to your request for funding for (fill in the blank), but there’s just not enough money.”

The other theory is that tax cuts, far from reducing government revenue, actually increase it. This is so-called “supply side economics.” It burst on the national scene in the initial years of Ronald Reagan’s presidency.

Its argument is that when people keep more of their income, they spend and invest it, and that stimulates economic activity, which in turn generates more personal and business income, which in turn results in more government revenue.

Supply-side advocates point to increased federal revenue during Reagan’s administration as evidence of the truth of their theory. (They ignore or downplay other factors affecting the 1980s national economy.) They claim that it didn’t translate into a more balanced budget because Congress appropriated more expenditures than the increased revenues could offset.

This theory’s slogan is, “We’re going to raise more state government revenue by cutting taxes. The state and its people will be more economically sound as a result.”

Theoretically, supply side economics doesn’t necessarily require cuts to government expenditures, because the additional revenue generated by the tax cuts will fund those expenses, even help handle limited spending increases.

The problem is, there are few legislators who, even if they subscribe to supply side economics, are willing to write anticipated increased revenues into the budget along with tax cuts.

Even if they go out on a limb to do so, they have to convince their caucus brethren who believe in the more traditional effect of tax cuts: that lower revenues need lower expenditures to maintain balance.

Another problem — to get a fair test of supply side actions, the people who get the tax cuts would need to spend all (or most) of their retained income within the state where the legislature authorized the cuts. Otherwise the benefits go to the other states where the private spending is made.

If I get a $1,000 Iowa state tax cut, and spend two-thirds of it on online purchases or across the border in Nebraska or Illinois, or invest in stocks of non-Iowa companies, Iowa government is the poorer from the cut.

Kansas and Louisiana in recent years experimented with supply side tax cuts. Both experiments have proved disastrous to government services in both states.

The point is, some legislators argue both points of view.

They say that after the tax cuts, there’s not enough money to provide a decent increase for public education, or for mental health, or for meaningful improvement to water quality.

But they also maintain that tax cuts are good for the economy, and will therefore result in more revenue for the state.

They can’t have it both ways.

Ask your legislator — what does he or she think will result from cuts to personal state income taxes?

Will state revenues decrease or increase?

And regardless of which result happens, what does that mean for state services in the coming years?