Tax cut irrationale #4

There are so many misleading statements in Tom Patterson's East Valley Tribune (State doesn't 'invest'; it spends) commentary today (Tuesday) it's hard to know where to start.

Mr. Patterson says the state surplus will be in "the $1 trillion range." Odd, I was at a meeting where one of the Governor's staffers spoke last month and they said it would be closer to $500 million. There's a pretty big difference $1 trillion and $500 million. Not that I know the correct number, but wouldn't it be nice if someone who's pitching another tax cut could at least get an accurate figure? So let's say it's the lesser number. What does that do for Patterson's tax-cut pitch? In my view, it doesn't help his case.

Next, Patterson states that government can't invest because in his dictionary it means "using money to generate interest or profit." According to the "Dictionary of Modern Economics," the word investment describes "the flow of expenditures devoted to projects producing goods which are not intended for current consumption. These investment projects may take the form of adding to both physical and human capital as well as inventories. (p. 224)" Not quite the same thing, is it?

From a government perspective, adding to physical capital clearly means roads, school buildings, police cars, fire trucks, sewer and water systems, waste handling and the like. I'm constantly amazed that people like Mr. Patterson seem to think this stuff just appears and has no cost. He talks about the importance of growth but seems to have zero clue as to the public infrastructure required to support that growth at all levels. Buying things like fire and police stations and school buildings are, Mr. Patterson, an i-n-v-e-s-t-m-e-n-t and one that you should be supporting.

He makes the misleading comment that if the legislature passed a 10 percent tax cut that this would magically result in all taxpayers being able to "boost their investing and spending." Again, I'm amazed that someone who's supposed to be running an economic analysis organization would make such a silly statement. Maybe Mr. Patterson hasn't noticed the price of gasoline. Maybe Mr. Patterson hasn't seen the cost of kid's clothing. Maybe Mr. Patterson hasn't seen the cost of food lately. After people are done "spending" on necessities, they don't have money left over to use for Mr. Patterson's definition of "investing."

The Congressional Budget Office published a report on December 1, 2005 that shows that the supply-side theory used by Patterson with regards to increases in government revenues doesn't work. Addressing supply-side theory, the CBO states "there is insufficient theoretical and empirical basis for (supply-side) effects to allow CBO to incorporate them in (its) analysis." Isn't that interesting that Mr. Patterson says there is "economic research that tells a different story.” How come the CBO can’t find it?

The CBO report shows, in its best case, a 10 percent tax cut made up only 25% of the lost revenue, which means a higher deficit in near and long term. Patterson simply ignores the increased risk of debt should revenues not keep up with required i-n-v-e-s-t-m-e-n-t. What happens if the economy gets rough again? Then what, Mr. Patterson?

I tried to find Richard K. Vedder's research, but even using Google, I couldn't do it. One paper I did find and read made the comical assertion that taxes had a negative impact on people's income living under the poverty line and that was a bad thing.

Well, duh.

Of course it has an impact because a five percent tax on an income of $12,000 per year is a much bigger bite that five percent on an income of $150,000, and that doesn't account for the itemized deductions the person making $150,000 gets to take. Maybe that's why tax cuts should go to the lower income people and not the upper income crowd. It seems to me rather insincere for Mr. Patterson to feign worry about poor folk's incomes while at the same time championing higher personal investment. As if...

Continuing to live in the past, Patterson cites a 1997 study that shows when tax rates were cut, the Arizona per-capita income and earnings per-employee improved. What he doesn’t say is that Arizona’s current tax rates, according to The Tax Foundation, are “competitive compared to other states.” He also doesn’t mention that Arizona’s income tax rates ranks 39th out of 50 states and the tax burden is right at the national average.

Clearly there’s no pleasing Mr. Patterson. We have a growing economy with lower tax rates than in the last decade and we have a surplus. Good for us. It could be worse. We also have a clear need for more investment in community infrastructure and yes, programs. Since the real definition of investment means expenditures devoted to improving physical and human capital, maybe putting money where it’s needed and paying down debt is a good idea. Who knows when we may get the chance again.