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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Today’s Policy Agenda: Was Kansas’s Big Small-Biz Tax Cut a Failure?



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The economy had an ugly first quarter. What should we do about it?

In complementary pieces, Mark Mills and economist John Makin weigh in on the shockingly weak economic growth numbers from last week, for Forbes and AEI respectively.

First, Mills:

There is no mystery as to what will restore growth.  The nation needs more, a lot more, new businesses. New, small businesses are where jobs come from, and then tax receipts follow to fund government programs. But the rate of creation of small businesses today is 30% lower than the booming 1980s. . . . How did we end up getting fewer small businesses?  We taxed and regulated them away.

This is touching on a distinction Republicans often miss when discussing this administration’s regulatory approach. “Anti-business” is probably a less accurate description than “corporatist,” as the new rules from energy regulations to the Walmart-endorsed minimum-wage hike offer something of a shield from competition for large incumbents. As venture capitalist Marc Andreessen explains of Sarbanes-Oxley, but also could be said of heavy regulation more generally, “The compliance and reporting requirements are extremely burdensome for a small company. It requires fleets of lawyers and accountants who come in and do years of work. . . . It’s biased enormously toward companies that are big enough to hire fleets of lawyers and accountants, biased against companies that are very young and for whom there’s still a lot of variability.” This is a problem because there’s pretty solid economic evidence that start-ups drive job growth and the kind of disruptive innovations that increase productivity and in turn GDP.

Mills also mentions the two keys to restoring previous levels of entrepreneurship. First, our corporate tax system is a mess and hurts workers as much as our firms. Luckily, there’s growing bipartisan consensus behind reforming the corporate code. We also need to create a regulatory environment more conducive to entrepreneurship; changing the tax treatment of corporate debt, moving from a too-big-to-fail financial framework to one that better serves the needs of start-ups, and removing barriers to our growing energy sector would be good starts.

And the Fed should stop just printing money before we get inflation, right? Not so much.

So says John Makin of AEI:  

The third estimate of the first-quarter 2014 US GDP rate was reported on June 25 to be -2.9 percent. Current dollar GDP also fell at a 1.7 percent pace. That is a Japan lost decade-style number. And prices rose at only a tepid 1.3 percent pace. These are awful growth numbers…This inflation fussing is nonsense for three reasons. First, it is not going to happen, especially in an economy that is barely growing. Second, there is nothing the Fed can or should do about the recent food-and-energy-driven rise in headline inflation. And third, an inflation rate that stabilizes in the 1.5 to 2.5 percent range would be optimal for a US economy struggling to sustain a subpar growth rate of barely 2 percent as real wages stagnate…Food prices have been driven up by drought conditions, and energy costs have been boosted by rising tensions in the Middle East. There is nothing the Fed can do about either factor…Core PCE inflation, the best guide to Fed policy, has stabilized at an average level well below the Fed’s 2 percent target. It currently stands at 1.5 percent.

Makin’s argument is pretty strong considering the weak growth numbers, an inflation rate well below target, and the example of the disastrous Whip Inflation Now program of the 1970s that responded just as today’s inflation hawks would to a negative supply shock and seriously damaged the economy before being abandoned. Furthermore, even if inflation crept above target, it could actually be helpful to the labor market by reducing real wages in the short term, allowing firms to hire or avoid firing employees and inducing what Scott Sumner dubbed “catch-up inflation” just to get our economy back on the trend line it was on before the recession.

China’s suicide rate has fallen dramatically

The Economist reports on the sharp decline of suicides in China:

In the 1990s China had one of the highest suicide rates in the world. Young rural women in particular were killing themselves at an alarming rate. In recent years, however, China’s suicides have declined to among the lowest rates in the world. . . . Paul Yip, director of the Centre for Suicide Research and Prevention at the University of Hong Kong and a co-author of the recent study, says no country has ever achieved such a rapid decline in suicides. And yet, experts say, China has done it without a significant improvement in mental-health services—and without any national publicity effort to lower suicides. . . .Two intertwined social forces are driving the reduction: migration and the rise of an urban middle class. Moving to the cities to work, even if to be treated as second-class citizens when they get there, has been the salvation of many rural young women, liberating them from parental pressures, bad marriages, overbearing mothers-in-law and other stresses of poor, rural life. Migrants have also distanced themselves from the easiest form of rural suicide, swallowing pesticides, the chosen method in nearly 60% of rural cases, and often done impulsively.

This an exciting turnaround, and – confirmation-bias alert – it would seem that the rise of the free-enterprise system in China is behind some of the drop. (Suicide rates in China, by the way, have long been subject to some suspicion from the West, but this isn’t nearly as big an issue when looking at data for the country over time.)

The massive increases in standard of living aside, a freer economic environment provided opportunity to leave villages that young people previously would’ve been trapped in, especially liberating them to experience the wide array of benefits of employment. American conservatives forget this too often: Capitalism isn’t just about creating wealth; free-enterprise is needed for any social-justice agenda.

Is GPS monitoring as a replacement for prison a way forward for prison reform?

For Vox, Dylan Matthews has written a compelling essay detailing the fiscal and human costs of mass incarceration and a path forward to reform relying on GPS-managed house arrest. Matthews:

Taxpayers are paying through the nose for [incarceration]. About 2.2 million Americans were incarcerated in 2012, accounting for one in every 108 adults, a figure that has more than quadrupled since 1980, leading state spending on incarceration to rise nearly as fast. America imprisons more people than any other country, and has the highest incarceration rate. And this wrecks communities. Mass incarceration weakens the economy and increases teen pregnancy in areas where many residents are sent away, and harms the children of the incarcerated in ways that persist for decades, among many other damaging effects…Researchers have tested electronic monitoring as an alternative approach to parole, probation, or other criminal punishments that fall short of imprisonment — and it’s been a huge success…The most intriguing evidence comes from Argentina, where Harvard’s Rafael Di Tella and Torcuato Di Tella University’s Ernesto Schargrodsky found that electronic monitoring cuts recidivism nearly in half relative to a prison sentence.

Conservatives should recognize the way incarceration cuts ties between criminals and their families and the workplace and serves practically as a “graduate school for crime.” Criminal-justice reform along the lines of Matthews’s proposal could result in stronger families and communities in the parts of the country most afflicted by crime and entrenched poverty. Moreover, these reforms wouldn’t require a choice between fewer sentences and being tough on crime. Drug-policy guru Mark Kleiman often notes that the swift and certain penalties that would be easy to enforce uniformly in a world where every inmate is wearing GPS better instill law-abiding habits in those from chaotic and inconsistent environments than the irregularly-enforced, devastating jail sentences of today.

Kansas’s business-tax-cut experience shows tax cuts aren’t a panacea.

For the Upshot, Josh Barro suggests that cutting tax rates and eliminating collection of “small business income” has actually damaged the Kansas economy.

Kansas has a problem. In April and May, the state planned to collect $651 million from personal income tax. But instead, it received only $369 million. . . . Jim Dunning Jr., managing partner of Dunning & Associates C.P.A.s in Wichita, says he has seen a few clients change the way their businesses are incorporated to take advantage of the tax law . . . thus avoiding any Kansas tax. . . . . Job growth in Kansas has been modest since he signed the bill, trailing the national average and the rate in three of its four neighboring states.

The distortionary impact of treating “small-business income” so differently and a huge cut failing to deliver economic gains has made the Kansas tax reform seem a lot less successful than expected. This offers a good reminder in a time of no-tax pledges that not every tax cut is a good idea, nor every tax increase a bad one. I certainly prefer a lightly taxed market economy, and the broader conservative macroeconomic message of reduced taxes and regulation is a good one that is conducive to growth.

But not all taxes are created equal. This massive cut has failed to produce any growth, and Barro’s right about some of the reasons why. Meanwhile, there are also tax increases that would promote outcomes we want. Increasing alcohol taxes, instituting congestion pricing on the roads, and repealing tax deductions for state and local taxes and mortgage interest are good ideas even though they are all “tax increases.” Conservatives need to be more discerning about which tax cuts will return benefits to society or risk losing credibility when advancing any number of conservative tax reform proposals that have a lot to offer our economy and middle-class Americans. 



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