California: Raising taxes on the rich did not kill the recovery as conservative economists predicted

The Washington Post this week made a real world comparison between California’s progressive economics versus the faith based supply-side trickle down economics utopia of Kansas. The interesting thing that happened when Kansas cut taxes and California hiked them:

CaliforniaIn 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.

[California has reclaimed its role as the world’s 6th largest economy.]

DorothyThe 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.

Other effects of the Kansas tax cuts, which were meant to spur entrepreneurship, are well-documented.

While state officials anticipated that the reductions would create a shortfall in the state budget, tax revenues have been consistently below even those expectations. Standard & Poor’s and Moody’s Investors Service have signaled that they could reduce Kansas’s credit rating, indicating there is a chance the state cannot pay its bills.

The shortfalls have forced Gov. Sam Brownback (R) and lawmakers to make additional adjustments. The state canceled the initial reduction in sales taxes, then increased them again, while delaying additional scheduled reductions in the income tax.

[Coming this week: Five things to know ahead of the Kansas Legislature’s special session on school funding]

On the whole, Brownback’s policies modestly increased taxes for the poor and working class, who pay more in sales taxes than income taxes, while reducing taxes drastically for the rich.

The poorest 20 percent of households — those making less than $23,000 a year — are paying about $200 more, on average, according to an analysis by the Institute on Taxation and Economic Policy in Washington. For the middle class, the changes have been a wash, with less-affluent households paying somewhat more and more-affluent households giving up a little less.

Meanwhile, the wealthiest 1 percent of households, those making at least $493,000 a year, are saving an average of $25,000.

Kansas’s gross domestic product is still less than it was at the end of 2011, said Menzie Chinn, an economist at the University of Wisconsin-Madison, who has been following Kansas’s economy. Meanwhile, the economy in the rest of the country continues to expand.

“It’s remarkable,” Chinn said.

It is perhaps less remarkable — or surprising — that California has powered along. The recovery nationwide has favored massive metropolitan areas stocked with high-skilled workers, which is to say places such as Los Angeles, San Jose and San Francisco. The damage from California’s deep housing crash has slowly healed in places such as the Central Valley.

Still, the noncoastal regions of California lag far behind Silicon Valley and Los Angeles in their job and growth recoveries. The state’s median income remains below pre-recession levels after adjustment for inflation, although it still beats the national average.

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.

What conservative economists preach is pure propaganda not grounded in real world economics. See, for example, Paul Krugman’s post, Is Our Economists Learning?

7 responses to “California: Raising taxes on the rich did not kill the recovery as conservative economists predicted

  1. John Huppenthal

    California is the ultimate example of the hypocrisy of democrats. Founders and initial employees of companies like Google, Facebook, Apple, Pixar, Youtube, Adobe, etcetera have never had to pay a penny on the billions they have made. Its called unrealized capital gains and its completely spendable without being taxed.

    Warren Buffett has made an artform out of this hypocrisy, advocating for higher taxes on his competitors while he completely evaded taxes on the $50 billion he made.

    The real question is how little money California’s 12% tax will yield. Roosevelt’s 92% tax never yielded a penny, the average tax yield of the economy did not budge.

    That means the elasticity of taxable income with respect to taxation is above 1.0 meaning that if you reduce taxes, revenues will go up not down at the federal level. When Reagan reduced tax rates, taxes paid by the 1%, people earning more than $80,000 (1980$) went from $150 billion in 1980 to $470 billion in 2007.

    • For Sure Not Tom

      “Ultimate hypocrisy of the democrats….”

      One day you’re telling us that California is taxing people to death, next day it’s not taxing people enough.

      Let me introduce you to Elizabeth Warren, and all of the Bernie Sanders supporters. Change is coming to the Democratic Party.

      BTW, sockpuppetmaster, did you hear Pathfinder Health is leaving Kansas? Because of your One True God Trickle Down and Brownback are trashing the state?

      But don’t take my word for it, here’s the story from the CEO:

      http://pathfinderhi.com/kansas-isnt-home-anymore/

      Facts will make you sad, Falcon9.

      • John Huppenthal

        Here’s your task. Prove that the 12% rate actually pulls down real money over time. Personal income in the United States has grown significantly faster than inflation, at least until Obama got into office. go to California tax tables and begin showing the growth of revenues from the 12% rate relative to the other rates and personal income. Then you will have something to talk about.

        Meanwhile, we have 70 years of history of these high tax rates producing nothing at the federal level except rich tax lawyers which is why they are so eloquent about taxing the rich.

        Also, imports from China through California have hit $300 billion with a lot of the processing and partnerships taking place in California. The pace of productivity of these relationships can’t keep up with the increasing costs of California, their market share has already dropped ten percent over just a year ago. Now that we have two morons running for president promising a trade war with china, don’t be bragging on California too much.

        • For Sure Not Tom

          The post was about conservatives predicting the end of days if California raised taxes on the wealthy, how California is thriving, and how your trickle down scripture is failing, in spectacular fashion, in Kansas.

          And how do you respond? With a task (which was already answered in AZ Blue’s post), no response on Kansas, a mis-direct to China, and a nonsensical bash on Obama.

          Trump is YOUR candidate precisely because you’ve been lying to people for years, telling them trickle down is a real thing, climate change isn’t, more guns makes them safer, Obama caused a recession (that started before he took office) and that Jesus wrote the Constitution.

          HRC ain’t my candidate, but she’s going to win in a landslide, and you and yours are to blame.

      • John Huppenthal

        When we had this debate before, I mentioned that the 2 percentage point reduction of Kansas would take years to assess and that there are no quick fixes, except at the federal level. Also, Kansas offset those increases with a slew of other tax increases. Very little fuel there.

        The 42 percentage point reduction of Ronald Reagan resulted in an 8 percentage point gdp increase quarter. Obama hasn’t had a 3% increase. Why? Because taxes are now eleven percentage points higher than under Reagan and that is not counting the
        Social Security tax increases and state and city level income tax increases and sales tax increases.

        The formula for economic ruin at the national level is high tax rates, high regulation and comfortable welfare.

        Comfortable welfare is cancerous at the national level but an economic boon at the state level because you are sucking off all other 49 states and that money has a multiple within your state. California’s leading economic sector is government and its growth.

        Also, economic growth is 2 parts population growth and 1 part productivity growth. California is now 24% illegal immigrants which is an economy that is largely untaxed while Arizona, under the E Verify, is only at 13%. Both California and Texas were big beneficiaries of Arizona’s E Verify legislation. We beat Texas every month for 17 years economically until E Verify.

    • John,

      Please explain this, ” Its called unrealized capital gains and its completely spendable without being taxed.” I have some ‘unrealized capital gain’ I’d like to spend but would rather not have to pay taxes on it nor to pay interest on a loan for which it is the collateral.

      Bill

  2. For Sure Not Tom

    San Jose, California is turning down businesses wanting to move to or expand in the area because there is no place to house any new employees.

    They’re too successful, they have too many jobs.

    Idiots like Ducey, Kavanagh, and Falcon9, love to mock California, lying that their high taxes in the state are killing jobs.

    Meanwhile, in the real world, California’s economy rockets past Arizona’s. And Kanasas’, and Louisiana, and Florida….

    I pity conservatives, what with facts being so militantly against them.