Saturday, October 10, 2009

Economists: Tax Increases Will Boost Economy

Posted By on Sat, Oct 10, 2009 at 5:31 PM

Moderate tax increases will help Oregon climb out of the recession more than holding down revenues and cutting state services, according to a group of more than three dozen Oregon economists.

Initiatives to repeal two legislative measures that would raise corporate income taxes from the current minimum of $10 a year and hike personal income taxes for the most affluent 3% of Oregonians apparently have qualified for the January ballot.

But contrary to conventional conservative wisdom, the economists – who come from public and private universities as well as the private sector – wrote in an open letter that repealing the increases would do more harm than enacting them.

Because states (unlike the federal government) can’t borrow to get through hard times but must balance their budgets, “There are … no easy options for states in this kind of recession. That said, the worst thing the state can do during a recession is further reduce aggregate demand — the total spending by households, businesses and government. Without the revenue measures enacted by the legislature, aggregate demand in Oregon will further fall and the economy will further contract.”

The economists’ letter goes on to note that “the bulk of the money that the state spends on public services — more than 90 percent of which goes to education, health and human services and public safety — is spent right here in Oregon. Cutting state spending reduces in-state aggregate demand, virtually dollar-for-dollar.”

Moreover, the economists added, the effect would be aggravated by the loss of federal matching dollars: “Some forms of state spending, particularly in the area of health care, bring matching federal dollars into the state’s economy. So cuts to certain public services result in even bigger reductions in aggregate demand because they prevent federal dollars from coming into Oregon’s economy.”

But what about that good old trickle-down effect? If we leave more money in the pockets of rich Oregonians and big corporations, won’t that boost the state economy?

Not so much, the economists say: “High-income people typically don't spend all their money, and some of the money that they do spend is likely to be spent outside Oregon. … And since a significant fraction of Oregon’s corporate taxes are paid by out-of-state, multi-state corporations, the corporate tax measure also does not reduce demand dollar for dollar in Oregon.”

Although the economists focus on the short-term effects of cutting taxes vs. cutting services, the long-term consequences of lowering taxes while letting schools, public safety, transportation and other public needs go to hell aren’t good for the business climate either.

As Oregonian columnist David Sarasohn memorably expressed it a number of years ago: “If low taxes were the secret of prosperity, Mississippi would be the economic powerhouse of America.”

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