A long time ago, when VCRs were state of the art technology, Ronald Reagan became President, and his captains proclaimed a new economic philosophy:
We’ll give massive tax cuts to everyone, but especially corporations, and that will cause them to create millions more jobs. Formerly unemployed people will become productive taxpayers, and even though they pay lower tax rates, the revenue will come flowing in, and governments too will have more money than ever before.
They adopted a Kennedy-era slogan, “a rising tide lifts all boats,” and the revolution’s sacred relic was a napkin on which economist Arthur Laffer had supposedly drawn a curve in 1974 showing how all this was supposed to work. Cut taxes, get more revenue.
It was a great theory. In practice it resulted in record federal budget deficits, and the beginning of a massive transfer of wealth from the poorer half of the population to the richest few, a pattern that continues today.
Most economists regarded the Laffer curve theory pretty much the way George Bush the first originally described it – “voodoo economics.”
Regardless, five years ago, a businessman named Rick Snyder got himself elected governor of Michigan, and tried a slightly crueler version of the same thing. Snyder economics involved a massive tax cuts for businesses and corporations, cuts to education, and the taxing of people’s pensions.
Fortunately for him, Michigan benefited from the national recovery. But the Snyder cuts never produced the jobs we were led to expect, and according to today’s Detroit Free Press, the number of jobs created has actually dropped every year since the Snyder tax cuts took effect.
And yesterday we learned that for this year and next, the expected rising tide has left us stranded in the mud. The state is projected to have almost half a billion dollars less than an over-optimistic revenue estimating forecast expected in January.
If this were a lurid novel, you might call this “The Death of Rosy Scenario.” This resulted in worry lest the legislature use it as an excuse to kill the effort to save Detroit Public Schools, or reduce the help available for stricken Flint.
So far the governor’s office indicates that neither is on his agenda, though things like the effort to prevent tooth decay in poor children may take a hit. But there is a solution, and it lies in a chance remark made by the state treasurer yesterday. He said part of the reason for the shortfall was that citizens were spending more on services and less on stuff.
Bingo. If you sell me a length of copper pipe, I pay six present sales tax on it. If I pay you to come install that pipe, I pay no sales tax, and the state gets nothing. Why is this?
Because times have changed, and our tax collection ideology hasn’t. Back when the sales tax started in the 1930s, we were overwhelmingly a manufacturing state. We made and sold stuff. Now, the world has changed. We are primarily a service-driven economy.
Not extending the sales tax to most services makes no more sense than not extending it to hybrid cars. The legislature could easily fix this, and save Rosy Scenario, just by passing a law.
But that would sacrifice ideology for reality. So, don’t hold your breath.
Jack Lessenberry is Michigan Radio's political analyst. Views expressed in his essays are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, The University of Michigan.
