Kansas is one of those bits of America we don’t pay much attention to over here. But in an intriguing piece for Telegraph, Jeremy Warner argues that we really ought to – because there’s an awful lot riding on the economic future of the Sunflower State:
“I’ve been taking a look at a fascinating experiment in fiscal policy being played out in the state of Kansas. There, two years ago, the presiding governor, Sam Brownback, embarked on an aggressive programme of tax cuts in the hope of emulating the economic success of his low-tax neighbours in Texas.”
This is hardly the first time this has been tried. However, the Kansas experiment differs from, say, the Republic of Ireland’s decision to slash corporation taxes, because there isn’t the complicating factor of Eurozone membership or a massive debt-fuelled property boom. It’s also unlike the tax cuts of the Reagan and Thatcher era, because this isn’t a rollback from the confiscatory tax rates of the 1970s.
In other words, Kansas is as close we’re going to get to a controlled experiment; one that might just settle the question as to whether tax cuts – by which I mean proper tax cuts, not fiscally-neutral tax reform – really can pay for themselves.
So, how’s it all going?
“Results so far have been mixed: tax revenues have fallen significantly, forcing the state government to dig deep into its reserves to sustain public services.
“Most states, including Kansas, are by law not allowed to run budget deficits, so unless revenues pick up soon, Kansas will eventually be forced either to reverse its tax cuts and/or cut spending sharply. Even more worrying, overall economic growth and job creation has remained stubbornly below the wider US average.”
Still, as Jeremy Warner reminds us, we need to wait and see:
“Trailing the national economic averages therefore doesn’t really amount to evidence that tax cutting has failed; it was the reason the reforms were introduced in the first place. In any case, it is still early days. Incentives take time to work, and businesses to take advantage of them.”
This may or may not prove to be the case, but the Kansas approach is clearly not a quick fix. In circumstances – such as our own – where the top priority is to restore confidence in the public finances, conservatives should surely favour the elimination of deficits over the cutting of taxes.
Of course, they should also favour restraint in government expenditure – and Warner makes a powerful case that smaller government makes for more efficient public services and a more vigorous private sector. What he doesn’t do, however, is demonstrate that tax cuts are a reliable way of shrinking the state. He asserts it – “tax less, and it would force the Government to spend less” – yet also admits that, in Kansas, “they’ve cut taxes, but they haven’t reduced spending to match.”
Kansas isn’t unusual in this respect. The argument that tax cuts ‘starve the beast’ (i.e. force governments to reduce their spending) is, in practice, a weak one. Furthermore, while Kansas doesn’t have the option of running a deficit, Britain most certainly does.
Much to Jeremy Warner’s disapproval, the current UK government has increased taxes. Yet it is also on course to eliminate the deficit (by cutting expenditure, for the most part) and it now has the best record on job creation and economic growth in the G7.
We’d therefore do well to remember that tax-cutting conservatism and fiscal conservatism aren’t always one and the same thing. When a choice has to be made, we should go with the straight and narrow path of paying our way in the world, not the yellow brick road of debt-funded tax cuts.