Growing up in the ’60s, William Beach knew it was a good idea to show up to caddy at the local country club on Thursdays. The future economist knew that on Thursdays, most of the rich men in town skipped work and met at the course to play golf, and they would usually be good for healthy tips.
Today, Beach works as head of data analysis at the Heritage Foundation, a conservative Washington think tank. Looking back, he told a Georgia Public Policy Foundation conference last week, he believes that those high-earning men worked just four days a week because at the time, high marginal tax rates of 90 percent to 70 percent didn’t make it worth their time to work a full schedule.
In other words, marginal tax rates drive the availability of country club tee times.
Beach didn’t seem to be joking in those remarks, and his audience certainly didn’t take it that way. His story offers a wonderful example of what I call “magic-button economics,” the tendency to explain almost anything that happens in economics and human life through the factor of tax rates on the wealthy.
Christine Ries, an economics professor at Georgia Tech who served on a state tax-reform commission last year, also subscribes to magic-button economics. In her own presentation at the GPPF conference, Ries bemoaned the Legislature’s failure to adopt the commission’s recommendations earlier this year, but predicted the setback would be temporary.
The commission’s recommendations, she reminded her listeners, would have reduced the tax burden on the wealthiest of Georgians — the “job creators,” she called them — by cutting the state income tax rate in half. To her credit, Ries also acknowledged that cutting taxes on the wealthy would mean putting more of the tax burden on the lower and middle classes, mainly by broadening the sales tax to apply to items such as food. But that’s a burden they should be willing to bear, she said.
“If you’re going to put a good tax reform proposal together, it’s going to be regressive,” she said. “People are going to have to accept that.”
Georgia already has a very low tax burden on business, she acknowledged. But it’s essential to Georgia’s future that taxes on the wealthy be made lower still, especially since the state is trying to compete with states such as Florida, South Carolina and Tennessee, with even lower taxes on job creators.
If Georgia enacts such reform, she predicted “growth beyond what any of us imagine, in a shorter time than any of us imagine.”
In other words, magic-button economics.
Unfortunately, the magic button hasn’t seemed to work for Florida, with a 10.7 percent unemployment rate; or for Tennessee, with a 9.7 percent unemployment rate; or for South Carolina, which has an unemployment rate of 11.1 percent, all well above the national average of 9.1 percent.
It also hasn’t worked at the national level. President Bush hit the magic button hard, enacting major tax cuts in 2001 and 2003. Yet even before the recession hit, gross domestic product and the number of jobs had both grown more slowly in the 2000s than they had since World War II.
In their comments, Ries and Beach talked about computerized economic models that Heritage Foundation is creating to help legislators and citizens project the impact of tax reform in Georgia. Those models will assume that tax reform inspires considerable growth, Ries confirmed in emails after the conference.
In other words, those models will project “magic-button” economic growth that is likely to be much too optimistic, putting the state budget at great risk. In fact, such models are so notoriously inaccurate that the Congressional Budget Office refuses to use them to project revenue.
Earlier this year, for example, Heritage used such assumptions to model the impact of a GOP proposal to cut a variety of taxes at the national level, with most again accruing to the wealthy. According to the model, the proposal would lower unemployment to 6.4 percent by next year, and to an unheard-of 2.8 percent by 2021.
After howls of disbelief from other economists, Heritage was forced to withdraw those projections as unrealistic. But that same approach is now coming to Georgia.
– Jay Bookman