Kansas and supply side economics

Supply side economics, or trickle-down economics, is universally praised on the right but loathed on the left. One of the modern successes, or failures, of supply side economics comes from Kansas. Kansas cut taxes for the wealthy in order to incentivize them to invest more, which leads to economic growth and more jobs. This is where trickle-down comes in, because the wealth (in theory) is supposed to trickle-down to the poor and middle class. Everyone gets richer.

Liberals point to Kansas, where taxes were cut but growth was lackluster. They argue that this proves that cutting taxes does not work. They hope to cause Republicans to back down on the issue—in part because tax cuts are a good conservative talking point—and also in hopes to cause voters doing a quick google search to oppose those initiatives, which are usually at the forefront of the GOP platform. So are liberals correct in saying that the Kansas experiment has disproven supply side economics?

Not really. Economist Scott Sumner notes how the tax changes in Kansas were not that large—and definitely not as large as the GOP presidential candidates would make them. “The past two years Kansas reduced its state income tax rates. As a result, the top rate of income tax faced by Kansas residents (combined state and federal) rose from 41.45% in 2012 to 48.3% in 2013 and then fell a tad to 48.2% in 2014 (if they don't itemize.) That's a pretty tiny drop in the top marginal tax rate in 2014, and a much bigger rise in 2013.” You can see that Federal taxes counterbalanced the tax cuts, and tax decreases were very small; 0.1% decrease in 2014. This is hardly a tax cut. Had the Federal income tax stayed the same, the cut may have had an effect. But the increase in taxes nearly offset all of the growth effects. A 0.1% decreases in taxes is not nearly large enough to impact incentives and cause a trickle-down effect. So, no, the Kansas tax cuts don’t disprove supply side economic theory—it only says that if you raise taxes nearly 7% and then decrease them by 0.1%, you aren’t going to get growth. That is not really devastating to the GOP or supply sider economists.

It should also be noted that even the 0.1% tax cut even had some positive effects. Kansas has always been in the lower half of the nation for job growth. Kansas went from 27^th in the nation for job growth to 21^st, now in the top half. Wages also increased by 3.5%, faster than the national average of 1.9%. But unemployment reduction is still slower than the national average (though, that could be skewed by a few outliers like the Dakotas and Texas, which have reduced unemployment a lot). On the other hand, labor force participation has not changed; labor force participation fell for the nation as a whole. So the Kansas tax cuts—even though they are small—have done some good, despite how small the tax cuts were.

There are a few things to take from this:

First, the tax burden didn’t change much. So lackluster effects are to be expected. This does not mean  a 1, 2, or 10% tax cut would have no effect.

Second, it has only been a few years. Tax cuts usually take time to cause growth because the benefits from new companies emerging and investment sometimes take years to come to fruition.

And finally, even over this short time period and the minimal tax cut, the evidence seems to show that a small amount of good can be done.

Supply side economics is not disproven by Kansas and, in the long term, it may end up proving it.