Should Conservatives Abandon the Supply Side?

The iconic moment for conservatives of my generation was the Reagan tax cuts of the early 1980s. Those supply-side cuts fueled a boom whose ripples are still felt today, and refuted liberal economic theories once and for all.

Much has happened since then; taxes have gone up and down. But a common denominator is that whenever federal income taxes have been cut, they have also been made more progressive. The result is that the U.S. now has the most progressive personal tax system of any developed country, and around one-half of Americans don’t pay any federal income taxes at all.

So in recent years, many conservatives have argued that tax cuts are no longer a winning political issue. This has happened even as economic growth rates that historically would have been considered pathetic have been embraced as the new normal. The Cato Institute’s Dan Mitchell argues that conservatives shouldn’t let go of the supply side. He points out that static scoring of tax changes makes no sense:

[F]or those who doubt the value of dynamic scoring, I challenge them to come up with an alternative explanation for why rich people paid five times as much tax after Reagan lowered the top tax rate from 70 percent to 28 percent in the 1980s.

He goes on to contest the theory that tax reduction “is no longer important or desirable.”

I’m not an expert on politics, so I won’t pretend to have any insight on whether tax policy motivates voters. But from an economic perspective, assuming the goal is a faster-growing economy that creates broadly shared prosperity, it would be very unfortunate if Republicans abandoned supply-side tax policy.

I agree. Here are a couple of charts:


This one shows how different tax cuts will actually impact revenue, given their effects on incentives:


Liberals assert the absurd proposition that tax policy doesn’t affect people’s behavior. In the real world, no one would say such a thing. Here in Minnesota, one of America’s highest-taxed jurisdictions, we know it isn’t true.

The think tank that I run, Center of the American Experiment, a nonpartisan 501(c)(3) organization, will release a paper on Thursday that is based on Internal Revenue Service data on taxpayers who move from state to state. It shows that Minnesota’s high-tax policies are badly hurting the state’s economy, as measured by the willingness of Americans to move to Minnesota, or to stay in Minnesota. This is the executive summary:

Newly-released Internal Revenue Service data make it possible to track households moving into and out of each state. Households’ adjusted gross incomes are reported, and beginning with calendar year 2011, the IRS has made available demographic information about the households that move into and out of a state. This IRS database is a powerful tool that allows us to analyze Minnesota’s competitiveness with other states, measured by the most significant metric: the willingness of people to move into, and out of, our state.

Analysis of IRS data yields conclusions that bear directly on Minnesota’s public policies, especially its tax policies:

Between 2013 and 2014, Minnesota lost nearly $1 billion in net household income to other states. Minnesota’s 2014 net loss of $944 million represented a sharp increase over prior years. Just three years ago, the state’s net loss of adjusted gross income was $490 million.

Between 1992 and 2014, Minnesota lost a cumulative net total of $7.6 billion in household income to other states. The average net annual loss over that period was $346 million in 2014 dollars.

With few exceptions, Minnesota loses taxpaying families to lower-tax states. Of the ten states that receive the most taxpaying households from Minnesota, eight rank among the ten states with the nation’s lightest tax burdens. Conversely, of those states that contribute people and income to Minnesota, seven of the top ten impose tax burdens that are among the country’s ten highest.

Most of the taxpayers who leave Minnesota for lower-tax states are in their prime earning years. One might think that most high-earning families who leave Minnesota are retirees moving to Florida or Arizona, but this is not the case. Working-age people between 35 and 54 account for nearly 40 percent of Minnesota’s net loss of tax filers for the 2013-2014 period. People between 55 and 64, most of whom are still in the workforce, account for another 23 percent. As for the loss in household income, the IRS data show that 34 percent ($343 million) of the net loss in adjusted gross income is from people between 35 and 54. Another 30 percent ($298 million) of the net loss comes from people aged 55 to 64.

Minnesota loses high-earning families at a much higher rate than other states. Minnesota’s net migration rate is particularly bad for one category of residents: families earning more than $200,000. Relative to other states, Minnesota is losing these taxpayers and their incomes—not to mention their other contributions to our state—at an alarming rate. Minnesota’s net migration rate for these high earners between 2013 and 2014 was -1.45 percent, ranking behind 46 states and ahead of only New Jersey, Illinois, Vermont and the District of Columbia.

The exodus of citizens from Minnesota accelerated after the legislature’s 2013 tax increases. The IRS data show a substantial increase in Minnesota’s loss of taxpaying households immediately after the legislature and Governor Mark Dayton enacted a large income tax increase in 2013. The following year, Minnesota’s net loss of adjusted gross income leaped from $697 million (2012-2013) to $944 million (2013-2014). The nearly $1 billion loss sustained in 2014 is well above anything previously recorded. It dropped Minnesota’s rank among the states, with respect to gain or loss of top income earners, from 37th to 47th.

Taken together, the IRS income migration data clearly signal the need for Minnesota to reduce taxes if the state is to have any hope of being competitive with lower-tax states in the future.

One thing in the report that we didn’t mention in the executive summary is that there is one demographic where Minnesota is drawing large numbers of migrants from other states: persons aged 26-34 with incomes of less than $10,000 per year.

I expect this bombshell report to have a major impact on public policy debates in Minnesota. Beyond that, no sensible person doubts that states’ tax policies affect their economic fortunes. Why, then, should there be any question about the fact that federal tax policies impact our national growth rates, too?