A Clash of Visions—In a Battle that Matters

March 6, 2012

The Great Recession of 2008-10 put in serious doubt longstanding assumptions that the overall tax burden on American taxpayers must increase consistently, and that the size of government—including its “footprint” in the economy—naturally expands.
Yet, now that the U.S. economy is marginally improved, and even substantially improved in places like Oklahoma, many in the political class want those assumptions restored. They want to hurry up and get back to “normal,” to get state appropriations back to “pre-downturn levels.”

Yet there are dissenters—we at OCPA are among them—who believe the nation is in a new normal, that the government growth of the last century is not a law of nature, it’s a function of political decisions. Limiting or at least flattening out that growth, as a prelude

to creation of a new economy for the 21st century, may or may not be a law of nature, but some pretty intelligent folks argue it’s good economics.

In late November, Dr. Arthur Laffer spoke at a joint meeting of the downtown Kiwanis, Lions, and Rotary civic clubs in Oklahoma City.

Distilling an econometric analysis his firm had prepared in conjunction with OCPA, the former economic adviser to President Ronald Reagan said that the goals of lower taxation and smaller government are “not political, and not partisan” but simply “good economics.”

He “noted that President John F. Kennedy, a Democrat, scaled back significantly the draconian income-tax rates that had been imposed during the Great Depression. Nearly two decades later, Ronald Reagan built on the Kennedy model to bring income-tax levies still lower, triggering an economic boom that lasted for nearly a decade.”

Laffer’s speech and policy paper got people talking. (For example, Gov. Mary Fallin’s Cabinet Secretary of Finance and Revenue, Preston Doerflinger, smiled and said, “Let’s get it on.”) The Laffer-OCPA proposal had planted the seed for a big idea, perhaps one whose time has come.

Conservative Republican legislators responded with enthusiasm to Laffer’s idea. In the state Senate, four members introduced what they dubbed “the Laffer plan” to phase out the income tax. The quartet aimed to eliminate most personal tax credits, exemptions, deductions, and exclusions—and to drop the top income-tax rate from 5.25 percent to 2.25 percent, then steadily drive the levy down for a decade, leading to its elimination.

Momentum for the reform grew when 23 members of the House, led by Rep. Leslie Osborn of Mustang, unveiled their plan (like the Senate’s, closely patterned on Laffer). Their goal was to trim income-tax rates “in such a way that the state would have the lowest overall tax burden in the continental United States.”

In her State of the State speech, Gov. Fallin unveiled a bold plan featuring “the most significant tax cut in state history.” She asked lawmakers to join her in “an ambitious and exciting undertaking” intended to reform “the tax code, and chart a course towards the gradual elimination of the income tax.”

National attention quickly followed. Weeks earlier Budget & Tax News, a Chicago publication, had taken note of Laffer’s vision, but now a Wall Street Journal editorial highlighted the dozen or so states considering income-tax reductions, concluding “it is Oklahoma that may have the best chance in the near term at income-tax abolition. The energy state is rich with oil and gas revenues that have produced a budget surplus and one of the lowest unemployment rates, at 6.1 percent. Alaska was the last state to abolish its income tax, in 1980, and it used energy production levies to replace the revenue.”

OCPA president Michael Carnuccio embraced Gov. Fallin’s “bold, transformational leadership” and the burgeoning legislative momentum, capturing in a series of interviews the audacity of (conservative) hope.

Gov. Fallin’s speech was on a Monday (February 6). By Wednesday, Oklahoma was the talk of the nation. Gov. Fallin was appearing on national television interviews, the tax-cut plan was a lead story on the nationwide Franklin Center online “platforms” for state-capitol news from all 50 states, and it was eliciting cheers from Americans for Tax Reform, the National Taxpayers Union, the American Legislative Exchange Council, and more. Americans for Prosperity (the group President Obama loves to single out for criticism) joined the applause, with an article at National Review Online entitled “Oklahoma Leads on Income-Tax Repeal.”

As this issue of Perspective went to press, three of the Laffer-linked plans had cleared their first rounds in the committee process and were pending before the two chambers. Fallin and the Republicans had indeed launched “a conversation starter.”

The Tulsa World editorial board was apoplectic. The Oklahoman was skeptical—at times sympathetic, at times fretting. And the state capitol press corps was largely hostile.

And of course, the Empire struck back. As Andrew Spiropoulos, OCPA’s Milton Friedman Distinguished Fellow, had predicted: “The public-spending lobby will continue to fight—they can’t afford not to.”

The Oklahoma Policy Institute, a left-wing think tank and lobbying organization, assailed Laffer’s credibility, contending his analysis could not withstand scrutiny. In an effort to “save the income tax,” the group hired a lobbyist to organize the various tax consumers discussed in the cover story of last month’s issue of Perspective (“Taking Your Money, Lobbying for More”).

The Institute on Taxation and Economic Policy (ITEP), a national left-wing think tank, also weighed in, spending a new round of its Soros-funded credibility attacking Laffer’s analysis and conclusions. OCPA responded with a paper, “Economics 101,” pointing out that ITEP previously acknowledged that taxes alter behavior but now seems to have changed its mind.

A lot of sound and fury, signifying something: This is a clash of visions.

As Wisconsin was (and remains) the nexus of conflict over labor policy in 2011-12, so in the course of human events Oklahoma has become a battleground state over tax policy.

The attacks from ITEP and its allies are to be expected. As OCPA pointed out in a recent blog post, “There is nothing new under the sun. President Reagan and Dr. Laffer fought these battles in the 1980s, and visionary leaders like Gov. Mary Fallin and certain state lawmakers must be prepared to pay ‘the penalty of leadership’ as they fight them anew in the weeks and months ahead.”

After all, the Laffer plan being considered in Oklahoma is the boldest tax-cut plan now under consideration in the free world. Both sides understand what’s at stake. If this domino falls—if a state with structures and systems rooted in the Populist/Progressive Era actually eliminates the income tax for the first time since Alaska did so three decades ago—then contemporary “progressives” won’t be progressing but will be in full retreat, something akin to Napoleon’s long slog from Moscow to Paris. A prelude to Waterloo.

It’s ITEP and the organized Left versus OCPA and its allies.

It’s Barack Obama and George Soros versus Ronald Reagan and his economist, Arthur Laffer.

If not a grudge match, then perhaps the equivalent of the first Ali-Frazier fight. Toe to toe for 15 rounds.

Let’s get it on.