Conservatives are all about tax cuts. They are necessary to the platform of a party or candidate that wants to be known as conservative — a sort of economic policy litmus test. However, tax cuts, like virtually everything else, have diminishing returns. The most recent example is in Kansas, where the Republican legislature defected from Governor Sam Brownback’s path of tax cuts that have resulted in a fiscal crisis, but no growth.
From the American Enterprise Institute’s James Pethokoukis:
As Bloomberg View’s Justin Fox wrote in a 2016 piece on the Kansas tax cut. “When Brownback took over, Kansas was a state with a below-average tax burden in a part of the country that wasn’t growing very fast.” And thus it remains. It’s not that taxes are unimportant for growth, it’s just that they are hardly the only thing important for growth.
As a low-tax state, Kansas was not the ideal place for cuts. Conservatives should be careful to apply their principles to the development of policy on a more case-by-case basis. There are other areas in which reforms would be more beneficial for growth. The Nordic countries provide an example of one.
No, the United States should not adopt not a wide-open-door policy to just anyone who wants to come here. Nor should we move toward socialism. Far-left cries to the contrary, Venezuela is a heart-breaking example of the poverty and suffering in truly socialist regimes, while even egalitarian misery remains elusive:
While most Venezuelans struggle to buy food and make ends meet, a small group still manages to eat sushi and sip cocktails in exclusive discos and country clubs…. The country may be stricken by poverty and political violence, but a rich minority acts like they are untouched by the crisis.
The Scandinavian countries, by contrast, are friendlier to free markets than a socialist state would be, and they have been moving in that direction for some time, after finding too much socialism (predictably) stifling. Despite high taxes and extensive social welfare systems, they avoid becoming poor by maintaining good environments for business. In fact, the regulatory environment in all of the Nordic countries is freer than in the United States.
Conservatives should emphasize regulatory reform, especially in places where tax cuts are already low. The burden of regulations is crushing the opportunity for much growth in the United States. The Mercatus Center has estimated that since 1980, the regulatory burden added during that time has resulted in an economy $4 trillion smaller than we would have had regulations stayed at their 1980 levels.
How much is $4 trillion? It’s about one quarter of the US economy in 2012, and equals $13,000 per American. The $4 trillion dollars in lost GDP associated with regulatory accumulation would be the fourth largest economy in the world—larger than major countries like Germany, France, and India.
The United States has dropped from the top position in the world for business in 2006 to the 23rd position today, according to Forbes’ annual ranking. Sweden essentially has switched places with us, moving from the 17th place to number one in 2016, by cutting taxes (it made sense there), keeping debt under control, and keeping regulations out of the way of entrepreneurship. The Heritage Foundation reports that
Sweden’s economy performs notably well in regulatory efficiency, with open-market policies that sustain flexibility, competitiveness, and large flows of trade and investment. The transparent and efficient regulatory environment encourages robust entrepreneurial activity. Banking regulations are sensible, and lending practices have been prudent. The legal system provides strong protection for property rights, buttressing judicial effectiveness and government integrity….
[I]institutional assets such as high degrees of business efficiency and transparency have counterbalanced some of the shortcomings of heavy social spending…. The efficient regulatory framework strongly facilitates entrepreneurial activity, allowing business formation and operation to be dynamic and innovative.
Business environments in other Nordic countries perform similarly well — and better than the United States. Both Denmark and Norway rank as significantly better places to do business than here by almost all measures, including ease of starting a business, registering property and paying taxes. Embarrassingly, the United States is 51st in starting a business.
The Heritage Foundation reports similar regulatory efficiency and flexibility to Sweden in Denmark, Norway and even Finland, where “the quality of the legal framework is among the world’s highest, providing effective protection of property rights. The rule of law is well maintained, and a strong tradition of minimum tolerance for corruption continues.”
At the same time, Finland shows why continuing in the direction of its neighbors is so important. The Heritage Foundation report found that
over the past five years, [Finland’s] economy has experienced economic slowdown and uncertainty. Efforts to restore economic growth, increase competitiveness, and reduce public debt continue to be at the top of the policy agenda. Government spending accounts for over half of GDP and has proven to be a drag on the economy instead of a stimulus, and public debt continues to rise.
In general, the Scandinavian countries still experience more frequent recessions and higher unemployment than the United States. However, both have been alleviated by moves toward a freer economy. These reforms, along with high social trust and healthy institutions, have kept the substantial welfare states from dragging the countries down into stagnation.
If conservatives in America are looking for ways other than tax rates to stimulate economic growth, the regulatory environment is a good place to start.