Aug 052010
Title: "No, No! Not That Way" Locati...
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The good news about Meg Whitman is that, while she does subscribe to the same policies prescribed by Congressional Republicans, she has rejected their tactic of running on pure contrarianism and has actually formulated a plan. Her plan, which is readily available on her website, lays out her priorities and communicates with reasonable accuracy what can be expected under her leadership.

The first of Ms. Whitman’s priorities is the creation of jobs. Her campaign promise is to create 2 million private-sector jobs by 2015. Her plan to facilitate job creation is taken straight out of the conservative’s handbook — roll back regulation and cut taxes. Of course, this is exactly the recipe that created the recession that Whitman hopes to get us out of, but hey — maybe it’ll work this time.

On the tax cut chopping block are the $800 pre-paid minimum tax to form an LLC and a cut to capital gains, which California currently treats as regular income. She also supports increased credits for both R&D and agricultural investment in water conservation. On their own, these changes all have some merit, but when taken as part of a bigger picture, they quickly lose much of their luster.

Certainly, when looking to spur innovation, credits for R&D make a good deal of sense. But to think that a large number of new businesses would be created because owners wouldn’t have to pre-pay $800 seems a stretch. On capital gains, Whitman just wants the tax eliminated. Her website calls it, “double taxation at its worst,” yet previously taxed money is routinely taxed again, as in the case of sales tax. The only real difference to make capital gains “the worst” is that it applies almost exclusively to the rich.

The Whitman plan suggests that California’s treatment of capital gains needs to be aligned “with other competing states,” and mentions nine that have no capital gains tax. What it doesn’t mention is that none of those 9 states have state income tax, and that all of the other 41 tax capital gains as regular income — just like California. She also fails to mention that, amongst her nine-with-which-to-align, only Wyoming has lower property taxes than California, and some, like Texas tax property at nearly three times the California rate.

Whitman’s position on capital gains should come as no surprise. She is a supply-sider and aggressively supports tax cuts for the rich, no matter how regressive they are. The cut to capital gains is without doubt the largest piece of the Whitman tax plan, and while it may indeed spur some economic activity, one thing is certain — it will trim billions from the tax bills of the wealthy, including Whitman herself.

Of course, cuts to capital gains taxes are very popular with conservatives, and are always touted as great stimulators of investment. The problem is that most economists disagree, and the historical record supports their position. As far back as 1980, conservative economist, Larry Summer’s definitive study concluded that eliminating federal capital gains would raise U.S. output by only 1 percent over the next 10 years. His conclusion is strongly supported by empirical data.

Past cuts in the federal rate refute the conservative myth and support Summers. The rate was dropped in 1978, and turned the prior year’s 5.8% growth into a decline of 1% over the following 18 months. It was cut again in 1981, and instead of the prior year 3.5% growth, the following year dropped 2.8%. Of course, this might be coincidence, but it is a bit odd that when the rate was increased in 1976 and 1982, it was followed both times by improved growth. It’s also interesting that Whitman promotes the cut as a job creation effort, yet for each of the adjustments mentioned above, unemployment climbed when capital gains were cut and vice versa.

The fact of the matter is that the theory behind the stimulating effect of cuts to capital gains tax is flawed. Very little of the money saved by the wealthy is actually returned as investment in job-creating activities. Just like the cuts to the marginal rates in the 80s and both variety of cut under G.W. Bush, when the tax burden on the rich is reduced, the money is often saved or spent on economically meaningless items like art work and sports cars. If the net effect of tax cuts directed at the rich had any positive impact on job creation, the Bush era would not have been the slowest period of job growth of any cycle since 1945.

Meg Whitman wants voters to believe that she has the experience and the plan to create jobs in California, yet she offers nothing more than the same old tried-and-failed conservative voodoo. The national jury is in on Whitman-style policies, and the finding is that they best serve only one purpose — to further concentrate wealth amongst the most affluent. Middle class voters need only look at the historical record to understand this truth. Like the federal policies of the past 30 years that have concentrated more wealth in the upper 1% than is held by the bottom 90%, the only way Whitman’s plan creates jobs is when the middle class becomes willing to work for scraps so that the economic elite can bask in their opulence.

But, unlikely as it is, that capital gains tax cuts will spur job growth, it’s certain that they will reduce State tax revenues. Looking back to just before the economy crashed, California took in $10.8 billion in capital gains tax revenue in 2007. Voters might wonder how the State can forgo such revenue when faced with deep deficits, but they need not worry. Meg Whitman has that figured out too. Whatever shortfall may still remain after all the wonderful new economic activity generated by her tax cuts will be fully offset by cuts in spending.

So in short, Whitman proposes to combat a $20 billion deficit by eliminating billions more in tax revenue and making up the difference with spending cuts. How will she do that?

More about that in Part 3 — a look at the Whitman spending plan.

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