Guest Blog (Steve Ellis): Evidence and Ideology: Beyond ECON 101

Stephen Ellis, Ph.D., is Associate Professor in the Department of Philosophy at the University of Oklahoma. His research areas include philosophy of economics, decision theory, philosophy of mind and ethics.

The debate about the degree to which economics supports drastic reductions in income tax rates in Oklahoma has gone through three stages.

1. A study by the Oklahoma Council of Public Affairs (OCPA) and Arduin, Laffer, and Moore Econometrics (ALME) supplies the main intellectual prop for the income tax cut proposals.  It claims that “both the statistical and anecdotal evidence” establish “clear[ly] that Oklahoma’s economy would soar if the proposed economic plan [‘a complete phaseout of the state’s personal income tax’] were implemented.”
2. A group of Oklahoma economists has sought to debunk the OCPA/ALME report, arguing that the evidence it provides doesn’t actually support the conclusions it advances.  They note, for example, that any correlation between the rate of economic progress and tax rates is more plausibly explained by the the fact that tax rate changes are motivated by economic conditions.
3. Supporters of cutting income tax rates have responded, not by defending the analysis of the OCPA/ALME study or by appealing to additional evidence, but by citing basic economic theory.  According to Joseph Haslag, for example, “[t]he OCPA/ALM economic theory is elegant: higher income tax rates mean lower returns to work and to capital, thereby reducing the equilibrium amount of those inputs employed. With lower inputs, total income declines.”  What really matters, according to Arthur Laffer and others, is ECON 101: “This is not rocket surgery; it is common sense.  Economics is all about incentives.”

The latest move in this debate reflects an unfortunate misunderstanding of the role theory plays in the discipline of economics.  Basic economic reasoning – ECON 101, if you will – is an elegantly systematized and formalized version of common sense, one that is extremely useful in framing and thinking through problems concerning human behavior.  While it is arguably an indispensable tool for social scientists, it doesn’t follow that we can forget empirical evidence.  By itself, ECON 101 doesn’t tell us what we want to know about proposals to decrease income tax rates.  Granting that incentives matter, it isn’t clear whether anything on the table will provide net increases in incentives.  As critics have pointed out, other taxes are likely to go up, especially at the local level.

Furthermore, incentives aren’t all that matter – resources and institutional structures count too.  Oklahoma might not be able to generate the economic activity people would be motivated to seek, for example, if the provision of public goods were harmed by tax rate cuts.  Simple economic theorizing can’t tell us whether an incentive effect will dominate a resource effect or vice versa.  The critics of the OCPA/ALME report appeal to exactly these sorts of shortcomings in their analysis.  Tax cut advocates consistently appeal to what they consider ‘sensible’ precisely where evidence is called for.  The economics curriculum beyond ECON 101 recognizes that looking at evidence carefully is critical – it is the only way to predict what effects will be important in the circumstances we care about.  Using their advanced economic training, the critics of the OCPA/ALME report looked at the evidence and concluded that it doesn’t support the story that lack of incentives is holding back economic activity in Oklahoma.  If you want to revive that story, you’ve got to respond with something more than freshman-level analysis, i.e., with evidence, not just theory and assumptions.

In a more philosophical vein, the fact that those who would slash income tax rates rely exclusively on simple, intuitive principles reflects a basic misunderstanding of the role of theory in the discipline of economics.  ECON 101 is the starting point for the study of economic phenomenon, not the final product.  Even the most common-sense application of a theory may fail to comport with the evidence. (For an economic example, see the work on motivation crowding theory.)  The proper thing to do in such cases is to accommodate the evidence (e.g., apply the theory in a novel way, change the theory), not just to point to common-sense.  Real scientific investigation uncovers some surprising, counter-intuitive results.  If it didn’t, we wouldn’t need to bother with science at all.

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