Scott Walker's 'Kohl's Curve,' Explained
To promote his economic ideas and tout his blue collar credentials, Scott Walker has been using a unique tactic: talking about his shopping habits. In his presidential campaign kick-off, the Wisconsin governor talked about how much he and his wife, Tonette, love a certain Wisconsin-based discount retailer.
"Some of you know that Tonette and I like to shop at Kohl's. Over the years, I've learned that if I'm going to buy a new shirt, I go to the rack that says that the shirt was $29.99 but now is $19.99," he said.
Kohl's is one of Walker's favorite campaigning topics — he brings it up all the time in his speeches. One obvious advantage of talking up his Kohl's trips is that it could help Walker connect with the regular, bargain-hunting folk who also shop at the bargain shop. However, he has also been using the retailer to explain more complex economic concepts. As he went on to say in his announcement speech:
"So how does a company like Kohl's make money? Volume. They make it off of volume. The government could charge the higher [tax] rates and a few of you could afford it. Or we can lower the rates and broaden the base and increase the volume of people participating in our economy.
"Years ago, we saw this kind of plan work well under President Ronald Reagan. Back then, it was called the Laffer curve. Today, I call it the Kohl's curve, because I believe that you can spend your own money far better than the government — and that will help grow the economy."
It's a folksy analogy, but does his idea hold water? Here's where Walker's Laffer-Kohl's connection falls apart — as well as where he really does seem to be getting at some bedrock conservative ideas.
What's Walker trying to say?
Walker's idea is that, just as Kohl's draws more people in with shirts that cost $20 instead of $30, the government could raise its revenue by having a lower tax rate and getting more people to pay.
And that's somewhat similar to the argument made by economist Arthur Laffer, who first drew his famous curve on a linen napkin while out at a restaurant with Donald Rumsfeld and Dick Cheney.
To be clear, the idea wasn't invented by Laffer, but the curve he drew to distill it down has taken on his name. The big idea is that taxes can clearly be too high or too low, but somewhere in there you're going to find the rate that gets you the most revenue — and that might mean lowering taxes.
"If you think about it in the most basic sense, if the tax rate on income is zero percent, then the government's not going to collect any revenue. If the tax rate is 100 percent, why would anyone generate any revenue?" explained Michael Strain, a resident scholar at the right-leaning American Enterprise Institute.
Somewhere in the middle, Laffer said, there has to be an optimal rate of taxation at which the government gets the most revenue possible:
So Walker is trying to say that lower tax rates (cheaper shirts) with a broader base (more shirt-buyers) — a broader base that could mean getting more taxpayers by creating more jobs, for example, or by getting rid of deductions — could help bring about that optimal, high rate of revenue, even while asking people to pay lower tax rates on their hard-earned money.
So does Walker's Kohl's curve make sense?
Walker's association between low taxes and a cheap polo shirt falls apart almost immediately when you really sit down to think about it. As one retail expert explains, Walker is comparing apples to oranges (or, more precisely, supply-and-demand laws to tax rates).
"What Kohl's is doing is what every retailer does. ... As you lower price, demand increases. It's a classic example of the law of supply and demand," said Greg Girard, program director of merchandise strategies at market research firm IDC. "The Laffer curve is expressing a completely different notion."
Or, more simply, the government is not a retailer. It's not offering goods and services it hopes people will buy in simple transactions. Rather, it's requiring people to pay money for a range of government functions and public goods — roads and national defense, for example. People don't pay their taxes because they think they're getting a steal on a pair of shoes (or, rather, a nifty new highway); they pay them as a matter of course and as the cost of living in a society that provides certain basic services.
Kohl's, meanwhile, attracts customers by convincing them they're getting a good deal on quality goods, Girard explained. They're coming for the value — brand names and low prices.
But does the Laffer curve work?
So even if Walker's analogy is flawed, would lowering the tax rate still fill the government's coffers? That's a much more complicated and controversial question. The Laffer divide tends to fall heavily along ideological lines — liberals tend to say the curve doesn't work, but Laffer's idea has endured for decades among conservative economists and politicians.
As former Obama administration economist Austan Goolsbee said in a response to a 2012 survey, "Moon landing was real. Evolution exists. Tax cuts lose revenue. The research has shown this a thousand times. Enough already."
President George W. Bush, meanwhile, used Laffer-style reasoning to justify his tax cuts. Some of his own advisers acknowledged, however, that the cuts didn't boost revenue.
In practice, the Laffer debate is not a black-and-white debate of whether tax rates should be superhigh or superlow, but whether they should change from where they are now.
"The operative question, I think, is that if we move the top income rate down from [the top marginal rate of] 39.6 percent, would that mechanically raise revenue? In other words, is 39.6 to the right of the peak? And I think the answer is pretty clearly that it's not," says Strain. "I think 39.6 is very clearly to the left of the peak of the Laffer curve."
He does make a distinction between income taxes and corporate taxes, however: "Now the corporate rate — I think [if you lowered it] you would increase the amount of revenue that you get."
One recent panel of top economic experts suggested that at current income tax levels, lower tax rates could have some economic benefits, but maybe not the revenue-boosting ones Walker is hoping for.
In a 2012 University of Chicago Booth School survey, economists were more likely than not to say lower tax rates would speed economic growth. However, they also overwhelmingly said that lower tax rates would not mean higher tax revenues.
What Walker might be getting right
Interestingly, Kohl's could be a good exemplar of conservative ideals, but in a different way than Walker is saying.
Kohl's has all sorts of ways it keeps profits high, explained Richard Jaffe, a retail analyst at Stifel Nicolaus: strategic store layouts and being smart about which brands it offers. But there's one huge thing Kohl's has done amid all that: It keeps costs down.
"They sell a lot of stuff, and they've focused on a low-cost business, so they don't buy expensive stores in downtown locations. They have inexpensive stores where land is cheap — the buildings are relatively inexpensive compared with a mall or a downtown location," said Jaffe.
In short, Kohl's is successful not just because of selling lots of shirts but by keeping its spending low — an idea that any small-government conservative would love. When your facilities costs are super low, you don't have to make a huge profit on each individual shirt, Jaffe explained. That's how Kohl's has managed to be so successful.
And as a small-government conservative, a lean-operating retailer might in this way hold a better analogy for how Walker wants to shape government.
Of course, this is also an imperfect analogy — the government isn't trying to make a profit, after all. But it's a way for Walker to invoke his favorite store on the campaign trail, and in a way that makes more sense than using a shopping trip to promote lower taxes.
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