Supply side snake oil
Like many others here, I often find myself reading this or that bit of nonsense from some supply-sider and thinking, "Christ, what an utter load of bullsheetrock." The problem, as I see it, is that suppy side economics has become a religion for too many people, and tax cuts have become the holy grail, a panacea for all that ails us, and even a tool for revenue enhancement!
Yes, most of this is bullsheetrock, and there are a number of right-leaning think tanks that would no doubt have excommunicated me for heresy by this point. Still, I maintain that the problem is not with supply side economics itself, so much as overzealousness on the part of its adherents.
Below is the famous Laffer Curve.
I submit that the Laffer Curve is completely uncontroversial, so long as one isn't too concerned with its exact shape. I think we can agree, for example, on the endpoints. If the tax rate is 0%, we get zero revenue. If the tax rate is 100%, we also get zero revenue, or near to it, because no one will work. In the middle somewhere is a maximum, labeled "Equilibrium Point" in the diagram. Perhaps it's skewed more to the right than the figure above shows, but it's in there somewhere.
I think we should all be able to agree on that much. Now, what supply siders say is this: There is no reason for any government to have tax rates to the right of the equilibrium point, ever. On this point, they are correct. Tax cuts for such a system would not only return more money to private taxpayers, but would also swell government coffers, as the tax rate moves back toward the optimum, increasing government revenue. In this instance, tax cuts really can "pay for themselves."
Now applying this logic to the U.S. income tax code might have made sense back in the 70's, when Art Laffer first sketched in on a cocktail napkin, but it makes no sense given the income tax rates of today.
It drives me crazy to see right-wing religionists misusing supply side theory to claim that tax cuts always pay for themselves. They don't! And the Laffer Curve doesn't claim that. In fact, if you look at the graph, tax rate cuts anywhere to the left of the equilibrium point actually reduce government revenue.
Given today's income tax rate structure, I just don't believe that future tax cuts would increase revenue. What I will grant the Church of Arthur Laffer is this: future tax rate cuts will be less costly than CBO's "static scoring" might indicate. Such tax cuts do have a stimulative effect and might help augment the tax base, and therefore make such a tax cut less costly than the CBO might assume, but that's a far cry from "paying for itself."
Now don't get me wrong. I'd support almost any tax cut for pretty much any reason. But not because I think it's going to increase government revenue. I agree with Milton Friedman -- if cutting tax rates increases revenue, that means you haven't cut taxes enough.
Comments
The Supply Side view that income tax rates deliver maximum revenues when reduced to about the 22% mark, seems true enough Barry, but THAT'S also the flaw in Supply Side reasoning - it's been used, to date, to MAXIMIZE government revenues, which seems to tacitly endorse the view that larger revenues, and thus a larger government is to the good.
If Ronald Reagan was right, that "Government isn't the solution, government IS the problem," and I believe he was, then we should be supporting tax cuts significantly BELOW that equilibrium point, to make government do more with less.
In other words, tax cuts SHOULDN'T "pay for themselves."
Tax cuts SHOULD always be accompanied by cuts in government spending. In fact, spending cuts should come first and last.
I've acknowledged that Supply Side policies have worked, while Keynesian policies ("more government spending generates its own economic boom") does not, BUT I also acknowledge that the success of Supply Side policies have been a double edged sword.
On the one hand, they have delivered over a quarter century of unprecedented prosperity - Reagan, Bush Sr, Bill Clinton and Bush Jr ALL dutifully adhered to the Supply Side policies endorsed by Alan Greenspan, BUT those policies have also masked the basic structural problems with our income tax based system.
First, it fails to tax the "truly wealthy" (those who don't rely on income for wealth), second, it excludes the "Underground (off-the-books) Economy" and third, it inanely claims to "tax the rich," while defining "the rich" as higher income earners, while skewering mostly lower income earners, as those higher income earners can and usually DO defer more of their income as tax rates rise.
In my view, the most basic flaw in our system is that it penalizes/taxes productivity/work in the form of income. Those who argue in favor of the flat tax seem to ignore the fact that it does the same.
The ONLY tax system that would have the "truly wealthy" (those who don't rely on income for wealth) pay anything to close to their share, impact the Underground economy and free productivity from the restrictions of a poorly devised tax policy is the Fair Tax (http://www.fairtax.org/site/PageServer)
If we had a system like the Fair Tax, we wouldn't have to argue over rate cuts, as everyone would pay and everyone would be motivated to look at ways of reducing governments costs and government waste.
Posted by: JMK | November 21, 2007 09:15 PM
I saw this post, and noticed there was just one response, and I said to myself, "I betcha I know who it is..." and as soon as I saw the orgy of capital letters and bold type creaming at me, I didn't even have to scroll down to see who the respondent was.
Posted by: fred | November 23, 2007 08:37 AM
I was going to remark that you spoke as though reducing Tax revenues were a bad thing, but JMK beat me to it.
Posted by: Paul Moore | November 23, 2007 03:33 PM
THANKS Fred! I DO have a very distinctive style, don't I?
I believe some things warrant emphasis (capitals and bold, etc.), and any subject worth responding to, or discussing, is worth giving a fully detailed and even measured accounting on.
I tend to think those quick, one-sentence replies generally show the level of interest and understanding of the poster. I've been guilty of posting "drive-by" responses on rare occasion, but I try to make those occasions very rare, if I can.
Posted by: JMK | November 24, 2007 10:55 AM
Paul, to be fair, I think Barry is arguing against the idea, put forth by many, that "tax cuts ALWAYS pay for themselves." At least that's how I read it, and I can only speak to my own interpretation of that post.
Without question, tax cuts DO tend to fuel both spending and investment and that's generally good for revenues, and they have also largely increased revenues by inducing higher income earners to take more of their income upfron, and since the top 10% of income earners pay about 70% of all income taxes, as those people take more of their income "up front," tax revenues usually INCREASE, while they DECREASE when those people respond to incentives and defer more of their income in tax deferred vehicles.
BUT tax cuts SHOULDN'T always pay for themselves. That's why I'd ideally want to see tax rates cut BELOW the point where they actually increase revenues!
The whole idea should be to make government do more with less and thus intrude less on people's lives.
I think most reasonable people (Left & Right) would agree with that goal (less government at lower cost), BUT where folks tend to disagree most, is what role government SHOULD take.
For instance, I'd like to see a lot less government meddling in the economy, in social services, etc. and a more efficient, cost-effective military, and an effective court system and an even more pervasive law enforcement arm.
When I see those "To Catch a Predator" specials, it makes me appreciate how much MORE law enforcement we need and how the barriers to catching the various predators among us, need to be lowered a little bit.
Posted by: JMK | November 24, 2007 12:20 PM