Supply-side economics is not just alive and well in political thinking, it is being embraced as the only life-preserver floating in our sea of federal red ink. The trouble is, it's an anvil in disguise.
The premise that tax cuts yield more revenue was an instant hit for the rich, as you might expect. And by simply lining some charts up side by side (see comment below), you could almost see the proof. Except it turned out to be a correlation that even supply-siders could not convert into cause and effect.
They’re aided in that extrapolation by the simple fact that the American economy grows over time. As a result, even if you cut taxes the federal government will eventually take in more tax revenue than it once did. And that allows supply-siders to fashion a spurious syllogism: taxes were cut in 2001, government revenues are higher in 2007 than they were in 2001, therefore the tax cuts increased revenue. The comparison that really matters in analyzing the impact of the tax cuts, of course, is not between government revenue in 2001 and government revenue in 2007. It’s the comparison between actual tax revenue in 2007 and what tax revenue would have been in 2007 had there been no tax cuts in 2001. And studies that make these types of comparisons—including one by Bush’s own Treasury Department that looked at the tax cuts’ impact on economic growth—find that government revenues would be greater had taxes not been cut. But that hasn’t stopped President Bush from claiming victory. [More]One of Bush's leading economic advisers, and noted economist Greg Mankiw rejects the idea the Reagan tax cuts "paid for themselves". And he is far from alone.
I used the phrase "charlatans and cranks" in the first edition of my principles textbook to describe some of the economic advisers to Ronald Reagan, who told him that broad-based income tax cuts would have such large supply-side effects that the tax cuts would raise tax revenue. I did not find such a claim credible, based on the available evidence. I never have, and I still don't. [More]My earlier post referring to this report from the Congessional Budget Office carries more weight in my thinking because it is an effort to model mathematically - not philosophically - how such results could be achieved. Perhaps it could be argued that the CBO aimed for a particular answer, but certainly no more so than than the Heritage Foundation on this issue.
One reason is I have never found the Heritage Foundation to embrace any taxation or reject any tax cut. The second reason is conservative think tanks such as Heritage rightly point out the REAL problem is uncontrolled government spending, and vigorously rail against it, but then seemingly shrug their shoulders when no fiscal restraint is forthcoming and get back to the main business of lowering taxes, especially on the wealthy.
Since there is NO reason to expect any meaningful, even perhaps measurable change in government spending (I mean, the Republicans are worse than the Democrats!), ranting about taxation strikes me as single-minded self-interest. Supply-side think tanks need to get real about how they are going to raise revenues, since no effort to control spending has a prayer.
In short, I hate "tax and spend", but I really hate "borrow and spend". Take a look at our deficit growth, fer cryin' out loud! Promising to cut taxes is a political winner, I grant you, but who's gonna pay your farm subsidy? The preponderance of economic thought seems to me to side with Mankiw, especially with our economy mired in slow or even negative growth. We can watch tax revenues and prove this point or not pretty quickly.
Supply-siders happened to be in the right place at the right time with a faulty idea that got carried by good fortune. Expecting a second lottery ticket to win is not my idea of a prudent economic plan. Like energy, the obvious budget solution virtually all want to ignore is using less.
We are not over-taxed, we are under-restrained. Until even growth in public spending is brought under control, don't talk to me about tax cuts. Even my own.