Sunday, April 08, 2007

Bumper Sticker Economics: Time to Give Supply Side a Decent Burial?

Bruce Bartlett, who served in the administrations of Ronald Reagan and George H. W. Bush, doesn't like what's happened to supply side economics. Writing in the New York Times (and rescued for posterity at Economist's View), Bartlett points out that supply side theory was at first narrowly understood:
The original supply-siders suggested that some tax cuts, under very special circumstances, might actually raise federal revenues. For example, cutting the capital gains tax rate might induce an unlocking effect that would cause more gains to be realized, thus causing more taxes to be paid on such gains even at a lower rate.
But today it is common to hear tax cutters claim, implausibly, that all tax cuts raise revenue. Last year, President Bush said, “You cut taxes and the tax revenues increase.” Senator John McCain told National Review magazine last month that “tax cuts, starting with Kennedy, as we all know, increase revenues.” Last week, Steve Forbes endorsed Rudolph Giuliani for the White House, saying, “He’s seen the results of supply-side economics firsthand — higher revenues from lower taxes.”
This is a simplification of what supply-side economics was all about, and it threatens to undermine the enormous gains that have been made in economic theory and policy over the last 30 years. Perhaps the best way of preventing that from happening is to kill the phrase “supply-side economics” and give it a decent burial.
Economics may be the dismal science, but it is still a science, with measurable results. But the most zealous supply siders take its pronouncements as articles of faith. Mark Thoma at Economist's View offers a useful commentary:
The question, of course, is how much additional growth comes from a cut in taxes and here I agree to some extent with Bruce Bartlett. It depends upon the type of tax cuts that are enacted, some are more productive than others and hence some types of tax cuts generate more tax revenue than others. Whether the tax cut is permanent or temporary is also important.
We'd disagree over the magnitude however. While some types of tax cuts can affect growth, the effect is nowhere near large enough to generate a 33% tax revenue recovery rate, not even close, and, in any case, all the low-hanging fruit has already been plucked, something that is often overlooked.
Readers are free to agree or disagree with Bartlett or Thoma, but please spare me the bumper sticker aphorisms like "Tax cuts work," a statement so vague that it defies rational discussion.

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