Friday, April 06, 2007

Bruce Bartlett, one of the original supply-siders, has a good op-ed taking issue with some of the myths perpetuated by some of the Republican candidates as well as rebuking to a lesser extent indirectly of some of those on the left who characterize supply-side economics as "voodoo economics."

However, I think Bartlett misses the point when he write, "Today, hardly any economist believes what the Keynesians believed in the 1970s and most accept the basic ideas of supply-side economics — that incentives matter, that high tax rates are bad for growth, and that inflation is fundamentally a monetary phenomenon. Consequently, there is no longer any meaningful difference between supply-side economics and mainstream economics." I am not sure he has any empirical proof to back-up that assertion but even assuming it is true regarding economists, many Democratic policy makers do not understand that in the long-run in many cases they will not collect a $1 of revenue for every $1 of a tax hike. Hence, this is why the Democrats running in 2004 and 2006 have always claimed if they revoked the tax cuts for the top 2% they could fund "insert program."

That said, this is a good article by Bartlett (despite his recent turn on the GOP) and probably a necessary one as many of the Republican presidential candidates at least rhetorically have boxed themselves in a corner by exclaming that tax hikes are neither necessary nor efficient. In the long run, this is probably not a good platform for the party as it does not appear to deal with economic reality.

The Money Quotes:

"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."

And

"We believed that our tax plan would stimulate the economy to such a degree that the federal government would not lose $1 of revenue for every $1 of tax cut. Studies of the 1964 tax cut showed that about a third of it was recouped, and we expected similar results. Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior."

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