A farewell to supply-side economics
Writing in National Review, Kevin Williamson lays waste the ‘magical thinking’ of supply-siders and the notion that somehow tax cuts will completely pay for themselves. There’s a great deal of really excellent stuff in the article, but here’s a good bit:
When the Reagan tax cuts were being designed, the original supply-side crew thought that subsequent growth might offset 30 percent of the revenue losses. That’s on the high side of the current consensus, but it’s not preposterous. There is, however, a world of difference between tax cuts that only lose only 70 cents on the dollar and tax cuts that pay back 100 cents on the dollar and then some.
There is considerable debate among economists and federal legume-quantifiers about how large supply-side revenue effects are. The Congressional Budget Office did a study in 2005 of the effects of a theoretical 10 percent cut in income-tax rates. It ran a couple of different versions of the study, under different sets of economic assumptions. The conclusion the CBO came to was that the growth effects of such a tax cut could be expected to offset between 1 percent and 22 percent of the revenue loss in the first five years. In the second five years, the CBO calculated, feedback effects of tax-rate reductions might actually add 5 percent to the revenue loss — or offset as much as 32 percent of it. That’s a big deal, and something that conservative budget engineers should keep in mind. But the question of whether the CBO accounts for tax cuts at 100 cents on the dollar, 99 cents on the dollar, or 68 cents on the dollar is hardly the stuff that a broad-based political movement is going to put at the center of its campaigns. Federal spending, on the other hand, is a national crisis.
Obviously there are benefits to cutting taxes when those taxes have reached truly burdensome levels, but unless spending is also curtailed, this is hardly an act of fiscal conservatism. Nor does starve the beast work in a system in which the primary goal of all lawmakers is reelection. Williamson points out that it’s easy to sell tax cuts but nearly impossible to sell reductions in spending. He suggest conservatives “develop a rhetoric in which “spending” and “taxes” are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes — levies on Americans today or on our children tomorrow, with interest.”
In the meantime, serious politicians in both parties need to stop passing the buck. At some point we’re going to need to come up with new revenues from higher taxes or new taxes like the VAT. We’re also going to need to cut spending – and not just around the edges. Entitlement spending and defense spending are not only cash cows but sacred cows, and until we have legislators brave enough (or stupid enough) to go after those, we’re going to keep barreling headlong toward fiscal insolvency. Some combination of spending cuts and tax increases is in our future. The question is only a matter of when.
I am made only slightly more optimistic by the fact that this is an article in the National Review, a place not well known for its questioning of GOP orthodoxy.
P.S.
Conceivably you could just raise taxes or just cut spending to tackle the national debt and right the fiscal ship. These are both valid positions, and both those in favor of raising taxes to maintain current spending levels and those who think we should simply cut massive chunks out of the federal budget are both right on the merits. However, both are equally impractical. Spending is too popular but too unsustainable. Tax increases are unpopular, too, but more than likely a great deal easier to push through than major cuts to Medicare or the defense budget.
Starve the beast was the worst thing the Fiscal Conservatives could have recommended, I realize now.
It merely divorced spending from taxation. The two things had nothing to do with each other, anymore.
Full, 100%, pay-go is (probably) the answer. Raise taxes (on everybody) until the budget is balanced. Let everyone know that if spending goes up, their taxes will go up (even more).
Let them vote for the amount of spending they want… but everybody has skin in the game.Report
Supply-side, on the other hand, was a deal with the (proverbial) devil.
“Hey, lowering taxes will give us *MORE* money! We’ll have more money to spend! On programs! And other stuff! The Children! Imagine the works we could create!Report
“And those stupid Democrats, always raising taxes. They’d rather punish rich people than have more money to spend.”Report
I’d like to see a thorough history of “starve the beast”. It’s my impression that it was a rationalization of the Reagan-era deficits that resulted from cutting taxes while increasing spending on defense and not making compensating cuts elsewhere. That is, describing a bug as a feature. But I don’t know this for a fact.Report
Well, yes, cutting taxes does no good if spending isn’t cut. I believe that’s what the public’s been saying for the last year — a little late, but better late than never. Libertarians have been saying it for decades. The problem is that you have truly limit government in order to stop the out-of-control spending.Report
You know what I’d like? Line-item taxation. They could soak me, provided I got to check off where I want my taxes to go. Schools? Yep. SWAT teams? Not so much.Report
@Rufus, Ooooh. I’m trying to think of downsides. We might lose the Dairy Indemnity Program, Census Geography, and Special Grants to Native Hawaiians but… my goodness. The upsides!Report
@Jaybird, think of all the jobs that would be created by having bureaucrat and cops to determine if somebody could use a park or trail. I would pay for those things but i’ll be damned if those who didn’t pay can use the trails i pay for. I want somebody getting rid of the freeloaders.Report
I’m trying to think of downsides.
You think political ads are bad now? Wait until they’re trying to get into your wallet directly instead of via a candidate.Report
@Mike Schilling, it might be refreshing.
Two elderly guys sitting at the VFW talking about how their best friend Bob had to be cremated. “He wasn’t buried next to his wife?” “No… we didn’t have enough people check off the State Cemetery Grants at tax time… it looks like I won’t be buried next to Vera, either.”
Voiceover: Please. Check the box next to State Cemetery Grants. “It’s a forever thing.”Report
“I am made only slightly more optimistic by the fact that this is an article in the National Review, a place not well known for its questioning of GOP orthodoxy.”
F**kin’ ridiculous, to complain about lack of fiscal judgment from NR after you endorse the Obama health care bill.Report
Sure, most tax cuts don’t pay for themselves, but then the purpose of government is ostensibly not the maximization of its own revenue.Report
Since I’ve been told for 30 years that cutting taxes always results in more revenue, I thought we could cut taxes to 0% and thereby have an infinite amount of money! Not true? That sucks!Report
People have some weird beliefs about taxes. If you do the math, you find that the basic economic equilibrium is stagnant with a handful of rich people who don’t spend much and a lot of poor people who can’t spend much. Investment is minimal because there is no one to buy anything. The real world data shows the same thing. Progressive taxation primes the pump, taking idle money from the rich and giving it to the poor who immediately spend it. That allows investments to pay off and people to get rich and richer. Taxation is more of investment than a burden. You can’t keep taking from the wheel unless you give a bit now and then, otherwise the wheel stops turning.Report
Spending must be reduced with taxes because debt is nothing more than taxes in the future. This is economics 101. Government spending is the problem and it does not matter tax cuts or whatever if the budget is growing.Report