SubscribeLike most crank doctrines, supply-side economics has at its core a central insight that does have a ring of plausibility. The government can't simply raise tax rates as high as it wants without some adverse consequences. And there have been periods in American history when, nearly any contemporary economist would agree, top tax rates were too high, such as the several decades after World War II. And there are justifiable conservative arguments to be made on behalf of reducing tax rates and government spending. But what sets the supply-siders apart from sensible economists is their sheer monomania. You could plausibly argue that, say, Reagan's tax cuts contributed around the margins to the economic growth of the 1980s. But the supply-siders believe that, if it were not for Reagan's tax cuts, the economic malaise of the late '70s would have continued indefinitely. They believe that economic history is a function of tax rates--they insisted that Bill Clinton's upper-bracket tax hike must cause a recession (whoops), and they believe that the present economy is a boom not merely enhanced but brought about by the Bush tax cuts.If you want more, you know where to find it.
It doesn't take a great deal of expertise to see how implausible this sort of analysis is. All you need is a cursory bit of history. From 1947 to 1973, the U.S. economy grew at a rate of nearly 4 percent a year—a massive boom, fueling rapid growth in living standards across the board. During most of that period, from 1947 until 1964, the highest tax rate hovered around 91 percent. For the rest of the time, it was still a hefty 70 percent. Yet the economy flourished anyway. None of this is to say that those high tax rates caused the postwar boom. On the contrary, the economy probably expanded despite, rather than because of, those high rates. Almost no contemporary economist would endorse jacking up rates that high again. But the point is that, whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor.
That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And, if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points--zero taxes and zero revenue, 100 percent taxes and zero revenue--Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.If you say that the Laffer Curve doesn't say that income tax revenue is 0 at 100% income, that's in fact what Laffer himself says. In fact, he seems to be saying that tax revenue is 0 at lower levels than 100% (linked chart is from the second link).
At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve--that is, that rates were then high enough that tax cuts would produce higher revenue.
I haven't actually run the regression, but it looks clear to me that revenues rise with tax rates, and the fit also looks better than in the first graph.Even if the original article was completely drawn freehand and not derived statistically, all that we're comparing is one freehand sketch against another; both subjective.
His primary exhibits for the nefarious influence of supply-side policy are: Larry Lindsay, Dick Cheney, Jack Kemp, Jude Wanniski, and George Gilder. Cheney I give you, but Larry Lindsay was drummed out of the administration in disgrace (for unrelated reasons) even before Bush's major tax cut, and Chait somehow neglects to mention the more conventional economists who have occupied the job since. Jack Kemp hasn't had access to serious power since I was snoring my way through Algebra I, and what power he did have was over HUD. Moreover, though I agree that Jude Wanniski and George Gilder are barking moonbats, they have, to put it kindly, limited influence on today's Republican party; which is hardly surprising given that Wanniski was kicked out of the party in disgrace before he died in 2005, and George Gilder has turned his attentions to that hugely influention Republican mouthpiece, the Gilder Technology report. This motley collection of names is hardly proof that the Supply Siders Have Taken Over the Building.Matthew Yglesias replies to McArdle. Excerpt:
Chait's point, however, was that the very same ideas espoused by these crazy people continue to control the GOP policy agenda. To get around this point, Megan seems to elide the small fact that Dick Cheney is Vice President of the United States. One other believer who has some impact on public policy is a fellow by the name of George W. Bush [...] And, of course, in addition to this insignificant crew of presidents and congressional leaders, there's people like Rudy Giuliani and John McCain. As Greg Mankiw put it "fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party." Those segments just happen to include the party's entire national leadership.Jonathan Chait responded to other parts of McArdle's blog entry. Excerpt:
Finally, she asserts that I'm wrong to write that "the Laffer Curve was not, strictly speaking, correct." Let me explain this. The Laffer Curve is a concept that says a 0% tax rate and a 100% tax rate will both produce zero revenue. Therefore it's possible to cut taxes and raise revenue. Most economists agree that this is true in theory, but ridicule the notion (put forth by leading Republicans) that current U.S. tax rates are high enough that tax cuts can raise revenues.
I think it's also true, in theory, that some tax rates could be high enough that a rate cut could produce higher revenue. I have not disagreed with that idea anywhere in my book. What I took exception to is the idea that a 100% tax rate would produce zero revenue. I know for a fact that this is false. How could I know that? Because if tax rates were 100% I would still work anyway. Why not? It beats sitting home all day. I wouldn't work as hard, but I'd work. The government would get revenue from me. There, that's above zero. I'm also highly confident that other people would work, too. Not nearly as many as do work, and again not very hard, but work they would.
The point here is that the supply-side model, which holds that all human activity takes the form of calculating the marginal return on our work, is wrong. People work for all sorts of reasons other than income -- intellectual stimulation, pride in their craft, feeling productive, etc.
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