Return of Supply Side
good news is that supply-siders want to cut taxes. The bad news
is ... well, let's accentuate the positive for the moment. The supply-siders
reject Washington's tendency to think in static terms. To most politicians
and bureaucrats, the economy is a pie for the tax collectors and
special interests to slice up and gorge themselves on. Then they
are shocked when the economy stops growing.
truth, people respond to policy changes in ways Washington can't
anticipate. When capital formation and value creation is taxed,
there is less of it. Unlocking that capital by reducing taxes on
income and investments is a sure path to economic growth. So far,
the supply-siders are correct, and a big improvement on Keynesian-style
D.C. economic theory.
say tax cuts only help the rich. But by definition, the rich are
the ones with the financial means to invest and create jobs. If
it's economic growth and restored prosperity that we're after, no
plan that punishes the rich disproportionately is going to succeed.
static attitude of Washington spills over into all areas of fiscal
policy. Especially pernicious is the doctrine of "revenue neutrality,"
which says that tax cuts are forbidden unless they can be "paid
for" with equal spending cuts. At the same time, the doctrine hasn't
restrained spending. Thus taxes can never go down so long as static
that reason, the supply-siders have warned that fear of deficits
is little more than a smokescreen for keeping deficits high. As
political analysis, this is true. When the 104th Congress shifted
its focus from cutting government to cutting deficits, it doomed
itself to failure. In fact, in the sweep of American history, the
debt has been reduced primarily in times of tax cutting.
main trouble with this doctrine is that it puts too much emphasis
on the incentives introduced by tax rate changes and not enough
on the overall tax burden. For example, supply-siders at the Wall
Street Journal disparage the idea of allowing tax credits for
children because it doesn't cause people to churn their investment
accounts. Guru Jude Wanniski has attacked Bob Dole's proposed tax
credit as "very expensive for what it would yield in added economic
for whom? The government, of course. But from the point of view
of the family, it's a wonderful thing, as is any tax cut, anywhere
any time. It allows people to keep more of their own money, an essential
precondition for restoring prosperity.
the overall tax rate leads to other errors. The supply-siders back
flatter taxes, on grounds that progressive rates penalize wealth
accumulation. But if these flatter taxes end up as higher taxes
(as they do in most proposed reform packages), it would be for the
worse. It's better to have three progressive rates of 15%, 28%,
and 33 % than a flat rate of 30%. It's not the flatness that counts
so much as the overall level.
a danger to view taxes as a tool for social or economic planning,
even when the planning involves policy changes friendly to the free
market. People's actual behavior will always surprise the planners.
One example: if taxes were dramatically lowered working mothers
might decide to leave the work force, thus causing a statistical
"loss of jobs," fewer tax receipts, and, even, a supposed economic
slow-down. Would supply-siders tolerate this, even if American families
were made better off?
strength of supply-side doctrine is its attention to the disincentives
that high marginal tax rates create for saving and investment, the
pillars of economic growth. Its weakness is that it does not go
far enough: it's not just ascending marginal rates that dampen economic
growth, but all taxes that redistribute wealth from the private
to the public sector. The overall level of all taxes including
payroll taxes, excise taxes, and inheritance taxes matters
just as much as how those taxes are structured and which sectors
much for the soft claims of supply-siders. In the best light, it's
classical economics marketed for our times, and praiseworthy as
far as it goes. But there is another side to supply-side tax doctrine
that deserves more scrutiny, beginning with its claim that tax cuts
tend to pay for themselves. This is a doctrine constructed mainly
for political advantage. It relieves tax-cutting candidates from
having to specify spending cuts.
empirical example usually cited to prove this claim comes from the
1980s: rates went down, growth went up, while revenue went up. Sadly,
the data usually consider only income tax rates, which were indeed
cut, and leave aside all other taxes, which were vastly increased.
For example, the primary text defending the 1980s, Robert Bartley's
The Seven Fat Years, suppresses all discussion of Reagan's
it was Bob Dole who watered down the tax cut of 1981, and eventually
pushed through a reversal when he served as chairman of the Senate
Finance Committee. Dole claimed frequently on background to the
New York Times that tax cuts are potentially inflationary.
ink was barely dry on 1981's tax cuts when Dole and Pete Domenici
devised new tax increases totaling $48 billion. By the end, this
had ballooned to $122 billion, and it included a repeal of the third
installment of cuts. Dole shepherded it through the Senate on a
partisan vote, with Democrats voting against tax increases. In light
of what was then the largest tax increase in U.S. history, it's
hardly surprising that revenue increased.
an even darker side to supply sideism, typified by Jack Kemp's wild
spending when he was head of Housing and Urban Development. While
calling for tax cuts, he demanded far more for his own department
than even a Democratic Congress would consider. As Jeff Tucker has
pointed out, if Kemp's requests had been approved, HUD would have
grown by half, as it was, he managed to expand it by a third.
this the exception to the supply-side rule? Sadly not. Their writings
express the view that we can keep the mixed economy just as it is
dominated by the world's largest system of transfer payments so
long as we reconfigure the tax code. Private enterprise can be enlisted,
unwittingly, to pay for ever-higher public spending.
make tax cuts a reality and a public benefit, government must be
made to curb its appetite for spending. Without such a curb, the
spending will be paid for in other ways: through increased borrowing,
which crowds out private investment, or through debt monetization.
similar problem spoils supply-side monetary policy. Many advocate
a gold price rule for monetary management. But the chief benefit
of gold is that it shackles the ability of government to borrow
and monetize debt. All that government spends must be collected
in taxes or else. Loose money is absolutely prohibited. The benefits
of gold derive from the fiscal discipline it imposes, the discipline
supply-siders reject as "root-canal economics."
we cut taxes? The more the merrier. It doesn't matter whether it's
socialists, free marketeers, or supply-siders doing the cutting,
so long as the burden of government is reduced. But let's not fool
ourselves into thinking that tax cuts can make today's socialistic
policies fiscally feasible. The goal is to hinder the planners whether
they seek to control what the people demand, supply, or both.