Supply Side Economics — Is the Experiment Over?

David Kay Johnston wonders why the experiment  isn’t over:    (complete article is here).
You would think that whether this grand experiment worked would be settled after three decades. You would think the practitioners of the dismal science of economics would look at their demand curves and the data on incomes and taxes and pronounce a verdict, the way Galileo and Copernicus did when they showed that geocentrism was a fantasy because Earth revolves around the sun (known as heliocentrism). But economics is not like that. It is not like physics with its laws and arithmetic with its absolute values. Tax policy is something the Framers left to politics. And in politics, the facts often matter less than who has the biggest bullhorn.

What is the evidence that the tax cuts implemented under Reagan and Bush have made us ALL better off?
Since 1980, when President Reagan won election promising prosperity through tax cuts, the average income of the vast majority—the bottom 90 percent of Americans—has increased a meager $303, or 1 percent. Put another way, for each dollar people in the vast majority made in 1980, in 2008 their income was up to $1.01.
Those at the top did better. The top 1 percent’s average income more than doubled to $1.1 million, according to an analysis of tax data by economists Thomas Piketty and Emmanuel Saez. The really rich, the top 10th of 1 percent, each enjoyed almost $4 in 2008 for each dollar in 1980.
So, there is no evidence that even most of us are “better off” because of tax cuts.  The psychology of tax cutting tends to favor those proposing the tax cut.  Even if you only slightly benefit from a reduction in taxes,  any reduction is an increase in income.  The only downside is a loss of tax revenue for funding government, an abstraction for many of us  (most) because government services have been unaffected by revenue shortfalls.  If the growth is robust, revenue rises even if rates are reduced.  This is not to argue that the supply theory is correct.  Even if tax cuts have not had a  special impact on revenue, revenue will increase under conducive conditions.
The economist James K. Galbraith argues this point in recent testimony before the  Senate Finance Committee, March 8, 2011, hearing on Principles of Efficient Tax Reform.

Growth? Tax reformers often promise that their proposals will favor economic growth. But there is little evidence that this has ever happened in the past. In principle, this should be no surprise. The long-run potential for economic growth depends on the growth rate of our population, the cost of natural resources, technological progress and the rate of business investment. It is very difficult for any tax reform to change these factors materially. Business investment can sometimes be stimulated by tax favors in the short-run, such as the investment tax credit. Sometimes, this is desirable policy. But a one-time increase in investment does not yield a long-term increase in the rate of growth.

Despite the tradition of hype that suffuses this topic, the most any tax law change can reasonably promise is modest improvement in economic conditions in the fairly short run. History also teaches that most of that effect comes from increasing purchasing power when it is too low – that is, from the Keynesian effect and not the supply-side effects. Tax law changes do not supply magic bullets for financial crises, nor for a period of slow technological innovation or rising costs of energy.

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2 Responses to Supply Side Economics — Is the Experiment Over?

  1. A Yellow Dog Democrat says:

    New Hampshire is a very conservative state and probably has a few people in state goivernment, in influential places, who believe in supply-side economics. Have they done a supply-side tax cut there? How did it work?

  2. Good question. We have no taxes to cut with the exception of the property tax which funds education. The current Republican majority is keen on eliminating fees and various business taxes. I doubt the cuts will be of a magnitude sufficient to affect economic activity.

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