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January 25, 2005

Weak Tea on Supply-Siders from the New York Times

Nick Confessore, having moved from the Washington Monthly to the New York Times, writes:

Hey Brad,

Wanted to alert you to this piece on tax reform for the Times mag this weekend http://www.nytimes.com/2005/01/16/magazine/16TAXES.html

It was a good piece, a good look into Grover Norquist's mind. But I was quite disappointed about one piece of it.

At one point, Nick wrote:

[Norquist's group has also come to share a few articles of faith about the relationship between taxes and growth. One is that for years the American economy has been enormously handicapped by excessive taxation on savings and investment; because people and businesses are discouraged from saving, the theory goes, there is a pervasive shortage of capital for future investments. Another belief is that lifting those burdens would create a permanent increase in most Americans' standards of living. Still another belief is that cutting all those taxes won't worsen the deficit, because the growth the cuts will unleash would produce more than enough income -- and, therefore, tax revenue -- to make up the difference.<

Most economists typically find this line of argument questionable. (When rates on savings and investments were cut back beginning in the 70's, they note, the savings rate actually went down, indicating that people's propensity to save probably isn't greatly affected by changes in marginal tax rates.) So Bush's proposals are unlikely to win the kind of expert consensus that the 1986 one did...

Now there are two analytically distinct claims there at the end of the first paragraph I quote, the first of which--for which I have a good deal of sympathy--is that our system of taxing income from capital has in all likelihood been very costly in terms of deadweight losses imposed on the economy when measured against the revenue raised and the progressivity gained

The second claim, however, is the problem. The second claim is the old supply-side b.s.: that the growth the tax cuts will unleash means that the tax cuts would more than pay for themselves.

If I were writing about that second claim, I would not say that "most economists typically find this line of argument questionable." I would say that an overwhelming majority of economists find this claim ludicrous. And I would back it up by at one or more of the following three examples:

Greg Mankiw writing in 1998: "An example of fad economics occurred in 1980, when a small group of economists advised presidential candidate Ronald Reagan that an across-the-board cut in income tax rates would raise tax revenue. They argued that if people could keep a higher fraction of their income, people would work harder to earn more income. Even though tax rates would be lower, income would raise by so much, they claimed, that tax revenue would rise. Almost all professional economists, including most of those who supported Reagan's proposal to cut taxes, viewed this outcome as too optimistic. Lower tax rates might encourage people to work harder, and this extra effort would offset the direct effects of lower tax rates to some extent. But there was no credible evidence that work effort would rise by enough to caues tax revenues to rise in the face of lower tax rates. George Bush, also a presidential candidate in 1980, agreed with most of the professional economists: He called this idea "voodoo economics." Nonetheless, the argument was appealing to Reagan, and it shaped the 1980 presidential campaign and the economic policies of the 1980s.... Congress passes the cut in tax rates... but the tax cut did not cause tax revenue to rise... tax revenue fell... government began a long period of deficit spending... largest peacetime increase in the government debt in U.S. history. Fads can make experts seem less united than the actually are... when the economics profession appears in disarray, you should ask whether the disagreement is real or manufactured... [by] some snake-oil salesman who is trying to sell a miracle cure..."

Irving Kristol, the Godfather of neoconservatism--who used the Public Interest to give the supply-siders their launching pad in the late 1970s--writing in 1995, denying that he had ever believed that tax cuts would pay for themselves: "The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority--so political effectiveness was the priority, not the accounting deficiencies of government... [which excuses this]... rather cavalier attitude toward the budget deficit and other monetary or fiscal problems."

Bruce Bartlett, writing last week about the amount by which higher taxes reduce economic welfare: "A common estimate is that the federal tax system as a whole has a deadweight cost of about 20 cents per tax dollar."

That's what Bruce accepts as the common estimate, and I think he's broadly right. Now I do believe there are pieces of the tax system that impose much bigger deadweight costs per dollar of revenue raised. But you need the tax to impose a deadweight cost of at least 200 or more cents on the dollar before cutting it pays for itself. And in my view, at least, that fits very few parts of today's tax system.

To say that economists "typically" find Norquist's pay-for-itself claim "questionable"--that's remarkably weak tea to serve the New York Times's readers. They deserve to know that George W. Bush's own chief economic advisor called it--before he went under message discipline--a doctrine of "charlatans and cranks," and that at least at one point in time neoconservative Godfather Irviing Kristol was anxious to convince an audience that he had never been enough of a fool to believe it. Why not tell New York Times readers what they deserve to know?

Posted by DeLong at January 25, 2005 09:55 AM