Attempting to verify supply-side theories

Supply-side economists believe that tax cuts stimulate the economy to such an extent that any loss of revenue to the government is more than made up by revenues flowing from enhanced economic activity. While there is much historical evidence that this is true, the precise effects of tax cuts on the economy have not so far been measured – and sceptics say they never can be measured in an economy so variable and complex as the U.S.A.’s.

But help may be on the way.

  • Representative Bill Thompson (Republican, California.), chairman of the U.S. House Ways and Means Committee, is pushing the U.S. Congress's Joint Committee on Taxation to undertake a study of the true effects of tax cuts – including their impact on government revenues.

  • Supply-side advocates have complained for years that the current system of evaluating tax cuts overstates the expense to the federal budget by looking only at lost revenue – the static approach – and not taking into account the dynamics of the cuts' ability to increase output and jobs.

  • Establishing their case would give supply-siders in Congress and the administration powerful ammunition to back up their arguments for an expanded tax-cutting agenda.

  • Realizing the implications, Democrats have tried in recent weeks to slow the inquiry by stacking a congressional panel of economists studying the issue with new members sympathetic to their objections.

    But even Democrats admit that their efforts are probably doomed to be no more than a holding action – and that the inquiry will probably commence next year.

    The joint committee's staff has indicated that it intends to issue reports that would for the first time assess the likely economic effects of changes in tax policy.

    Source: Richard W. Stevenson, Group May Estimate Effects of Tax Cuts, New York Times, September 18, 2002.

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    FMF Policy Bulletin\25 September 2002
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