The supply-side solution

Despite ample evidence to the contrary, liberal publications have devoted great space and attention to attacking the entire theory that lower tax rates can increase incentives for investment, saving and work, says Stephen Moore, senior economics writer for the Wall Street Journal editorial board.

The quality of this discourse rarely rises above the level of trash talk. Nevertheless, some arguments are repeated with such regularity that they need to be addressed. One argument is that supply-siders dishonestly claim that tax rate cuts increase tax revenues. In reality:

  • Tax receipts are up, not down, by $745 billion in four years since the 2003 tax cuts.

  • After the second Bush tax cut of 2003, the budget deficit tumbled to $163 billion in FY 2007 from $401 billion in FY 2003.

    It is also claimed that supply-side economics' sole purpose is to give jumbo-sized tax handouts to corporations and high-income earners. However:

  • The share of taxes paid by the top 1 per cent and 5 per cent income earners has consistently risen from 1980 through 2007, even as tax rates declined.

  • Today the highest income tax rate is half what it was in the 1970s.

  • Yet the share of taxes paid by the top 1 per cent of income earners is twice (39 per cent) today what it was then (19 per cent).

    Regardless of what one believes about the distributional effects of the Reagan and Bush tax cuts, there's no expunging the reality that the economic growth rate surged after each of these changes – just as they did in the 1960s after President Kennedy's tax rate cuts, says Moore. And while there have been economic booms without tax cuts, supply-siders never argued that only tax cuts matter. In the 1990s, for example, monetary, trade and spending policies were all leaning in a pro-growth direction, possibly offsetting the negative impact of the Clinton tax rate hikes.

    Source: Stephen Moore, The Supply-Side Solution, Wall Street Journal, November 9, 2007.

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    For more on Economic Issues:

    FMF Policy Bulletin/ 13 November 2007
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