So Arthur Laffer — still arguing the improbable “supply side” proposition that cutting income tax rates generally raises total tax revenue — is apparently now a special adviser to John McCain. And McCain has taken on a big consignment of the snake oil, to Greg Mankiw’s dismay. The political temptation for a Republican candidate to promise both lower tax rates and higher revenues is irresistible. The policy-makers who cut taxes when Ronald Reagan and George W. Bush, respectively, came to power subscribed to this claim. Remarkably, at the same time, the economists who were the chief economic advisers to Reagan and Bush during these tax cuts disavow the proposition that they increase revenue (Murray Weidenbaum, Martin Feldstein, Glenn Hubbard, Mankiw…) . Almost all serious economists – let us say Ph.D. economists – disagree with this proposition, with only a microscopic handful of exceptions like Laffer. Indeed some of the advisers who defend the Reagan and Bush economic policies claim that this formulation of supply side economics is a caricature, and was not the true rationale of the tax cuts. This wishful thinking is directly at odds with quotes from the presidents themselves and their Treasury secretaries and other economic officials, to the effect that tax cuts stimulate income so much as to produce more tax revenue. Laffer is not a straw man. (See my next post.)
Even more interesting, the academic defenders of the Republican tax cuts often offer a proposition that is diametrically opposed to the defense offered by their political masters. This is the famous “starve the beast” hypothesis: the claim that if you deprive the government of tax revenue, it will reduce government spending, which is of course viewed as a worthy objective. If this proposition were true, and the supply side hypothesis were also true, it would lead to the nonsensical proposition that Republican presidents should raise tax rates in order to reduce tax revenue (Laffer) and thereby reduce government spending (Starve the Beast). I challenge some candidate to run on that platform !
As it happens, there is abundant empirical evidence against both the Lafferite hypothesis and the Starve the Beast hypothesis. In other words, just because two propositions are diametrically opposed doesn’t mean they are not both wrong. I hope that in this election campaign, the media do something they have failed to do in the past. If McCain proposes extending the Bush tax cuts, he should at least be forced to choose between the Lafferite defense, which tends to be driven more by political expediency, and the “Starve the Beast” defense, which has more support among at least some reputable Republican economists. Only then can the rest of us know which of the two propositions to refute.
Somehow this information must find its way into the national media. There are hoards of righteous souls out there who truly believe the myth. Our chance for a saner economic policy and the hope for extricating ourselves from the present unsustainable economic mess, depends on well supported information in the public’s hands. Perhaps you will whisper it in Obama’s or Hillary’s ear…
Dr. Frankel,
Thanks so much for your comments, particularly the logical (and non-sensical) proposition, that if republicans really wanted to “starve the beast” they should raise tax rates in order to reduce tax revenues (particularly among the rich, since, given the chance offered by lower taxes, they are presumably those most responsible for the phenomenal growth which produces the increased tax revenues).
I hadn’t thought of this argument before and will surely use it the next time I return to my rural Iowa roots and resume the on-going argument with my mostly Republican old friends and extended family.
Your post does in fact create a straw man. Nobody thinks that tax cuts always raise revenue. (Yes, many Republican politicians–not economists–make statements to the effect that the US is on the wrong side of the Laffer Curve. Some probably even believe this; though generally it’s just a way to make a popular idea more popular).
Also, there is no sense in which supply-side economics and the starve the beast theory are “diametrically opposed.” Do you dispute that if you raise tax rates enough, revenues (and eventually spending) will decrease? I think that withan across-the-board effective tax rate of about 80% the beast will be quite dead. (Republicans want to reduce government spending because they think it will be better for the economy. Reducing spending by destroying the economy would amount to achieving a means by defeating your end).
Finally, I strongly doubt your claim tat the starve the beast hypothesis has more and/or more legitimate defenders than the Laffer curve is inaccurate.