The conservative mantra of supply-side economics (aka, the current mantra of “the cure for everything is a tax cut”) is completely silly (and obviously so for anyone paying the least amount of attention in the last 30 years). And yet, the brainless scarecrows of the current GOP keep repeating the “tax cuts” mantra like a broken record.

Finally, a conservative commentator (from NRO, amazingly – the home of Jonah “Liberal Fascism” Goldberg) is pointing out that the emperor has no clothes.

It is true that tax cuts can promote growth, and that the growth they promote can help generate tax revenue that offsets some of the losses from the cuts. When the Reagan tax cuts were being designed, the original supply-side crew thought that subsequent growth might offset 30 percent of the revenue losses. That?s on the high side of the current consensus, but it?s not preposterous. There is, however, a world of difference between tax cuts that only lose only 70 cents on the dollar and tax cuts that pay back 100 cents on the dollar and then some.

There is considerable debate among economists and federal legume-quantifiers about how large supply-side revenue effects are. The Congressional Budget Office did a study in 2005 of the effects of a theoretical 10 percent cut in income-tax rates. It ran a couple of different versions of the study, under different sets of economic assumptions. The conclusion the CBO came to was that the growth effects of such a tax cut could be expected to offset between 1 percent and 22 percent of the revenue loss in the first five years. In the second five years, the CBO calculated, feedback effects of tax-rate reductions might actually add 5 percent to the revenue loss ? or offset as much as 32 percent of it.

Of course tax cuts stimulate growth. But they aren’t magic, and they don’t actually completely offset the lost revenue from the rate cut. (And if you believe they do, you are an idiot.)

An important line:

Tax cuts give Republicans an opportunity to distribute economic benefits through the tax code the way Democrats distribute them through appropriations, and the exaggeration of the supply-side effect gives them an opportunity to pretend like those benefits are cost-free.

Tax cuts are wealth redistribution. And the way the GOP structures those cuts, it redistributes wealth up the ladder.

You can’t have tax cuts without significant spending cuts and call yourself “fiscally responsible”. In the last 30 years, the only people to come anywhere close to fiscal responsibility have been Democrats. And until the GOP is willing to walk away from the myth of “tax cuts increase revenue”, that will never change.

  • tudorman

    “In the last 30 years, the only people to come anywhere close to fiscal responsibility have been Democrats.”

    Good article and good post. The federal government does not have a revenue problem – they have a spending problem. And both parties have been dishonest about that issue and done nothing to fix it for years. I'll agree the Democrats have been marginally more forthright in that they at least don't pretend they want to cut spending. I would not however, call that “close to fiscal responsibility”.

    I hope all the wealth-sucking, tax-eating, the-state-is-never-too-big-to-fail parasitic government lovers out there are paying attention to what is happening in Greece and the EU, because that same show is coming to statehouses across America, sooner than you might think.

  • Redistributive tax cuts? I like that…

  • Good link. Certainly, a reduction in marginal income tax rates today would not have the same effect that the Reagan tax cuts of the early 1980s did. Reagan reduced – slashed – the top rate from 70 percent to 33. Today's top rate is 35 percent – double the rate Reagan inherited. It's called the law of diminishing returns – as one 'does' more X, one gets less return from each marginal application of X. Makes sense.

    But I wonder: Exactly how are tax cuts 'wealth redistribution'? You can argue that the federal government should take money from some productive people and give it to other, less productive people. In fact, many politicians do. This is real re-distribution of wealth. Take from some, give to others, according to politicians' wishes.

    Now flip it around: Arguing that tax cuts are somehow a form of 'redistributing' wealth makes absolutely no sense because tax cuts don't require taking anything from anybody. Allowing productive people to keep more of what they earn – produce – is the exact opposite of redistributing wealth.

    Wealth doesn't come from government, it comes from productive activity. No?

    And if you concede that “of course” tax cuts stimulate growth, would you also concede that “of course” tax hikes are detrimental to growth?

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