Tyrrell: The supply-side miracle continues

WASHINGTON (Creators Syndicate) -- It is very reassuring that Republican negotiators in the House and Senate have reached an agreement to extend President George W. Bush's cuts in tax rates on dividends and capital gains. Equally reassuring, the negotiators plan to liberate as many as 15-million middle-income Americans from the impending burden of the alternative minimum income tax. Now the unparalleled economic growth that has characterized the American economy since the early 1980s can proceed. My only question is why?

Why did the Republicans extend these tax cuts? Many of them are the same salons who offered the embarrassing quackery of a $100 rebate to ameliorate the burden of high oil prices. I doubt that politicians who think a $100 rebate is a sound economic response to an oil price increase reflecting the scarcity of oil really understand the value of marginal tax cuts. They put me in mind of President Jimmy Carter offering Americans rebates as a response to his opponent's offer of tax cuts in the 1980 presidential race. Such politicians have enjoyed enormous economic growth since the Regan tax cuts that followed his election but apparently do not know where the growth comes from.

We saw the growth rev up again early in the Bush administration following his tax cuts, the tax cuts that have now been extended. The president says we cut taxes to "put money into the tax payers' pockets." But there is more to it. We cut taxes to increase economic activity, to reduce the burden of taxation on workers to encourage their increased output. We cut taxes on investments, stocks and dividends to increase investments, stocks and dividends -- to increase wealth. That is what has been happening -- FOR TWO DECADES.

"Democrats would raise taxes to punish the rich and to increase tax revenue for their favorite projects. Perhaps they could find some other way to punish the rich. Their demagoguery impedes economic growth and -- as their phrase has it -- 'revenue enhancement.'
"Those of us who favor tax cuts can now look proudly at the recent record of tax payments. According to the Treasury Department's monthly report, tax receipts were up 11.2 percent for the first seven months of Fiscal 2006. That is $137 billion. In Fiscal 2005 tax receipts were up 14.6 percent, which is $274 billion. These increases come as a great surprise to those Democrats and Republicans who insist tax cuts cause deficits. Holed up over at the Congressional Budget Office (CBO), their minions issue predictions of puny revenue growth following tax cuts that are always gloomy and always wrong. The CBO's recent predictions for Fiscal 2006 were $76 billion for the whole year for individual tax receipts and $24 billion for corporate receipts. Seven months into the year the respective figures are already $56 billion and $40 billion.
"Unburdened by high taxes, the rich paid more in taxes. By lowering marginal tax rates we have encouraged economic vigor and put more money in the government's hands. This we call Supply-Side Economics. Yet many Republicans remain agnostic, and many more Democrats are contemptuous of it. This is a cultural problem. In the culture of economic ideas, many on Capitol Hill will not look at the evidence of the past two decades. They are living in an era of great prosperity and do not know how they arrived at it."

Perhaps, it is not so much that Democrats do not understand the real world outcomes of leaving a worker's or investor's money in his/her own pockets so that the individual can exercise his/her "right to choose" how it is utilized.

More likely, it is that Democrats find it easier to keep poor voters "on the plantation" (and you know what I mean--roll eyes) by promises of increasing taxes on those wealthy folks they love to beat up on when they're campaigning.

(Never mind that the Kerrys, the Edwardses, the Kennedys, the Hollywood stars, et al control enormous wealth themselves.)

In the meantime, 2008's Democratic "golden boy" is establishing a name for himself "studying poverty." You'd think his time would be better spent studying wealth, and the means of acquiring it, in order to help those poor folks he claims to have known back in Moore County, North Carolina (although that county, in 2002, ranked 5th in NC in per capita income, according to U. S. Dept. of Commerce, BEA analysis of May 2002).

Thankfully, America's Founders spent more time understanding the moral philosopher Adam Smith's ideas about economics than they did figuring out ways to purchase votes and gain political power by transfering income from those who worked and earned it to those who did not.

As I understand the essay, and with all respect to you, the writer did not, in fact, limit his sentence, "This we call Supply-Side Economics" to the single preceding sentence you have quoted in your response, but to the interpretation and facts related throughout his entire piece. In that sense, his claim makes sense.

An article in The Library of Economics and Liberty by Dr. James D. Gwartney located here provides both theoretical and historically factual information on this topic, and would be good reading for young people who hear the term being thrown about today and need some understanding, as well as historical perspective and fact.

"By lowering marginal tax rates we have encouraged economic vigor and put more money in the government's hands. This we call Supply-Side Economics."

"The author has no idea what he's talking about. Reductions in marginal tax rates and putting more money in the government's hands are not the defining characteristics of supply-side economics."

ACtually he is quite correct. Supply-side economics re-introduced the concept of dynamic incentives wrt taxes in the economy, which included the Laffer curve notion that lower tax rates could produce higher tax revenues.
Further, that lower taxes increases growth rates which increase revenues.

This is the standard stuff from the supply-side classic 'The Way the World Works' and "Wealth and Poverty'.

Supply-side economics re-introduced the concept of dynamic incentives wrt taxes in the economy, which included the Laffer curve notion that lower tax rates could produce higher tax revenues. Further, that lower taxes increases growth rates which increase revenues.

Those weren't the defining characteristics of supply-side economics. It was supply-side economists who correctly identified the correlation between lower tax rates and higher tax revenues simply because they were competent economists who knew what they were talking about. "Increasing government revenues" has never been an underlying goal of supply-side economists (at least I hope not).

Ironically, reducinig marginal income tax rates (regardless of whether it is an inherently justifiable or laudable goal) is the exact opposite of what a supply-side economist would tend to promote -- mainly because it is effectively a demand-side measure aimed at increasing economic activity in sectors related to consumer spending.

". It was supply-side economists who correctly identified the correlation between lower tax rates and higher tax revenues "

Er, that's what we've all been talking about all along. This is not about a 'goal' of increasing revenues, this is talking about how taxes interact with the economy.

"Ironically, reducinig marginal income tax rates (regardless of whether it is an inherently justifiable or laudable goal) is the exact opposite of what a supply-side economist would tend to promote -"

Not true at all.
I think if you read Lawrence Lindsay's "The Growth Experiment" and other supply-side books, it would clear itself up. Keynesian effects and supplyside effects are both discussed by Lindsay, described, separated, and measured; and he shows how the supply-side effects on incometax rate reductions are real, significant and powerful in justifying lower tax rates.

Perhaps you're correct, though the Laffer Curve clearly and accurately demonstrates the relationship between tax rates and revenue. The only unknown is the "optimal" marginal rate. It's like the chicken and the egg argument. There is no way to prove or define an "optimal" rate. Unfortunately, the only way for a supply-sider to "prove" that lower rates generate higher revenues is to argue against tax-cutting opponents who claim that lower rates will generate lower revenues. Example: Robert Rubin, in 1997, argued that the '97 capgains cut would generate less revenue. Just the opposite occurred. A supply-sider may not necessarily want the government to have more revenue, but that is always the end result when marginal rates are cut.

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