The government and me, they are not the same

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Matt has argued that Republican supply-side tax arguments are as if

. . . Hillary Clinton got up at the next presidential debate and said "I believe a policy of 'Medicare for all' could save enough money to pay for a universal preschool program and more generous Social Security benefits,"


Ezra says:

If Clinton said that, heads would nod. A very strong argument could be made that administrative and bargaining savings -- i.e, the government saying they're going to pay 20 percent less for Lipitor, and Pfizer will just have to deal -- from a Medicare-for-All system would save enormous amounts of money. Obama wouldn't dare attack it, he'd just argue that he doesn't think it politically possible, and the sort of policies required for those savings have tradeoffs Americans may not want to make. (Incidentally, I don't think Medicare-for-All would create those savings, but not because it couldn't, only because we wouldn't want to implement the necessary regulations.)

The problem with supply siders is that they are arguing that they can make the government money by lowering tax rates, not that they can make the economy money. Arguably single payer health care will save the economy money, but the government will be out a whole lot more cash. Government health programs already enjoy all the administrative cost savings that Ezra promises, and even really vigorous price controls bargaining on drug prices is not going to save enough from Medicare Part D to put the 247 million people currently not enjoying government insurance on the rolls.

Arguments like this are exactly why I have a hard time debating this topic: it's not clear what the people on the other side understand supply-sidism to be. If you want to frame a supply-side argument on the terms that Ezra has framed the health care debate--that "we" as a nation can save money by cutting taxes--then the supply-siders could be right; the tax cuts might make the economy grow by more than the size of the tax cut. Probably will, in fact.

The problem is a fiscal one: the government only takes in a little less than one-fifth of any extra growth that tax cut produces. So the extra growth has to be quite massive in order to overcome the lost revenue from the tax cut. Say you've got an economy worth $100, growing 10% a year with a tax rate of 25%. In year one, with no tax cut, the government will take in ($110 X .25=$27.50). If you cut taxes to 20%, the economy has to grow to $137.50 in order to make the same revenue, which means that a 5% tax cut has to more than triple the rate of economic growth. This is not likely. Although you should note that this means that supply-side claims are more likely to be right the farther out you go, since small changes in the rate of economic growth compound.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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