I'm diving into Jonathan Chait's piece in The New Republic on how a whole huge conspiracy of crazy supply-siders has taken over the Republican party. This is, to put it kindly, wildly overblown. I mean, I'm all for someone taking on the sillier kind of supply siders who fanny about claiming that tax cuts increase tax revenue, but they've been rather thin on the ground lately. Most tax cutters today want tax cuts because they think they are good for the economy, not because they think that it will increase tax revenue. And contrary to Chait's assertions, these are not wild, insane things to think.
Chait tars all tax-cutters with the ideas of the looniest supply siders. One can believe that tax cuts, by reducing deadweight loss and/or providing fiscal stimulus, will be good for the economy, without necessarily believing that the economy will be crippled by a 5% rate increase.
His primary exhibits for the nefarious influence of supply-side policy are: Larry Lindsay, Dick Cheney, Jack Kemp, Jude Wanniski, and George Gilder. Cheney I give you, but Larry Lindsay was drummed out of the administration in disgrace (for unrelated reasons) even before Bush's major tax cut, and Chait somehow neglects to mention the more conventional economists who have occupied the job since. Jack Kemp hasn't had access to serious power since I was snoring my way through Algebra I, and what power he did have was over HUD. Moreover, though I agree that Jude Wanniski and George Gilder are barking moonbats, they have, to put it kindly, limited influence on today's Republican party; which is hardly surprising given that Wanniski was kicked out of the party in disgrace before he died in 2005, and George Gilder has turned his attentions to that hugely influention Republican mouthpiece, the Gilder Technology report. This motley collection of names is hardly proof that the Supply Siders Have Taken Over the Building.
Chait also elides the difference between statutory and effective marginal rates in "proving" that the latter group is wrong: after all, if high marginal rates are so bad for the economy, how come we grew so fast in the fifties, when the top marginal rate was 91%? The answer is that there was a pretty big difference between effective and actual tax rates, thanks to various generous deductions that were largely done away with by the middle of the Reagan administration.
Chait then claims this as evidence for the notion that "whatever negative effect such high tax rates have, it's relatively minor. Which necessarily means that whatever effects today's tax rates have, they're even more minor." For the record, I don't think that increasing the marginal tax rate on the rich (or almost anyone else) will have much effect on the economy. But Chait's breezy assertions are not good evidence for my belief. Perhaps growth in the 1950's could have been even more fabulous absent the high tax rates. Also, our tax code, and our economy, is substantially different in structure from the tax code of the 1950's, so extrapolating from then to now is very, very silly. Again, it might be that the changes would make the effects of rate cuts even more minor--but in fact I doubt it; the tax base is much broader now, and labor and capital mobility much higher, which should greatly magnify the effects of a change in rates.
The article features this kind of simplistic, off-the-cuff journalistic reasoning over and over. And it's often flat wrong, as in its discussion of the Laffer Curve:
That fateful night, Wanniski and Laffer were laboring with little success to explain the new theory to Cheney. Laffer pulled out a cocktail napkin and drew a parabola-shaped curve on it. The premise of the curve was simple. If the government sets a tax rate of zero, it will receive no revenue. And, if the government sets a tax rate of 100 percent, the government will also receive zero tax revenue, since nobody will have any reason to earn any income. Between these two points--zero taxes and zero revenue, 100 percent taxes and zero revenue--Laffer's curve drew an arc. The arc suggested that at higher levels of taxation, reducing the tax rate would produce more revenue for the government.
At that moment, there were a few points that Cheney might have made in response. First, he could have noted that the Laffer Curve was not, strictly speaking, correct. Yes, a zero tax rate would obviously produce zero revenue, but the assumption that a 100-percent tax rate would also produce zero revenue was, just as obviously, false. Surely Cheney was familiar with communist states such as the Soviet Union, with its 100 percent tax rate. The Soviet revenue scheme may not have represented the cutting edge in economic efficiency, but it nonetheless managed to collect enough revenue to maintain an enormous military, enslave Eastern Europe, fund ambitious projects such as Sputnik, and so on. Second, Cheney could have pointed out that, even if the Laffer Curve was correct in theory, there was no evidence that the U.S. income tax was on the downward slope of the curve--that is, that rates were then high enough that tax cuts would produce higher revenue.
Ownership of the means of production doesn't really model the same way as an income tax, and at any rate the Soviet government did not take 100% of any worker's output. And no economist that I have ever met doubts that the Laffer Curve holds true, to the extent that there is a revenue-maximizing tax rate which is well to the left of 100%. The Laffer Curve isn't wrong, as Chait wrongly implies; it's just that we're not anywhere near its maxima in the US, this being what responsible tax-cutters like Greg Mankiw have been saying all along.
Chait finishes up with another, really inexcusable bit of journalistic sloppiness: he complains about the share of national income going to the very richest, without informing the reader that these figures are calculated pre-tax. The implication is that the tax cuts have somehow altered the income composition of America at the behest of corporations and mean rich people, when at the most they have acted as a somewhat smaller check on inequality that is growing for reasons unconnected to the tax code.
It is not that I do not support Chait's project: refuting the sillier supply-side notions about tax revenues and growth is God's work. Except . . . this isn't the way to do it. This article isn't going to convince the people at the places Chait excoriates like the Club for Growth or the Weekly Standard--or indeed any of their supporters--that they should jettison their more extreme claims. It's too easy, reading this article, to claim bad faith.
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