Thursday, April 12, 2007

The Current State of Supple-Side Economics

In a recent NY Times article, Bruce Bartlett discusses how the ideas of supply-side economics have become more and more popular. However, he also argues that the ideas are being taken too far:
Today, supply-side economics has become associated with an obsession for cutting taxes under any and all circumstances. No longer do its advocates in Congress and elsewhere confine themselves to cutting marginal tax rates — the tax on each additional dollar earned — as the original supply-siders did. Rather, they support even the most gimmicky, economically dubious tax cuts with the same intensity.
A particularly interesting part of the article shows how high the marginal rates were in the 1950s - 1970s:
Kemp-Roth was intended to bring down the top statutory federal income tax rate to 50 percent from 70 percent and the bottom rate to 10 percent from 14 percent. We modeled this proposal on the Kennedy-Johnson tax cut of 1964, which lowered the top rate to 70 percent from 91 percent and the bottom rate to 14 percent from 20 percent.
Another interesting note is that supply-side economists of the 1970s and 1980s did not believe that tax revenue would actually increase when taxes were cut, they just believed that the loss of tax revenue would be smaller because of the greater incentive to work:

Thus, contrary to common belief, neither Jack Kemp nor William Roth nor Ronald Reagan ever said that there would be no revenue loss associated with an across-the-board cut in tax rates. We just thought it wouldn’t lose as much revenue as predicted by the standard revenue forecasting models, which were based on Keynesian principles.

Furthermore, our belief that we might get back a third of the revenue loss was always a long-run proposition. Even the most rabid supply-sider knew we would lose $1 of revenue for $1 of tax cut in the short term, because it took time for incentives to work and for people to change their behavior.

(Source: Greg Mankiw's Blog)

1 comment:

Anonymous said...

I think the ideas of supply-side economics have become somewhat intertwined with the ideas of basic economics. People favor tax cuts, which is why politicians in general work to cut taxes to stimulate economic growth instead of government spending. Tax rates in the past (especially in the 1950s-1970s) were much higher than they are presently because the idea of supply-side economics was not yet thought up. I, however, truly do believe that people react to and change their behavior with incentives. If taxes are cut, people will get to keep a larger portion of their income, which would be a positive incentive to work harder or work more. I believe supply-side economics isnt really isnt own "economical idea" anymore, rather a common entity to the economics we know today. I do believe that people's responses to incentives are delayed due to the time lags associated with changing jobs, increasing pay, and spending habits and might be a reason why supply-side economics might be hard to see in the short run.