A farewell to supply-side economics
Writing in National Review, Kevin Williamson lays waste the ‘magical thinking’ of supply-siders and the notion that somehow tax cuts will completely pay for themselves. There’s a great deal of really excellent stuff in the article, but here’s a good bit:
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. That’s a big deal, and something that conservative budget engineers should keep in mind. But the question of whether the CBO accounts for tax cuts at 100 cents on the dollar, 99 cents on the dollar, or 68 cents on the dollar is hardly the stuff that a broad-based political movement is going to put at the center of its campaigns. Federal spending, on the other hand, is a national crisis.
Obviously there are benefits to cutting taxes when those taxes have reached truly burdensome levels, but unless spending is also curtailed, this is hardly an act of fiscal conservatism. Nor does starve the beast work in a system in which the primary goal of all lawmakers is reelection. Williamson points out that it’s easy to sell tax cuts but nearly impossible to sell reductions in spending. He suggest conservatives “develop a rhetoric in which “spending” and “taxes” are synonyms, so a federal budget with $1 trillion in new spending means $1 trillion in new taxes — levies on Americans today or on our children tomorrow, with interest.”
In the meantime, serious politicians in both parties need to stop passing the buck. At some point we’re going to need to come up with new revenues from higher taxes or new taxes like the VAT. We’re also going to need to cut spending – and not just around the edges. Entitlement spending and defense spending are not only cash cows but sacred cows, and until we have legislators brave enough (or stupid enough) to go after those, we’re going to keep barreling headlong toward fiscal insolvency. Some combination of spending cuts and tax increases is in our future. The question is only a matter of when.
I am made only slightly more optimistic by the fact that this is an article in the National Review, a place not well known for its questioning of GOP orthodoxy.
Conceivably you could just raise taxes or just cut spending to tackle the national debt and right the fiscal ship. These are both valid positions, and both those in favor of raising taxes to maintain current spending levels and those who think we should simply cut massive chunks out of the federal budget are both right on the merits. However, both are equally impractical. Spending is too popular but too unsustainable. Tax increases are unpopular, too, but more than likely a great deal easier to push through than major cuts to Medicare or the defense budget.