05-14-2011, 05:32 PM
Hmm. The original question seems to have been lost in the back and forth over social security etc.
I actually have a copy of the original version of Jude Wanniski's book "The Way the World Works," which is the Bible for the supply siders (well, the Old Testament anyway). It was written in an era when the top income tax bracket was a long way above 50% -- actually above 70%, having been cut from 90% in an earlier era. Wanniski attempted to justify Arthur Laffer's argument that cutting tax rates could be beneficial. The argument concentrates on the real life effects of setting official tax rates at levels so high that there is an inverse incentive.
One example you can find by google search is the effect on heavyweight championship fights before and after the rates were cut from 90% to 70%. In the 90% era, it didn't make sense for a Floyd Patterson to risk losing the title in a second fight in the same year, since every dollar he made would be taxed at 90 cents. The cut took effect in 1965, and the observed outcome was that there were two title fights in the next year. It may be that this effect was confined to a small number of high income earners, but for them, it was fact. There is a certain amount of truth to the argument that tax rates above a certain level become "confiscatory," a word the conservatives love to toss around. Strangely enough, that era of confiscatory taxation coincided with powerful economic growth here in the USA. This doesn't mean that confiscatory tax rates are a good thing, but it does suggest that the overall economic effect has been overstated by conservative writers.
The supply siders more or less took charge in the early Reagan administration, and we had a race between Republicans and Democrats for how low they could cut federal taxes. It's curious that Wanniski himself had written a piece hoping that someday, the top marginal rate would be cut to 49%, so we could at least know that more than half of our top income got to stay home. The Reagan tax cuts went way beyond that, down to the high 20s, and the next decade saw a chronic federal deficit and a chronically increasing federal debt.
Reagan had a little more maneuvering room than the current Republicans, and he signed tax increases every year during the latter part of his presidency. His successor, George H.W. Bush, also signed a tax increase. The result was that the federal deficit became less of a burden, but was still a deficit. Some of us who are old enough may remember that there was a national debt clock that somebody set up in NYC as a reminder of our difficulties. Bill Clinton signed a tax increase early in his presidency that finally ended the debt spiral, balanced the budget, and even showed some net surplus.
The results of this historical experiment are unambiguous. As one conservative commentator recently pointed out, the supply side ideology has been shown to be wrong by 30 years' experience. Yet for some reason, Republican leaders continue to make the erroneous argument (see M Bachmann) that tax cuts should not be counted as part of a deficit reduction program.
Curiously enough, even traditional economics points out the flaw (actually there are several flaws) in the Laffer/Wanniski argument. It is a very old observation that the well to do save more of their income than the less well off. It is not surprising, since somebody taking home $2000 a month won't have much left to save, whereas someone taking home $10,000 a month may very well have money to set aside. Keynes offered the insight that spending money was the economic stimulus that the economy needs to stay vigorous, and that money that is tied up in a nonproductive way is a drag on the economy. There are technical terms like "velocity of money" and "the multiplier" that come into play, but it isn't necessary to write complicated equations on the board to understand that injecting a thousand dollars of spending into the economy allows for somebody to collect that money, buy new inventory to sell, pay employees, and so forth. When the wealthy few percent earn a large fraction of all the money that our country generates over the course of a year, they save a higher percentage than middle class people would save, and the effect is to slow the economy down.
One way to reverse this effect is to tax the richest and redistribute that money in the form of lower taxes on the middle class (they will spend their savings), on school teachers' salaries (ditto), on construction projects (ditto) and so forth.
At the current tax rates, it is hard to believe that any of the original Laffer/Wanniski arguments come into play, even if they once had some resonance. At tax rates well below 50%, the argument that people will stop being productive due to their high taxes is not only fairly absurd, it actually contradicts the argument that Wanniski made originally.
By the way, the beginning of Wanniski's book talks about economies where marginal tax rates went stratospheric even at fairly low incomes. Wanniski was writing in the era of "banana republics" that set income taxes at 90% for income above $20,000 or its local equivalent. Wanniski described the effects of these policies: People hid their income and kept transactions off the official books, creating a gray economy that interacted with the black market. The argument (inter alia) was that government revenues in such countries stayed artificially low because people had no choice but to engage in widespread tax avoidance. This is a far cry from the current Republican ideology, which seems to have forgotten everything and anything about the original supply side argument. When the current Speaker of the House says that increasing taxes will kill job growth, he is exactly wrong. We have the empirical data from the past 30 years to refute Boehner's claim, and we have two-thirds of a century of economic experience to support the Keynesian demand side model.
This is not to say that governments can't or won't interfere with their economies by overtaxation, but that we are very far from that place at the moment, and if we want to bring our federal deficit down, raising taxes is the way to do it.
Final point: It is not necessary to reduce the overall national debt to zero. It is, however, useful to keep the national debt at less than a certain fraction of our GDP, and to make sure that national debt does not start growing out of control. We were in that situation during the Bush Senior years due to the Reagan tax cuts, and it took a lot of political will to stop it.
I actually have a copy of the original version of Jude Wanniski's book "The Way the World Works," which is the Bible for the supply siders (well, the Old Testament anyway). It was written in an era when the top income tax bracket was a long way above 50% -- actually above 70%, having been cut from 90% in an earlier era. Wanniski attempted to justify Arthur Laffer's argument that cutting tax rates could be beneficial. The argument concentrates on the real life effects of setting official tax rates at levels so high that there is an inverse incentive.
One example you can find by google search is the effect on heavyweight championship fights before and after the rates were cut from 90% to 70%. In the 90% era, it didn't make sense for a Floyd Patterson to risk losing the title in a second fight in the same year, since every dollar he made would be taxed at 90 cents. The cut took effect in 1965, and the observed outcome was that there were two title fights in the next year. It may be that this effect was confined to a small number of high income earners, but for them, it was fact. There is a certain amount of truth to the argument that tax rates above a certain level become "confiscatory," a word the conservatives love to toss around. Strangely enough, that era of confiscatory taxation coincided with powerful economic growth here in the USA. This doesn't mean that confiscatory tax rates are a good thing, but it does suggest that the overall economic effect has been overstated by conservative writers.
The supply siders more or less took charge in the early Reagan administration, and we had a race between Republicans and Democrats for how low they could cut federal taxes. It's curious that Wanniski himself had written a piece hoping that someday, the top marginal rate would be cut to 49%, so we could at least know that more than half of our top income got to stay home. The Reagan tax cuts went way beyond that, down to the high 20s, and the next decade saw a chronic federal deficit and a chronically increasing federal debt.
Reagan had a little more maneuvering room than the current Republicans, and he signed tax increases every year during the latter part of his presidency. His successor, George H.W. Bush, also signed a tax increase. The result was that the federal deficit became less of a burden, but was still a deficit. Some of us who are old enough may remember that there was a national debt clock that somebody set up in NYC as a reminder of our difficulties. Bill Clinton signed a tax increase early in his presidency that finally ended the debt spiral, balanced the budget, and even showed some net surplus.
The results of this historical experiment are unambiguous. As one conservative commentator recently pointed out, the supply side ideology has been shown to be wrong by 30 years' experience. Yet for some reason, Republican leaders continue to make the erroneous argument (see M Bachmann) that tax cuts should not be counted as part of a deficit reduction program.
Curiously enough, even traditional economics points out the flaw (actually there are several flaws) in the Laffer/Wanniski argument. It is a very old observation that the well to do save more of their income than the less well off. It is not surprising, since somebody taking home $2000 a month won't have much left to save, whereas someone taking home $10,000 a month may very well have money to set aside. Keynes offered the insight that spending money was the economic stimulus that the economy needs to stay vigorous, and that money that is tied up in a nonproductive way is a drag on the economy. There are technical terms like "velocity of money" and "the multiplier" that come into play, but it isn't necessary to write complicated equations on the board to understand that injecting a thousand dollars of spending into the economy allows for somebody to collect that money, buy new inventory to sell, pay employees, and so forth. When the wealthy few percent earn a large fraction of all the money that our country generates over the course of a year, they save a higher percentage than middle class people would save, and the effect is to slow the economy down.
One way to reverse this effect is to tax the richest and redistribute that money in the form of lower taxes on the middle class (they will spend their savings), on school teachers' salaries (ditto), on construction projects (ditto) and so forth.
At the current tax rates, it is hard to believe that any of the original Laffer/Wanniski arguments come into play, even if they once had some resonance. At tax rates well below 50%, the argument that people will stop being productive due to their high taxes is not only fairly absurd, it actually contradicts the argument that Wanniski made originally.
By the way, the beginning of Wanniski's book talks about economies where marginal tax rates went stratospheric even at fairly low incomes. Wanniski was writing in the era of "banana republics" that set income taxes at 90% for income above $20,000 or its local equivalent. Wanniski described the effects of these policies: People hid their income and kept transactions off the official books, creating a gray economy that interacted with the black market. The argument (inter alia) was that government revenues in such countries stayed artificially low because people had no choice but to engage in widespread tax avoidance. This is a far cry from the current Republican ideology, which seems to have forgotten everything and anything about the original supply side argument. When the current Speaker of the House says that increasing taxes will kill job growth, he is exactly wrong. We have the empirical data from the past 30 years to refute Boehner's claim, and we have two-thirds of a century of economic experience to support the Keynesian demand side model.
This is not to say that governments can't or won't interfere with their economies by overtaxation, but that we are very far from that place at the moment, and if we want to bring our federal deficit down, raising taxes is the way to do it.
Final point: It is not necessary to reduce the overall national debt to zero. It is, however, useful to keep the national debt at less than a certain fraction of our GDP, and to make sure that national debt does not start growing out of control. We were in that situation during the Bush Senior years due to the Reagan tax cuts, and it took a lot of political will to stop it.