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Goodbye Supply Side? Not so fast!


Ross Kaminsky
April 27, 2010

Kevin Williamson of National Review has an article on the National Review website today called "Goodbye Supply Side" in which he correctly describes the lack of success our nation has had with spending cuts but, in my view, understates the case for "supply side" tax cuts.

Following is my note to Mr. Williamson in response to his article:

Dear Mr. Williamson,

I appreciate your reminding people of the importance of spending cuts -- and of our politicians' unwillingness or inability to make substantial progress in that area.  However, in your article on the NRO web page today, I'd suggest you somewhat understate the value of tax cuts.

In particular:

  • You didn't mention that the dot-com bubble was not the only time that capital gains tax revenue rose after the capital gains rate was cut.  Therefore, there is more evidence for the benefit of cutting capital gains taxes than you let the readers believe.
  • You didn't mention the important paper of Barack Obama's own adviser, Christine Romer, which says such things as "The most striking finding is that tax increases have a large negative effect on investment" and "We find that exogenous tax increases have a large, rapid, and highly statistically significant negative effect on output" and "Our baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent."  If one were to agree with Romer's conclusion to any substantial degree then it follows that tax cuts "pay for themselves" to a larger degree than you suggest even if not fully.
  • You didn't even wonder aloud about whether low taxes, in the sense that they represent increased freedom for actual people, are of inherent value and therefore a goal worthy of pursuit on that basis alone. Perhaps you won't be surprised that I hold this view.

Best regards,
Ross Kaminsky

UPDATE: Kevin Williamson did me the favor of sending a reply to my note.  Here it is:

A few quick things:

1. You're correct that cap-gains revenues have grown after other cap-gains tax cuts. They've also grown after cap-gains tax increases. Cap-gains taxes grow when the economy grows and the markets are doing well.

2. The Romer scenario is not so different from the CBO scenarios. But even a generous interpretation does not find that tax cuts produce net revenue growth.

3. I'd agree with you that low taxes are independently valuable if "low taxes" meant "low taxes," but it doesn't; it means "relatively low taxes now and relatively high taxes later, when the debt has to be paid." $1 spending = $1 taxes.

Best,
Kevin

UPDATE 2: If you want to read an article by a man who really understands the danger of high taxes, check out this piece by Larry Kudlow, also at National Review Online: http://www.nationalreview.com/kudlows-money-politics/4086/washington-tax-attack-marches


 

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Submitted by kopi at: June 18, 2010
It should not take even amental midget to realize that if we have money in their pocket they will spend it, and the economy will flourish. So lower the taxes and our economy will thrive!

Submitted by How Long at: April 28, 2010
Romers reported 3% GDP increase from 1% tax cuts (historical review). Laffer reported revenue increase with tax cuts (at current level).