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Tuesday, June 20, 2006
Republicans Tell More Supply-Sider Bedtime Stories
This morning’s Senate Budget Committee’s markup session on Judd Gregg’s (R-NH) Stop Over-Spending Act of 2006 saw more Republican hand wringing over the budget deficit, but not much more. Republican senators took turns this morning bemoaning the level of federal expenditures and how that spending has crated the huge deficits we now face.
"You can't tax your way out of this problem" was the refrain sung by the supply-side choir boys this morning. Gregg’s bill is 100% aimed at controlling spending (at least that’s the Republicans’ claim) with no mention of increasing revenues through taxation. On this point the Republicans were inflexible.
But I’m glad that’s the approach supporters of this bill want to take - that raising taxes does not increase revenue - because it draws attention to the economic theory behind this argument - supply-side economics. This theory is based on the premise that taxes discourage capital investment and labor, and that when the government lowers taxes, capital investment and labor increase so much that government revenues actually increase. In other words, "tax cuts pay for themselves." It’s an interesting theory, but, empirically, wholly without merit. Even on a theoretical level it’s a bit daft. If one follows supply side theory to its logical conclusion, then one finds that a 0% tax rate results in infinite revenue.
Supply-siders, like the Republicans currently charting the government’s course to fiscal disaster, would have us believe that the only way to increase revenue is to lower taxes. It’s unfortunate for them that no credible, mainstream economist (whose name does not rhyme with "affer") seriously argues that tax cuts pay for themselves or that tax revenues increase when tax rates are decreased - not one. Even George W. Bush’s former Chairman of Council of Economic Advisors, Greg Mankiw, accedes that only "half of a capital tax cut is self-financing." It’s an unfortunate situation because as long as this crew is devising fiscal policy, we will be adrift on a sea of unending red ink.
Posted by Craig Jennings
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