Liberal politicians and pundits like to chuckle or snort when conservatives talk about supply-side economics. Proponents of supply-side economics roughly believe that reduced tax rates cause the economy to expand to the point that the government will collect as much or more tax revenue as it would have at the old higher rates. There have been studies that verify this and others that dispute it.
It’s clear that people disagree on what the right tax rate is, but do you suppose they can all agree that neither zero taxes nor a 100% tax rate is the right answer? Probably not, but I think most will. Even fiscal conservatives agree that some amount of government is necessary. We need to at least maintain order and defend the nation. I think sane liberals (that excludes Dennis Kucinich) would agree that a 100% tax rate would cause our economy to collapse. Not many people would continue to work for someone else when they are taking no pay home. They would have to self-produce some of the essentials of life and barter for the rest.
So, if a sane liberal — or anyone else — actually does believe that a 100% tax rate will destroy the economy and result in reduced government revenue, that person believes in supply-side economics. They believe that a tax rate lower than 100% will result in greater government revenue.
The real disagreement then is not on the theory of supply-side economics but on what rate is the right rate. A theoretician might argue that the right rate is the rate that maximizes government revenue. Conservatives think that rate is lower than the current rate; liberals think it is higher. Unfortunately we don’t have economists smart enough to give us the right answer, so we are left with experimentation.
Two of the last four presidents have significantly reduced tax rates with favorable results. If the next president is a Democrat (heaven forbid) and she raises taxes, at least we will get a data point in the other direction.
I don’t know when I have seen a clearer explanation of supply-side economics. You nailed it. Let’s hope your post is picked up and read far and wide.
It is telling, isn’t it, that when the economy needs a real shot in the arm both Dems, Reps, conservatives and liberals agree they need to put more money in the hands of those of us holding up the economy with consumer spending? If it works now, why not always?
Yes, that’s another piece of evidence that even liberals believe in supply-side economics. Thanks for adding it, Beda.
A theoretician might argue that the right rate is the rate that maximizes government revenue.
Of course, we might argue that shouldn’t be the real goal at all. But a government with max revenues implies the nation’s people are prosperous, so that goal probably gets the job done.
LEP, you’ve added a bit of clarity to what I was trying to say. If supply-side economics does indeed work, the optimum tax rate would be optimum for both the government and the tax payers. The government would collect the maximum amout of tax revenue and the tax payers would enjoy the maximum amount of prosperity. The problem is finding that optimum rate.