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Uchitelle's Snide Criticism of Supply-Side Tax Cuts

"When Ronald Reagan ran for president in 1980, he promised to cut taxes in what seemed, at the time, a magical way."

Supply-siders are on the march again, warned Times economics reporter Louis Uchitelle on the front page of Wednesday's Business Day - "A Political Comeback For Supply-Side Doctrine - Debate on Tax Theory Now Focuses on the Wealthiest."



Times Watch hasn't detected any huge comeback for comprehensive supply-side tax cutting -as opposed to McCain's muted call to maintain Bush modest reduction of the top tax bracket rate from 39.6% to 35%.



(The Times' international edition headline over Uchitelle's story had the slant of an opinion piece: "McCain sticks to supply-side economics despite evidence it doesn't work.")



Uchitelle's NYT piece began snidely:


When Ronald Reagan ran for president in 1980, he promised to cut taxes in what seemed, at the time, a magical way. Tax revenue would go up, not down, he said, as the economy boomed in response to lower rates.


Since then, supply-side economics, as it was called - first with derision but then as a label embraced by its supporters - has become a central tenet of Republican political and economic thinking. That's despite the fact that the big supply-side tax cuts of the 1980s and the 2000s did not work out as advertised, as even most supporters acknowledge.


Federal tax revenue did in fact increase during the Reagan years, as no less a liberal authority than Media Matters acknowledged:


According to the White House Office of Management and Budget (OMB), when adjusted for inflation to constant fiscal year 2000 dollars, receipts (revenues) grew only from $1.077 trillion to $1.236 trillion during Reagan's term in office.


Besides, as the Heritage Foundation defines it, supply-side theory assumes replenishment of some but not necessarily all lost revenues.



Uchitelle quoted a supporter of lower tax rates, making sure to label his group "conservative."


But advocates see broader economic benefits from lowering tax rates, which is one of the reasons the concept has reappeared as a point of contention in this year's election campaign, in an amended form.


"What really happens is that the economy grows more vigorously when you lower tax rates," said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. "It is beyond the reach of economic science to explain precisely why that happens, but it does."


Even with a growing economy, however, the promised boon in tax revenue never materialized. Arthur B. Laffer, the renowned proponent of supply-side economics, still holds that tax revenues "rise dramatically" when tax rates are cut.


In the 1980s, though, during the initial era of supply-side tax cuts, per capita revenue from personal income taxes, adjusted for inflation, rose an average of just 0.7 percent annually throughout the Reagan presidency, according to the White House Office of Management and Budget.


Strangely, the Times' international edition of Uchitelle's story has a different figure: 0.5 percent.


But you can slice the numbers all sorts of ways. The House Joint Economic Committee collated an April 1996 report, also using OMB figures, showing "individual income tax revenues rose from $244 billion in 1980 to $446 billion in 1989." That's almost a doubling of revenues. Uchitelle, befitting his liberal bent, chose the least attractive way to present the numbers.


That was far below what turned out to be an average annual increase of 6.5 percent in the eight years of the Clinton administration, when tax rates at the high end of the income ladder were raised.


Since 2001, the annual per capita revenue from income taxes fell 1 percent under President Bush even though tax collections picked up sharply starting in 2005. The budget surplus Mr. Bush inherited turned into a deficit.


"If you are cutting taxes without offsetting the cuts through reductions in spending, then all you are doing is increasing the debt and postponing the taxes," said Jason Furman, director of the Hamilton Project at the Brookings Institution, and also a policy adviser to the Democratic presidential candidates.


Circumstances vary across the decades, of course, and it is difficult to sort out all the various influences on the economy and tax revenues. But when Mr. Reagan and his supply-side advisers first pushed through a range of tax cuts, they applied their logic to the broad mass of taxpaying workers. They argued that the incentive from lower rates on additional increments of income would prompt people to work that extra day or get more education to qualify for a better job.


Similarly, a spouse might take a new job, encouraged to do so by the promise of more take-home pay. The family's taxable income, and the nation's, would grow, the theory suggested, producing more tax revenue even at the lower rate.


That was before so much more of the national income flowed to upper-end households, and before the actual tax collections of the last three decades undercut the supply-side argument. Now the supply-siders single out the wealthiest Americans and argue that because they have so many ways to shelter their money from taxes, the incentive to declare more taxable income is much greater when tax rates are lowered than it is for the less well-to-do.


Uchitelle made a dubious proposition:


Not since Mr. Reagan ran in 1980 have supply-side tax cuts been so central a campaign issue. George H. W. Bush and Bill Clinton each ended up raising taxes, ignoring the supply-side thesis, which the elder Mr. Bush once called "voodoo economics."


...


The supply-siders also argue that at the corporate level, lower tax rates, which Senator McCain favors, prompt companies to hire more workers and to invest in new equipment, generating more output and more taxable income.


The Democrats, and many economists who describe themselves as nonpartisan, have a different perspective. Tax incentives might indeed increase labor supply and output, they acknowledge, but what good is that if there is insufficient demand for the additional labor and for the goods and services that are produced?


Of course, "non-partisan" doesn't mean "non-ideological" or "non-liberal."


Uchitelle let a supply-side opponent have the last word:


Gene Sperling, an economic adviser to Bill Clinton during his administration and now to Mrs. Clinton as a candidate, said that supply-siders vastly exaggerate the incentive effect of relatively small changes in tax rates while ignoring the benefits of bringing government revenue more closely in line with spending.


"The supply-siders predicted in the 1990s that raising rates, even for deficit reduction, would lead us to recession," Mr. Sperling said. "What followed instead was the longest recovery in history, and the people whose tax rates went up had exceptional income gains."