Supply side myth debunked.

[RandomGuy]

The myth that tax cuts for the wealth spur economic growth or "increase revenues" takes another hit.

Tax Cuts on Profits, Savings, and the Wealthy Fail to Spur Economic Growth

The first supply-side era in modern economic history began in earnest in 1981 with huge tax cuts for the wealthy and corporations. Although there were modest steps back from these tax cuts in the ensuing years in response to fiscal deficits and tax-sheltering, this first supply-side era didn’t end until the tax hikes of 1993. This respite from supply-side policies ended in 2001, however, when a new set of supply-side tax measures were enacted. Today, as budget shortfalls mount and the economy weakens, the supply-side approach to economic policy is once again up for debate. This paper reviews the theory underlying supply-side tax cuts and examines their results.

The term “supply-side” comes from the idea that economic policy, and tax policy in particular, can influence private-sector production decisions by changing the incentives to work or to invest. Like many ideologies pushed to an extreme, supply-side theory does contain a kernel of truth: In certain cir stances lower tax rates can lead to additional economic activity and can lead to additional government revenue. This is a standard incite in public economic theory. But, it is equally true that in other cir stances lower tax rates do not lead to additional economic activity or government revenue.

The chain of logic for supply-side policies to work requires the following. Lower tax rates on savings (or on those who save more) leads to higher saving rates. Higher saving leads to more economic investments and greater capital ac ulation. Finally, more capital leads to greater economic growth. At each of these steps, however, there is reason to doubt the theory—there are other possible outcomes and conflicting theories.

The efficacy of supply-side policies thus becomes an empirical question: Do they work? As importantly, do they work better than alternative approaches of greater public investment to stimulate our economy? The two supply-side eras that sandwich the period from 1993 to 2001 offer us an opportunity to assess the impact of supply-side policies. The claims for these policies have been great, yet the results have been meager. Specifically:

Real investment growth after the tax increases of 1993 was much higher than after the tax cuts of 1981 and 2001. The yearly growth rate after 1993 was 10.2 percent versus 2.8 percent for the first supply-side era beginning in 1981, and 2.7 percent in the period of the second supply-side era beginning in 2001. Without better investment growth being associated with supply-side policies, a critical link in the theory of supply-side economics is broken—and it is difficult to draw any plausible connection between supply-side tax cuts and any observed positive economic performance.

Economic growth as measured by real U.S. gross domestic product was stronger following the tax increases of 1993 than in the two supply-side eras. Over the seven-year periods after each legislative action, average annual growth was 3.9 percent following 1993, 3.5 percent following 1981, and 2.5 percent following 2001.

Average annual real median household income growth was greatest after the 1993 tax increases, at 2.0 percent annually compared to 1.4 percent after 1981 and 0.3 percent after 2001.

Wage levels also did better after 1993. Average real hourly earnings following 1981 fell at an annual rate of 0.1 percent and following 2001 rose at a rate of only 0.3 percent. Following the 1993 tax increases average hourly earnings grew by 0.9 percent per year.

Employment growth was weaker during the supply-side eras than during the post-1993 era. Average annual employment growth was 2.1 percent after 1981, 2.5 percent after 1993, and 0.6 percent after 2001.

Federal budget deficits and national debt increased during supply-side periods and decreased following the 1993 tax increases. In the seven years from 1993 to 1999, the country went from a federal deficit of 3.9 percent of GDP to a surplus of 1.4 percent. After 1981 the deficit ballooned to 6 percent of GDP by 1983. In the year the 2001 tax legislation was adopted, there was a surplus of 1.3 percent of GDP. This turned into a deficit of 3.6 percent by 2004, which fell back to 1.2 percent in 2007 but will undoubtedly be higher in 2008. The national debt has followed a similar pattern, rising by an astounding 14.8 percentage points relative to GDP over the 7 years following adoption of the 1981 supply-side tax cuts, shrinking by almost 10 percentage points relative to GDP following 1993, and moving back up by 3.8 percentage points relative to GDP after the 2001 tax cuts.


Of course, the reason for the failures of the supply-side periods to deliver as strong an economic performance as the 1993 to 2001 era may not have anything to do with tax policy. Other short-term factors and long-term trends influence the economy as well. The evidence that supply-side tax cuts help economic growth is, however, weak at best and much contradicted in the economic literature. As the data we present in the pages that follow shows, economic policies with tax cuts for corporations and the wealthy as their centerpiece have simply failed to produce strong economic growth by a variety of measures.

Linky dinky doo

[KenMcCoy]

Wage levels also did better after 1993. Average real hourly earnings following 1981 fell at an annual rate of 0.1 percent and following 2001 rose at a rate of only 0.3 percent. Following the 1993 tax increases average hourly earnings grew by 0.9 percent per year

WOW...you think this had anything to do with that stat???

http://www.dol.gov/ESA/minwage/chart.htm

History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 2007

Apr 1, 1991
$4.25 for all covered, nonexempt workers
Oct 1, 1996
$4.75 for all covered, nonexempt workers


4.25/4.75= .89

[RandomGuy]

WOW...you think this had anything to do with that stat???

http://www.dol.gov/ESA/minwage/chart.htm

History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 2007

Apr 1, 1991
$4.25 for all covered, nonexempt workers
Oct 1, 1996
$4.75 for all covered, nonexempt workers


4.25/4.75= .89

???

Only if every worker in america only made minimum wage. Most don't.

[DarrinS]

Wow, an article from a "think tank" founded by former Clinton cheif of staff John D. Podesta. How unbiased.

[KenMcCoy]

If you are "debunking" supply-side economics and don't believe in the trickle down effect then you probably believe in trickle up economics...thus a wage raise at the minimum wage would have the same affect beyond the minimum wage.

[KenMcCoy]

WASHINGTON -- In a stunning reversal, Barack Obama has finally admitted his proposed tax increases will cause harm to the economy.

During an interview shown on ABC's This Week, host George Stephanopoulos asked Obama if he would still enact tax increases if there was a recession upon taking office.

Obama replied: "I think we've got to take a look and see where the economy is. I mean, the economy is weak right now. The news with Freddie Mac and Fannie Mae I think, along with the unemployment numbers, indicates that we're fragile."

http://www.theconservativevoice.com/article/34385.html

If you truly believe that supply side doesn't work then you better tell Obama...

[RandomGuy]

Wow, an article from a "think tank" founded by former Clinton cheif of staff John D. Podesta. How unbiased.

Read the study.

It is illogical to dismiss the study simply because of the source.

You should be somewhat skeptical of the conclusions of the study, and should look closely at the methodology. I read through and attempted to find any unreasonable conclusions, but was unable to.

Perhaps you can find something I missed.

They controlled for all sorts of outside factors, and attempted to isolate the effects of tax increases and tax cuts.

There simply was no correlation between tax cuts for the wealthy and economic growth.

To be able to claim "tax cuts for the wealthy make everybody better off" or "tax cuts always increase revenues" you MUST have some data to support this, even marginally.

It isn't there.

[RandomGuy]

The authors showed the logical underpinnings and assumptions required for the "supply side" theory to work.

They then evaluated each underlying assumption against availabale evidence.

[101A]

The term “supply-side” comes from the idea that economic policy, and tax policy in particular, can influence private-sector production decisions by changing the incentives to work or to invest.

To claim otherwise is against any logic whatsoever.

His cotnrol was the 1990's end of the cold-war, dot-com growth party? THIS he uses to prove supply-side wrong?

Also, we're taliking about a change in the top marginal rate of, what? 4.5%? From 39.5 to 35%? THAT, afteralll, is what all the caterwalling from the left is about, right? 4.5% for the rich?

Ridiculous study; doesn't prove anything.

Tell you what, let's end the experiment; raise taxes to 100% on income over $250,000. THEN let's see if production changes. According to this study it won't. In my estimation, it will.

[101A]

The authors showed the logical underpinnings and assumptions required for the "supply side" theory to work.

They then evaluated each underlying assumption against availabale evidence.

No, they used very limited evidence: Specifically the United States economy from 1981 to 2007.

Why not include the Carter years?

Why not Eisenhower - followed by the earlier supply-side policies of one JFK?

They used the evidence that would help make their case. Nothing more. It's a political piece; don't see it published in any economic journals, do we?

[101A]

They also don't point out that Clinton's era ended in a recession.

[RandomGuy]

No, they used very limited evidence: Specifically the United States economy from 1981 to 2007.

Why not include the Carter years?

Why not Eisenhower - followed by the earlier supply-side policies of one JFK?

They used the evidence that would help make their case. Nothing more. It's a political peace; don't see it published in any economic journals, do we?

The carter years offered no supply-sider data, as Carter was not a supply sider.

To my knowledge neither really was JFK, nor Eisenhower. The theory as a whole didn't really come into its own until Reagan.

If you can point me to some data that says otherwise, I would love to read it.

Seriously. I do like to poke around this stuff to see if it is worth a crap.

Maybe you can point me to any economic study showing that supply side tax cuts for the wealthy have had some effect?

If there is data to support it, I would be all for such policies, but strongly suspect that there isn't.

In the quest for the true peak of the Laffer curve, I think that supply siders in general play up what the wealthy do to create real economic growth, and COMPLETELY ignore what the government does.

[RandomGuy]

They also don't point out that Clinton's era ended in a recession.

... as did Reagan's, they didn't point that out either.

Such bits are irrelevant to whether supply side tax cuts for the wealthy "increase revenues" through increased growth.

Savings rates, investment rates and so forth ARE very relevent and neither of those showed any real boost from supply side tax cuts.

They indicated that it was really technology and other factors that seemed to be a MUCH stronger driver of economic growth than anything else, and that tax policy in and of itself seemed to have little to no effect.

[Ryvin1]

Not to say it would debunk this theory, but some of the conclusions to me seem to only take in count part of the economic system. I think a huge economic influence not even mentioned would be the years of the dot com boom. I think we saw much of the growth in investment income, average annual real median household income growth, and US gross domestic product increase because of the tech boom more then either tax-cuts or increased taxes.

[RandomGuy]

http://www.theconservativevoice.com/article/34385.html

If you truly believe that supply side doesn't work then you better tell Obama...

(shakes head)



Re-evaluating spending priorities and plans in a potential meltdown of the economy doesn't quite mean that he subscribes to a failed theory.

[RandomGuy]

There is no question that there are cir stances where tax levels can be too high and damaging to an economy. There are also, of course, cir stances where taxes are too low, limiting the ability to provide public services and investments that fuel economic growth—cir stances where our public structures are starved. Excessive government deficits resulting from taxes that are too low can also pose economic risks.

Our analysis suggests that during the recent periods where supply-side economics were embraced and put to a practical test the great economic success predicted by the tax cut advocates simply did not occur. In contrast, the era of new investments and fiscal responsibility begun in 1993 paid for by tax increases an hetical to supply-side practice led to a period of strong economic performance—suggesting that those tax changes were not harmful, and possibly were helpful, to the nation’s economic growth.

Link to full pdf study, 22 pages.

[101A]

There is no question that there are cir stances where tax levels can be too high and damaging to an economy.

Confusion. So we are in agreement? Tax policy DOES affect the economy?

[RandomGuy]

No, they used very limited evidence: Specifically the United States economy from 1981 to 2007.

Why not include the Carter years?

Why not Eisenhower - followed by the earlier supply-side policies of one JFK?

They used the evidence that would help make their case. Nothing more. It's a political piece; don't see it published in any economic journals, do we?

The answer is in the footnotes. Supply siders themselves don't really point to either of those two presidents as being supply siders:

Given the much greater size of the 1981 cuts and that it is the policies of then-President Reagan who most supply-side advocates point to as the most accomplished presidential prac ioner of their arts, we take 1981 to be the fairest place to start an examination of a supply-side tax regime. For a list of top personal income tax rates, including capital gains rates, in effect for each year, see from Citizens for Tax Justice: http://www.ctj.org/pdf/regcg.pdf.

[RandomGuy]

To claim otherwise is against any logic whatsoever.

His cotnrol was the 1990's end of the cold-war, dot-com growth party? THIS he uses to prove supply-side wrong?

Also, we're taliking about a change in the top marginal rate of, what? 4.5%? From 39.5 to 35%? THAT, afteralll, is what all the caterwalling from the left is about, right? 4.5% for the rich?

Ridiculous study; doesn't prove anything.

Tell you what, let's end the experiment; raise taxes to 100% on income over $250,000. THEN let's see if production changes. According to this study it won't. In my estimation, it will.

No, they use data from the two supply side eras after the massive tax cuts enacted by both Reagan and Bush.

To examine the claim that supply side economics creates massive boosts to the economy, one would not logically look at eras where there were no such cuts, and that is not what the authors did.

Let me know when you actually have read the whole study, and not just the exerpt.

[KenMcCoy]

I don't know on the macro level... but my personal experience working in corporate tax shows that the more the US raises tax rates the more income is allocated overseas.

[RandomGuy]

Confusion. So we are in agreement? Tax policy DOES affect the economy?

Indeed it does. But the rosey scenarios predicted by supply siders after the happy fun cuts never really came to pass.

Much like the doom and gloom scenarios predicted by the same people after increases in the minimum wage.

I would argue that increases in taxes to fuel basic research and invest directly in infrastructure have far more beneficial effects on economic growth than tax cuts for the wealthy.

[RandomGuy]

I don't know on the macro level... but my personal experience working in corporate tax shows that the more the US raises tax rates the more income is allocated overseas.

... and the authors of the study would agree with that observation. Just the Laffer curve in action.

[RandomGuy]

I don't know on the macro level... but my personal experience working in corporate tax shows that the more the US raises tax rates the more income is allocated overseas.

Up until a point where the income is taxed by the other foreign governments.

We studied this in international ecomomics. A multinational corporation has to consider tax rates when allocating income, and there are effects of differing rates.

The US still compares fairly favorably to many other governments in that regards.

[KenMcCoy]

Singapore...0%
Ireland...15%

Again...personal experience. not studies.

[Purple & Gold]

Trickle down economics has never worked. Repubs would like to make you think that Reagan was some type of Great President and the 80's was the best decade ever. They're perception of history is laughable.