I thought Martin Feldstein and John Taylor understood the role of fiscal policy in a Solow growth model:
Here’s how the three components of Sen. McCain’s tax plan will work in practice. To create jobs, Mr. McCain will reduce the corporate tax rate — now at 35% the second highest among all industrial countries — to one that doesn’t penalize firms for doing business here. To encourage small businesses to expand, he will fight against higher tax rates on their income. To increase wages, Mr. McCain will provide incentives to raise productivity, which leads to higher wages. To increase productivity, he will provide incentives for developing and applying new technologies by expanding the tax credit for research and development, and by making that credit permanent. More savings and investment in businesses also raise productivity. Mr. McCain will stimulate saving by keeping tax rates low on the returns to saving in the form of dividends and capital gains. He will also allow faster depreciation of assets, which encourages investment. And he will strengthen the incentive to save by reducing the maximum estate tax rate, with a substantial, untaxed exemption.
They contrast McCain’s tax proposals to those of Barack Obama. The Wonk Room attempts a rebuttal in three parts with the first two focusing on the distributional impacts of the McCain v. Obama plans. But this will not do as Feldstein and Taylor are mainly arguing supposed supply-side effects. It isn’t until the last part of the attempt at the rebuttal that we get to the real fallacy of this political spin from two eminent economists:
CLAIM: Mr. McCain will bring the budget into balance.
Of course, this is a silly claim. The McCain fiscal proposals amount to continued fiscal irresponsibility which will lower national savings leading to less investment and long-term growth. I’m shocked that these two gentlemen would lend their name to such free lunch supply-side silliness.
Update: Lerxst sees more misleading arguments in this op-ed with respect to the Feldstein-Taylor claim that McCain’s health care proposals work as a tax cut for everyone.