Theory & Evidence about Tax Cuts and Growth for Alan Reynolds
Jesse Taylor has been reading some of the latest from the free lunch supply-siders so we don’t have to. Shorter Jesse: last year’s increase in real GDP and tax revenues only partially makes up for the losses in the earlier part of Bush’s first term. But I want to pick up on this from Alan Reynolds:
But that rosy figure depends entirely on the hidden assumption that the economy would be just as strong with higher tax rates as with lower tax rates. I am aware of no economic theory or evidence that suggests that might be true.
Unless Alan never learned classical macroeconomics, this statement is beyond disingenuous. Not even the most extreme Keynesian would argue that we need permanent fiscal stimulus to get back to full employment. And many of the free lunch supply-siders are also Bush43 cheerleaders who have declared the recession long and buried (not that they are entirely correct). And if you are going to claim “giving people their money back” promotes consumption, you can’t hide behind Ricardian Equivalence to put forth the phony notion that the law of scarcity (aka crowding-out) has been repealed.
Beyond theory, look at the vaunted Reagan tax cuts, which resulted in less savings and investment. And look at the fact that over the Reagan-Bush41 era, real GDP growth averaged only 3% v. 3.5% during the 1947 to 1980 era and 3.7% during the Clinton years. Of course, 3% is better than the 2.5% average annual growth during Bush43’s first term.
Update: Jesse’s post provides a link to Federal tax revenues by year, which includes forecasts through 2009. Comparing the 2009 projections to 2000, it would seem that the average annual growth in income tax revenues and corporate profit taxes (per these projections) would be barely enough to cover the increase in prices for the period. So Bush’s two terms will see no increase in inflation-adjusted tax revenues even as the economy sluggishly grows. Of course, these are projections and if Bush makes his tax cuts permanent, we are likely to see lower real revenues in 2009 than in 2000. And yet the supply-siders are given the exclusive blame for the deficits to government spending?