Conceding too much to Supply Siders

This is my usual post lamenting the fact that reasonable people allow supply side dynamic scorers to set the terms of debate. They confidently assert that tax cuts for the rich cause more rapid GDP growth and want to argue whether that means they pay for themselves . Jeb!’s economists admit that they don’t without 2 magic asterisks. But if one concedes that the effect on growth is positive and argues about the magnitude then one should concede that taxes on the rich should be cut — we don’t dislike deficits because they cause us pain by themselves but rather because they harm the economy.

There is no reason to believe that cutting the top marginal tax rate will cause higher GDP growth. The evidence points the other way.

The very excellent Kevin Drum makes my knee jerk with one sentence (with which I don’t even disagree) in this excellent post on the conservative Tax Policy Center’s analysis of Jeb!’s proposed tax cuts.

My comment.

Nice catch and post. However I think you (impicitly) conceded too much when you wrote “The Tax Foundation has a very rosy view of dynamic effects, which are almost certainly far less than they estimate.” The reason is that “less” can mean smaller (closer to zero) or lower (closer to negative infinity). In principle, it is also possible to argue that Jeb’s tax cuts will cause 20% lower GDP. is this less than the effect the tax policy center asserts ? It’s larger in absolute value.

I haven’t run the numbers (I can’t) but I am confident that Jeb’s plan would cause lower growth. Partly this is because of post WWII data on top marginal tax rates (I admit on labor income) and growth in OECD countries. Atheoretic estimates, if taken literally, suggest that the growth is maximized at a top rate of over 50% (some estimates are 70%). In contrast, I know of essentially no evidence published in the peer reviewed literature that lower rates cause more rapid growth (the essentially is in regressions which consider convergence that is incude initial per capita GDP as a regressor — it’s negative coefficient is overwhelmingly statistically significant for the sample.

The Jeb team analysis (not tax policy center but Feldstein Hubbard et al) assumes additional growth from unspecified regulatory reform and also assumes unspecified spending cuts. They consider no effects of spending but costs — that is assume the spending is pure waste. In standard models, eliminating wasteful government spending causes increased growth, but the assertion that government spending is waste is completely unproven in the Jeb team analysis — it is just assumed.

This is important because if the tax cuts without the magic spending cuts cause higher deficits, the higher deficits will cause higher interest rates (The Fed is lifting off the zero lower bound soon or in a few months) which cause lower investment which causes lower growth.

Back to atheoretic data analysis — deficits are strongly negatively correlated with growth. Of course the case against supply side voodoo is very familiar to Americans who follow the news with the Clinton tax increase followed by a boom and the W Bush tax cuts followed by disaster and the 2013 tax increases followed by a (slight) increase in GDP growth.

My point is that international evidence and reasonable theory support the impression that the Tax Policy center didn’t just get the magnitude of the dynamic effect wrong but also are wrong about its sign.

Comments (19) | |