More on Supply-Side Economics
By David Henderson
On yesterday’s post, Bob Murphy asks:
David, what exactly do you mean by saying tax rate cuts didn’t increase revenues? Tax revenues did in fact go up (eventually), right?
So I assume you mean they didn’t go up more than we would have predicted in the absence of the tax rate cut.
But then we get into a really complicated alternate universe. For example, what if the economy didn’t grow nearly as much in the 1980s if Reagan had kept marginal income tax rates really high?
I am presumably biased since I worked for Arthur Laffer and saw dozens of his papers making (what appeared to be) very persuasive cases that the Laffer Curve is alive and well.
What I meant was that tax revenues were lower than otherwise, that is, lower than they would have been. The best study I know of this is Larry Lindsey’s book, The Growth Experiment. The academic article on which a major part of this book is based is his article in 1987 in the Journal of Public Economics. It’s gated and Elsevier is charging an outrageous price for it. But the bottom line is this sentence from the Abstract:
Comparison of this baseline [his term for Bob Murphy’s alternate universe] with actual tax return data shows that at least one-sixth, and probably one-quarter, of the revenue ascribable to the rate reductions was recouped by changes in taxpayer behavior.
I agree that the Laffer Curve is alive and well. It has to be correct. That is, at a zero tax rate, tax revenues would be zero and at a 100% tax rate, perfectly enforced, tax revenues would be zero. When the rate rises from zero, revenues rise from zero. Voila: a Laffer Curve. The real question is where we are on the Laffer Curve. Larry did find, by the way, that the cut in the top income tax rate from 70% to 50% did generate higher revenue than otherwise. So the highest-income people were in the prohibitive region of the Laffer Curve.