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Did the IGM Reject Laffer Optimism or Old-School Keynesianism?

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When I first read David's latest post, I mentally reversed the true results.  I thought that every expert on the panel agreed that:
A cut in federal income tax rates in the US right now would raise taxable income enough so that the annual total tax revenue would be higher within five years than without the tax cut.
Given my mis-reading, I immediately thought, "Oh, the IGM universally accepts the Keynesian view that fiscal stimulus would have a big economic effect - big enough to actually increase tax revenues over the medium-run."

I quickly realized my mistake.  But my mistake is fruitful nonetheless.  Yes, like Mark Thoma, you could read the responses as a verdict on Laffer optimism.  However, you could just as easily read the responses as a verdict on old-school Keynesianism.  Which raises an interesting question: If the question had been framed in explicitly Keynesian terms, would the expert verdict have remained the same?

P.S. If you think this is a stretch, consider: supply-siders have long pointed to the Keynesian-inspired Kennedy tax cuts as a vindication of supply-side economics


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COMMENTS (5 to date)
mark writes:

I think you are right. The question asks for opinions on the effect 5 years out. Fiscal stimulus has been pretty well shown to peter out well before then, so this question seems to be a subset of the larger question whether fiscal stimulus results in greater tax revenue 5 years out than if no stimulus had been put in place. I think even pro-Keynesian models would say not.

Lord writes:

Unlikely. Most would say the economy would be larger, but not the tax revenues for it takes a much larger economy to make up for even somewhat lower taxes, but it does bring to fore that the empirical data is largely based on periods of growth rather than recession/depression. Still likely not sufficient to cover the economy/revenue spread, but less so.

Daniel Kuehn writes:

Agree with Lord. Those seem like two very different propositions.

On the supply-siders issue, it seems like there's a problem here with treating supply-side economics and Keynesian economics as opposites. They're not.

Do low tax rates have supply side benefits? I can't imagine answering "no" to that. Do low tax rates stimulate demand? I can't imagine answering "no" to that either.

Real business cycle theory, it seems to me, is a different story. That is more opposed to Keynesianism.

Does anybody really think of "supply side economics" as an "economic theory", though? I think of that as a political movement that had a lot of things to say about economic policy, but then that was - if not before my time - at least before my formative years.

Daniel Kuehn writes:

Although I should be careful with my comment on RBC... people are often too strenuous on these points. There's absolutely no reason why real shocks and demand shocks can't both contribute to recessions. Indeed, there's no reason they can't both contribute simultaneously! They're only contradictory insofar as you allege that one operates exclusively.

Which is right is, of course, an empirical question.

pyroseed13 writes:

Well given that the IGM topic is the “Laffer Curve,” I think we should assume that the question refers to cuts in marginal income tax rates for only top earners. Isn’t “old style Keynesian” essentially the belief that the only tax cuts that spur economic growth are the ones that stimulate consumption by “putting money in people’s pockets?” I don’t think these economists would disagree, though at this point it seems that such cuts would be ineffective as many people do not pay federal income taxes.

It’s also important to emphasize that supply-side economics isn’t only about tax cuts. It’s a policy mix. If government fails to cut spending and crowds out resources, or if the central bank fails to adopt a rules-based monetary policy, you may not have any beneficial supply-side effects.

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